From July there will be more money for the around 21 million pensioners in Germany. With the annual adjustment of pensions, retirement benefits will increase by 4.57 percent for the first time in both the East and the West. However, this increase is not enough for the majority of pensioners. Although many Germans dream of a carefree retirement, the reality is often different. More and more older people receive basic security in addition to their old-age pension. Their number increased from around 414,000 at the end of 2020 to 469,000 in September 2023, according to an analysis by the Federal Statistical Office.

As the German Trade Union Federation reports, women in particular are affected by poverty in old age. Many only receive a pension of 850 euros per month. The reason for this is, among other things, the high share of part-time women. “Poverty in old age is feminine. Many women still have interruptions in their working lives due to raising children or caring for relatives,” says Uta-Micaela Dürig, state director of the Paritätischen Wohlfahrtsverband Baden-Württemberg.

Salaries play an important role in your pension, as does your work history.

The German Institute for Retirement Provision points out that the amount of the pension also depends on the individual's work history. Important factors include inflation, wage increases, job changes and unemployment during working life. Although it will no longer matter from 2023, it is important whether an employee has worked in East or West Germany in recent years.

Mandatory pension insurance in Germany is based on the earning points system. These points reflect how much you earn and pay compared to the average for all policyholders. By 2023, the value of a payment point will be around 37.60 euros. To obtain a pension of 2,000 euros per month, you need around 53.19 income points.

Although theoretically possible, only a few German citizens reach this level of income and therefore also this level of pension. But how do you do that? First of all, it is important to know the pension system.

How is the pension composed?

The pension is based on contributions paid by employees. People who contribute for longer or longer usually also receive a higher pension. The pension amount is calculated using the “retirement pension formula”, which is based on the following factors:

• payment points
• access factor
• current value of the pension
• Pension type factor

How do you get 53.19 profit points?

To reach this number of salary points, you must earn on average throughout your working life as much as the average of all insured people. The gross annual income required is currently around 45,358 euros or 3,780 euros per month. Assuming a working life of 45 years or 540 months, this results in a lifetime working sum of €2,041,110. However, this would mean that employees would have only accumulated 45 pay points. But for the pension of 2,000 euros you need 53.19. Therefore, an employee would have to earn a gross salary of 53,613 euros per year. That would be equivalent to at least 4,468 euros gross per month.

To reach this amount in 45 years of work, the average gross monthly income would have to be 3,778 euros. This amount is obtained by dividing the total working life by 540 months.

How many people receive a pension of 2000 euros?

Around 25.86 million people (as of November 2022) receive a pension from the German pension insurance. After deducting orphan's pensions, the number of pension recipients amounts to 21.26 million. Only a fraction of them receive 2,000 euros or more transferred each month: in 2015, only 97,271 people were affected.

Many employees will later be affected by poverty in old age

Young professionals only earn these amounts in extreme cases, and even during their careers, some jobs don't even come close to this value. If you want more pension, you have to look for alternatives. “Employees who want to close a gap in their pensions must now make private provisions,” the German insurance company explains to FOCUS Online.

How you can improve your pension

Mandatory pension insurance offers a solid foundation. However, additional provision from private or company pensions is essential for a life without financial worries in old age. Whether the pension is actually sufficient depends on each individual case. But for some employees it is possible. These measures can help:

1. Private pension insurance

The classic option for private pension provision is actually private pension insurance. It has been sold millions of times in the past. But consumer advocates like Merten Larisch, a retirement planning expert at the Bavarian Consumer Center, advise against entering into a contract.

High costs, opaque investment models and low interest rates often make pension insurance unattractive. “In the payment phase, insurers calculate a life expectancy so high that pensioners sometimes have to live more than 100 years to receive their money,” says the consumer advocate.

Whoever dies first leaves the majority of the sum to the company, not the family. Larisch calls this a “money grab.” Furthermore, in old age the amount of the pension does not adapt to inflation. So they lose purchasing power over time.

Klaus Morgenstern, press spokesman for the German Pension Insurance Institute (DIA), also recommends private pension insurance only in exceptional cases: “If you have a great need for security and regularly need a certain amount in old age, you can take out one . However, the security is paid for with a low pension compared to other forms of investment.

2. Company pension plan

Company pension plans (bAV) are more suitable. In principle, every employer must offer this to his employees and also cover part of the payments, except in the case of those who earn more. For several years, a participation of at least 15 percent has been required. The more the employer contributes, the more the title is worth to the employee. Especially if the employer covers all contributions.

But as soon as their own money flows in, employees should take a closer look. “If employees pay for their contract themselves through so-called deferred compensation, their statutory pension entitlement is reduced,” says Morgenstern. This is not always worth it, especially since in these cases the company pension plan is usually just private pension insurance. Their disadvantages don't go away just because the boss adds something extra.

3. ETF or stocks

What is left for private pension provision? Both experts recommend taking control of the investment and investing in stocks and interest investments.

“Investors should create an efficient portfolio,” advises Merten Larisch. “The best thing you can do is set up a savings plan based on a stock ETF that tracks a global index. If you like it and know a little about it, you can spread your money even further and also invest in other ETFs.” for example to cover other regions of the world.

If you don't have the confidence to do it yourself, you can also invest your money through a profitable robo-advisor or in balanced mixed funds that are as profitable as possible. It also makes sense to have a current account as a security component, rather than a fixed deposit or pension ETF.

Stocks are especially suitable for retirement planning, as the long investment horizon allows you to weather capital market fluctuations. With an ETF that invests globally, for example, an average return of seven to nine percent annually can be achieved.

But savers over 50 can also venture into the stock market, says Morgenstern. “You don't need all your capital at once when you retire. Therefore, the terms are still long enough to reduce investment risk.” However, the proportion of stocks in the investment mix should be somewhat lower.

4. Pension Riester

Riester contracts now have such a bad reputation that in recent years the number of new contracts has continually decreased. But subsidized pensions are unfairly criticized, says Klaus Morgenstern. Despite all the problems, there are constellations in which it is possible to obtain high returns. These arise from the allocations that Riester savers receive.

Anyone who wants to get the full state subsidy of 175 euros a year must pay at least four percent of their income subject to pension insurance, minus subsidies. Anyone with children receives 185 euros a year for each child born before 2008 and 300 euros for those born after 2008. This particularly supports low-income people with many children.

Merten Larisch formulates a general rule: “If your own contribution does not exceed a third of the amount contributed, then it is worth it.”

However, Riestern's problem is that almost no contracts are closed anymore. The few that remain are usually bad, says Larisch. But the Riester pension will soon be renovated. Maybe then there will be new and better offers.