Chancellor Schroeder apologised for the freeze
The governing coalition in Germany has proposed freezing the level of retirement pensions in 2004 as a part of its economic reform package.
The decision - described by Chancellor Gerhard Schroeder as one of the most difficult his government has had to take - was announced after a meeting between coalition partners, the Social Democrats and the Greens.
Mr Schroeder admitted that the freeze effectively amounted to a cut in real benefits received by pensioners.
The freeze is designed to help the government deal with a substantial shortfall of $12m (10.3m euros) in state pension funds.
The shortfall has been caused by an ever-ageing population and fewer contributions to the fund due to high unemployment.
"If we don't start to address the demographic challenges decisively and with determination it will be too late when we do face this extreme change in our society in the coming years," Mr Schroeder said.
The decision has already met resistance from Germany's 20 million pensioners and the head of the VdK pensioners association, Walter Hirrlinger.
"They [the pensioners] only have one means of resisting and that is at the ballot box," Mr Hirrlinger told the Freie Presse newspaper.
Pension payments have been cut for the first time in the history of the federal republic," said opposition welfare expert Andreas Storm, adding that old people stood to lose the most.
On Friday, the German parliament narrowly backed a package of social and labour market reforms which the chancellor, Gerhard Schroeder, staked his career on.
The reforms, unveiled earlier this year, are aimed at revitalising Germany's economy - currently stuck in recession.
The pensions proposal, submitted by the German cabinet, will now be submitted to the parliament for final approval.