If a business model is based on a few people making a profit at the expense of many others and the construct relies on a growing number of participants, it is quickly referred to as a snowball or pyramid scheme. In fact, such models are – at least partially – illegal in many countries in the western world. The German pension system has many parallels to a Ponzi scheme, which we will show in more detail in this article.
New money pays for old claims
The most important thing that the German pension system has in common with a classic Ponzi scheme is the basic principle: in order to finance existing entitlements, young contributors are required to pay part of their monthly earnings. Those who work today pay contributions into the pension fund for others. Those who retire later are paid out from the work of the younger generation. The money is therefore not saved for each individual, as is the case with a private pension, but is redistributed directly to the generation of pensioners. There is no capital stock that could accumulate. The amounts are merely passed on.
In fact, the German pension insurance system benefits from the fact that there is a growing number of participants who constantly provide the system with new money. In view of demographic change, the system can no longer be maintained on a sustainable basis. While five contributors financed one pension payment in 1955, the ratio of contributors to pensioners has steadily deteriorated in recent years. According to the German pension insurance scheme, around 56.73 million insured persons were financing almost 25.84 million pensioners by the end of 2019, which means that there were not quite 2.2 contributors for every pensioner.
The state supports the system
However, these statistics are glossed over, as a distinction is made between active and passive contributors. While actively insured persons make new contributions within a reporting year, no new money is paid into the system by passively insured persons. They have acquired the right to a pension payment in the past, but no longer pay contributions. This can happen, for example, if you have become self-employed after many years of employment and no longer have voluntary statutory insurance. After all, the actively insured make up the significantly larger group of around 39.12 million people.
This discrepancy will become even more pronounced in the coming years: The baby boomers are slowly coming into retirement and thus moving from the most important source of income to the highest payout group within the DRV, whereas the birth rate has almost halved in the last 50 years. The number of people receiving contributions is rising faster than the number of people paying contributions.
The entire structure is already being relieved today by the fact that the German state contributes over 110 billion euros in taxpayers’ money every year, thereby continuously increasing the contributions of all contributors in a hidden manner. The figure for 2025 is as much as 128 billion euros. The subsidy already accounts for almost a fifth of the entire state budget. The snowball is really picking up speed here!
Only a few benefit, everyone else pays
Another parallel to a Ponzi scheme: only a few people benefit. If you want a net pension of 2,000 euros later on, you need a gross pension of just under 2,500 euros and have to accumulate around 68 pension points during your career. If you manage this for 40 years, you will have to bring home almost 6,150 euros a month from the start of your working life without a single interruption. This is a far cry from the average salary and therefore quite unrealistic for many people.
Anyone who studies and thus extends their working life to 30 years would have to earn a gross salary of EUR 8,185 month after month in order to receive EUR 2,000 later on. However, this scenario is no longer mathematically possible due to the contribution assessment ceiling. Earned income in the range of 2,800 to 3,800 euros is more realistic. However, depending on the duration of the contributions, this will only lead to a net pension of 1,000 euros. Who can live on that in old age, even if they own a paid-off property? Social decline into poverty in old age is almost inevitable.
According to figures from Deutsche Rentenversicherung, the average pension in 2023 was €1,102 net and therefore only slightly higher than the €1,000 mentioned critically above. In fact, a very large proportion of pensioners receive far less. Around 2.06 million pension recipients receive less than 300 euros per month. That is already 11% of all contributors. The next 7% receive between 300 and 450 euros, and a further 7% or 1.3 million pensioners receive between 450 and 600 euros and between 600 and 750 euros.
Just 1,052 people received more than 3,000 euros a month in statutory pension in 2023. The absolute maximum was only reached by 65 people. This shows that while the majority of pensioners are fobbed off with amounts that are not enough to live on, only very few participants receive above-average amounts. As in a Ponzi scheme, only the fewest benefit, while the majority keep the system running.
No individual entitlement, obligation to participate
As in a Ponzi scheme, the payout is only available as long as new players can be persuaded to pay in. While classic Ponzi schemes collapse at some point, this cannot happen to the German pension system, of course. Contributions are compulsory – at least as long as you are not employed by the state or have not managed to get off the hamster wheel and become self-employed. Because hardly anyone can really opt out, the system is “stabilized” and artificially kept alive with additional cash injections from the state budget.
Furthermore, there is no individual entitlement or even a guarantee of future benefits for current contributors. The pension level and access are constantly being adjusted by politicians. Only recently, the raising of the retirement age was once again brought up for discussion. There is no accumulated capital cover that could provide additional growth – everything is based on trust in future generations and is sold under the guise of “solidarity” and the intergenerational contract.
The focus is on solidarity instead of profit orientation. The aim is not to make a profit, but to provide socio-political security. The path towards additional capital cover, such as a share pension or generational capital, failed under the traffic light government and is not being pursued by the current coalition.
Personal provision remains the way out
The similarity between the German pension insurance system and a classic Ponzi scheme is therefore clear: The structure only remains stable through the constant financing of current pensions by the next generations. However, there are decisive differences – such as the state guarantee, compulsory insurance and a social solidarity claim.
Nevertheless, one thing is certain: without fundamental reforms and adjustments, the system is at risk of being overburdened by demographic change. The danger that the system will not remain sustainable in the long term without fresh contributions and constant political support is real and the subject of ongoing social debate.
Every young contributor should therefore make additional provisions on their own responsibility – as we have been advocating since the beginning of this blog…
