The German Public Pension System: How it Was, How it Will Be
by Axel H. Börsch-Supan and Christina B. Wilke
Germany still has a very generous public pay-as-you-go pension system. It is
characterized by early effective retirement ages and very high effective replacement rates.
Most workers receive virtually all of their retirement income from this public retirement
insurance. Costs are almost 12% of GDP, more than 2.5 times as much as the U.S. Social
The pressures exerted by population aging on this monolithic system, amplified by
negative incentive effects, have induced a reform process that began in 1992 and is still
ongoing. This paper has two parts. Part A describes the German pension system as it has
shaped the labor market from 1972 until today. Part B describes the reform process,
which will convert the exemplary and monolithic Bismarckian public insurance system to
a complex multi-pillar system. We provide a survey of the main features of the future
German retirement system introduced by the so called “Riester Reform” in 2001 and an
assessment in how far this last reform step will solve the pressing problems of the
German system of old age provision.
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