Day 2: How government pension insurance works – The young pay for the retirement of the elderly
The retirement system in Germany is built on a pay-as-you-go system in which the current workforce pays for today’s retirees. Government pension insurance is known in Germany simply as “German pension insurance.”
Government pension insurance contributions are compulsory for all workers (including some who are self-employed) in Germany. The employer pays half of the retirement contributions, and the employee pays the other half. Government pension insurance benefits get paid out starting at age 65 and constitute a basic supply source.
When are you entitled to government retirement?
You are entitled to this benefit once you have worked in Germany for at least five years. The amount of the retirement payout depends on the contributions you paid in throughout the time you worked in Germany.
The government provides different ways to enhance your government pension. Examples of this are the Riester pension and the Rürup pension.
The Riester pension, introduced in 2002, is intended as a supplement for the state pension to compensate for income losses stemming from pension reforms. The state promotes the Riester pension through allowances and tax advantages. This pension scheme is named after Walter Riester, a former Minister of Labor.
Who can take out a Riester contract?
Basically, everyone who pays into government pension insurance is entitled to establish supplemental retirement provisions via a Riester contract. If you would like to take out one of these contracts, you’ll have to contribute a minimum of 4% of your annual income (maximum 2100 euros per year). You’ll then receive an allowance of 175 euros from the state each year. The Riester contract is more impactful if you have children, as the state throws in 300 euros per year per child – the more kids, the more money. You can also deduct these contributions on your annual income tax return.
The Rürup pension was established in 2005 for those who don’t pay into government pension insurance and aren’t entitled to the Riester pension. These are mainly freelancers and entrepreneurs. It was developed by the economist Bernd Rürup and is designed to provide at least foundational provisions for retirement. For this reason, it is sometimes called the basic pension. The government supports the scheme through tax advantages. You are free to decide how much you pay in. There’s no bonus from the government here, although the savings plan is promoted by tax incentives. You can currently contribute a maximum of 25,787 euros per year.
Who can take out a Rürup contract?
Anyone and everyone can take out a contract, although it was developed especially for independent contractors, freelancers, and high-income earners.