Germany's coalition pushes major tax and pension reform package

The German coalition government is preparing a comprehensive reform package that combines changes to the income‑tax system, pensions, health, care and the labour market. In the Koalitionsausschuss meeting, Chancellor Friedrich Merz, Finance Minister Lars Klingbeil and CSU leader Markus Söder presented two draft income‑tax proposals – one offering around €10 billion and another about €25 billion in relief – aimed at cutting taxes for low‑ and middle‑income earners by roughly €500 per year from 1 January 2027. The financing debate centres on whether to raise the top‑income tax rate, increase inheritance tax, adjust the value‑added tax, or cut expenditures elsewhere.

Parallel pension reforms follow the Rentenkommission’s recommendations, including linking the retirement age to life expectancy, expanding the contribution base, and introducing a mandatory capital‑based pillar. Trade‑group and union leaders, such as the DGB and the Familienunternehmer‑Verband, have voiced concerns over higher contribution rates and the impact on small‑and‑medium enterprises. Industry bodies and regional chambers also warned that the current proposals do not provide sufficient relief for sectors like the craft trades. The reforms are slated for cabinet approval before the parliamentary summer recess, with implementation slated for 2027.

The package also touches on working‑time flexibility, proposing a shift from a daily eight‑hour limit to a weekly maximum, subject to collective agreements, and seeks to stabilise long‑term care financing through targeted budget cuts.