The end of early retirement and the start of mandatory equity-based pensions: Capital-based pensions, contribution rates, and the long road to intergenerational fairness

Working until 68? The radical 33-point plan to save our pension system is ready

The Swedish model is coming: Who benefits from the new equity-based pension – and who loses out?

Germany's statutory pension insurance system is facing a historic turning point. Faced with a rapidly aging society and exploding costs, the federal government under Chancellor Friedrich Merz is planning the most significant overhaul of the social security system in decades. At the heart of the controversial 33-point plan from the Pension Commission: the end of early retirement without deductions, a retirement age linked to life expectancy, and the introduction of a mandatory "capital-funded pension" modeled on the Swedish system. Starting in 2028, contributors will gradually pay up to two percent of their gross salary into a state-organized equity fund. But while proponents see this capital-funded system as a lifeline against system collapse, unions and social welfare organizations warn of massive additional burdens for employees and an unresolved generational conflict. One thing is clear: the political silence of recent years has come to an end – with far-reaching financial consequences for every individual.

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The German pension system is facing its most profound restructuring since the introduction of the dynamic pension in 1957. The Pension Security Commission, appointed by Chancellor Friedrich Merz, presented its final report with 33 recommendations on June 23, 2026. The centerpiece: a mandatory capital pension based on the Swedish model, combined with a gradually increasing retirement age, the abolition of early retirement without deductions, and an expansion of the pool of contributors. What at first glance appears to be a technical financing issue reveals itself upon closer examination as the largest pension policy project in the Federal Republic for generations – with significant economic, social, and distributional consequences.

Demographic pressure: Why business as usual is not an option

The pay-as-you-go system of the statutory pension insurance is based on a simple principle: The currently working generation directly finances the pensions of today's retirees and, in doing so, acquires its own entitlements for the future. This construct, known as the generational contract, functions smoothly when the ratio of contributors to pension recipients remains stable. However, this very principle is coming under massive pressure due to demographic change.

Germany is aging faster than almost any other economy in the world. The large baby boomer generation is gradually retiring, while the younger generations are significantly smaller. This has a direct impact on the finances of the statutory pension insurance system. The contribution rate is currently 18.6 percent of gross wages – a figure that, according to forecasts by the German Pension Insurance, can only be maintained at this level until 2027. From 2028 onward, a sharp increase to 19.8 or even 19.9 percent is expected. The CEO of the German Pension Insurance Association, Alexander Gunkel, explicitly speaks of an "extreme jump in the contribution rate." By 2039, the contribution rate could rise to 21.2 percent.

This development is no surprise. Demographics are the most predictable of all economic variables. For decades, federal governments of various political persuasions have masked the structural problems of the pension system with short-term interventions. The sustainability factor, which dampens pension increases when the number of retirees grows faster than the number of contributors, was effectively nullified by the coalition government through a pension level cap of 48 percent. The consequence: Pension adjustments have been made above what the system can finance in the long term without contribution rate increases or tax subsidies. On July 1, 2026, pensions will even rise by 4.24 percent – ​​an increase that, given the state of the pension insurance fund, is politically attractive but represents a fiscal burden on the future.

The pension commission and its reform mandate: Between courage and compromise

Chancellor Friedrich Merz had already announced at the Deutsche Börse's annual reception in February 2026 his intention to pursue a "paradigm shift in German pension policy." The statutory pension insurance system would remain, but would only be one component of a new overall level of provision. Private pension schemes and company pensions, funded through capital reserves, were to play a significantly larger role. A comprehensive pension reform was to be initiated later that same year.

The pension commission established for this purpose, chaired by Constanze Janda and Frank-Jürgen Weise, presented its 76-page final report with 33 recommendations on June 23, 2026. Merz and Federal Labor Minister Bärbel Bas (SPD) received the report at the Chancellery and announced their intention to fully implement the recommendations. The pension reform is scheduled to be debated after the parliamentary summer recess and is expected to come into effect at the beginning of 2027.

