A new analysis by the Ifo Institute has revealed a looming fiscal imbalance within Germany’s upcoming 2026 federal budget, drawing critical attention to the escalating financial burden of the state pension system and its impact on strategic future investments. The study, examining the core federal budget, indicates that approximately one-third (33.3%) of projected tax revenues will be channeled into the state pension insurance scheme, amounting to an earmarked €127.8 billion.
This significant allocation, representing nearly a quarter of the overall federal budget, raises concerns about the diminishing budgetary flexibility available for other crucial areas. Ifo researcher Emilie Höslinger cautioned that without fundamental structural reforms, the federal government will be perpetually obligated to provide increasing financial support for pensions, effectively squeezing the capacity for forward-looking spending in other sectors.
The Ministry of Social Affairs and Labour is already slated to receive the largest share of funding within the core budget. The annual growth rate within this ministry, previously averaging a modest 1.37% between 2016 and 2019, has surged to 2.27% between 2024 and 2026, further exacerbating the strain on the overall fiscal landscape.
Compounding the challenge is a steadily increasing reliance on debt financing. Borrowing now accounts for roughly 19% of total revenue within the core budget, a significant shift from the pre-pandemic norm when tax revenues comprised between 90% and 93% of income. This decline in the tax contribution is nearly 20 percentage points below pre-crisis levels.
Höslinger argues that this recourse to debt represents a postponement of unresolved financial issues, transferring the burden of repayment – including associated interest – onto future generations. The increased debt level presents a long-term economic liability, potentially hindering future growth and limiting the government’s ability to respond to unforeseen crises.
While the budget proposal outlines a total of €520.5 billion for the core budget, coupled with an additional €119.96 billion through specialized funds, the Ifo Institute’s assessment highlights a worrying trend: a fiscal structure increasingly dominated by an aging population and reliant on future debt, potentially undermining long-term economic stability and limiting the government’s capacity for strategic investment. The ongoing reliance on borrowing, the study implies, is not a sustainable solution to the systemic challenges facing Germany’s social security system.