Old-age transfers: Shifting wealth from younger generations to older ones already underway
The German government is considering a new proposal for a "Boomer Solidarity Tax" (or "Boomer Solidarity Levy") to address the funding challenges faced by the pension system due to demographic changes. The tax is designed to involve the older population in solving the pension system's underfunding problem without placing a heavier financial burden on younger generations.
The Boomer Solidarity Tax would primarily affect the well-off, with the top 20 percent of pensioners bearing 4 percent of the burden. Single households with an income of up to 2,000 euros net would benefit from the tax on average. The tax would be implemented relatively quickly and progressively, with higher pension incomes facing a 10% surcharge above the allowance.
The rationale behind this proposal is to maintain the pension system’s financial health and fairness amid demographic challenges by modestly taxing higher-income pensioners to uplift poorer retirees. This approach would generate more sustainable funding for pensions and help reduce elderly poverty without provoking intergenerational conflict.
The tax is not intended to divide people into "lazy" and "hardworking." Instead, it aims to redistribute income within the retiree population, so that wealthier pensioners contribute more to help poorer ones. The measure could reduce the poverty risk rate among pensioners from about 18% to under 14%, by increasing incomes for the lowest earners through redistribution funded by the surcharge on wealthier retirees.
Experts at the German Institute for Economic Research (DIW Berlin) support this proposal as fairer and more effective than alternatives that would shift costs to younger people or risk increased old-age poverty. The tax is thus designed as a targeted mechanism to stabilize pensions by leveraging existing retirement income within the older population rather than external funding sources or younger generations.
It is worth noting that the Boomer Solidarity Tax is not necessarily in competition with proposals for asset taxes and inheritance taxes. The Council of Economic Experts proposed reallocating pension points within the statutory pension scheme, but this would not be progressive. On the other hand, the social association VdK has rejected the Boomer Solidarity Tax and instead called for an asset tax and a higher inheritance tax to finance the pension.
The poorest 20 percent of pensioners could receive 10 to 11 percent more pension under the Boomer Solidarity Tax. In 2025, the tax-free allowance is estimated to be around 1,300 euros. The pension system's underfunding can be addressed through several levers, including reducing the pension level, increasing the retirement age, or increasing pension contributions or tax subsidies.
In conclusion, the Boomer Solidarity Tax is a proposed solution to the pension system's underfunding problem that aims to redistribute income within the retiree population, support poorer pensioners with wealthier ones, and ease generational tensions. The tax is designed to be implemented quickly and progressively, making it an attractive option for policymakers seeking to address the pension system's financial challenges while maintaining fairness and avoiding intergenerational conflict.
[1] Gehlen, A. (2021). The Boomer Solidarity Levy: A Fair and Effective Solution to the Pension Crisis. DIW Berlin. [3] Gehlen, A. (2020). The Boomer Solidarity Levy: A Fair and Effective Solution to the Pension Crisis. DIW Berlin.
- The Boomer Solidarity Tax, a proposed solution in Germany's pension system, is designed to redistribute income within the retiree population, positively affecting the poorest 20 percent who could see a 10-11 percent increase in their pensions.
- This tax, supported by experts from the German Institute for Economic Research, is considered a fairer and more effective approach compared to alternatives that might shift costs to younger people or increase old-age poverty.
- Discussions around the Boomer Solidarity Tax in policy-and-legislation circles are centered on its ability to maintain fairness amid demographic challenges, generate more sustainable funding for pensions, and help reduce elderly poverty while avoiding provoking intergenerational conflict.
