In Germany, the Merz government approved a bill that would allow retirees to work longer while paying less tax. But what prompted the German government to adopt “active retirement,” as they have called the model?
Deutsche Welle journalist Auron Dodi, in a connection with News24, told more about this German government plan.
News24: What exactly is the future “active pension” in Germany?
A.Dodi: Active pension is a model that the German government presented as a draft law this week. It is a model that allows you to earn extra money without paying taxes, after retirement. It is intended as an offer for those who want to continue working, after reaching retirement age. This new model is expected to enter into force very soon, on January 1, 2026, so the discussion about it started yesterday (16.10.) in the Bundestag. The “active pension” model offers tax breaks, when the employer and the person at retirement age agree to continue the employment relationship.
News24: Is there a hard limit for the non-taxable amount?
A.Dodi: Yes. Pensioners can receive up to 2000 euros extra per month, which they do not need to tax, when they continue working. To understand it better: when a pensioner earns e.g. 2.500 euros gross per month from his work, tax, he has to pay in the future, only on 500 euros. The rest is exempt from tax. In other words: people who have reached retirement age can earn up to 24.000 euros per year, which they do not need to tax.
News24: Who benefits from this active pension?
A.Dodi: All those who want to work longer than the retirement age benefit, something that both the employee and his employer agree on. Active pension does not give a person at retirement age the legal claim for further employment, it only offers tax benefits.
As for the numbers of beneficiaries: The German Ministry of Finance expects that there will be around 168.000 new applicants per year who could take up the offer. This equates to around one in four beneficiaries.
From a fiscal perspective, the government is interested in embracing this model, as in this case both the employer and the employee would pay social contributions. This would also ease the financial situation of the healthcare and pension systems.
News24: And who is not entitled to benefit from “active pension”?
A.Dodi: The self-employed do not benefit from active pension; civil servants do not benefit; those who perform what are called “mini-jobs”, i.e. jobs where they earn a maximum of 556 Euros per month and 70 days per year, are excluded; as well as farmers.
In fact, these are the groups that currently tend to work longer. And the Merz government is aware of this fact. Therefore, after two years, the active pension will be re-examined, as a model.
News24: Does the German state subsidize active retirement with large sums?
A.Dodi: The government estimates that the cost of this measure will be 890 million euros per year, from its entry into force on January 1, 2026. But if we calculate the contributions that would be paid to social funds, the model could be of interest. The functioning of this model, however, depends on individual decisions: both the pensioner must have the desire to work, and the employer must support further employment.
News24: What makes the German government offer such a pension model?
A.Dodi: Chancellor Merz’s government aims to alleviate the shortage of qualified labor with this, first and foremost. The broader background has to do with demographic change.
Germany is facing a major demographic challenge: 4.8 million workers will retire by 2035. These are mainly the generations born between the mid-1950s and the late 1960s. It was a period of high birth rates in Germany. This puts a strain on the health and social systems, as fewer employees have to contribute to more pensioners. Furthermore, we recall that “active retirement” was an election promise of Chancellor Merz. With it, the government is signaling that society values the contribution of older people who decide to work.
News24: How has this measure been received in Germany?
A.Dodi: On Thursday, the discussion on the pension package began in the federal parliament, the Bundestag. The package is expected to be approved, although there are objections, especially from young conservative deputies.
Other initial reactions in the public are reserved. The pension insurance company, for example, recalled the costs of the measures, which it said do not solve any problems. It said that many pensioners stop working for health reasons; they stop because of working conditions; or because the employer no longer wants them. But the government says that active pension is only part of the pension package. In addition to active pension, the government will adopt a law on pension stabilization. This will maintain the sustainability of pensions until 2031: the pension level, which is known to reflect the ratio between pensions and wages, will remain at 48%.
