The tax burden in retirement depends on many factors. One of them is where to retire. Because there is a discrepancy between East and West.
Berlin – The news is not entirely new: pensioners in the East have to pay more taxes than their West German peers with similarly high salaries. But the Left has now criticized this again in the Bundestag and is calling for an adjustment. But the background is complicated.
Pensioners in the East have to pay more taxes than in the West
The reason for the demand is a current response from the federal government to a request from left-wing MP Sören Pellmann. Accordingly, pensioners with a so-called standard pension who retired before 2023 pay higher taxes on their retirement benefits in the East than in the West. Pellmann made a request to the government a year ago with a similar result.
The current figures that were sent to him by the Federal Ministry of Finance and are available to the German Press Agency show: Anyone who has been retired since 2010 and receives the newly calculated standard pension of 20,768 euros per year pays 241 euros in income tax in the East, and in the West it is only 132 euros. East Germans who retired in 2020 pay 542 euros in taxes annually on such a standard pension, in the West 524. The standard pension shows the value that a recipient currently receives with average earnings and 45 years of contributions.
After all: According to the information, there will no longer be any tax differences when you retire in 2023, the year of east-west equalization of pensions. For Pellmann, this is the right path. “But we must not forget the existing pensioners who have been receiving pensions for a long time,” he explains. The fact that they still pay more taxes in the East is a joke of history. “Especially since in the East most older people have to live almost exclusively on the statutory pension, while in the West there is often other retirement income.”
Pension taxation: Complicated background for different tax burdens
The background for the different tax burdens is complicated. Since 2005, there has been a gradual switch to so-called downstream pension taxation: the pension contributions are taken into account in the income tax and reduce it, but income tax is later due on the pension paid out. In plain language, this means: If you retired in 2005, 50 percent of your pension is considered taxable income, the other 50 percent is tax-free. When you retire in 2020, the ratio was already 80 to 20. From the time you retire in 2040, the pension should generally be taxed at 100 percent.
The set allowance at the start of retirement no longer changes, even if pensions increase annually, as is usual in July. This increases the taxable income, explains the Ministry of Finance in its response. By 2023, there had been higher annual pension increases in the East compared to the West. “This explains the difference in income tax burden between East and West if you retire before 2023.”
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More purchasing power: Pensioners live particularly cheaply in the East
Even if pensioners in the East have to live with a higher tax burden, according to a new study they also have an advantage over seniors in the West: According to an analysis by the Prognos Institute, pensioners in East Germany are financially more comfortable than in the West, which purchasing power is concerned. The ratio between housing costs and pension income was particularly favorable in Gera in 2021. In contrast, regional pension purchasing power was lowest in western Germany and in the south, especially in Bavaria. “The result is clear. Pensioners live particularly cheaply in East Germany,” the authors write. “Because relatively high pensions meet low living costs.”
For the study, the researchers used figures from the pension insurance research data center, which published the evaluation of the level of pensions at district level for 2021 last fall. In addition, Prognos used data on the asking rents in the relevant years for its calculations, as an indicator of the cost of living. Since 2021, both the cost of living and pensions have risen nationwide due to high inflation.
In Gera in 2021, the average monthly pension purchasing power was 1,437 euros, significantly above the national average of 1,036 euros. Gera is followed by four other East German municipalities in the top five: Chemnitz, Cottbus, Görlitz and the Spree-Neiße district.
With material from dpa