The most important recommendations at a glance: The retirement age should continue to rise beyond 67 and be linked to life expectancy – increasing by six months every ten years. Early retirement without deductions after 45 years of contributions should be abolished, and retirement with deductions should only be possible from age 64 at the earliest. Minijobs should generally become subject to mandatory pension insurance, with the exception of students. The self-employed, members of parliament, and board members of public limited companies should be included in the statutory pension insurance scheme – but not civil servants. The sustainability factor should be reintroduced from 2031. And the centerpiece: the introduction of a mandatory statutory capital pension.

The capital annuity: Paradigm shift or risky experiment?

The concept of a statutory capital-funded pension represents the most structurally profound element of the entire reform package. The commission recommends the introduction of a mandatory, capital-funded pension component within the statutory pension insurance system. For this purpose, individual capital accounts are to be established for all contributors. A jointly financed additional contribution rate of two percent is recommended – borne equally by employees and employers. The start is planned for 2028 at 0.5 percent, followed by a gradual increase to two percent. Overall, insured individuals would then contribute 20.6 percent of their monthly income to their pension.

The money is to be invested primarily in the capital market via a central sovereign wealth fund – specifically, the KENFO (Fund for Financing Nuclear Waste Disposal) is cited as a model. Its portfolio already comprises more than 9,000 individual securities in over 90 countries. Those who do not wish to contribute to the sovereign wealth fund can choose from a limited number of certified investment funds, which are subject to strict criteria. The effective management costs are to be a maximum of 0.1 percent per year.

The calculations anticipate a real return of 3.5 to 5 percent after adjusting for inflation. According to calculations by ZEW Professor Tabea Bucher-Koenen, a member of the commission, a typical pensioner with an average income could receive €150 more per month in pension after 20 years of savings, and even over €770 more after 45 years – in real terms based on the 2026 price level. Those retiring from 2032 onwards will receive a transitional supplement, as older insured individuals will not have been able to accumulate a sufficiently large capital reserve by then.

The long-term macroeconomic effects of such a reform would be considerable. Firstly, a significant portion of the German wage bill would be permanently diverted into the capital market – a massive capital flow that would provide German and European financial markets with additional liquidity and investment capital for years to come. Secondly, it would create, for the first time, a broad societal ownership structure of productive capital, which is currently almost non-existent in Germany. Compared internationally, Germany has one of the lowest shareholder rates among developed economies.

Commission member Jörg Rocholl, president of the Berlin business school ESMT, describes the concept as a potential "breakthrough for our country" and emphasizes its outstanding macroeconomic advantages. Indeed, the addition of funded pensions in the face of demographic change offers structural advantages that purely pay-as-you-go systems cannot provide: Funded systems are not primarily dependent on the ratio between contributors and pensioners, but rather on the overall productivity of the economy and capital market developments.

The Swedish model: Lessons learned from 25 years of premium pensions

No other country is cited more frequently in German reform discourse than Sweden. The Swedes fundamentally restructured their pension system around 25 years ago. Their system consists of three pillars: state pension, occupational pension, and private savings. The unique aspect is that 16 percent of income from pension contributions flows into a pay-as-you-go system, while another 2.5 percent goes into the so-called premium pension, which is invested in the capital market. Insured individuals can choose from several hundred funds; those who make no choice are automatically invested in the state-managed AP7 Såfa fund. These days, younger generations rarely opt for active fund selection and rely on the standard fund.

The results are remarkable: Over the past ten years, the Swedish sovereign wealth fund has generated an average double-digit return. Even with a conservative estimate of five to six percent annual return, this would result in substantial capital accumulation over decades. However, the Swedish model is not a panacea: The retirement age has been automatically adjusted to life expectancy and recently rose to 67. The majority of retirement provision remains dependent on the pay-as-you-go system. And Swedes have already had to accept pension cuts, which the state has had to mitigate through tax breaks.

Sweden's experience clearly demonstrates the most important lesson: Capital-based pensions can be a powerful supplementary instrument, but they do not solve the fundamental challenges of an aging society on their own. They shift the risk profile – away from the purely demographic risk of the pay-as-you-go system and towards capital market risks. Whether this risk shift is advantageous for policyholders depends largely on their investment horizon: Those who have 30 or 40 years until retirement can ride out stock market fluctuations. Those who retire in just a few years bear the full capital market risk.

