Wealth formation as the basis for prosperity, democracy and social justice

_ Yuri Kofner, economist, MIWI Institute. Munich, 10 October 2021.

The founding fathers of the social market economy, such as Walter Eucken, Alfred Müller-Armack and Ludwig Erhard, saw the possibility of wealth accumulation and private home ownership for the broader population as one of the most important foundations for a prosperous, free and socially just society. [1], [2], [3]

Germans are less wealthy

Unfortunately, we have to admit that in the 20s of the 21st century, Germans lag far behind other industrialized countries when it comes to wealth accumulation and private homeownership.

In 2021 the median annual income in Germany in 2019 was 23.5 thousand euros, higher than in France (22.6 thousand euros), Italy (17.2 thousand euros), Spain (15 thousand euros) and Greece (8, 2 thousand euros). [4]

In addition, Germany has one of the highest employment rates of any OECD country. In 2019, unemployment in the FRG was only 3.1 percent; in contrast to France with 8.4 percent, Italy with 10 percent, Spain with 14.1 percent and Greece with 17.1 percent. [5]

And at the same time, Germany is one of the OECD countries with one of the highest savings rates of disposable household income: 10.9 percent in 2019. Only one member of the eurozone had a slightly higher savings rate – the Netherlands. [6]

Nevertheless, the average wealth per adult in Germany is significantly lower than in most other industrialized countries. According to the Credit Suisse Research Institute, it was 56.7 thousand euros. In France, on the other hand, it was 115.8 thousand euros, in Italy 103 thousand euros and in Spain 91.7 thousand euros. Only the Greeks were less wealthy, with 50,000 euros.

But the Germans were also less rich than the Austrians (80 thousand euros), the Australians (89 thousand euros), the Canadians (109 thousand euros), the Danes (144 thousand euros), the Finns (64 thousand euros). The Koreans (78 thousand euros), the Dutch (118 thousand euros), the Norwegians (102 thousand euros), the Swedes (78 thousand euros), the British (114 thousand euros) and the US -Americans (69 thousand euros). [7]

As the German economist Daniel Stelter puts it, “despite high incomes and diligent savings, Germans are significantly poorer than other nations”. [8]

Germany’s economy is the main financier of the EU. Studies by cep show that Germany’s average annual net transfers to the EU budget between 2008 and 2017 amounted to 11.9 billion euros. That was almost two or three times higher than the net contributions from France (6.6 billion euros) and Italy (4.1 billion euros), let alone from Spain and Greece, which were net recipients of EU and received transfers amounting to 3.2 billion and 4.9 billion euros respectively. [9] As a result of Brexit and the assumption of the joint debt of the Corona Reconstruction Fund (NGEU), Germany’s annual net contributions will rise significantly to over 27 billion euros in the years 2021-2027. [10]

Not only are the industrious and thrifty Germans poorer than most of their peers from other European and industrialized economies, the German low-income and middle classes are also much less wealthy in comparison. In 2021, the bottom 20 to 40 percent in Germany owned only 27.1 thousand euros. The same category had 33.8 thousand euros in France, 42 thousand euros in Greece, 76.8 thousand euros in Italy and as much as 80.8 thousand euros in Spain, i.e. one and a half to three times more.

And the famous German middle class was also comparatively less wealthy. The middle 40 to 60 percent of German earners had EUR 64.8 thousand, while the French with the same income level had EUR 113.8 thousand, the Spaniards EUR 117.7 thousand and the Italians EUR 131 thousand. And even the middle class Greeks were wealthier, with 70.4 thousand euros. [11]

Three reasons for impaired wealth creation

What are the reasons for that? In Germany, the potential for wealth creation is increasingly restricted. This can be seen in three main areas: a low homeownership rate, the inability of the private sector to save due to negative interest rates and a low propensity to invest, and a significant tax burden.

Owning a home is one of the most important prerequisites for economic independence, wealth accumulation, crisis resilience and the prevention of old-age poverty. Unfortunately, only 44 percent of German households own their own residential property. In Austria the proportion is 46 percent of households, in France 58 percent, in Italy 69 percent, in Greece 72 percent and in Spain even more than three quarters of households. [12]

And the homeownership rate of the German lower and middle income groups is lower than in the comparable income groups of the euro area countries. Among the low-income earners, only 34.6 percent owned a home, while in France with the same income level it was 40.2 percent, in Italy 59 percent, in Greece 65.4 percent and in Spain 70 percent. Of the German middle class, only 43.5 percent owned a home, while 60 percent of the French middle class owned a home. 66.5 percent in Italy, 74 percent in Greece, and 78 percent of middle-income households in Spain. [13]

The relatively low homeownership rate is an important factor in the relative “un”- prosperity of the broader population. Another important factor is the impossibility of accumulating financial assets.

