The structure of the old-age security system in Germany is based on the guiding principle of the "three-pillar model". The main pillar of old-age security is general pension insurance. The second and third pillars of old-age security are occupational pension provisions - supplementary insurance financed by employers - and supplementary individual provisions. In addition to statutory pensions, for self-employed persons in certain occupational groups there are compulsory old-age insurance schemes, for example for farmers or the liberal professions under public law.
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:
- old-age pensions when certain age limits (usually the age of at least 63) are reached,
- 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 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 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). The pension insurance's expenses are covered by current income. Half of the contributions on the insurable earnings are paid by employees and half by employers in principle. The Federal Government also contributes to the financing of the statutory pension insurance scheme with tax revenue via federal subsidies.
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.