Another point of comparison is Norway, whose state pension fund (the oil fund) already manages around €1.7 trillion and achieves long-term annual returns of approximately 6 percent. The Norwegian approach also confirms that broadly diversified, long-term capital market investments within an institutional framework can generate robust returns.

Public approval: More support than expected

A politically significant result comes from a representative Civey survey, conducted by the opinion research institute between June 23 and 25, 2026, on behalf of web.de, among 5,000 people: 59 percent of respondents view the plan to invest two percentage points of pension contributions in the capital market positively. Only 23 percent reject the plans, and 18 percent are undecided.

The age structure of the approval rating is noteworthy: It is highest at 67 percent among those over 65, the group that would themselves hardly benefit from the capital-based pension. Approval is lowest among 30- to 39-year-olds at 50 percent – ​​the generation that would feel the contribution increase most directly, but also benefits most from capital accumulation in the long term. Politically, a clear divide is evident: Among supporters of the CDU/CSU, SPD, FDP, and Greens, approval is between 75 and 77 percent, while only 44 percent of AfD voters, just 28 percent of BSW voters, and 35 percent of Left Party voters agree.

These figures are not to be taken for granted. As recently as 2023, an IG Metall survey conducted by the Kantar Public Institute revealed that two-thirds of Germans rejected the idea of ​​a stock-based pension. The shift in opinion within just a few years is significant and likely related to the growing awareness of the financing problems of the pay-as-you-go pension system. As early as October 2025, a Forsa poll showed that 90 percent of people considered a decline in pension levels inevitable – a record high. Only 7 percent still believed that policymakers could guarantee stable pensions in the long term.

The distribution conflict: Who pays, who benefits, who loses?

Despite the overall positive poll results, the reform package is highly controversial in its specific form. The conflict runs along several axes: unions versus employers, younger versus older generations, reform proponents versus those who want to protect the status quo.

The trade unions – DGB, IG Metall, and Verdi – reacted to the commission's proposals with a mixture of partial agreement and fundamental criticism. DGB Chairwoman Yasmin Fahimi welcomed the commitment to a pension that secures living standards, but firmly rejected the abolition of early retirement without deductions after 45 years of contributions. She argued that the affected insured individuals had, on average, paid in for ten years longer than the average pensioner; the existing system was fair and should be maintained. Verdi Chairman Frank Werneke described the proposal for a capital-based pension as a "questionable construct" – particularly because it would require people nearing retirement age to make mandatory contributions without any significant benefit.

IG Metall chairwoman Christiane Benner warned that the proposals ignored the working and living conditions of many employees. Many workers in the metal and electrical industries are simply not physically or mentally capable of working until a higher retirement age. A blanket link between the retirement age and life expectancy would hit hardest those in physically demanding jobs who have a lower life expectancy than those in academic professions.

Employers were far from enthusiastic either. BDA President Rainer Dulger criticized the proposal, arguing that an additional mandatory pension scheme would mean an extra burden of over 40 billion euros per year for companies and employees. He advocated instead for voluntary, company-sponsored or privately organized pension plans. BDA Managing Director Steffen Kampeter acknowledged that the plan demonstrated "political courage," but viewed the mandatory contributions and the abolition of mini-jobs as particularly counterproductive for Germany's economic competitiveness. The German Hotel and Restaurant Association (DEHOGA) even described the mini-job reform as a "catastrophe" and warned of massive job losses in the low-wage sector.

DIW President Marcel Fratzscher criticized the commission's recommendations as "too unbalanced." He argued that the package could further exacerbate existing social inequalities because disability pensions, child-rearing periods, and basic pension supplements would be devalued even more due to the sharper decline in pension levels, while people with long, uninterrupted employment histories would benefit disproportionately.

Economic advisor Veronika Grimm, however, criticized the proposals as not going far enough. The fundamental problem, she argued, lay not with the commission, but with the fact that the federal government had already moved too far in the wrong direction through previous decisions. According to her, while the introduction of a statutory pension is fundamentally the right thing to do, she fails to understand why the self-employed should be integrated into a system with structurally low returns – this only makes self-employment less attractive.

