Germany's Bundestag Approves Major Pension Reform to Address Aging Population Challenges

Germany's Bundestag approved a significant pension reform package on December 5, 2025, with a vote of 319 in favor, 225 against, and 53 abstentions. The legislation aims to maintain state pensions at 48% of average wages until 2031, introduces tax incentives for working retirees, and enhances the "mother's pension." Despite internal opposition from younger members of Chancellor Friedrich Merz's center-right Union bloc, the package passed without relying on opposition support, underscoring Merz's ability to consolidate his coalition.

The reform ensures that state pensions remain at 48% of average wages until 2031, preventing a previously planned decline. Additionally, starting in 2026, retirees who continue working can earn up to €2,000 monthly tax-free, aiming to address labor shortages and encourage prolonged workforce participation. The legislation also extends childcare credits for children born before 1992, increasing the credited childcare time from six months to three years, benefiting approximately 10 million parents, predominantly women.

A group of 18 young lawmakers within the Union bloc opposed the post-2031 provisions, arguing that they could impose an annual cost of up to €15 billion, potentially burdening younger generations. Despite this internal dissent, the package passed without relying on opposition support, reflecting Chancellor Merz's ability to consolidate his coalition.

The pension reform package is estimated to cost approximately €185 billion over 15 years. To address challenges posed by Germany's aging population, a commission is established to propose further pension system reforms by mid-2026.

Germany faces demographic challenges with a rapidly aging population, leading to a diminishing worker-to-retiree ratio expected to fall to 1.3 by 2050. The reform's tax incentives for working retirees aim to mitigate labor shortages projected to worsen due to an annual decrease of around 400,000 in the working-age population.

Germany has a history of pension reforms aimed at addressing demographic shifts and economic challenges. The current reform continues this trend by implementing measures to sustain the pension system amid an aging population.

Germany's recent pension reform represents a significant policy shift aimed at maintaining pension levels and addressing demographic challenges. The legislation's passage, despite internal opposition, underscores the complexities of balancing economic sustainability with social welfare in an aging society.