Pensioners in Germany could be offered tax breaks of up to 45% if they stay in work, according to the government. The new law, designed to tackle a rising labour shortage, would see those aged 66 and older given an additional £21,000 tax-free to incentivise working beyond the state pension age.
The plans will see people earn up to £1,750 a month tax-free, even if they are already drawing a state pension and is one of several proposals brought by the ruling coalition to boost investment and tackle a stagnant economy. Known as “aktivrente”, or active pension, the new laws could be in place as early as January, but experts have warned that it will not solve the issues faced by the country on its own.
Peter Haan, professor of empirical economic research at the Frei Universität and head of the public sector department at DIW Berlin, told IPE: “It is also important to invest in health, continuing education, and jobs, so that older people can actually work longer. For many, this is currently impossible due to poor health or excessive workload.
“In the long term, it could lead to fewer investments in private pensions if younger people plan to work longer. How large this effect would be is difficult to estimate. In my opinion, it’s rather small.”
The country is dealing with the consequences of falling birth rates during the 1960s and 1970s exacerbated by the increased costs of the state and public sector pensions.
CDU general secretary Carsten Linnemann told Reuters: “We want to make working in old age more attractive.
“We want the active pension to help combat the shortage of skilled workers.”
Susanna Adelhardt, of retirement providers Heubeck and chair of the German Actuarial Association, warned that the issues being faced by Germany are not unique to the country.
She said: “We have demographic change. It’s not only Germany, it’s European-wide. We have experienced workers missing.
“We see that younger people are more focused on work-life balance and not working as hard. They say ‘No, it’s my time.’ Part time working is also more popular, so we have this lack of experienced people.
“It’s not possible to fill this with AI or more industrialisation, so we need the workers during this period.
“The active pension takes action, with people working longer after the retirement age. If they want to work after this age, they get a tax reduction.”
Gerard Lyons, of wealth managers Netwealth, said: “The German approach provides a strong incentive for able pensioners to remain working. It’s worth considering here.
“The UK needs to index tax-free allowances so they rise in line with inflation. Without reform, many will soon find the State Pension alone pushing them over the allowance, hitting them with tax bills that erode retirement incomes or the incentive to work.”