Germany to Introduce 'Aktivrente' Scheme Allowing €2,000 Monthly Tax-Free Earnings for Working Retirees

Germany Unveils 'Aktivrente' to Incentivize Post-Retirement Work

Germany is preparing to introduce a new 'Aktivrente', or active pension, scheme, allowing retirees who continue working to earn up to €2,000 per month tax-free in addition to their regular pension. This measure, scheduled to come into force on January 1, 2026, is a key component of the government's strategy to address economic stagnation, skilled labor shortages, and an aging population. The initiative was championed by Chancellor Friedrich Merz and is part of a broader 'autumn of reforms' aimed at revitalizing Europe's largest economy.

Key Details of the 'Aktivrente' Scheme

Under the 'Aktivrente' scheme, individuals who have reached the statutory retirement age of 67 and choose to remain in employment will benefit from the tax exemption. The monthly tax-free limit is set at €2,000, equating to €24,000 annually. While the earnings will be tax-free, both employees and employers will still be required to pay social security contributions on these additional moneys.

The scheme is primarily designed for those working in jobs subject to social security contributions. However, certain professional groups will be excluded from the 'Aktivrente', including:

• Civil servants
• Tradespeople
• The self-employed
• Those employed in agricultural and forestry industries

Addressing Economic and Demographic Challenges

The German government, a coalition of the Christian Democrats (CDU) and the Social Democrats (SPD), hopes the 'Aktivrente' will incentivize post-retirement working and keep valuable experience and knowledge within companies for longer. The country faces a significant demographic challenge, with approximately 9% of its workforce, or 4.8 million people, expected to retire in the next decade. This demographic shift contributes to a chronic skilled labor shortage affecting sectors such as construction, education, and health.

Chancellor Friedrich Merz has described the measure as an attempt to tackle economic stagnation exacerbated by these labor market issues. The government anticipates that the tax incentive will lead to an overall increase in the employment rate, contribute to economic growth, and generate higher government revenues through increased social security contributions.

Broader Reform Package and Criticisms

The 'Aktivrente' is part of a wider package of reforms. Other measures include making overtime bonuses tax-exempt, provided they do not exceed 25% of an employee's basic wage, and offering one-off tax-free bonus payments of up to €4,500 to part-time employees who increase their working hours.

Despite the government's optimistic outlook, the scheme has faced criticism. The German Economic Institute (IW) has warned that the policy's overall labor market impact might be marginal and could potentially increase inequality, as primarily higher earners are expected to benefit. Ruth Maria Schüler, an IW pension expert, questioned the justification for tax-exempting one type of income while others are not. The German Trade Union Confederation (DGB) has also expressed concerns, stating that the regulation 'costs billions, but does not solve any of the existing problems'.