Bundesbank: Pension Contributions Significantly Influence Tax Burden

19 June 2024

By Aurėja Bobelytė – VILNIUS (Econostream) – Pension-related contributions strongly affect the total tax burden in many countries, according to the latest monthly report published by the German Bundesbank on Wednesday.

‘[T]he pension-related part of the tax burden is significant in many countries. The sole reference to the total tax rate is therefore insufficient’, the report said.

According to the paper, while a higher tax burden generally reduces the incentive to work, breaking down the tax ratio into tax-related and pension-related parts shows that pension contributions can mitigate this effect.

‘A higher pension contribution payment leads to a higher pension entitlement (contribution equivalence), this payment is more like a contribution to a compulsory pension plan: like a tax, it reduces the net wage, but also increases the pension entitlement of the insured person. If this is taken into account, the pension contribution dampens the incentive to work less’, the Bundesbank said.

The tax-related portion was significantly lower than the total tax burden in Germany due to the substantial weight of equivalence-oriented pension contributions.

‘The tax-related tax rate and the total tax rate are above average compared to other countries. This is particularly true for single people and households with two earners. The relative position is more favourable for multi-person households with only one earner’, the report said.