Germany's pension reform and labour laws face overhaul calls

Economist Schularick on Pensions, China and Capital Markets Union - Germany's pension and labour reforms urged to boost economic competitiveness

President of the Kiel Institute for the World Economy Criticizes German and European Economic Policy

Moritz Schularick, president of the Kiel Institute for the World Economy (IfW Kiel), is a sharp critic of Germany's and Europe's economic policies. He argues that the state protects high earners too rigidly.

For over two and a half years, Schularick, an economist originally from Berlin, has led one of Germany's most prestigious economic research institutes. His work typically focuses on financial stability, wealth distribution, and economic sanctions.

In an interview with the German Press Agency (dpa), however, he also addressed other pressing issues—including the proposed health levy, what he describes as a dysfunctional pension system, and an inflexible labor market.

Health Levy: "A Leaky Bucket" The Social Democratic Party (SPD) aims to overhaul the financing of Germany's healthcare system, proposing that capital income—such as bank interest on fixed-term deposits—and rental income be tapped to cover costs. The plan has been dubbed the health levy.

Schularick opposes the idea, arguing that the system's problem is not insufficient revenue. "Imagine a bucket with a hole in it," he said. "You can keep pouring in water to keep it full, but that doesn't fix the hole." The real issue, he insists, lies elsewhere.

Pension System: "A House of Cards" The federal government has tasked a commission with presenting reform proposals for the pension system by the end of June. Schularick believes reform is long overdue, warning that roughly one-third of federal tax revenue is already being funneled into pensions—leaving too little for infrastructure like bridges, swimming pools, and daycare centers.

"At some point, the pile of broken pieces will be so large that the force of circumstance will leave us no choice but to change course," he said. "It chills me to think that the only thing in this country growing by around four percent a year is pensions."

A viable alternative, he suggests, would be a reform linking retirement age to life expectancy and phasing out the "pension at 63"—a scheme introduced in 2014 allowing long-term contributors (with at least 45 years of payments into the statutory pension system) to retire early without penalties.

Schularick points to Germany's generational contract, the pay-as-you-go principle underpinning the pension system, where current workers fund retirees' benefits. But demographics have turned the system against itself: persistently low birth rates mean fewer contributors, while the baby-boom generation is now retiring in droves.

"The older generation forgot to have children," he said. "Not individually, perhaps, but collectively, they broke the generational contract. Yet young people are still expected to uphold their end of the bargain."

Labor Market: "Stuck in the Industrial Age" Schularick has long called for a debate on part-time work and labor market flexibility. He argues that Germany's rigid, conservative labor structures—relics of an industrial past—are ill-suited to today's rapid transformations, driven in part by artificial intelligence. "Our institutions can no longer keep pace with the speed and scale of change we're experiencing," he said.

He questions why protections like strict dismissal laws still apply to high earners making over €100,000 a year. "This paternalistic mindset has been carried into the 21st century, though it probably expired by the end of the 20th," he said. "It's outdated—but some employees and unions still cling to it."

Economist Moritz Schularick has called for the abolition of dismissal protection for high-earning employees. The proposed reform would apply to those subject to the top tax rate—meaning individuals with an annual taxable income starting at nearly €70,000. "I also want to challenge the de facto job security enjoyed by public sector workers," Schularick argues. "Why should they receive preferential treatment?"

In Schularick's view, Germany's rigid dismissal protections are driving companies to relocate research and development to China. "Ideally, R&D should stay in Germany and Europe, since we have the brightest minds—while others just assemble the cars."

The underlying issue, he explains, is that Germany has become too expensive, partly due to these labor laws. When costs in China remain manageable, businesses face unnecessary risks at home. "If a failed project forces a German company to keep a team of 20 developers on the payroll for years, they won't even start the project in the first place."

Schularick also attributes the stalling of the EU's Capital Markets Union to member states' vested interests. While financial groups like Germany's savings banks (Sparkassen) publicly endorse the initiative, he notes, "they support it in principle—but the fine print says everything should stay the same." Even German insolvency administrators resist cheaper competition from Spain, for example.

Compared to the U.S., EU banks remain relatively small, and this fragmentation is seen as a competitive disadvantage. Schularick urges the German government to drop its opposition to a potential takeover of Commerzbank by Italy's UniCredit. "An Italian bank acquiring a German one sounds like the Capital Markets Union in action to me."