Increase and abolition of the additional earnings limit: How has retirement behavior changed?

Persons with 35 years of qualifying periods are insured for many years and must accept reductions on their pension entitlement if they draw their pension early. After an insured period of 45 years, the early pension is granted without deductions to those with particularly long insurance periods. The old-age pension for particularly long-term insured persons is often still referred to as ‘pension at 63’, although the minimum age for drawing an early pension without deductions is gradually being raised and will reach 65 years in 2031 when the standard retirement age reaches 67 years.

Legislators have increased the supplementary income limit for long-term and particularly long-term insured persons twice for a limited period since 2020 and abolished it permanently at the start of 2023. The aim of the reforms is to increase the employment of these two pension groups and thus alleviate demographically induced skills shortages. Before the reforms, marginal employment was considered financially attractive for (particularly) long-term insured persons, as 40 per cent of additional earnings subject to social insurance contributions were offset against the old-age pension if they worked beyond this level. Nevertheless, in 2018 and 2019, a small proportion of people with (particularly) long-term insurance worked above the marginal employment threshold in addition to their pension and accepted the additional earnings being offset against their old-age pension. In the following, this employment above marginal employment is referred to as large additional earnings. In this analysis, the three reform steps are understood as a natural experiment in which the affected groups of (particularly) long-term insured persons are compared with the group of standard old-age pensioners who could earn in addition to their pensions even before the reform took place.

Among women with particularly long insurance periods who were drawing an old-age pension for the first time, the proportion with large additional earnings rose by 14.1 percentage points from 2019 (before the reforms) to 2023 (after the reforms). The increase among standard old-age pensioners, who were already able to earn unlimited additional income before the reforms, was only 2.3 percentage points in the same period. A comparison of the group of women with particularly long-term insurance treated by the reform with the untreated group of regular old-age pensioners shows the so-called difference-in-difference of 11.8 percentage points. In the same period, the proportion of pensioners with large additional earnings rose by 12.1 percentage points among men with particularly long-term insurance compared with the flatter trend among pensioners who retired at standard retirement age. Those with long-term insurance show a similar pattern, although it is less dynamic. The increase here is mainly concentrated in 2023 after the complete abolition of the supplementary income limit. Since the reforms, (particularly) long-term insured persons have therefore more frequently taken advantage of the opportunity to earn additional income alongside their pension. Linear regressions also show that, on average, they earn more supplementary income than before the reform. It remains unclear whether this increase in supplementary income includes a windfall effect, i.e. whether it would trigger earlier retirement while continuing to work (as planned anyway). If retirements were brought forward by the possibility of unlimited additional earnings, this would mean a considerable financial burden for the statutory pension insurance scheme. This requires further empirical studies, particularly with regard to behavioural changes in individual labour supply.