By Craig Mellow

Pension, or Social Security, reform tends to be mission impossible for democratic governments beholden to aging electorates. Germany's government, a fractious right-left coalition with approval ratings dwindling toward single digits, just pulled it off, apparently.

Chancellor Friedrich Merz and his senior Social Democratic partner, Labor Minister Bärbel Bas, were quick to endorse a 33-point blueprint released by the blue-ribbon Pension Security Commission on June 23. The plan indexes retirement age, currently 67 for most workers, to increasing life expectancy and ends an early-retirement option for those in the workforce for 45 years.

Most important, it ushers in mandatory contributions to personal retirement accounts that will be invested in securities markets, the so-called Swedish model. Employees and employers will each kick in 1% of salary after a four-year phase-in period.

That's not all. This spring, Merz's government enhanced incentives for tax-advantaged private pension savings. The two initiatives together could pump a gross 80 billion euros ($91 billion) annually into capital markets, calculates Jan Schildbach, head of financial markets research at Deutsche Bank macro research.

"All of a sudden, this makes German savers also investors," adds Carsten Brzeski, global head of macro for ING Research.

It has also set off a scramble among asset managers for a piece of the pending action. "Every provider is working on a product offering," Schildbach says.

Merz could badly use a reset after 14 months in power. The world's No. 3 economy remains stuck around pre-Covid levels in real terms. The Dax 40 stock index has barely budged since he assumed the chancellorship in May 2025, while the S&P 500 has climbed by a third.

The 70-year-old German leader has been slammed by circumstances beyond his control: The U.S.-Iran war delivered a fresh energy shock. Germany's vaunted auto makers keep wilting before Chinese competition. Volkswagen CEO Oliver Blume upstaged the government's pension announcement, flagging 100,000 pending job cuts and the closure of four German factories.

Merz and the government have made things worse by letting red tape tie up their signature infrastructure program, says Robert Timper, global fixed-income strategist at BCA Research. "Payouts have been limited by bureaucratic processes," he says.

Pension reform might just mark the start of a comeback, argues Marion Mühlberger, Deutsche's head of European policy research. The government already passed a phased-in 5% cut in its corporate tax rate, which is the highest among large European economies. It's wrangling over an income-tax revision that could save middle-income earners EUR450 a year. "This shows the government is embarking on structural reform," she says.

"Germany absolutely has a path to a turnaround," agrees Eoin Drea, senior researcher at the Wilfried Martens Centre for European Studies. Government debt remains by far the lowest among large advanced economies at just over 60% of gross domestic product. That leaves plenty of space to keep pumping up infrastructure and defense. German companies are global leaders in growth industries including green technology ( Siemens Energy), semiconductors ( Infineon Technologies), and pharmaceuticals ( Merck).

Merz's problem is that the turnaround could take more time than he has before facing voters again by March 2029, moving at Germany's congenitally measured pace and with the Alternative for Germany, or AfD, party gaining strength to his right. "It's very hard to see that this government will last long enough to reap the benefits of structural reforms," ING's Brzeski says.

The pension contributions are an engine that should only accelerate over time, though.

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