The Germans have one of the highest savings rates, as shown above, but the negative interest rates (deposit facility) that the ECB introduced after the euro crisis not only prevent the possibility of paying interest on deposits, but also make private households poorer. The author’s estimates based on calculations by the DZ-Bank and the Bundesbank show that the net losses of private savers (i.e. offset against “cheaper” loans) amount to 34.5 billion euros annually. That is almost 500 euros per adult per year. [14]

Unfortunately, Germans are traditionally “risk averse” and at the same time rather sceptical about investing in securities. While in Germany only 10.9 percent of private households own shares, it is 11.3 percent in France and 11.6 percent in Spain. 10 percent of Italian households own bonds, compared to only 3.2 percent in Germany. And in Finland, over a fifth of households owns shares. [15]

This is a shame, since while most German commercial banks are already charging penalty interest, the average dividend yield of the DAX index, for example, has been around 3 percent in recent years. [16] With an initial investment of 10 thousand euros and a 30-year investment period, the financial assets would grow to over 24 thousand euris (excluding inflation).

Last but not least, and despite the relatively high employment rate and the relatively high income level, the average German employee is finding it increasingly difficult to build up wealth due to the high tax burden on his salary. In 2020, he had to give almost a third (32.5 percent) of his wages to income tax and social security contributions. This is the third-highest wage burden on the employee side among the OECD countries. Only Lithuania and Denmark had a higher tax burden rate, with 35.2 and 35.4 percent respectively. Together with the employer’s social security contributions, taxes take away almost half (49.1 percent) of the average wage in Germany, giving the country the unpleasant second place in terms of wage tax. [17]

What not to do

So what should be done to solve this problem and make the majority of citizens more wealthy? The left-green answer would be “more redistribution” and “tax the rich”. It is gratifying that researchers at DIW, of all people, do not share this view and agree with the contrary claim: “We have to do more to make the broader population more prosperous. Simply levying higher taxes on income and wealth does not solve the problem”. [18]

Wealth taxes and rent caps are among the most anti-social state interventions, as they lead to negative welfare effects.

Macroeconomic models from the ifo Institute show that the reintroduction of a wealth tax would reduce the gross domestic product by 6.2 percent, i.e. would make every citizen poorer by almost 2,600 euros. It would also reduce domestic corporate investment by 11 percent and foreign direct investment by 20 percent. [19] It should be particularly emphasized that in Germany, the top 1 percent hold over two thirds of their private wealth as business assets. Entrepreneurial equity is a prerequisite for business investments and innovations, as well as an important buffer in recessions. And of course it creates jobs. [20]

The rent cap also has serious negative effects for flat hunters, tenants, landlords and investors. According to a survey by the IW Cologne, the Berlin rent cap has halved the supply of rental flats. A fifth of the landlords reported negative wealth effects due to losses from letting, and almost 60 percent stated that the regulation had a negative effect on the willingness to make large investments in their housing stock. [21]

Home ownership, securities and more net from gross

So what would be the right solution? Government policy must focus on facilitating wealth creation for the public. A good benchmark would be to reach a median wealth per adult like in France or the UK.

The development of the citizen’s wealth ratio must be published in an annual government report.

The above analysis suggests that the necessary policy measures should focus on three core areas: increasing the homeownership rate, enabling households to build financial capital, and increasing net income from gross wages.

Promotion of private home ownership

An important instrument to achieve this goal would be the abolition of the property tax and the property transfer tax. This would relieve the real estate market by 27.2 billion euros (0.9 percent of GDP) and each adult citizen by 390 euros annually. [22] Compensation for lost income to the municipalities is to be paid by the federal government via the federal-state distribution key for value added tax. Furthermore, the tax deductibility of mortgage interest should be introduced.

Another measure would be a reduction of the partially excessive standards and requirements that make new residential construction difficult, including making the energy saving ordinance more flexible, as well as reducing fire, heat and noise protection to a necessary minimum.

