Faced with a Worsening Economic Situation, the German Government Tries to Reform its Social Security System

Aleksandra Kozaczyńska, an expert at the Polish Centre for Eastern Studies, believes that the reform’s efficiency will be constrained by the coalition partners’ differing political priorities and concerns over the social costs of the reforms, which could benefit the poll-leading Alternative for Germany (AfD).

On 2 July 2026, Germany’s federal government agreed on a reform package entitled the Programme for Economic Recovery and Employment. The bill’s very title is a telling one, suggesting that the German economy is in need of ‘economic recovery’ – even though there has been no war, nor a large-scale global economic crisis.

The package comprises 34 measures aimed at stabilizing the social security system and reducing the tax burden for some taxpayers. One of the package’s most important elements is the commitment to implement, by the end of 2026, the recommendations of the Pensions Commission published in the second half of June. These include linking the statutory retirement age to increases in life expectancy. According to media estimates, this would gradually raise the retirement age to 70. The possibility for early retirement will also be restricted: the government intends to abolish the existing rule that allows those who have worked for 45 years to retire at a younger age without seeing any reduction to their pension.

The package is a response to Germany’s deteriorating economic situation and the growing pressure this has placed on the government. In the spring, the government lowered its 2026 GDP growth forecast by 0.8 pp to 0.5 percent, citing the negative effects of the war in Iran, including higher energy prices, weaker competitiveness and declining exports to the United States and China. The industrial sector has been particularly affected. According to an Ernst&Young analysis, employment in German industry was 2.3 percent lower at the end of the first quarter of 2026 than a year earlier, with a total of 341,500 jobs lost since 2019.

In March, the Bundestag adopted a social benefit reform, and changes to the healthcare system are currently being finalized. These reforms aim to limit upward pressure on social security contributions in the face of a deteriorating demographic outlook. The government intends to compensate its social expenses by raising the tax on high incomes. Annual incomes above EUR 250,000 will be taxed at 45 percent, and for incomes higher than EUR 280,000 the rate will grow to 47 percent.

The selective and compromise-driven nature of the package highlights the government’s limited room for maneuver. The government’s cautious approach to more far-reaching reforms reflects both the policy differences between the Christian Democrats and the Social Democrats and the coalition’s low public approval, with only 13 percent of respondents satisfied with the federal government’s performance. It is also driven by concerns that unsuccessful reforms could further increase support for the Alternative for Germany (AfD) party. According to an ARD Infratest dimap poll conducted in July, support for the CDU/CSU stands at 22 percent, compared with 27 percent for the AfD.

The document contains no concrete proposals to consolidate the strained federal budget, while the planned income tax reform is less focused on low- and middle-income earners. The tax scale will anyway be adjusted this autumn to account for so-called fiscal drag, whereby inflation-driven increases in nominal wages push taxpayers into higher tax brackets even though their purchasing power declines.

The German Taxpayers’ Federation (BdSt) called the reform package proposed by the government a sheer disappointment. BdSt President Reiner Holznagel explained that the EUR 10 billion annual exemptions promised account for less than one percent of all tax revenues.

Original publication: https://www.osw.waw.pl/en/publikacje/analyses/2026-07-07/compromise-reforms-amid-germanys-economic-stagnation