Rising pension contributions on the horizon: What does it mean for expats?

With a hike in pension contribution rates in Germany on the horizon, it has never been so important for expats to keep a good oversight of their pension pots around the world, to ensure they don’t lose out on precious retirement funds, as Anna Kliem from Germany Pension Refund explains. 

The German pension insurance (Deutsche Rentenversicherung) plays a central role in the German social security system meant to assure social security to the elderly. Amid increasing global instability, economic turmoil and a rapidly ageing population, the German pension system needs to make constant adjustments to keep the current pay-as-you-go system functional.

Currently, the working population’s contributions pay the pension benefits of those who have already retired. When the current working population retires, their benefits will be paid by those working in the generation below them, and so on. However, with birth rates on the decline, over time there will be fewer contributing people to pay the pensions of the non-working population. 

These dynamics and fluctuations in population growth and decline make it necessary for the German government to periodically adjust pension contribution rates, to keep the system sustainable. 

A brief history of pension contribution rates in Germany

To understand this dynamic, let’s take a brief look at the historical contribution rates. The current contribution rate to the German pension scheme has been stable at 18,6% since 2018. The contribution is shared equally by the employee and the employer, meaning that you as a worker contribute 9,3% of your gross income to the pension scheme each month (up to a certain threshold). 

Since its foundation in 1957, the contribution rates to the German pension insurance have been adjusted several times to meet social and economic changes. At the beginning, the contribution rate was 14%. It peaked at 20,3% between 1997 and 1999, but has since settled at 18,6%. Looking ahead, to keep up with the demands of Germany’s ageing society, the government plans to raise the contribution rate to 20,2% in 2030 and 21,1% in 2037. 

It’s also worth bearing in mind that not only the contribution rate affects your contributions, but also the threshold that determines how much of your income is actually subject to the contribution. This so-called “Beitragsbemessungsgrenze” is adjusted upwards virtually every year, meaning workers earning an above-average income are seeing their pension contributions go up each year. 

The threshold is currently set at 7.550 euros per month in the former states of West Germany and 7.450 euros in East Germany. Compare that to 10 years ago, when the threshold was 5.950 euros in West Germany and 5.000 euros in East Germany. 

What do I get back from my German pension contributions?

Knowing how you contribute to the pension scheme, let's have a look at what you can get out of it. Presupposing you plan to retire in Germany, the following formula will help you calculate your retirement benefits: 

Pension benefit = Entgeltpunkte x Zugangsfaktor x Aktueller Rentenwert x Rentenartfaktor

If that sounds like gobbledygook to you, let’s break it down a bit: 

Entgeltpunkte

Entgeltpunkte refers to the average income for the whole country in the year you made contributions. In 2024, this has been set at 45.358 euros. For each year that you make contributions on the average income for that year, your pension account gets one credit. If you earn half the average income, you get 0,5 credits for that year, and if you earn double (or more), you get a maximum of 1,9774 credits. When your pension is cashed in, your points are added together and the total is put into the formula above. 

Zugangsfaktor

Zugangsfaktor is a figure that shows the discrepancy between the statutory retirement age, and the age at which you actually retire. Early retirement results in a reduction in your pension benefits, while working beyond retirement age gives your pension a boost. 

Aktueller Rentenwert

Aktueller Rentenwert is the value of the pension that is paid out in the formula above. Currently, one pension point is worth 37,60 euros. 

Rentenartfaktor

Finally, Rentenartfaktor describes the type of pension you are claiming. Most commonly, this is a retirement pension, but it could also be something different like a widow’s pension, a disability pension, or something else. This also influences the value of your pension when it is paid out. 

In English, please? 

Well, that was a rollercoaster full of numbers, complicated German expressions and complex correlations! Assuming that you have already been in touch with the German social security system, you will most likely be familiar with some of the terms and conditions but it was probably hard for you to fully understand what is going on.

And let’s be honest, it is not our first priority to get familiar with the underlying systems when we move to a new country to start a new job and spend a part of our life in a foreign country. 

How does all of this affect expats? 

While as a working expat you cannot escape pension contributions - you are required to contribute a proportion of your salary each month to the scheme - the fact that they are increasing in the not-too-distant future makes it extra important to keep track of your various pension savings. 

Moving all over the world, expats often lose track of the pension pots they have contributed to - meaning they lose out on the money they have accumulated. Those contributions quickly add up - and in future, with higher contribution rates, will do so even quicker - meaning a significant amount of money is at stake. 

Even if you don’t plan on retiring in Germany, those pension contributions are almost never lost. Provided you have fulfilled the minimum contribution period of five years, you are entitled to receive a monthly pension benefit when you reach retirement age. Or, depending on your personal circumstances (particularly if you are not an EU citizen) you might instead be entitled to a refund of all your contributions after leaving Germany!  

Leaving Germany, but not wanting to say goodbye to your pension contributions? Germany Pension Refund can step in for you and tackle the bureaucracy on your behalf. Equipped with many years of expertise and the required legal partners, they can help you get your pension contributions back. Check your eligibility for a pension refund now.