DGermany’s old-age security system will come under increasing pressure over the next few years. Fewer and fewer contributors have to pay for more and more retirees. Because the traffic light coalition does not want to tackle any pension reform, capital cover should now help to cushion the foreseeable financing problem in the state pay-as-you-go system.
According to the coalition agreement, the federal government will provide ten billion euros for this purpose. However, a study shows that a completely different dimension of capital stock would be required for a noticeable relief.
A study by the German Economic Institute (IW) on behalf of the New Social Market Economy initiative shows how little the planned tax-financed start-up financing will bring to the formation of a capital fund of this magnitude.
“Even an optimistically estimated return of five percent only leads to additional income of 0.5 billion euros,” write the IW researchers. In comparison, one percentage point in the pension contribution brings a good 16 billion euros. The total expenditure on pensions is already 330 billion euros, with almost a third of the money being financed by the federal government from taxpayers’ money.
The traffic light coalition sees a contribution to more intergenerational equity in starting to build up capital cover within the existing pension system. IW social expert Jochen Pimpertz considers this to be an innovative approach. “Because when they start funded, the baby boomers share in the rising financing costs of their pension.”
This relieves future contributors. But in view of the demographic challenge, the planned ten billion euros are “just a drop in the bucket.”
Not even 864 billion euros would slow down the increase in premiums
In order to illustrate the enormous magnitude of the financial problem, the IW has calculated how large the capital stock would have to be today so that the pension contribution rate does not rise above the 22 percent mark from the current 18.6 percent by 2060. With an annual return of five percent, the capital stock would have to be around half a trillion euros.
Assuming a return of only three percent, fixed assets of 864 billion euros would be required in the pension insurance system in order to maintain the contribution rate of 22 percent with the income from the fund. And even with such a capital stock, future contributors and taxpayers would still be burdened much more than is the case today.
The demographics expert Martin Werding from the Ruhr University Bochum does not believe that the traffic light coalition’s “share pension” is a sufficient answer to the foreseeable imbalance in pension finances. The idea pushed through by the liberals to relieve the pay-as-you-go system with partial funding is good. “But there is little left of the original FDP concept in the coalition agreement,” complains the economist.
The plan is also on shaky ground. So it is completely unclear how the ten billion euros are to be financed. It is also unclear whether it is a one-off amount and whether there will be further payments by the federal government at a later date. In the FDP concept, individual benefit claims should be justified with the capital cover.
Funding is not entirely new to retirement planning
Instead, the coalition agreement stipulates that the new capital stock will be used generally to finance future pensions. “However, such a small amount of ten billion euros is quickly lost in the total budget for pension insurance,” warns Werding.
It is also completely unclear where the new capital fund will be located. Reinhold Thiede, Head of Research and Development at Deutsche Rentenversicherung, makes it clear that his authority has no interest in taking on this task. “We do not assume that the pension insurance manages the fund,” emphasizes Thiede. Other public bodies would probably be more suitable.
The idea of capital coverage is by no means a new topic in old-age provision. Because the savings model has always existed in the second and third pillars, i.e. in company and private pension provision. The pay-as-you-go system was not introduced until 1957 in statutory pension insurance. Until then, the funded system applied there as far as possible.
The economists Pimpertz and Werding consider it urgently necessary to expand this form of old-age provision and make it more binding. So far, however, the coalition agreement only provides for a test order, Werding criticized.
The political realization is questionable. The pension expert advocates making supplementary pensions compulsory, or at least introducing an obligation for employees with the option of being exempted from it.