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The fiscal dimension: What the reform costs and what it saves

The financial implications of the reform package are complex and cannot be reduced to a simple cost-benefit analysis. In the short term, the introduction of the capital-based pension increases the burden for both employees and employers. In addition to the already anticipated increase in contribution rates from 18.6 percent to 19.8 or 19.9 percent in 2028, a further two percentage points will be added for the capital-based pension in the final implementation phase – potentially totaling 20.6 percent of gross salary for the pension alone. For an employee with a monthly gross salary of €3,500, this means an additional contribution deduction of approximately €35 per month on the employee's side, plus the same amount on the employer's side.

In the medium term, however, the capital-based pension is intended to relieve the burden on pension funds by financing a growing portion of pension payments through investment returns rather than contributions from the working generation. The Pension Commission predicts that the pension level could rise again to 50 percent by the middle of the century thanks to the capital-based pension – from the current 48 percent, which would have fallen below 45 percent without reform. Even in the event of a financial market crisis on the scale of the 2008/2009 crisis, the pension level would be higher in the long run than without the capital-based pension, emphasized ZEW Professor Bucher-Koenen.

The German government agreed in its coalition agreement to support the development of private retirement savings for the younger generation, among other things, with the proceeds from a share package from federal government holdings worth around ten billion euros. The early start pension – an individual capital account that every child is to receive from the age of six with the statutory pension insurance – is designed as a supplementary element to activate savings effects as early as possible.

A crucial fiscal aspect is also the expansion of the contributor base. Currently, civil servants, a significant portion of the self-employed, and members of parliament do not pay into the statutory pension insurance scheme. Including these groups would considerably broaden the pension insurance's revenue base and lower the contribution rate for everyone else. However, political implementation is delicate, particularly with regard to civil servants, whose pension system is constitutionally guaranteed and could only be changed through comprehensive legal adjustments.

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Intergenerational justice: The core structural conflict

The core of the pension dispute is a generational conflict over resource allocation. The current pay-as-you-go pension system structurally favors the older generation: their pension entitlements are politically secure, their voter turnout is high, and their share of the population is growing. The younger generation pays increasing contributions but receives decreasing benefit promises in return – especially since the guaranteed minimum pension level of 48 percent is set to expire in the medium term.

A ZDF political barometer survey from November 2025 revealed that 71 percent of respondents believed that younger people were currently burdened too heavily by pension policies. Among 18- to 34-year-olds, this figure was even higher at 82 percent. Even among those over 60, 62 percent shared this view – evidence that the issue of intergenerational fairness is now recognized across party lines and generations.

The pension commission has addressed the core of this conflict by raising the retirement age, abolishing early retirement without deductions, and simultaneously introducing capital-based pensions as a mechanism to give the younger generation a stake in productive capital. The commission is thus pursuing a two-pronged strategy: on the one hand, it is curbing pension system expenditures, and on the other hand, it is establishing a new financing channel that is less dependent on demographic trends.

Nevertheless, the problem remains that the transitional generation – people retiring in the next 15 to 20 years – will be hit hardest by the reform package: They will pay higher contributions but can hardly build up a significant capital stock for a capital-funded pension. This is not an oversight on the part of the Commission, but an inherent problem of any transition from a pay-as-you-go to a funded pension system: Someone has to bear the transition costs.

Risks of capital-based annuities: What the reform proponents are keeping quiet about

Despite all the enthusiasm surrounding the Swedish model, a sober assessment of the risks is essential. Unlike the pay-as-you-go system, the funded pension system is highly dependent on unpredictable developments in the capital markets. Financial crises, periods of persistently low returns, or structural market distortions can significantly deplete the capital stock. The low-interest-rate environment after 2008, which only recently ended with the interest rate turnaround, would have posed considerable problems for a purely funded system.

