The structure of the old-age security system in Germany isbased on the guiding principle of the "three-pillar model". The main pillar of old-age security is the general pension insurance with the German statutory pension insurance (Deutsche Rentenversicherung) as the largest scheme. For self-employed persons in certain occupational groups there are compulsory old-age insurance schemes, for example the liberal professions under public law. Farmers have their own pension insurance scheme. There is also a separate scheme for civil servants.
The second and third pillars of old-age security are occupational pension provisions - supplementary insurance financed by employers and/or employees - and supplementary individual provisions.
Scope of insured persons
In Germany, statutory pension insurance is by far the most important old-age security system. The scope of persons insured under the statutory pension insurance scheme includes compulsory insurance for persons who are employed for remuneration or in their vocational training. Compulsory insurance also covers the self-employed in certain occupational groups (e.g. craftspeople, artists). There is also the option of applying for compulsory insurance. Compulsory insurance also covers those raising children and those receiving sickness benefits or unemployment benefits from a benefit provider. Furthermore, caregivers not gainfully employed have compulsory insurance. Persons who are not subject to compulsory insurance may insure themselves on a voluntary basis for periods from the age of 16 onwards.
Pension insurance benefits
Primarily, pension insurance provides pensions to insured persons or their survivors as wage replacement benefits, or maintenance replacement benefits, respectively. Entitlement to a pension depends on previously paid statutory pension contributions for at least a certain period of time (the so-called qualifying period) and having met certain individual requirements and insurance law requirements. Statutory pension insurance provides the following, when certain age limits are reached and other eligibility critera apply:
- old-age pensions:
The pension is payable after a qualifying period of 5 years. The pensionable age is gradually being raised to 67 years by the year 2031. A standard pensionable age of 67 will then apply to those born in 1964 or later. Early retirement is possible from the age of 63 after an insurance period of at least 35 years, but with permanent deductions. Persons with an exceptionally long insurance period of at least 45 years can retire early without deductions. The age limit is being raised simultaneously with the general pensionable age, until reaching age 65 for those born 1964 or later by 2031. Postponing the retirement age will yield a higher pension accrual of 0.5% for each month worked after the statutory retirement age. Pensioners can earn additional income in addition to their pension without an upper limit.
- pensions due to reduced earning capacity if the earning capacity has been reduced to a certain level or is completely absent,
- pensions due to survivors if an insured person has died.
The amount of the wage- and contribution-related pensions of the statutory pension insurance depends on the number of insured years and on the amount of insured earnings. The longer a person has paid into the statutory pension insurance system and the higher their insured earnings, the larger is the pension calculated on the basis of their individual insurance history (equivalence principle).
Pensions can also be raised by an individual basic pension supplement (Grundrente) if, above all, compulsory contributions to the statutory pension insurance have been paid for decades from below-average earnings and certain income levels are not exceeded. A distinction must be made between the basic pension supplement of the statutory pension insurance and the (supplementary) basic income support in old age and in case of reduced earning capacity as a means-tested social benefit. This latter secures minimum amounts needed for participation in social and cultural life.
In addition to paying pensions, the statutory pension insurance scheme also provides the insured with benefits for prevention, benefits for medical rehabilitation, benefits for participation in working life, benefits for aftercare, maintenance benefits and other supplementary benefits. This is provided by the statutory pension insurance if a person’s ability to work is at risk. The principle here is: prevention comes before rehabilitation; rehabilitation comes before retirement. The pension insurance institution must therefore first see if a pension applied for due to reduced earning capacity could be avoided through prevention or participation benefits.
Funding pension insurance
The statutory pension insurance scheme is a pay-as-you-go system (intergenerational contract). This means, all benefits over a period of time are directly financed through contributions as well as federal subsidies for the same period of time. The mandatory contribution rate to the statutory pension scheme for employees is currently 18.6 percent of gross income (but only up to a certain assessment limit). Half of the contributions on the insurable earnings are paid by employees and half by employers in principle.
Supplementary provisions for old age
In addition to statutory pension insurance, occupational pensions and individual pensions are the second and third pillars of old-age security in Germany. These are supported by the state with allowances, tax benefits and contribution savings in social insurance. Occupational pensions have traditionally been something that employers have provided on a voluntary basis. However, employees also have the right to put part of their wages towards an occupational pension scheme in order to receive an occupational pension later. The establishment of an individual, capital based old-age provision is promoted by the state under certain conditions. Promotion of the so-called Riester pensions is done in two ways: financial grants (allowances) and additional tax breaks (additional deduction of special expenses). This support from the state is available to those who are compulsory members of the statutory pension insurance scheme and the old-age insurance scheme for farmers, civil servants, judges and soldiers, and, under further conditions, their spouses.