Germany weighs retirement age hike, new investment-driven pension fund

A commission appointed by German Chancellor Friedrich Merz has recommended introducing a Swedish-style pension fund alongside a gradual rise in the retirement age, aiming to stabilise Germany’s pension system amid demographic pressure.

The commission’s report is expected to serve as the foundation for a broad reform of the pension framework, which the government hopes to finalise in the coming weeks, Reuters reports.

The proposal includes creating a fund based on the Swedish model, financed through mandatory contributions from both employees and employers, with the money invested in financial markets to supplement the existing pay-as-you-go system.

"The use of the capital market in the statutory pension scheme is perhaps the ⁠key factor in determining the long-term viability and stability of our pension system," Merz told a conference of the German BDI industry federation.

Germany’s current system, where pensions for retirees are paid directly from contributions made by workers and employers, is increasingly under strain as the population ages and the ratio of workers to pensioners declines.

Merz said the reform would keep contributions at manageable levels while ensuring younger generations can rely on secure pensions in the future. He also urged swift agreement with his Social Democrat coalition partners to implement the full set of recommendations.

Labour Minister Baerbel Bas, co-leader of the Social Democrats, supported the call for full adoption of the commission’s proposals, despite some resistance from the left wing of her party.

"I want to make it clear here: ‌I want ⁠to implement this package," she told a news conference.

Alongside the new fund, the report suggests removing the option of early retirement at 63 after 45 years of contributions and gradually increasing the retirement age in line with life expectancy, potentially reaching around 70 by the early 2090s. The current system is expected to raise the retirement age to around 67 by the early 2030s.

The report comes as Merz’s coalition works to agree on a package of tax and welfare reforms before parliament breaks for its summer recess next month.

The proposals have been broadly welcomed by business groups, including the DIHK industry and trade association, which described them as "key steps towards a long-overdue reform of our pension system".

Trade unions, however, criticised the plan to scrap retirement at 63, arguing it would unfairly affect workers in physically demanding jobs who may not be able to work into their late 60s. The BDA German employers federation also warned that the capital-funded element, including employer contributions, could increase labour costs.

Trailing the far-right AfD in opinion polls, Merz is under pressure to push through reforms to revive Germany’s sluggish economy, but has struggled with internal coalition disagreements and limited political momentum.

In addition to strengthening retirement income, Merz said the introduction of the new pension fund could generate at least 30 billion euros ($34.22 billion) annually for investment in the economy through capital markets.

By Jeyhun Aghazada