Germany’s Coalition Unveils Sweeping Labor and Pension Overhaul Amid Sharp Criticism

An ambitious package of 34 immediate measures adopted Monday by the ruling coalition is set to reshape Germany’s labor market, pension system, and tax code — but it has already ignited fierce opposition from doctors, unions, and even some lawmakers within the government’s own ranks. Dubbed the “Program for Upturn and Employment,” the reforms touch everything from sick notes to retirement ages and are projected to involve adjustments worth roughly €10 billion a year from 2027 onward.

Sick-Note Rule Sparks 30 Million Extra Doctor Visits Worry

One of the most contentious provisions tightens the rules for proving illness at work. Starting immediately after the law takes effect, employees will be required to present a medical certificate of incapacity (AU) from the first day they call in sick. Currently, the obligation kicks in only on the fourth day unless a collective or individual agreement says otherwise. The pandemic-era option of a telephone sick note, introduced to ease burdens on clinics and patients, will be scrapped entirely.

Chancellor Merz defended the step by pointing to Germany’s persistently high sickness absence rates. But the German Association of General Practitioners dismissed the move as purely symbolic. The National Association of Statutory Health Insurance Physicians warned that it could trigger at least 30 million additional visits to practices each year. Internal coalition dissent has already surfaced: the CDU’s worker wing is demanding the day-one requirement be dropped, while the SPD argues that sector-specific solutions should be left to collective bargaining.

A labour-law specialist noted that existing employment contracts with more generous notification periods are likely protected by the “most-favourable principle,” at least initially.

Fixed-Term Contracts Extended to 48 Months Without Cause

To give companies more hiring flexibility, the government plans a dramatic widening of fixed-term contracts that do not require a specific justification. For any worker hired before the end of 2030, the maximum duration will increase to 48 months, with up to six renewals allowed during that period.

Public sentiment is squarely against the change. A YouGov survey conducted on July 2–3, 2026, among 6,200 adults found 54 percent opposed to the extension, while only 26 percent supported it. Employer associations praised the measure as a vital tool to boost recruitment, but the DGB trade union federation and Verdi warned it could cement precarious employment patterns.

Easier Dismissals for High Earners and New Tax Brackets

The reform also introduces a sharper division in dismissal protection. Workers classified as “high earners” — defined as those with a gross annual income of roughly €177,000 — will face a streamlined process for ending their employment relationship. The government simultaneously plans tax incentives on severance payments.

On the income-tax side, as of January 1, 2027, the basic allowance and child allowance will rise. Total relief is set to reach about €10 billion annually from 2027/2028 onward. To help finance the package, the existing “rich tax” will be tightened: a rate of 45 percent will apply from €250,000 in income, rising to 47 percent above €280,000.

Pension Age to Climb Beyond 67, Capital-Funded Pillar Added

In retirement policy, the coalition is following recommendations from the Alterssicherungskommission (Old-Age Security Commission). The regular retirement age will be increased gradually above 67, and the option of a deduction-free pension after 45 contribution years will be abolished. A new capital-funded component will be introduced, which could push pension contributions up by as much as two percentage points.

Bureaucracy Cuts and Budget Details

To slash red tape, a “deemed approval” rule will take effect: applications to public authorities will be considered approved if the administration fails to decide within four months. Reporting obligations will be eliminated across the board, and tax returns will be progressively pre-filled automatically, moving toward full digitalisation. These steps are accompanied by a planned 8 percent reduction in federal agency personnel.

The Kiel Institute for the World Economy (IfW) acknowledged the package as a political achievement but cautioned that the relief could be largely neutralised by inflation and cold progression.

The cabinet also approved the 2027 federal budget on July 6, setting total spending at €555.4 billion. Defence spending jumps sharply to €109.7 billion, while climate and social programmes face cuts.

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