Statutory pension insurance follows the solidarity principle all for one and one for all. Pensions are financed mainly through contributions made by insured persons and their employers, together with state subsidies and other insurance-fund income.
The pension insurance system is based on the so-called pact between the generations. This means that the system is financed based on the pay-as-you-go principle, in which contributions paid by the working insured are paid out again in the form of pensions for those who are retired.
The statutory pension insurance is funded mainly through the contributions of those insured. Employees and employers each pay half of the applicable contribution rate. The amount of contribution depends on the amount of assessable income earned by the insured person, the so-called contribution assessment basis.
As of 1 January 2007 the contribution rate is 19.9 percent of the employee's gross monthly wage or salary. This is the same throughout the entire country. However, for 2010 the contribution assessment limit is 66,000 Euro per year in western Germany and 55,800 Euro in eastern Germany. An annual adjustment ensures that pensions are adapted to economic growth as measured by changing wages and salaries.
The benefits provided by the German statutory pension insurance are oriented primarily around the amount of contributions paid into the system. So-called earnings points are awarded each year for contributions paid, which represent the insured persons claim to pension as based on his relative income. Those earning an average income (approx.: 32.003 Euro per year) receive one point, those who reach the contribution limit receive two, and those who earn half the average income are awarded a half-point. This system is designed to ensure that the relative income position the insured person held during his working years is maintained in retirement. Complete contribution equivalence is not foreseen in the German pension system. Instead, there is a participatory equivalence that ensures that every insured person has a claim to a pension equivalent with the amount of years he has paid contributions.