Furthermore, there is a need for a nationwide simplification and standardization of building law and an acceleration of procedures by reducing bureaucracy and digitization.

Wherever possible, owner-occupiers should be given preference when selling public property.

State housing companies should offer tenants their apartment for sale. For young families in particular, the heritable building right should be expanded as a cost-effective entry into property. Housing cooperatives should be given preference in the allocation of residential building land in order to make it easier for more citizens to start property ownership. State guarantees as a substitute for equity for up to 10 percent of the property value are intended to facilitate the purchase of living space. Another measure would be the special tax depreciation for owner-occupied property.

In the case of rent, property funding should be replaced by subject funding. This means that social housing should be built through direct transfers to low-wage earners. This measure would benefit the socially disadvantaged in particular, help them to mingle with the high-income households and at the same time limit state interference in the rental market to a minimum.

Estimates of the extent vary, but the fact is that the influx of migrants and refugees in recent years has increased demand pressure on the housing market. According to a current survey by the BAMF, over three quarters of asylum seekers who have come to Germany since 2013 now live in apartments and private houses. [23] RWI Consult predicts that around 300 thousand new apartments will have to be built by 2035 in order to take account of the current immigration trend. [24] At the same time, many migrants and refugees receive social housing or housing money from the state, although they may still own a home or apartment in their country of origin. It would therefore only be fair to provide social housing or housing money only to those immigrants who can prove that they have no other home abroad. Necessary data exchange agreements within the EU and with third countries should become part of German migration and development policy.

According to estimates by the Deutsche Bundesbank, the implementation of these measures would increase the home ownership rate in Germany from 44 to 58 percent and thus increase the wealth of Germans by 11 percent – that is an average of 6,200 euros more wealth per adult. [25]

The development of the home ownership rate must be published in the annual government report.

Promotion of private financial assets

As already mentioned, the majority of German private households continue to save their income in traditional bank deposits despite considerable losses due to the negative ECB interest rate. So the solution to this paradoxical situation would be either to revert to a positive interest rate or to help Germans invest more of their money in stocks and bonds with positive returns.

However, as the economist Markus Krall rightly explains, the European Central Bank is unlikely to increase its interest rates in the foreseeable future despite rising inflation rates in the post-COVID euro zone, as this would lead to a major crisis in the banking sector and the upstream zombie companies. [26]

The many questionable measures by the ECB, such as the negative interest rates mentioned, but also the de facto state financing through its bond purchase programs and now its recently discovered love for “climate protection”, have intensified the calls for a renationalization of monetary policy.

In fact, earlier studies by the author show that an exit from the euro and the reintroduction of the D-Mark could even increase domestic GDP by 1.3 percent and make every German 665 euros richer a year – thanks to the exchange rate and interest rate effects. [27] A less radical option would be the introduction of a parallel currency, as proposed by economists such as Bernd Lucke and Fritz W. Scharpf. [28], [29]

Since both options are unlikely, there is only one real political alternative: to help more citizens to invest more money – not in “savings accounts”, but in other financial assets. This can be achieved through three key measures: tax cuts on private investments in stocks and bonds, broader financial literacy, and the creation of a sovereign wealth fund.

As a first measure, the government could lower the capital gains tax rate by 25 to 20 percent or increase the current tax exemption for SMEs and small private investors. The tax reduction would exempt a total of 5.7 billion euros (0.2 percent of GDP) and relieve each adult citizen by 82 euros annually. [30]

Another measure could be the abolition of the inheritance tax, which would leave the people 7.1 billion euros (0.2 percent of GDP) and make every adult German citizen 102 euros richer. [31]

As indicated above, a broad education in basic economic contexts and common finance is necessary in order for more citizens to learn how to invest money properly for wealth creation. For this reason, following the Finnish and Austrian model, the subject of “financial knowledge” should be introduced as a teaching subject in the intermediate level with participation in the corresponding PISA module. Furthermore, lifelong extra-occupational courses on the capital market are required.

