Actually, 2022 could be a good year for pensions. After a freeze in 2021—the year of the pandemic—pension payments are set to rise significantly in July.
So, is everything hunky-dory? Unfortunately, no.
The long-term security of pensions remains uncertain. And there’s uncertainty surrounding the upcoming pension increase. We clarify the most important questions.
Why are pensions increasing in 2022?
Because wages rose significantly on average in 2021. Generally speaking, pensions currently follow general wage trends—always with a six-month lag.
This principle is necessary to ensure the standard of living for people in retirement.
Without pension increases, retirees would face a problem: they would be left behind by the income growth of the working population. As prices rise, retirees would lose a little purchasing power every month. A gradual decline in living standards.
Why is the pension increase likely to be smaller than expected?
The so-called catch-up factor is to blame. It is part of the formula used to calculate pension increases (“pension adjustment formula”).
Here’s how the catch-up factor works: If wages fall, pensions would also fall in purely mathematical terms. However, this is prevented by a safeguard clause in pension law known as the“pension guarantee.”
If wages rise again in subsequent years, retirees must make up for the pension cut that was not implemented—by having their pension increases reduced. In other words, they pay off the pension cut in installments over a longer period of time.
Why is the catch-up factor unfair?
If pensions actually always kept pace with wages, then the catch-up factor would make a certain amount of sense: high wages, high pensions; low wages, low pensions.
However, pensions have only followed wages to a limited extent over the past twenty years. The reforms of the 2000s ensured that pensions regularly lagged behind general wage trends . This is reflected in the decline in the pension level.
In 2000, it was still at 53 percent. Today, it stands at around 48 percent. Under current law, it could fall to 45 percent by 2034. That would mean the purchasing power of pensions continues to decline. This is currently prevented by the “double safety net” (see next question).
What are the safety nets for pensions?
The so-called Pension Pact has been in place since 2018. With it, the federal government has established two safeguards for pensions: The pension level may not fall below 48 percent, and the contribution rate for pension insurance may not rise above 20 percent. This Pension Pact currently ensures a stable pension level. In other words, pensions are once again keeping pace with wages.
The “traffic light” coalition government has reaffirmed these limits in its coalition agreement. It aims to permanently secure the pension level at a minimum of 48 percent. This meets a demand made by IG Metall, but it is not yet sufficient.
To safeguard the standard of living in old age and reliably prevent poverty, the pension level must rise again—to about 53 percent.
How can we make pensions future-proof?
Certainly not the way employers are proposing. They want to slash the statutory pension. Benefits are set to keep falling, while the retirement age continues to rise.
The motive behind this is simple: Employers want to keep pension contributions as low as possible, since they pay half of them.
The younger generations—whom employers’ associations like to portray themselves as defending—gain little from this. They pay slightly lower pension contributions. But in return, their pensions will keep getting smaller. They will then have to make up the gap in their retirement income with private savings. And employers do not contribute to that.
IG Metall proposes instead:
- A moderate increase in the contribution rate
- Higher tax subsidy
- Transforming the pension insurance system into a solidarity-based system for all working people—including lawyers, doctors, and architects.
This would put retirement provisions on a solid footing—for the long term—with adequate pensions for everyone.
