Germany: a mandatory dose of funded pension at the heart of the statutory scheme

The essentials

On 23 June 2026, an independent expert commission handed the German government a report of 33 recommendations aimed at overhauling the pension system. The most striking proposal is to introduce a mandatory dose of funded pension inside the statutory scheme itself - and no longer merely as an optional supplement, as is the case in Germany today. Several points deserve to be retained from the outset.

• A pay-as-you-go system caught in a demographic vice. By 2040, Germany will have barely more than two workers per retiree. Under current law, the contribution rate would climb from 18.6% to over 21% of wages, without preventing the pension level from falling.
• Funding conceived as a complement, not a replacement. Pay-as-you-go explicitly remains the core of the system.
• A public, mandatory, pooled and very low-cost scheme. An additional contribution of 2%, split equally between employers and employees, paid into individual capital accounts managed by a public fund on the Swedish model, with fees capped at 0.1% per year.
• The central trade-off: funding "on top", not "by carve-out". The 2% is added to existing contributions rather than diverting part of them. There is therefore no financing hole in the pay-as-you-go system, unlike the scenario feared in France. The cost takes the form of additional contributions - a choice Germany can afford because it starts from a much lower base (18.6% pension contribution and 40.9% of GDP in compulsory levies, versus around 28% and 45.3% in France).
• It is not a law yet. Chancellor Merz and Minister Bas want to implement the whole package, with no "cherry-picking"; the draft laws still have to be prepared, with the funded component targeted ideally for 2028. At this stage it remains a recommendation - not an enacted decision.

A pay-as-you-go system cornered by demographics

The commission's diagnosis is blunt: ageing is already under way. The old-age dependency ratio - the number of people aged 67 and over per hundred people of working age - rises from 32 today to 38 in 2030, then 45 in 2040, as the baby-boom generations retire. In other words, a retiree will soon face barely more than two workers.

For a pay-as-you-go system, where workers' contributions directly pay current pensions, this is a financing shock of the first order. The commission describes a tension it calls "insoluble": for a given level of State subsidy, one cannot simultaneously hold down the contribution rate and keep the pension level high. One of the two must give way.

The official German projections show it. Under current law:

• the contribution rate would rise from 18.6% today to 20.2% in 2031, then 21.1% in 2040 and 21.4% in 2050;
• the pension level, guaranteed at 48% of wages until 1 July 2031, would then fall to 46.4% in 2040 and 46.1% in 2050.

On top of this comes a starting handicap: the net replacement rate for an average earner is already lower in Germany (53%) than the OECD average (63%). It is to escape this vice, at least partly, that the commission turns to funding.

The flagship proposal: mandatory funding, inside the statutory scheme

Germany already practises funding, but only as an optional supplement: occupational pensions and subsidised individual savings, the second and third pillars set up from 2001. The break proposed here lies elsewhere: to introduce, for the first time, a mandatory funded share within the first pillar itself - the statutory scheme, historically purely pay-as-you-go. It is this "statutory funded pension" (gesetzliche Kapitalrente) that forms the heart of the report.

The mechanism is modelled on the Swedish system. An additional 2% contribution on wages, financed equally by employer and employee, would feed individual capital accounts. The phase-in would proceed in steps of 0.5 percentage point per year, over four years, from 2028, so as not to burden labour costs abruptly.

The sums would be managed centrally and invested in the markets through a reference public fund (the commission cites KENFO, the public fund that finances nuclear waste management). Those unwilling to contribute to it could choose from a limited number of certified funds, subject to the same requirements.

It is the conditions attached that make the scheme's whole interest, and that contrast with the failures of Germany's private retirement savings:

• fees capped at 0.1% per year (ten basis points), to preserve net returns;
• professional, long-term, internationally diversified management, steered by a committee of external experts independent of political power;
• capital ring-fenced against any misappropriation, including political, and without investment exclusions on political grounds (apart from unethical cases examined individually);
• a product that is not a transferable individual investment: these accounts are neither bank accounts nor securities portfolios and cannot be inherited. It is social insurance, with pooled risks, paid out as a lifelong annuity alongside the pay-as-you-go pension.