Many influential economists, e.g. ifo President Clemens Fuest [32] or CEPS boss Daniel Gros, [33] propose the establishment of a national wealth fund based on the example of Norway. This fund could fulfill several tasks at the same time: make private investments in securities more attractive, increase the return on German foreign assets and put the state pension insurance on secure feet. [34]

The federal government should therefore set up a state fund that provides the citizens with share-based pension insurance and invests the funds in a broad portfolio of domestic and foreign assets. The fund can be financed in three ways: voluntary or compulsory pension insurance contributions with a guaranteed minimum return, new government debt or TARGET 2 claims as security (EUR 1,115 billion in September 2021). [35] Accordingly, the wealth per adult could increase between 720-1380 euros (in additional annuity payments per year) to at least 16 to 25 thousand euros (one-off payment). In order to guarantee an independent, return-oriented asset management, the national wealth fund should be administered by the Bundesbank.

Tax relief: more net than gross

Finally, but most importantly, the German welfare state should renounce the paradigm of exaggerated redistribution – the state quota before Corona was over 44 percent of GDP, in 2020 it jumped to 51 percent – and the broad creation of wealth should be once again the focus of its social- and set tax policy. Just as Ludwig Erhard intended and implemented with his “Prosperity for All”.

This means reducing the tax burden on labor, productivity and entrepreneurship.

As an important measure, the state should lower the income tax rates for low-wage earners and the lower middle class, which, according to calculations by the Ifo Institute, would exempt them from a total of 38.4 billion euros (1.2 percent of GDP). This corresponds to an annual relief of 553 euros per adult. The complete abolition of the solidarity surcharge will reduce the tax burden by a further 0.8 billion euros or 12 euros per capita. [36]

A possible abolition of trade tax and a reduction in the corporate income tax rate from 15 to 10 percent would significantly relieve small and medium-sized enterprises by 71 billion euros (2.2 percent of GDP) or 1,022 euros per German citizen. [37]

The wealth formation reforms proposed above would increase the wealth of every German adult by an average of almost 25,000 euros to 81.400 euros – higher than in Austria, Korea, Sweden, Finland and the USA.


[1] Gerd Habermann G. (2004). Müssen Utopien sozialistisch sein? ORDO. Stuttgart.

[2] Eucken W. (1952). Grundsätze der Wirtschaftspolitik. Freiburg.

[3] Tüpper R.A. (2020). Vermögenspolitik in der Sozialen Marktwirtschaft. KAS. URL: https://www.kas.de/en/veranstaltungsberichte/detail/-/content/vermoegenspolitik-in-der-sozialen-marktwirtschaft

[4] Eurostat (2021). Mean and median income by age and sex – EU-SILC and ECHP surveys, URL: https://ec.europa.eu/eurostat/en/web/products-datasets/-/ILC_DI03

[5] OECD (2021). Unemployment rate. URL: https://data.oecd.org/unemp/unemployment-rate.htm#indicator-chart

[6] OECD (2021). Household savings. URL: https://data.oecd.org/hha/household-savings.htm

[7] Credit Suisse Research Institute (2021). Global Wealth Report 2021. URL: https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

[8] Stelter D. (2021). Ein Traum von einem Land. Deutschland 2040. campus Verlag. Frankfurt.

[9] Kullas M., Rudolph K. (2020). Umverteilung durch die EU und den horizontalen Länderfinanzausgleich in Deutschland. Centrum für Europäische Politik (cep). URL: https://www.cep.eu/eu-themen/details/cep/umverteilung-durch-die-eu-und-den-horizontalen-laenderfinanzausgleich-in-deutschland-cepinput.html

[10] Kofner Y. (2021 a). Welfare effects of DEXIT: Deutschmark and European Economic Community 2.0. MIWI Institute. URL: https://miwi-institut.de/archives/1060

[11] ECB (2021). The Households Finance and Consumption Survey. Wave 2017 (May 2021 version). URL: https://www.ecb.europa.eu/pub/economic-research/research-networks/html/researcher_hfcn.en.html

[12] Ibid.

[13] Ibid.

[14] Kofner Y. (2021 b). Blue Deal: Fiscal and economic effects of the AfD’s economic program. MIWI Institute. URL: https://miwi-institut.de/archives/1284

[15] ECB (2021).

