Germany hopes to stabilise pension system with €200 billion capital stock

The German government hopes to secure the long-term financing of its pension system with a new capital stock of up to €200 billion, which should be invested in global markets and yield €10 billion annually starting from 2036. 

The government presented plans on Tuesday (5 March) to keep the level of public pensions stable until 2040, linking the “standard pension” to 48% of current wages, in the face of an ageing population that will see seven out of the current 46 million workers leave the workforce by 2035, as the generation of ‘baby boomers’  born in the late 1950s and 60s gradually retires.

With the plan detailed today, the government is looking to implement one of the key promises of Chancellor Olaf Scholz (SPD/S&D) in his election campaign in 2021, despite growing concerns about the sustainability of the country’s public pension system, which is mostly financed through contributions from the current workforce.

“For me, pension cuts are out of the question,” Scholz said in a video statement published on Tuesday, adding that “this is a question of decency and respect.”

“That is why we are stabilising the pension level in the long term by stipulating that pensions must not fall below a certain level,” Scholz said, while also ruling out further increasing the legal retirement age, currently at 66 years and set to increase to 67 by 2031.

As part of the reform, the government aims to build up a new fund that will invest in global capital markets, financed by additional public debt as well as by transferring shares the federal government currently holds in private companies into the new fund.

The fund, which starts this year through a first payment of €12 billion out of the federal budget, should grow to €200 billion “by the mid-2030s,” Finance Minister Christian Lindner (FDP/Renew) told journalists on Tuesday.

By making use of the low interest rates the government has to pay on its sovereign debt, and investing in riskier investments that gain a positive return, the government hopes to distribute €10 billion annually from the fund towards the public pension system as of 2036. 

This should help to reduce the increase of pension contributions paid by workers, which are already set to increase from 18.6% of wages at current levels to 22.3% in 2035 due to the ageing population.

Germany bets on stock market to secure pension system amid ageing population

Faced with an ageing population and millions of baby boomers leaving the job market over the next few years, Germany hopes to stabilise its pension system with a Sweden-style sovereign wealth fund.

Straining public budgets

Already today, a quarter of the public pension system’s expenditures is financed by contributions from the federal budget, which is expected to increase due to the fixed pension level.

“The federal budget currently supports the statutory pension insurance scheme with over 100 billion euros a year,” Lindner said, stressing that “demographic change will further exacerbate this burden in the coming decades”.

Unlike the money used to build up the new capital stock, the annual payments into the pension system also count towards Germany’s strict ‘debt brake’, which only allows for an annual structural budget deficit of 0.35% of GDP, adjusted for the economic cycle.

As Germany also fights with the repercussions of a far-reaching ruling by the country’s constitutional court, which led to €60 billion being cancelled from a climate fund, the 2025 budget could see a financing gap of up to €20 billion that would need to be closed by funding cuts or tax increases, Handelsblatt reported.

The budget gap could widen even more in the long-term, when the €100 billion additional debt taken on for military spending following the Russian attack on Ukraine is used up in 2027, but Germany aims to continuously spend 2% for defence, to comply with NATO requirements.

Commission calls on EU countries to adapt to ageing population

The EU Commission called on member states to adapt all their policies to the longer life expectancies of citizens, but it did not make any concrete proposals and shied away from tackling controversial topics such as an increase in retirement ages.

Pension level still too low, capital markets too risky, welfare group warns

Welfare association Der Paritätische, representing social facilities across the country, warned that the pension level of 48% was still too low to prevent old-age poverty.

“In our view, the pension level should be fixed much higher, at 53%,” Joachim Rock, head of social and European affairs at the association, told Euractiv, adding that “this would enable a reasonably adequate standard of living”.

The association criticised the government’s decision to resort to capital markets, arguing that this was “not without risk”.

“This is supposed to lead to a reduction in contributions from the mid-2030s. But capital markets are volatile, there are fluctuating returns, so it’s not certain, especially in such a short term,” Rock explained.

“To first take on debt, which after all also has to be refinanced and earn interest, and then hope to earn significantly more money on the capital markets in the long term is, in our view, a deceptive hope,” he added.

[Edited by Anna Brunetti/Zoran Radosavljevic]

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