Germany's Cabinet has approved a set of proposed pension changes on Wednesday that would link future benefits to wage levels, following months of negotiations, sources told dpa.
The proposed legislation would keep pension payments aligned with wage levels, fixing minimum benefits at 48% of the average wage in Germany.
Without reform, the level - meaning the amount paid to a pensioner each month - is set to fall to around 45%, because millions of people born in the 1950s and 1960s will turn from contributors into pensioners. Previous "sustainability" schemes had tied the level to the demographic situation.
The reform also opens the door to investing government funds in the stock market in the hope of helping to fund future pension increases.
The measure will now go to the lower house of Germany's parliament, the Bundestag, for consideration.
The plan calls for putting €200 billion ($217 billion) into a stock fund by the mid-2030s, with hopes that returns on the investments and interest income will provide another source of revenue for the system.
The pension system is expected to face heavy financial strain as the large post-War "Baby Boomer" generation begins retiring from the workforce and drawing benefits.
The plan was put forward by Labour Minister Hubertus Heil, a Social Democrat (SPD), and Finance Minister Christian Lindner, a leader of the free-market liberal Free Democrats (FDP).
Germany's coalition government had previously spent months wrangling over the plans. The Finance Ministry blocked the bill as part of a larger dispute over the budget.
Lindner on Wednesday said further reforms of Germany's pension system will be necessary to avoid overburdening younger workers with excessive contribution requirements.
"Due to the ageing of society, contributions to the statutory pension scheme are likely to rise into the 2030s if nothing changes," Lindner said in Berlin.
Lindner and other members of the FDP have complained that younger people will ultimately have to carry the burden of stabilizing the under-funded pensions of older generations.
"A pension is intergenerationally fair if, on the one hand, it ensures that people don't have to worry about old age, but on the other hand, active people are not overburdened," Lindnder said.
Lindner also suggested that pension reform would be an issue in Germany's next nationwide parliamentary election in 2025, as he believes negotiations among the current three-party coalition government will yield little further agreement.