[16] Deutsche Bank Research (2021). DAX-index dividend. URL: https://moneyinvestexpert.com/dividend-stocks/the-list-of-dax-index-stocks-and-dividend

[17] OECD (2021). Taxing Wages 2021. URL: https://www.oecd.org/tax/taxing-wages-20725124.htm

[18] Dinklage F. et al. (2020). Das obere Prozent. ZEIT, DIW. URL: https://www.zeit.de/wirtschaft/2020-07/vermoegensverteilung-deutschland-diw-studie-ungleichheit

[19] Fuest C., Potrafke N. (2021). Steuer- und Finanzpolitik: Auf Wachstum ausrichten. ifo Institut. URL: https://www.ifo.de/en/publikationen/2021/article-journal/taxation-and-fiscal-policy-positioning-growth

[20] Beznoska M., Hentze T. (2021). Vermögensteuer: Keine Steuer ist wirtschaftsfeindlicher. IW Köln. URL: https://www.iwkoeln.de/studien/martin-beznoska-tobias-hentze-keine-steuer-ist-wirtschaftsfeindlicher-510617.html

[21] Sagner P., Voigtländer M. (2021). Auswirkungen des Berliner Mietendeckels auf private Vermieter. IW Köln. URL: https://www.iwkoeln.de/studien/pekka-sagner-michael-voigtlaender-auswirkungen-des-berliner-mietendeckels-auf-private-vermieter-517575.html

[22] Kofner Y. (2021 b).

[23] Tanis K. (2021). Entwicklungen in der Wohnsituation Geflüchteter. BAMF. URL: https://www.bamf.de/SharedDocs/Anlagen/DE/Forschung/Kurzanalysen/kurzanalyse5-2020-wohnen.pdf?__blob=publicationFile&v=7

[24] rwi consult (2021). Wohnungsbedarf in Deutschland bis 2035. URL: https://www.rwi-essen.de/media/content/pages/publikationen/rwi-consult/2021-08-16_projektbericht_rwi_consult_wohnungsbedarf_deutschland_bis_2035.pdf

[25] Kaas L. et al. (2020) Reasons for the low homeownership rate in Germany. Deutsche Bundesbank. URL: https://www.bundesbank.de/en/publications/research/research-brief/2020-30-homeownership-822176

[26] Krall M. (2020). Die bürgerliche Revolution. Kopp Verlag. Rottenbutg am Neckar.

[27] Kofner Y. (2021 a) und Kofner Y. (2021 b).

[28] Lucke B. (2013). Wir wollen keine einseitige Rückkehr zur D-Mark. NZZ. URL: https://www.nzz.ch/wir-wollen-keine-einseitige-rueckkehr-zur-d-mark-1.18079264?reduced=true

[29] Scharpf F.W. (2018). There is an alternative: A two-tier European currency community. Max-Planck-Institut. URL: https://www.mpifg.de/pu/mpifg_dp/2018/dp18-7.pdf

[30] Own estimations based on: Destatis (2021). Steuereinnahmen aus der Erbschaftsteuer in Deutschland von 2007 bis 2020. URL: https://de.statista.com/statistik/daten/studie/235806/umfrage/einnahmen-aus-der-erbschaftsteuer/#:~:text=Im%20Jahr%202020%20betrugen%20die,und%20wird%20als%20Erbanfallsteuer%20erhoben.

[31] Own estimations based on: Büttner T. et al. (2020). Der Beitrag der Familienunternehmen zum Steueraufkommen in Deutschland. ifo Institut, Stiftung Familienunternehmen. URL: https://www.ifo.de/DocDL/Steuerbeitrag-der-Familienunternehmen_2020.pdf

[32] Fuest C., Chr. Hainz, V. Meier und M. Werding (2019). Das Konzept eines deutschen Bürgerfonds. ifo Institut. URL: https://www.ifo.de/DocDL/ifo-studie-2019-fuest-etal-buergerfonds.pdf

[33] Gros D, Mayer T. (2012). A Sovereign Wealth Fund to Lift Germany’s Curse of Excess Savings. CEPS. URL: https://www.ceps.eu/ceps-publications/sovereign-wealth-fund-lift-germanys-curse-excess-savings/

[34] Kofner J. (2021). Stabile Altersvorsorge trotz demografischem Wandel und Niedrigzinsen – staatlichen kapitalgedeckten Rentenfonds schaffen. MIWI Institut. URL: https://kofner.de/archive/3667

[35] Deutsche Bundesbank (2021). TARGET2-Saldo. URL: https://www.bundesbank.de/de/aufgaben/unbarer-zahlungsverkehr/target2/target2-saldo/target2-saldo-603478

[36] Kofner Y. (2021 b).

[37] Ibid.

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