Why do women in Germany typically receive lower pensions?
The German pension system is fair by design - but it’s exactly because it’s fair that it ends up unequal in terms of what retired men and women receive from their German pension. Seamus Wolf, co-founder of the retirement advisor app Horizon65, explains the cause of the inequality.
The state pension is essentially gender-neutral in design. It doesn't matter if you are a man, woman or non-binary; everyone is treated equally by the German state pension.
However, that principle only applies if everyone earns the same amount of money and works the same number of years over the course of their lifetimes. This very sensible and fair starting position unfortunately does not take into account existing inequalities such as the gender pay gap and the fact that women are much more likely to take time out from work - sometimes never going back full time - when raising a family.
The result is an unequal distribution in income earned over their lifetime, which directly leads to an unequal income in retirement income. To understand why, it’s important to understand how your state pension benefits are calculated in Germany.
How is the state pension accrued in Germany?
Every person signed up to the state pension system in Germany must pay a portion of their monthly salary towards pension contributions, and in return receives points that count towards their pension.
When the time comes and the required conditions have been met (usually when the person has reached the retirement age of 67, but it can be as early as the age of 62), the person then trades their pension points for a monthly pension benefit. The more pension points they acquire over their lifetime, the higher their pension payment will be when they retire.
Which brings us to the crux of the problem.
Due to the gender pay gap, women earn less income on average and therefore contribute less to the state pension over the course of their lives. The gender pay gap may initially be small but accumulated over a working career of 40 years it adds up. The inequality is worse if the woman drops out of the workforce, as then they are not contributing to their pension at all. And if they do not return to work full-time, their income will never fully recover and their contributions will lag behind, resulting in lower pension payments.
As a consequence, in many families that follow the “traditional” family model, the woman’s pension will be very small and hardly sufficient to cover the cost of living in old age. This leads to a financial trap for older women where they are fully dependent on their husband's pension.
For example, in the old (western) federal states, men have an average pension of 1.210 euros per month, but women only have 730 euros. That’s a gender pay gap of 40 percent. And that’s ignoring the issue that men have shorter life expectancy than women.
What happens if you outlive your partner?
This is also a scenario that the German state pension handles in a gender-neutral way. If you receive a statutory pension, you have two options:
- Widow's pension
- Pension splitting
The small and large widow's pension
Widows are entitled to a part of the pension from their deceased partner. However, some conditions must be met. The marriage or partnership must have lasted at least one year. And the deceased partner must have already contributed to the state pension system for at least five years. The only exception to these conditions is if the death was caused by an accident.
The size of the widow's pension depends on the circumstances and generally falls into one of two main categories: the small widow pension and the large widow pension.
The small widow's pension
If the widow is younger than 47, is able to work and is raising a minor, they will usually receive a small widow’s pension. This is generally 25 percent of the pension the deceased was receiving or would have received at the time of death.
This pension is paid for a maximum of two years and is designed to get the widow back on their feet following the death of their partner.
The large widow's pension
If the widow is aged 47 or older or is raising a minor, they will generally receive a large widow’s pension. This is usually 55 percent of the deceased’s (projected) pension and is unlimited in time.
You may also receive the large widow’s pension at any age if you are looking after a disabled child over the age of 18. It is paid out for the duration of the child’s life.
The other option is for the widow to apply for pension splitting, which is a mechanism where the pension points a couple acquired during the years they were married are combined and then halved.
There is no time limit on when you can apply for this mechanism, and you can generally receive it on top of the widow’s pensions mentioned above. So, if you are receiving a two-year small widow’s pension, it often pays to wait until the two-year period ends before applying for pension splitting. It can also be used if you wish to remarry, as you will lose your widow pension if you take a new spouse.
Once you’ve applied for pension splitting, the choice is permanent and the pension can only be drawn at age 63 at the earliest.
In either case, these mechanisms represent a loss of 25 percent of your family’s income in retirement which may not be enough to sustain your lifestyle.
What can you do to correct this inequality?
The most obvious solution would be to ensure your own financial independence prior to retirement, but if that’s not an option for you then you can take steps towards correcting the income gap by taking advantage of three potential schemes that are offered in the private sector and supported by the government with tax advantages.
The most well-known one is the Riester pension, which is a very limited option but often makes sense for a stay-at-home mother, as the government pays a fixed contribution per child. However, Riester contracts have historically not performed very well in terms of return on investment, due to government-imposed investment restrictions.
Riester pensions are often confused with another government benefit scheme, the Rürup pension, which is a scheme under which you can get a tax refund for up to 45 percent of your contributions (depending on your income). This private pension scheme allows you to contribute up to 25.639 euros (in 2022) of your pre-tax income, or up to 51.278 euros if you are a married couple filing your taxes jointly.
If you are not certain you will retire in Germany then you can also apply for a flexible pension, which does carry some tax advantages but mostly allows you to correct this inequality and, like Rürup pensions, allows you full flexibility in investment choices.
All have additional clauses to protect the lower-income spouse and potentially your children in the case of unfortunate events and, unlike the state pension, these pensions are transferred in full to the surviving spouse.
Retirement saving is a knotty issue, especially if you have taken time out of work to raise a family. Horizon65 helps you find a private pension plan that is truly personalised to your situation. Specially for IamExpat readers, they are offering a free consultation to help you discover what’s possible.