While the model recommended by the Commission provides for broad international diversification and is based on the proven KENFO fund, capital market risks remain structurally unavoidable. The Swedish model explicitly includes adjustment mechanisms that allow for temporary reductions in pensions during crises – a practice that would be politically difficult to justify in the German context. Furthermore, according to the Commission's recommendation, German capital accounts cannot be inherited, which implicitly results in a loss of returns, particularly for individuals with a shorter life expectancy.

Another structural problem is susceptibility to inflation. While the pay-as-you-go system is automatically linked to wage growth and thus maintains real value, funded models depend on nominal and real capital market developments. Periods of high inflation combined with negative real interest rates – as observed between 2021 and 2023 – can temporarily erode the real capital stock significantly.

The German Trade Union Confederation (DGB) also explicitly warns that capital-based pensions could exacerbate social inequalities: Disability pensions, child-rearing periods, and basic pension supplements would be further devalued by the sharply declining pension level, while people with long, uninterrupted employment histories and no health limitations would benefit disproportionately. This objection is economically valid: A capital market model rewards the continuity of contributions, not social history.

Political feasibility: Between coalition logic and resistance

Chancellor Merz has publicly announced his intention to implement all 33 recommendations of the commission. However, the political path is far from smooth. Within the coalition, despite fundamental agreement, there are significant divisions. The SPD's youth organization, the Jusos, rejected linking the retirement age to life expectancy as "socially unjust." Juso leader Philipp Türmer declared that this core point made the package "unacceptable." DGB (German Trade Union Confederation) chairwoman Fahimi emphasized that while the proposal package contained "some positive tendencies," it also contained "ambiguities and injustices.".

BSW founder Sahra Wagenknecht explicitly warned the SPD against harming itself by agreeing to the recommendations ahead of the upcoming state elections, and predicted that the East would rise up against this pension reform. This warning is not without merit: East German citizens have historically been more skeptical of funded pension models, and the differences in life expectancy between East and West imply that a general increase in the retirement age in the East would extend the working life to a relatively greater extent.

Parliamentary implementation will begin after the summer recess. Whether the reform package can be passed in its entirety depends on the extent to which the coalition partners, the CDU/CSU and the SPD, can internally push through politically difficult compromises. Experience shows that far-reaching social reforms in Germany are subject to considerable pressure to weaken during the parliamentary process. The pension adjustments of recent decades – from the Riester pension scheme to the pension package of the Grand Coalition and the current spending freeze of the Green-Red coalition government – ​​clearly illustrate this pattern.

A systemic finding: Germany's pension policy between realism and populism

An analysis of the current pension debate reveals a fundamental tension: Demographic and fiscal realities demand a combination of higher contributions, longer working lives, and structural system changes. At the same time, the political system's capacity to act is limited by a large pension electorate. For decades, this has resulted in a pension policy that catered to short-term redistribution demands while postponing long-term systemic problems to the next government.

The fact that a comprehensive reform agenda with concrete timelines is now on the table is in itself a political step forward. With its 33 recommendations, the pension commission has outlined a coherent reform plan that addresses both revenue and expenditure and introduces a structurally new element: the capital-based pension. The historical significance of this project—if it is actually implemented—is likely to far surpass that of the Riester pension reform of 2001.

Nevertheless, the package remains vulnerable to criticism. There is no easy solution to the conflict between the interests of the transitional generation and the need to shape the future. There is no model that completely eliminates capital market risks. And there is no way to reduce the costs of demographic change to zero – at best, they can be redistributed.

The crucial question, therefore, is not whether the reform package is perfect. It is whether it is better than continuing with the status quo. And demographic and fiscal reality answer this question unequivocally: An unreformed pay-as-you-go system with steadily rising contribution rates, a declining pension level, and increasing dependence on the state would be more economically destabilizing in the long run than a well-thought-out, gradual transition to a mixed system – provided that this transition is accompanied by robust social safety nets for vulnerable groups.

The 2026 pension reform is therefore more than just a technical upgrade of pension policy. It is a societal turning point, determining whether Germany will have the courage to openly address the real challenges of aging – or whether it will continue to play for time and pass the buck to a generation that is smaller in number, more economically burdened, and increasingly politically dissatisfied.