In September 2023, Europe turned in unison to Germany. What was normally one of the most solid economies in the euro zone was sounding the alarm: adding greater life expectancy to a demographic scenario of an inverted pyramid and an inflationary context left a very unpromising outlook for who are going to retire soon. In fact, the system was bringing retirees back to look for work to supplement pensions.
Two years later things have not improved, so the government has normalized them.
A structural turn. The Government of Friedrich Merz has put a clear and pragmatic proposal on the table: allowing retirees who decide to continue working receive up to 2,000 euros per month tax-free, a measure (the so-called “active pension plan”) designed to tackle the growing labor shortage that grips Europe’s largest economy.
The initiative is part of the package of reforms that the Executive has sold as his “autumn of reforms” and, according to the legislative draft in hands of the Financial Timeswill come into force on January 1. The coalition with the Social Democrats is preparing to approve it with the argument of retaining experience and knowledge in companies and increasing the employment rate in a country that faces one of the most severe demographic transitions on the continent.
What is offered and what is maintained. The measure exempts taxes up to 2,000 euros per month of additional labor income for retired people, but it does not eliminate contributions: employees and employers will continue to pay social contributions on those salaries, which (according to the Executive) will help strengthen healthcare and pension finances while improving the liquidity of companies with senior experience.
The already existing advantages for those who opt for early retirement (the legal age It’s still 67 years oldwith incentives to retire at 63). The change is intended, rather, to offer a tax incentive so that those who can and want to prolong their working life do so.
Public cost and projections. The Government itself estimates that the renunciation of collecting taxes for this incentive will cost around 890 million euros per year since its entry into force, a figure that some institutes consider optimistic: the IW Institute calculates a higher annual cost close to 1.4 billion and places the potential universe of beneficiaries at around 340,000 people.
Economists such as Holger Schmieding warn, however, that the net impact could turn positive in two or three years if the increase in economic activity and contributions compensates for the initial tax loss, in addition to the possible “psychological effect” of socially valuing the contribution of the elderly.
International lessons. The Government looks, among other examplesto Greece: when Athens allowed retirees keep their pension full and were additionally taxed at a reduced rate (10%) for their labor income, retired workers went from 35,000 in 2023 to more than 250,000 in September of the following year, a jump that illustrates the power of tax incentives to mobilize labor supply in older groups.
That experience is used in Berlin as a sign that politics can workalthough the scale, work structures and employment cultures differ.
Consequences in the labor market. The gesture aims to attack several structural symptoms: Germany today records some of the average working hours shortest in the OECD and marked growth from part-time work (which now reaches 30% of the workforce, more than double what it was at the beginning of the nineties). The policy aims to both increase effective hours and retain human capital that would otherwise escape companies.
Keep staff on staff senior can help reduce bottlenecks in sectors with a shortage of qualifications and facilitate the transfer of know-how, but it also poses the challenge of adapting positions, ergonomics and internal policies to an older workforce.
Political and economic risks. The main risk it’s double: On the one hand, the measure may penalize young people and employees in early career stages if companies choose to retain positions with cheaper payrolls and more experienced workers.
On the other hand, the Executive’s fiscal estimate could fall short if membership is high, putting pressure on public accounts at a time when the cost of social systems is already putting pressure on the budget. Besides, recalled the Times that there is a dimension of equity and public narrative: promoting people to work longer is politically sensitive when there are sectors with precarious employment or stagnant wages.
Pragmatism with doubts. Ultimately, the plan to allow 2,000 euros tax free to working retirees is, in essence, a pragmatic and technocratic response to a demographic shock and the lack of skilled labor: seeks to monetize experience, sustain contributions and gain economic muscle without resorting solely to mass immigration or abrupt increases in working hours.
Yet, your success will depend the magnitude of the accession, how it is combined with other labor policies (training, conciliation, redistribution of part-time employment) and the honesty of the fiscal projections: if the reception is high, the cost could approach the most pessimistic figures, and if it is moderate, the initiative can become a respectable exercise in institutional adjustment that contributes to lengthening the active life of many and partially mitigating the bill of aging. An unknown scenario that Japan also considers.
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