The “active pension” plan, a key campaign pledge from Mr Merz, is expected to be approved by his coalition government this week and will take effect from 1 January. The measure aims to mitigate the economic impact of Germany’s ageing population, addressing the “structural challenges” of baby boomers retiring while fewer young people enter the workforce.

According to draft legislation, the incentive is projected to cost €890 million (c. £775m) annually in lost tax revenue. This initial figure is based on the 285,000 retirees already in employment who will immediately benefit. However, some economists, such as those at the IW Institute, suggest the annual cost could be closer to €1.4 billion (c. £1.22bn), Financial Times reports.

The policy is a response to some of Europe’s most acute demographic pressures. Germany is forecast to lose 4.8 million workers – 9% of its labour force – by 2035. The challenge is compounded by Germany having the shortest average working hours in the OECD and a part-time employment rate that has doubled to 30% since the 1990s.

While working after retirement is already permitted, Berlin hopes these new tax breaks will make it a far more attractive option. Officials are looking to the success of a similar scheme in Greece, which saw the number of working retirees increase from 35,000 to over 250,000 after introducing a reduced tax rate on their additional income.

Proponents argue the benefits will quickly outweigh the costs. The government bill states the plan will help “retain experience and knowledge in companies for longer” and boost economic growth. Furthermore, as social security contributions will still be paid on these earnings, it will help bolster Germany’s strained health and pension systems.

Holger Schmieding, chief economist at Berenberg Bank, predicts that the resulting economic growth and increased social contributions will “more than offset the costs within two to three years”. He also noted the positive psychological effect, saying, “it is also a sign that society appreciates the contribution of older people who decide to stay on”.