The key features of the German pension system in the late 1980s

German pension insurance (Gesetzliche Rentenversicherung) provides for old age, invalidity, and survivors’ pensions. It comprises institutionally distinct schemes for blue- and white-collar workers with ultimately identical provisions. Civil servants draw pensions under the tax-financed civil service scheme (Beamtenversorgung), which provides benefits that equal 75% of final pay after 35 years’ membership. Other public employees are compulsory members of a special supplementary scheme based on collective agreements (Zusatzversorgung Öffentlicher Dienst), designed to augment pensions under the workers’ and employees’ scheme, in order to provide pensions similar to those of tenured civil servants. Members of various professions are covered by self-governing compulsory insurance institutions (Versorgungswerke). All dependent workers and recipients of unemployment benefits are compulsorily covered for pension insurance. Self-employed people are usually not compulsorily covered, but may join the insurance system on a voluntary basis.

Old age pensions are earnings-related and designed to maintain the relative standard of living attained by the recipient during his/her working life. Entitlement to an old age pension presupposes a minimum insurance record of 5 years of contributions and attainment of the age limit of 65 years. Women and the long-term unemployed are entitled to a full pension from the age of 60. People with 35 years of contributions may opt for a pension from the age of 63, or 60 if handicapped. The amount of individual pensions basically reflects the contribution record of the insured person and the level of his/her earnings (Lebenseinkommensprinzip). A worker with a contribution record of forty years and life-time earnings corresponding to the average income of all insured people will receive an old age pension equalling 60% of recent average earnings. All pensions have been indexed since 1957. The annual adjustments generally reflect the development of average gross earnings.

Pension insurance schemes are financed by earnings-related contributions which amount to 19.2% of earnings (1986). Employees and employers each pay one half of this rate. Earnings above a certain ceiling are exempted from contributions. The federal government contributes about 20% of aggregate resources. The insurance schemes operate on a pay-as-you-go basis with a minimum reserve fund of one month's expenditures. Contribution rates must be increased if financial forecasts show that reserves are to fall below one month's expenditures.