Spain has been applying different reforms for more than 15 years to guarantee its public employment system and plug a structural hole that, despite record contributions and tools such as the Intergenerational Equity Mechanism (MEI), has forced the State to inject 48,000 million extra in the last year. Germany and Spain share the same system based on the pay-as-you-go system, but with a big difference, and that is that the German country’s recipes for surviving the demographic tsunami are diametrically opposed to the Spanish ones, moving away from the incessant increase in taxes on work.
If we look at the study of Mercer CFA Institute Global Pension Index 2025Germany obtains a solid “B” grade with 67.8 points, clearly surpassing Spain, which stagnates in the “C+” category with 63.8 points due to its extreme fragility in long-term sustainability.
The difference is not in paying exorbitant pensions; In fact, the average gross public pension in Germany was around 1,102 euros per month in 2023, with a strong gender gap (men received about 1,431 euros and women barely 930 euros), figures that have experienced accumulated revaluations of more than 8.5% since then, bringing the average to over 1,200 euros. What is a real lesson is in the way it gives incentives for both working and saving.
The lifesaver of the ‘Aktivrente’ or the 2,000 euros tax-free
The measure that attracts the most attention and that Germany has implemented since January 1, 2026 is the Active (active retirement). This comes because the country urgently needs labor and “retiring” healthy workers is an unaffordable luxury. For this reason, the German Government has decided to reward in the form of money those workers who decide to delay their retirement age, that is, what in Spain would be a delayed retirement or active, partial or flexible if it is compatible with work and pension.
Just as in Spain we have the famous Law 27/2011, by which the progressive increase in retirement age up to 67 years, the legal retirement age in Germany also increases and will be 67 years old by 2031. Under the new law, any citizen who reaches that age and decides to continue working voluntarily will be able to collect up to 2,000 euros per month from their salary completely free of income tax (Lohnsteuer, which in Spain is personal income tax).
Although the worker must continue paying the contributions for his or her medical and care insurance, this tax exemption leaves him with a tremendously attractive net salary. At the same time, the citizen receives his normal pension (which continues to be taxed as usual), becoming a pensioner with a “double income” and a very high purchasing power. With this move, the State wins twice: it retains talent in the face of labor shortages and keeps seniors injecting money into the real economy.
The ‘Generationenkapital’
To prevent the youngest from ending up suffocated by social contributions higher than 22% in the next decade, Germany has broken the taboo of the pure pay-as-you-go system by launching the Generationencapital (Generational Capital).
Instead of raising taxes indiscriminately, the federal government has begun injecting public funds (initial €12 billion through loans, plus €15 billion in state assets until 2028) into a sovereign fund. The objective of this independent entity is to aggressively invest that capital in global stock markets to take advantage of compound interest.
The goal set by law is for this fund to reach a volume of 200 billion euros by the mid-2030s. The financial returns generated by these stock market investments will be protected and used exclusively to stop the rise in workers’ contributions and stabilize the finances of Social Security.
Despite its focus on sustainability and the market, Germany has not neglected social peace. In its last major reform, the government protected by law a “red line” which is the guarantee that the average level of pensions will not fall below 48% of the average salary at least until 2032. In fact, the system foresees a major update for this same year, with a pension increase of 4.24% effective as of July 1, 2026, applicable equally in the east and west of the country.
What Spain should take into account
While Spain bases its strategy on penalizing early retirement and creating a reserve fund (the “pension piggy bank”) fed exclusively by new tax burdens on companies and workers, Germany looks towards capital markets and positive tax incentives.
The German model demonstrates that demographic sustainability is not achieved by forcing people to work longer through punishment, but by transforming retirement into an attractive and flexible transition (Active), and assuming that the Welfare State of the 21st century urgently needs the profitability of private financial markets in order to survive.