The stated objective is twofold: to capture the returns of global markets - on average always positive over the long run and largely decoupled from German demographics - and to bring in those who are excluded from them today, for lack of access to the markets. The commission presents this social dimension as particularly important, and adds an argument of sovereignty: strengthening funding revives the European capital market and finances innovation and growth.

The decisive trade-off: funding "on top", without digging a hole

There are two ways to introduce funding into a pension system.

The first, known as carve-out, consists in diverting part of existing contributions into funded accounts. This is the scenario that fuels the case against funding in France: if pay-as-you-go is stripped of part of its revenue while it must still pay current pensions, a financing hole opens up that has to be filled.

The German commission preferred the opposite: these 2% are not taken from current contributions; it is an entirely new contribution, stacked on top of the existing one.

These 2% take nothing away from pay-as-you-go: there is therefore no financing hole in the existing scheme.

The cost is not nil for all that, because this scheme creates additional contributions on employees and employers: the working generation continues to fund current pensions in full and saves for itself on top.

To make this cost bearable, the commission relies on three levers:

• a smoothed phase-in (0.5 point per year);
• a partial offset through the other reforms in the package (raising the retirement age after 2031, ending early retirement without penalty);
• efficiency: collection through the existing employer channel, fees at 0.1%.

The commission recalls that market returns are not guaranteed in the short term - hence the insistence on a long horizon and transparency.

The other tiers: occupational pensions and funding from childhood

Mandatory funding is only one piece of a larger whole. The commission first wants to generalise occupational pensions, whose coverage is stuck at 52% of employees and remains very uneven: barely 25% in firms with fewer than ten employees and 34% among low earners, against 86% in large groups.

It proposes a dialogue between social partners as early as 2026, then a law, and the removal of structural obstacles (complexity, entry fees, lack of portability, insufficient support for low earners).

Two reforms already under way complete the picture:

• the "early-start pension" (Frühstart-Rente): for children, from the age of 6, a retirement savings account topped up by the State by 10 euros per month (1,440 euros over twelve years), transferable to the statutory funded pension at 18;
• the overhaul of subsidised individual retirement savings, for which the commission calls for close monitoring of take-up and costs.

The common thread, hammered home throughout the report: avoid costly parallel structures and build a coherent whole, from the first account opened at six to the lifelong annuity.

What happens next

As things stand, this is a report of recommendations, not a law. The document was drawn up by an independent expert commission of thirteen members - academics, OECD, parliamentarians from the main parties - set up on 7 January 2026 and meeting over nineteen sessions.

It sets out thirty-three recommendations, handed over on 23 June 2026 to Labour Minister Bärbel Bas.

Nothing is voted at this stage, but the political weight is strong. Chancellor Friedrich Merz praised "intelligent" proposals and wants to implement the entire package, judging that "we cannot afford to remove elements"; Minister Bas refuses any "cherry-picking" and is to present concrete proposals as early as the summer of 2026. The roll-out of funding is targeted "as soon as possible", ideally in 2028.

Above all, one must distinguish what is already under way from what remains to be arbitrated. Already in the legislative pipeline:

• the early-start pension for children (2026);
• the overhaul of individual retirement savings (passed in 2026);
• the second occupational-pension strengthening act (2026);
• the guarantee of a 48% pension level until 1 July 2031 (already in law).

By contrast, the most structuring measure - the mandatory 2% funded contribution - remains a recommendation, not yet translated into a text. That is the trade-off the Merz government will have to make in the coming months.

Appendix - The Commission's 33 recommendations

Full list, in the order and numbering of the report, grouped by its seven chapters.

I. Overall pension level and information for the insured

• 1. Set, as the political target for a living-standard-preserving pension, a net replacement rate of at least 70% after tax, across all pension sources.
• 2. Publish regularly, alongside the pre-tax "pension level", a net replacement rate (after tax), by case-types and by retirement cohort.
• 3. Improve the statistical monitoring of the population's retirement savings and the quality of administrative data.
• 4. Develop the digital pension overview as an information and planning tool, and launch a national financial-education strategy.

