German pension contributions & Inflation: Should expats seek a refund?

Amid the current economic climate, with savers anxiously watching the value of their pots decline, you might be thinking about your German pension contributions. Christian Haas from Fundsback explains what happens to your contributions, how much return on investment expats can hope to make, and the circumstances in which you might consider requesting a refund. 

Everyone who works in Germany, expat or local, pays part of their salary into the German pension system every month. This happens automatically and over time accumulates into a large pot of money; individual contributions can be up to 660 euros per month. 

Under certain conditions, you may be able to ask the German state pension system to refund your contributions (after you leave Germany), rather than drawing a pension when you reach retirement age. There are arguments that speak both for and against seeking a refund, but especially considering the current economic situation, it is worth considering your options.

Who is eligible for a German pension contribution refund?

The conditions under which you might be eligible for a refund depend on your:

• Nationality
• Length of employment in Germany
• Current place of residence

Your options are dictated by your citizenship. Only non-EU citizens are eligible, and it also depends on whether there is a social security agreement between Germany and your home country. If your country does have an arrangement with Germany, you are only eligible for a refund if you have been employed in Germany for fewer than 60 months. 

These so-called “contracting countries” are:

• Albania
• Australia
• Brazil
• Canada
• India
• Korea
• Moldova
• Northern Macedonia
• The Philippines
• Uruguay
• The US

If you are a citizen of a country without an agreement with Germany, even if you worked in Germany for more than 60 months, you can choose whether to receive a refund of your contributions or receive an old age pension when you reach retirement age. 

In a nutshell, therefore, non-EU citizens from contracting countries can only apply for a refund if they have worked in Germany for less than 60 months, while all other non-EU citizens have the choice. 

Disadvantages of a refund: You lose employer contributions

If you are free to choose between a refund and an old-age pension, the disadvantages of a refund are pretty obvious: not only have you paid into the pension system, but also your employer has had to match your contributions. If you decide to cash out, your employer’s contributions will not be refunded.

So the question is, is it worth it to wait and leave both your and your employer’s contributions in the system to get a decent return later on?

In an extensive study, the union-affiliated Hans Böckler Foundation considered how much of a return an employee could expect from the pension system. Taking the example of someone who paid into the German pension insurance system for their entire working life, they calculated a gross return of 3,59 percent at best - 3,04 percent when you consider that pensions are taxed and subject to social security contributions. 

Although this would be a decent return, you have to keep in mind that a federal subsidy finances a large portion of the pension plan and therefore of the return. It’s obviously hard to say whether the government will continue to pay the same rate of subsidy in the future, but at the current rate the return on investment for someone who contributes to the pension system their entire working life isn’t bad. 

Expats should expect a lower rate of return

However, we’re looking at this from the perspective of an expat - and, therefore, the Hans Böckler study doesn’t tell the whole story. In this case, the return on investment would likely be lower. 

This is because expats - as you can imagine - don’t usually spend their entire working lives in Germany and, by the time they reach retirement age, may have only paid into the pension system for a few years or even a few months. This means that they will receive a far lower return on investment than the “average person” considered by the study. 

It’s worth noting as well that you need to have paid into the system for a minimum of five years to be eligible for a German pension at all. Anyone who has paid in for less time should seek a refund or risk their pension contributions being completely lost. 

Considering inflation and the future of the Euro

Another factor worth considering is the threat to returns caused by current economic changes in Germany: inflation. In September, the inflation rate in Germany was 10 percent, and the Bundesbank isn’t expecting it to go down any time soon. The last time such a high inflation rate was measured in Germany was 70 years ago. 

If the value of the Euro falls to that extent, it might not be the wisest move to stash your retirement savings in euros, particularly if you might retire outside the EU and would therefore have to factor in exchange rates. Depending on where you draw your German pension, you might find that your former contributions are worth less than they were before. 

It is still unclear when the high levels of inflation in Germany and the EU will come to an end. 

However, one thing is certain: the rising energy prices are unlikely to provide any relief in the foreseeable future. For instance, the German Bundesbank is already predicting further price increases, in the coming year. How much the Euro (and thus the money paid into the employee pension insurance in Germany) will be worth in the future is impossible to predict.

For expats in particular who don’t plan on staying in Germany long-term, it is worth considering having your pension contributions refunded. 

You can check for free now if you’re eligible for a refund on your pension contributions. Fundsback specialises in applying for German pension refunds and removes the stress and bureaucratic hurdles from the process, having experience with even the most complicated cases.