Future-proof through stocks?
This is now planned for retirement
March 4, 2024, 8:28 p.m
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The government has been announcing a pension package for months. The plans are to be presented this Tuesday. For the first time, billions are to flow into the stock market for pensions.
After months of preparation, the federal government wants to launch its pension package: The introduction of share capital is intended to create a new source of finance for the statutory pension insurance for the first time. In the long term, this should relieve the burden on contributors and the federal budget. For this purpose, a capital stock of at least 200 billion euros should be built up by the mid-2030s, as the German Press Agency learned from government circles.
The income will be used to provide subsidies to the pension insurance. A second major goal of the pension package is to permanently secure pension levels. The most important questions and answers at a glance:
Why is the government putting together a pension package at all?
Millions of baby boomers born in the 1950s and 1960s are retiring. They turn from depositors into pensioners. Therefore, the level of pension protection is likely to fall in the coming years and the contribution rate is likely to rise. Now it’s about “permanently securing” the pension level, which indicates the ratio of pension amount to wages, as Labor Minister Hubertus Heil from the SPD said in an interview.
Money should also be invested on the capital market, the income from which will be used to stabilize contributions. The Ministry of Finance said that from the mid-2030s, an additional ten billion euros on average could flow into statutory pension insurance annually.
How would pension levels and contribution rates develop without reform?
According to current legislation, the pension level – currently around 48.2 percent – should not fall below 48 percent by 2025. According to the current pension insurance report, the security level is likely to fall to 45.0 percent by 2037. It specifically states what percentage of the current average wage someone who has always worked and paid contributions at the average wage for exactly 45 years receives as a pension. When pension levels fall, pensions rise less than wages. The contribution rate – currently 18.7 percent – is expected to rise to 21.1 percent by 2037 without political intervention.
Will pensioners automatically become stockholders with the new plans?
No, the coalition’s plans for so-called generational capital are only about state money. This will come from different sources: On the one hand, the government wants to invest 12 billion euros from public loans on the capital market this year. The money can be borrowed without having to be counted against the debt brake. In the coming years there will be a little more. More precisely: the additions should increase by three percent annually. In addition, federal assets worth 15 billion euros are to be transferred by 2028. A total of 200 billion euros is expected to be raised by the mid-2030s.
There are expressly no plans for pension contributions to flow into equity funds. How safe is money on the stock market?
Financial markets are always volatile and speculative – which is why the Greens in particular initially viewed the plans with skepticism. Last summer, Green pension expert Markus Kurth gave the example of the existing sovereign wealth fund for financing nuclear waste disposal (Kenfo). This fund suffered a loss of 12.2 percent in 2022. From the point of view of many social associations, you can’t risk something like that when it comes to pensions. “The statutory pension insurance is extremely unsuitable for speculating on the stock market,” warns Ulrich Schneider, general manager of the General Parity Association, for example.
But it is also true that the international capital markets have, on balance, developed very positively over the past decades. It is important not to plan short-term from year to year, but over many years. “The longer the investment horizon, the lower the risk of suffering losses with stocks,” explains the German Stock Institute. Accordingly, an average return of more than 8.5 percent was recently achieved over an investment period of 20 years.
The Ministry of Finance also points this out. The money should be invested long-term, broadly diversified and globally. “Historical observations and studies show that such an investment strategy has been able to achieve reliably positive returns in the past,” argues the Lindner House. In addition, if the share prices fall and the investments generate less return, this should be compensated by the federal government.
Is this the stock pension advertised by the FDP in the election campaign?
No. During the 2021 election campaign, the FDP advocated that two percent of income be put into funded pension provision. It’s not about private money right now. But the FDP has not yet given up on its idea. The pension reform can only be a first step, according to the ministry of FDP leader Lindner. The model could, for example, be expanded so that people could also individually pay their contributions into the capital stock. “Such a solution could not be implemented within the coalition, but it could be implemented in a next step,” says the Ministry of Finance.
What additional costs does it cost to support pension levels?
Regardless of the planned share capital, the plans to support pension levels will also cost large sums in the future. According to a rule of thumb, an increase in the pension level by one percentage point corresponds to the financial volume of almost half a contribution rate point. Half a contribution rate point corresponds to a good 8 billion euros.