Active Pension Mainly Relieves Higher-Earning Pensioners; Employment Effects Are Uncertain

Abstract

The new German federal government coalition is planning a significant tax break for workers of retirement age: the active pension (Aktivrente). With the active pension, workers who have reached the statutory retirement age may earn up to 2,000 euros a month tax-free, a move that the government is hoping will motivate more pensioners to work longer to counteract the skilled worker shortage. Microsimulation analyses using Socio-Economic Panel (SOEP) data show that at first, around 230,000 pensioners would benefit from the active pension, especially those with higher incomes. This would initially result in annual tax revenue losses of 800 million euros and uncertain employment effects. If 75,000 additional pensioners started working, these revenue losses could be offset by additional revenue from their taxes and contributions. Although including the self-employed in the active pension would result in more free-rider effects, excluding them is unfeasible, as tax treatment between the two groups would be too unfair.