ifo Dresden: Pension Contributors in Eastern Germany Worse Off than Before

The standardization of the pension system leaves pension contributors in eastern Germany worse off than they were before, according to calculations by the ifo Institute’s Dresden Branch. “In 2018, an employee with an average income in eastern Germany was entitled to a pension of EUR 37.60 per month for each pension point. Now it’s only EUR 31.51 per month for each pension point,” says Joachim Ragnitz, Managing Director of ifo Dresden. “This is because, to coincide with the alignment of pension value, the policy of valuing contributions in eastern Germany more highly was abolished, since the ‘standard pensioner’ with 45 years of contributions and a lifelong average income now receives the same pension in eastern and western Germany.”

“From the point of view of the overall pension system, this is a necessary step. However, the decision to end the preferential treatment that those paying contributions in eastern Germany had previously enjoyed automatically leaves them, whether by accident or design, in a worse position now compared to how things were,” Ragnitz continues. He adds that in 2018, for example, eastern German contributions were worth exactly 13.4 percent more. “The consequence of the abolition is that contributions in eastern Germany are now worth less than before, because the average income in eastern Germany is still significantly lower than in western Germany,” Ragnitz says. “It’s as if legislators now assume that both average incomes are the same. But that’s still not always the case. The average income in eastern Germany is still 17 percent below the average in western Germany. Or, conversely, gross wages and salaries per employee in eastern Germany are currently 82.8 percent of what they are in western Germany. This means that the general wage gap in eastern Germany will also be reflected in lower pensions for the majority of employees in the future. But the pension funds aren’t the right tool for aligning pensions; rather, this calls for an improvement in the competitiveness of eastern German companies.”