On May 22, the Danish parliament passed legislation raising the retirement age. The law, approved by 81 lawmakers with 21 voting against, sets the retirement age at 70 for all citizens born after December 31, 1970. Currently, the retirement age in Denmark is 67. By 2030, it will rise to 68, and by 2035 to 69.
Last year, 47-year-old Social Democratic Prime Minister Mette Frederiksen stated she would be open to reviewing the system once the official retirement age reached 70.
International comparisons show just how differently retirement ages are regulated. In some countries, people continue to work even longer than they are legally required to.
Will Germany follow Denmark’s lead?
Germany’s new government is still trying to figure out how to deal with the country’s struggling statutory pensions system.
At a party convention of the ruling Christian Democratic Union (CDU) in Stuttgart recently, Germany’ new chancellor, Friedrich Merz, praised himself and his Social Democratic coalition partner for having “written many good things into the coalition agreement” — the key issue of how to shore up the finances of the chronically underfunded pension system, however, isn’t among them.
At least, Merz warned that “the way things are today can only last for a few more years at most.”
For Bernd Raffelhüschen, a former government economic advisor, the Danish reform effort is worth emulating.
“We should raise the retirement age to 70 quickly so we can still catch at least part of the baby boomer generation,” the economist told the Augsburger Allgemeine newspaper recently, referring to the strong cohort of people born at the end of the 1950s and early 60s, who are currently retiring in huge numbers.
Raffelhüschen said that because one million Germans are leaving the workforce every year until 2035, this would push pension contributions higher for younger generations.
Beveridge vs. Bismarck
Pension financing in Europe follows two main models named after their founders: the Bismarck model, based on social legislation introduced by German Chancellor Otto von Bismarck in the 19th century, and the Beveridge model, developed in the 1940s.
The Beveridge system is a welfare model that provides universal coverage and is tax-funded. It was devised by British economist William Henry Beveridge, a member of the UK Liberals’ parliamentary faction.
The Bismarck model, on the other hand, is an insurance-based system in which both workers and employers pay into a fund. In simplified terms, it’s a so-called pay-as-you-go system where the working population finances the pensions of retirees through their contributions.
This is why comparing pension systems across Europe is difficult — even more so as many countries use hybrid models combining aspects of both. The specifics, often complex, also vary widely between nations.
Demographics, and the benefits of working longer — or shorter
Germany’s Bismarck-based system is increasingly under strain due to demographic changes. As the population ages and the workforce shrinks, there are more retirees and fewer people to fund the social insurance schemes.
At the same time, people are living longer due to rising life expectancy, which means they draw pensions for more years.
This puts mounting pressure on pay-as-you-go pension funds, with the result that either contributions must keep rising, or pension benefits may stagnate, failing to keep up with inflation. Alternatively, the overall pension level may have to drop.
Of course, a shorter working life and earlier retirement are appealing for most people as they can leave work before their physical capabilities decline and use the final third of their lives for meaningful activities or more time with family.
There are also economic benefits, as more leisure time creates more opportunities to spend money, thus stimulating consumer demand and the broader economy.
But working longer can also have advantages. Many people feel fit and engaged well into their 60s so that they may enjoy continuing to work, pass on their knowledge, and value interaction with younger colleagues.
Employers benefit from retaining experienced staff and established routines, which may also help to mitigate the skilled labor shortage in Germany.
Retiring a personal decision
Looking at international statistics reveals that legal retirement age rarely aligns with when people actually stop working. In most cases, people retire earlier because their bodies can’t keep up, or in creative professions, because of burnout.
In a few countries like New Zealand, Japan, Sweden, or Greece, people often work beyond the official retirement age. Whether they do so voluntarily is unclear. The reasons are often too personal to be captured by statistics.
The so-called gross replacement rate — the ratio of pension benefits to the final salary — plays a major role in people’s decisions. If that gap is too wide, some workers can’t afford to retire.
The threat of old-age poverty could be reduced if pensions were high enough to provide financial security after a long career. But that would require money that the pension system currently lacks. On the other hand, raising contribution levels too much would limit workers’ ability to save privately for retirement.
This article was originally written in German.