II. Retirement, rehabilitation and prevention

• 5. After 2031, moderately raise the statutory retirement age by linking it to life expectancy (a 2:1 sharing rule): about +6 months between 2031 and 2041, i.e. from 67 to 67.5 years.
• 6. Abolish penalty-free early retirement for very long careers (the "retirement at 63" without penalty after 45 contribution years).
• 7. Create no retirement entitlement based on contribution years alone.
• 8. Quickly raise from 63 to 64 the early-retirement age for long careers, then align it with the statutory age, keeping a three-year departure window.
• 9. Continue to calculate penalties and bonuses on actuarial principles neutral for the community, and update them regularly.
• 10. Strengthen health prevention and reintegration (individual case management, check-ups from age 45) and ease access to retirement for those who can no longer practise their occupation.
• 11. Examine a reform of survivors' pensions to adapt them to societal change.
• 12. Strengthen occupational rehabilitation and create within the statutory scheme a dedicated budget calibrated on real needs.
• 13. Raise from 55 to 58 the age of access to senior part-time work and link it to the statutory age; abolish the "block" formula, akin to early retirement.

III. Financing of the statutory scheme

• 14. Keep pensions indexed to wages and return to automatic annual adjustments reflecting demographics (sustainability factor, parameter raised to 0.33), without the pension level falling below current law.
• 15. Introduce a "transition factor" guaranteeing, for new retirees from 2032 still little served by funding, a pension level at least equal to today's - financed by tax, then reduced as funding ramps up.
• 16. Keep a single contribution rate on wages, with no new criteria or new bases, and keep the current method for calculating the contribution ceiling.
• 17. Clarify and finance by tax (renamed "State share") the benefits not covered by contributions that fall under national solidarity.

IV. Prevention of old-age poverty

• 18. Roll back "hidden" poverty (non-take-up) and guarantee effective access to the minimum subsistence level; simplify social benefits.
• 19. Reform the means-testing rules of the old-age minimum so that those who contributed have more than those who did not (a pension allowance).
• 20. Permanently abolish the possibility of forcing the long-term unemployed into early retirement with penalties.

V. Extending affiliation to other groups

• 21. Aim, as an ideal, for an "all-workers insurance" covering the self-employed, civil servants, members of parliament and company board members.
• 22. Affiliate compulsorily to the statutory scheme, with no opt-out, all newly self-employed not otherwise covered (opt-out possible for those already established).
• 23. Transpose identically the statutory-scheme reforms to civil-servant pensions, sharply reduce the number of tenured appointments and provision for pensions.
• 24. Affiliate members of parliament (Bundestag and Länder) to the statutory scheme.
• 25. Affiliate company board members to the statutory scheme.
• 26. Bring "mini-jobs" into the statutory scheme without opt-out and abolish their special tax and social status, except for pupils and students.

VI. Funded elements

• 27. Strengthen funded elements in the pension system, drawing on the most successful foreign models.
• 28. Create a mandatory funded component within the statutory scheme ("statutory funded pension"): individual accounts, a parity 2% contribution phased in by steps, centrally managed on the Swedish model through a very low-cost public fund.
• 29. Open in 2026 a social-partner dialogue to generalise occupational pensions, then translate it into law.
• 30. Improve the appeal of occupational pensions: administrative simplification, portability, legal certainty, cost-sharing, support for low earners.
• 31. Dovetail the "early-start pension" for children (Frühstart-Rente) with the statutory funded pension, to create synergies and very long saving periods.
• 32. Closely monitor the effects of the reform of subsidised individual retirement savings (former "Riester"): take-up, contracts, costs, returns and budgetary impact.

VII. Digitalisation and administrative modernisation

• 33. Reorganise the statutory pension body (DRV) to make it more efficient, faster and closer to users.