Germany Approves Post-Retirement Work Incentive amid Labor Shortage

The German government has approved a draft law aimed at addressing the country’s chronic labor shortage by encouraging retirees to remain in the workforce. 

Starting in 2026, retirees will be allowed to earn up to €2,000 per month tax-free while continuing to work, a move that underscores Europe’s growing struggle with demographic decline and pension system pressures.

The cabinet decision, announced Wednesday, is expected to cost the state an estimated €890 million in lost tax revenue between 2026 and 2030, according to a copy of the legislative draft reviewed by Reuters.

“We are creating stronger incentives for economic growth in Germany,” said Finance Minister Lars Klingbeil, noting that companies increasingly rely on older workers with experience to keep operations running.

A demographic report from the Interior Ministry warns that Germany’s working-age population will shrink by 6.3 million people by 2030 compared to 2010, a development that could significantly impact GDP per capita and strain social security systems.

“This isn't just about tax relief, it's about keeping our economy functional,” Klingbeil added.

Economy Minister Katrin Reiche emphasized that the skilled labor gap is already affecting businesses, particularly in engineering, healthcare, and manufacturing. She noted that Germany’s working-age population is decreasing at a rate of 400,000 people per year, and that trend is accelerating.

“The demographic clock is ticking. Companies are feeling it now — not in the distant future,” Reiche said.

The tax exemption will apply to workers aged 67 and above, the official retirement age in Germany, who are still employed and paying into social security. The Finance Ministry clarified that these workers will continue to contribute to the social insurance system, ensuring broader fiscal sustainability.

The reform is designed to be a win-win: retirees get additional income without tax penalties, employers retain experienced talent, and the government shores up the social safety net through continued contributions.

Germany’s move follows a broader trend across Europe as governments seek to revise pension systems and encourage longer participation in the labor market to relieve pressure on public finances.

However, the issue remains politically sensitive. In France, Prime Minister Sébastien Lecornu announced this week a pause on controversial 2023 pension reforms until after the 2027 presidential election, amid strong opposition from left-wing lawmakers.

With Germany facing one of the most acute labor shortages in the EU, the post-retirement work incentive may mark a turning point in how Europe views aging populations, not as a burden, but as a potential economic asset.