Senior coalition members, including Merkel and SPD Finance Minister Olaf Scholz, sealed the compromise deal during talks in the chancellery that lasted more than six hours.

The package also includes lower contributions to the public unemployment insurance scheme and the creation of an investment fund to support local high-tech start-ups.

“Germany will get a (higher) basic pension and this is a socio-political milestone,” said SPD interim leader Malu Dreyer, whose party had been pushing for a better deal for lower-income workers.

Dreyer estimated that up to 1.5 million people would benefit from the deal through increased pension entitlements.

Markus Soeder, leader of the Christian Social Union (CSU), the Bavarian allies of the CDU, said the coalition parties had shown with their compromise deal that they were able to deliver.

He estimated that the increased basic pension would involve additional costs of up to EUR1.5 billion (US$1.65 billion).