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Retirement Provision: How Many Years of Work Are Needed to Achieve a Pension Above the Level of Social Welfare?

If a person has never worked in Germany, they are still entitled to the so-called basic provision in old age. Depending on the place of residence and accommodation costs, this amount varies – but on average nationwide it amounted to around 862 euros per month in December 2022.

As reported by the “Spiegel”, a new model calculation by the Ministry of Labour and Social Affairs now shows that German employees will only receive a pension equivalent to the basic provision in old age after more than 27 years of employment.

This calculation is for average earners in Germany. However, a large part of the population earns less than the average.

Employees Need to Contribute 83,600 Euros to the Pension Fund

In total, employees must pay approximately 83,600 euros into the pension fund in order to have a better financial standing in old age compared to individuals relying on social welfare who may not have contributed anything.

To put it simply: if an employee earns one euro less than 33,293.55 euros annually or 2,774.46 euros monthly, their work as retirement provision does not pay off. How well does the pension system work for those who can contribute at least 83,600 euros? The answer to this question mainly depends on how the employee utilized the money, if they did not contribute it to the pension fund.

Example Calculation: Pension Fund vs. DAX

Since its standardization on December 31, 1987, the German stock market index (DAX) has gained an average of 7.92 percent. An employee who retained their average contribution to the pension fund for 27 years and invested it in the stock market would have had 269,005 euros after 27 years.

Even if the investor never touched this money afterwards, but only lived off the annual return, they would have had approximately 1,614.03 euros gross monthly, or – after deducting capital gains tax, solidarity surcharge, without considering individual allowances or church tax – 1,188.33 euros net monthly. This would be 326.33 euros more per month than they would receive as a pension.

A risk-averse retiree who didn’t invest their 269,005 euros anymore, but only consumed it, would have 198,054.93 euros available for the rest of their life. Given an average life expectancy of roughly 80.5 years and an average retirement age of roughly 66 years, this would correspond to 13,658.96 euros net annually, or 1,138.25 euros net monthly. This would be about 276.25 euros more per month than they would receive as a pension.

However, these example calculations do not take into account the risk of inflation or the generally higher risk of stock investments. They are a thought experiment to consider the effectiveness of the pension system using opportunity costs.

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