Germany: Economic Experts Advocate for Tax and Pension Overhaul Amid Labor Shortages

The Federal Republic of Germany is currently grappling with a profound structural crisis within its labor market, primarily driven by an unrelenting demographic transition. Projections indicate that the nation could face a deficit of seven million workers over the next fifteen years as the population ages, a scenario that poses a direct threat to the maintenance of current living standards. Consequently, the national discourse has evolved, moving away from criticizing citizens for preferring "part-time lifestyles" toward an urgent recognition of the need for comprehensive systemic transformations.

Key trends fueling concern among economists include the rapid retirement of the baby boomer generation and an exceptionally high prevalence of part-time employment. Statistical data from 2025 underscores the magnitude of this challenge; in the second quarter of 2025, the proportion of employees working part-time surpassed the 40% threshold, reaching a record 40.1%, a trend that persisted through the third quarter. This represents a stark departure from the 1990s, when part-time roles were the exception rather than the norm. As of September 2025, the number of part-time workers stood at 11,910,500.

While political leaders call for reforms to stimulate economic growth, experts point toward significant fiscal barriers that discourage labor. Dominik Grol from the Kiel Institute for the World Economy (IfW Kiel) observes that rational employees often see little financial benefit in working overtime due to the heavy burden of taxes and social security contributions, particularly for those in lower-wage brackets. There is a growing consensus among leading economic institutes to reform the tax-transfer system to make additional work more lucrative. Enzo Weber of the Institute for Employment Research (IAB) posits that capping the tax burden on extra earnings at 30% could potentially unlock hundreds of thousands of new job opportunities.

Robert Grundke, the head of the Germany department at the OECD, identifies significant untapped potential within older age groups, emphasizing the necessity of providing flexible working conditions and continuous professional development. He advocates for a radical reduction in marginal tax rates for low- and middle-income earners. To finance such a move, Grundke suggests the elimination of various tax exemptions related to capital gains, inheritance, and VAT, alongside more rigorous tax enforcement measures.

Pension sustainability remains a contentious issue, as Germany possesses the oldest working-age population in the European Union, placing immense pressure on its pay-as-you-go pension system. Dominik Grol proposes the abolition of early retirement at age 63 without benefit deductions and suggests linking the retirement age directly to life expectancy. This proposal addresses the demographic reality where, by the mid-2030s, the ratio is expected to drop to just 1.5 workers for every one retiree.

Ultimately, economists agree that a collective effort to eliminate distorting incentives in the tax and social sectors could yield a substantial macroeconomic impact. Against a backdrop of stagnating growth and a shrinking workforce, Germany requires a multifaceted strategy that blends fiscal incentives, employment flexibility, and structural pension reform to prevent a decline in quality of life. As of April 2025, the average gross monthly wage in Germany was 4,784 euros, though it is notable that two-thirds of full-time employees earn less than this figure.