Chancellor Friedrich Merz’s flagship incentive lets seniors work beyond retirement age without paying tax on up to €2,000 a month. Supporters hail a quick supply boost; critics warn it won’t fix deeper structural woes.

Berlin

Germany is turning to its oldest workers to help revive a faltering economy. In one of the most closely watched elements of Chancellor Friedrich Merz’s “autumn of reforms,” the federal government has approved an incentive that allows people who choose to work beyond the statutory retirement age to earn up to €2,000 a month tax‑free. The measure—informally branded the “Active Pension” (Aktivrente)—is designed to retain experienced staff, ease acute labour shortages and, in the words of one senior official, “send a cultural signal that work at 67, 68 or 70 is valued, not penalised.”

Under the plan, which the coalition intends to bring into force on 1 January 2026, the tax exemption applies to income from dependent employment for those who have reached the legal retirement age and continue to work. The Finance Ministry estimates that roughly 285,000 retirees who already hold jobs could benefit immediately, while the pool of potential beneficiaries is far larger as baby boomers exit the labour market in the coming years. Government costings suggest a revenue hit of around €890 million per year at the outset, though outside estimates put the figure as high as €1.4 billion if take‑up exceeds expectations.

Policy designers point to Greece, where a package of incentives for working pensioners coincided with a notable rise in employment among older cohorts. Germany hopes to replicate that dynamic—especially in sectors where skill shortages bite hardest, from engineering and construction to healthcare and local public services. Employers’ associations have lobbied for measures that reduce “red tape” for retirees who want to keep working a few days a week, arguing that many could slot into mentoring roles, fill part‑time shifts or bridge project bottlenecks without lengthy retraining.

Yet, even supporters agree the reform is not a silver bullet. Demography is exerting intense pressure. By 2035, Germany is expected to see millions of departures as the post‑war baby boom retires, shrinking the labour force unless offset by higher participation, productivity gains or immigration. The Bundesbank and independent economists warn that tax relief for older workers, while helpful, won’t undo incentives that still draw many into early retirement at 63. Nor does it resolve long‑running concerns about high energy costs, slow permitting and weak investment that continue to weigh on Europe’s largest economy.

Who gains—and who doesn’t
While the €2,000 tax‑free allowance sounds straightforward, the details matter. The exemption is intended for people in dependent employment. Early drafts and commentary around the bill indicate that self‑employed professionals and farmers would not qualify under the same terms, a carve‑out that has already triggered criticism from legal scholars and business groups, who argue it creates unequal treatment among older workers. The government says it will review distributional effects and the measure’s macro impact through 2029, leaving room for adjustments if distortions prove material.

Another design tweak addresses a long‑standing headache in Germany’s tax system: the so‑called “progression proviso,” under which additional income can push taxpayers into higher brackets. The Active Pension sidesteps that issue by ring‑fencing the €2,000 monthly allowance outside the progressive scale. Critics counter that this approach could disproportionately benefit higher‑income retirees who already have comfortable pensions and savings, while doing less for those in low‑wage work. Proponents respond that simplicity is the point: a clear, predictable incentive is more likely to change behaviour than a maze of deductions.

Economics of experience
In human‑capital terms, retaining older workers is attractive. A 68‑year‑old master mechatronics technician brings deep tacit knowledge and networks that are hard to replace quickly. Many firms—especially mid‑sized “Mittelstand” champions—say they can deploy veteran employees on flexible schedules to train apprentices, supervise complex repairs or shepherd quality‑critical production runs. Hospitals and care homes, strained by staffing gaps, see opportunities for semi‑retired nurses to take regular shifts without the current tax friction.

But scaling that vision depends on more than tax policy. Workplace ergonomics, health benefits, and age‑friendly scheduling will matter. So will investments in digital tools that reduce the physical burden of tasks—from collaborative robots to smarter logistics software. Trade unions have signalled cautious openness, urging employers not to use seniors as a stopgap to depress wages or delay necessary training of younger staff. The government has promised to monitor for abuse, including sham part‑time contracts that simply reclassify existing roles.

Budget arithmetic—and the broader reform puzzle
For the Treasury, the near‑term revenue loss is the price of a hoped‑for boost in labour supply and output. Officials argue the measure will still support public finances by lifting social‑security contributions and personal consumption. The medium‑term calculus is more complicated. Pension transfers already absorb more than a quarter of the federal budget, and the share is set to rise as the system absorbs demographic strain. That is one reason the Bundesbank has urged deeper structural measures—including linking retirement age to life expectancy and tightening the rules for early retirement without 45 years of contributions.

Business leaders broadly welcome the Active Pension, but they also want a credible plan to lift potential growth. They point to a backlog of permitting for energy and industrial projects, high electricity costs relative to peers, and a patchy record on digitising public administration. On these fronts, the coalition has promised action: a new “Germany‑Pact” for faster approvals, expanded gas‑fired power capacity alongside carbon capture, and a modernised debt brake to protect investment while keeping a lid on deficits. Whether these pieces add up to a sustained turnaround is an open question—and one that will shape Germany’s trajectory into the late 2020s.

What to watch next
First, the legislative process. The government’s goal is to pass the enabling law this year, with the tax‑free allowance taking effect on 1 January 2026. Expect technical debates over eligibility, especially for self‑employed seniors and mini‑jobs, and scrutiny from constitutional lawyers over equal‑treatment principles. Second, employers’ readiness to offer age‑friendly roles at scale; pilot programmes in manufacturing, healthcare and public services will provide early signals. Third, the interplay with migration and training policy: Germany is simultaneously courting skilled immigrants and expanding vocational pathways to replenish its talent pipeline.

The social signal may prove as important as the fiscal incentive. In an economy wrestling with stagnation narratives, demonstrating that experience is an asset—and paying seniors not to leave it on the shelf—could redraw cultural expectations around work and ageing. The Active Pension won’t, by itself, solve Germany’s demographic math. But if it nudges thousands to stay engaged longer, and if the government follows through on broader competitiveness reforms, it could help buy time for a more durable reset.

Sources: Government and coalition policy documents; public estimates from the Finance Ministry; and reporting/analysis by major financial and policy outlets on 14 October 2025.

Sources

Source notes:
• Financial Times, “Germany to allow retirees to earn €2,000 monthly tax-free starting January 1, 2026.”
• Die Welt, analysis of the “Aktivrente” and eligibility carve-outs (published 5 days prior to Oct. 14, 2025).
• Reuters, coverage of the CDU–SPD coalition’s labour and tax agenda (April 2025).
• Bloomberg, reporting on fiscal pressures and social spending under Chancellor Merz (Oct. 11, 2025).