Retirement at 63 in Germany leads to higher costs

The retirement at 63 is more expensive than originally thought. Costs are expected to rise even more when bigger birth cohorts are able to take advantage of the deduction-free early pension.

02/28/2019 · ifo Institut Leibniz-Institut für Wirtschaftsforschung an der Universität München e. V. · Forschungsergebnis · News · Wirtschafts- und Sozialwissenschaften, Raumwissenschaften

The ‘retirement at 63’ scheme in Germany leads to higher costs than originally thought. According to calculations by the ifo Institute in Munich the scheme has resulted in direct additional pension insurance expenditures of 6.5 billion euros between 2014 to 2016, while the German government had estimated the costs at 5 billion. “If foregone taxes and social contributions are added, the total costs in this period even amount to 12.5 billion euros. Costs are expected to rise even more in the coming years when bigger birth cohorts are able to take advantage of the deduction-free early pension”, say ifo researchers Carla Krolage and Mathias Dolls.

People who can claim a pension at 63 retire on average 5.4 months earlier than comparable people who can only retire early with deductions. "Men in particular are responding strongly to the reform. They retire on average 9 months earlier, women on average 4 months," say Krolage and Dolls.

Persons who can claim a deduction-free pension at the age of 63 also receive on average significantly higher pensions than persons who can only enter early retirement with deductions. "The retirement at 63 weakens the sustainability of the statutory pension insurance. It is a redistributive measure, associated with high costs, from contributors and recipients of smaller pensions towards pensioners with comparatively high incomes“, say Krolage and Dolls.

The retirement at 63 allows individuals with at least 45 contributory years to retire early without financial losses due to deductions. The 45 years include child-raising periods and certain periods of unemployment. If the 45 contribution years are not reached, insured persons must accept deductions of between 7.2 and 9.9 percent, depending on the year of birth, when they retire at the age of 63. 

Original publication

Dolls, Mathias and Carla Krolage, "The Effects of Early Retirement Incentives on Retirement Decisions", ifo Working Paper No. 291, 2019 | Details | PDF Download

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