The traffic light coalition wants to keep pensions stable and contributions low for years. Can the plan work out?
(Photo: Reuters)
Frankfurt Two problems are gripping German old-age pensions. First: In an ever older society it is becoming increasingly clear that a pay-as-you-go system for the statutory pension alone can no longer create sufficient supply in the long term. And secondly: The minimum interest rate, which has fallen to 0.25 percent, and the ever decreasing total interest rate for life insurances ensure that Germans, who love private old-age provision, can hardly fill gaps in their pensions.
A real reform is therefore needed: with more flexibility at the start of retirement, the targeted use of tax revenues and more returns from the capital market.
The new traffic light government is unfortunately making more promises in its coalition agreement than it can realistically hold. The statutory pensions should remain stable for years, but the contributions should increase little. Both are not possible in the long run. At least there are vague approaches to increasing flexibility and a tentative movement towards the capital market. Nevertheless, the bottom line is that the new government is only preserving the structure of the statutory pension instead of reforming it.
Each ruling party has left its mark on the coalition agreement when it comes to pensions. The SPD has achieved the goal of a “permanent” minimum pension level of 48 percent. And with the fact that the contribution rate does not initially rise by more than 1.4 percentage points – to 20 percent. After all, she has agreed to slow down the regular increase in pensions through the so-called catch-up factor, by indirectly taking into account a falling wage level in the event of increases.
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The Greens were able to score with requests for flexibility: for example, when retiring and examining an inexpensive state fund for private provision. And the FDP supports the start in the capital market for the statutory pension as well as more freedom in investing company and subsidized private pension capital on the stock market.
More money has to flow into the capital market
But all of these steps will not be enough to stabilize the pension system. In the next ten years, the baby boomers will retire. Fewer and fewer workers’ contributions cannot shoulder the burden for more and more retirees. Without pension cuts or a longer working life, significantly more tax money will have to flow in in the future.
This money should primarily benefit those receiving small pensions, who can hardly afford a greater capital market risk.
However, significantly more pension capital must flow into the capital market in order to strengthen all pillars of the pension system in the long term. Experience has shown that the probability of price losses with stocks after eleven years is almost zero if you look at the German leading index Dax, for example. The first grant of ten billion euros planned by the government, which is to be invested in the capital market for the statutory pension, is far too small: the Ifo Institute has calculated that each pensioner would later receive one euro per month from it.
There are tentative ideas in the coalition agreement for corporate and subsidized private provision that capital investments with higher potential returns should be allowed. An inexpensive public provision fund, which is to be examined as an alternative to the Riester pension, could bring momentum to provision.
There, however, there must be no rigid conditions, such as those that have previously existed as capital guarantees for the Riester pension. Because guarantee eats up returns, nothing is left in times of low interest rates.
It is time for bold, comprehensive reform. The traffic light has the chance to turn its vague approaches into a coherent concept. She should use it.
More: What consequences the coalition agreement has for investors and consumers