Germany's Cabinet has approved a set of proposed pension changes on Wednesday that would guarantee pensions will continue to rise in line with wages, following months of wrangling.
The proposed legislation would keep pension payments aligned with wage levels, fixing current minimum benefits at 48% of the average wage.
Without reform, the pension level - meaning the amount paid to a retiree 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 business-oriented Free Democrats (FDP).
With rising future benefits, costs of Germany's pension system will also increase. The draft reforms would increase pension expenditures through 2045 from €372 billion to €802 billion.
That drew criticism from the centre-right opposition CDU/CSU bloc, with conservative lawmaker Stephan Stracke accusing the government of "cancelling the intergenerational pension contract" with the proposed reforms.
The changes would increase the already heavy burdens expected to fall on future workers to fund growing numbers of retirees in Germany, Stracke argued.
Heil, the labour minister, defended the reforms by arguing that Germany needs to shore up the pension system's finances by bolstering the workforce, instead of limiting benefits. More workers would mean more pension contributions, he said.
Heil called for more immigration of skilled workers and better job training, among other measures.
"We must and will do our homework on the labour market,’ said Heil.
Social advocacy groups and trade unions, meanwhile, welcomed plans to keep benefits at 48% of average wages - but called for more to be done.
The head of the influential verdi trade union, Frank Werneke, said minimum pension benefits need to be over 50% of average wages "to permanently curb poverty in old age."
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.
Heil said the coalition would put forward further proposals before the next parliamentary elections in autumn 2025, including measures to reward people who choose to work longer as well as improved benefits for the self-employed.
"The aim is to ensure that people who are willing and able can voluntarily work longer," he said.
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," Lindner said.
Lindner, however, was sceptical that the current three-party coalition could reach agreement on important further changes.