A new report by the OECD has laid bare the inadequacies of the pension system in Germany, highlighting how even those who work full-time throughout their lives receive significantly lower pension benefits than the OECD average. 

Room for improvement in Germany pension system

The Organisation for Economic Cooperation and Development (OECD) sees considerable room for improvement in Germany’s much-disputed pension system. According to the latest update of the OECD’s “Pensions at a Glance” study, the German system is in desperate need of a major overhaul and performs poorly in international comparison. 

Under the current system, a full-time worker entering the labour market in 2018 could expect a wage replacement rate of 52 percent upon retirement. The average for other OECD member states is 59 percent. The difference is even starker for low wage earners, who in Germany have a wage replacement rate of 56 percent, compared with an OECD average of 68 percent. 

Germany’s ageing population puts pressure on pensions

The report further outlined how the rapid ageing of Germany’s population will soon put the financial sustainability of the German pension system under immense pressure: “Under current legislation, according to EU forecasts, public pension spending would increase from around 10 percent of gross domestic product to 12,5 percent in 2060, even though pension levels will fall by 10 percent due to the sustainability factor.” 

As people born during high birth rate years enter retirement over the next couple of decades, Germany’s working-age population will reduce by 21 percent by 2050. 

Self-employed and single parents at risk of old-age poverty

The OECD also highlighted the poor pension prospects of so-called atypical employees - the self-employed, part-time workers and those on fixed-term employment contracts. In contrast with most other OECD countries, Germany does not require self-employed workers to take out pension insurance.

Indeed, pension coverage for this group has fallen over the past 15 years. Overall, retirees who were self-employed in Germany have median pensions that are more than 30 percent lower than those in paid employment.  

The report stated that atypical employees and single parents, in particular, could increasingly be threatened by poverty in old age in the future. Above all, women in Germany are particularly at risk of old-age poverty. An above-average pay gap and a high proportion of female part-time workers mean that women’s pension entitlements are likely to remain below those of men.

Planned basic rent would not solve the problem

However, the study also highlighted positive aspects of the pension system in Germany, acknowledging that more older people work in the federal republic than in other OECD countries. The proportion of people working in Germany aged between 55 and 64 has risen from 37 to 71 percent since the turn of the millennium, making Germany the leader of the pack when it comes to the employment rate in this age group. 

The coalition’s planned basic pension (Grundrente) would partially alleviate the problem, but would not be enough to fundamentally solve it, the report said. The envisioned benefit would improve the pension prospects of some low paid workers, but not tackle the “old age poverty risk of low-income earners who take major career breaks.”