_ Florian Mueller, editor-in-chief, German journal “Krautzone”. First published in the Krautzone issue Nr. 38 “Remigration” available for subscription HERE.
Do you know how many retirees in Germany receive more than 3,000 euros in pension? Fifty. No, I didn’t forget a zero. Fifty. The average state pension in Germany is 1,543 euros, which is also taxed. Given the current cost of living and the often impending care and support costs, one doesn’t have to be a genius to predict that such a pension is too low for many. The boomer generation, currently retiring, fortunately mostly owns real estate, which can somewhat cushion old-age poverty. Nonetheless, a large portion of future retirees will have to come to terms with their new poverty or simply continue working until a heart attack. The reason is simple: the introduction of the pay-as-you-go system in the 1950s, followed by the later decline in the birth rate.
A calculation example
Pensions in Germany are calculated based on so-called pension points. The provisional gross average salary used by the pension fund was 43,142 euros in 2023. Anyone who earns that much gets one pension point. If a person earns only half, they get half a pension point. And if they earn double, they receive two pension points at maximum. 45 contribution years with two pension points result in the aforementioned over 3,000 euros pension. It is now clear that this pension rate is almost unattainable: a beginner in the profession would have to earn more than 80,000 euros gross in the first year of work to receive two pension points.
This point system has exactly one purpose: to obscure how much money a person actually paid into the social system, and how much they get out in the end. But even without calculating, most people instinctively feel a discrepancy: how can I have toiled fso many years and now get so little in return? People feel that they have been deprived of the fruits of their labor – and this feeling is not mistaken. Let’s take the average annual gross income of around 43,000 euros. This is the employee’s gross – the employer must pay 53,535 euros in this case. This sum corresponds to the value of the employee’s work, as the employer would not employ anyone who brings in less than they cost. 18.6 percent of the employer’s gross is paid to the pension fund, amounting to 668 euros monthly. The “earned” 45 pension points correspond to a gross pension of 1,692 euros. Whether it is “secure” is beside the point. If Konrad Adenauer had not listened to the “Schreiber Plan” during the pension reform of 1957, which recommended the pay-as-you-go system, he might have further expanded the so-called capitalized model. Contrary to widespread belief, the pay-as-you-go pension is not “normal” – rather, the “generational contract” is an invention of the economist Wilfrid Schreiber. Historically, Germany had a capitalized pension system, and many other countries such as Chile, Norway, the United Kingdom, Sweden, the Netherlands, or China are now partially or entirely based on the capitalized pension system. Here, everyone finances their own pension – in the meantime, the money is invested in the stock market.
An alternative scenario
Instead of paying pension contributions into an imaginary pot, which is nothing more than a pass-through account, the average German worker would simply have a monthly savings rate of 668 euros. And that for 45 working years. The result can be calculated using the numerous online stock calculators: If all the money had been invested in the DAX, after 45 years of saving, a fortune of 4.4 million euros would be amassed! With a slightly more pessimistic average return of five percent, upon retirement age, one would still land at 1.32 million euros. With an optimistic life expectancy of 85 years, the retiree must sustain himself with his savings for twenty years, or 240 months. With an investment portfolio of 4.4 million euros – without further interest effects – he would receive 18,000 euros per month. Even in the five percent interest scenario, he could withdraw 5,500 euros monthly. In reality, his wealth would continue to grow. With an average DAX return of nine percent, this would ultimately correspond to an annual wealth increase of 400,000 euros. The accumulated wealth would continue to grow even up to a monthly payout of 33,000 euros! The pessimists may now object: Uncertainty. If an economic crash occurs and stocks plummet, there will be no more money. The chance of a total loss certainly exists, but is nearly excluded, as in this case all companies in which investments were made would have to go bankrupt. A government bankruptcy or at least the inflationary devaluation of the pay-as-you-go pension is much more likely than a total market collapse. Nevertheless, critics point to the low interest rates or returns of recent years to argue against the stock-based pension. Let’s assume that over a period of 45 years, everything that could go wrong does go wrong, and in the end, one is left with an annual return of only one percent. Even then, the pension saver would have a pension fortune of over 450,000 euros – receiving 1,875 euros monthly with a life expectancy of 85 years, still more than in the current pay-as-you-go system
A sovereign wealth fund
There’s another interesting side effect: If one chooses the ‘Norwegian model’ of the stock-based pension, namely a sovereign wealth fund primarily invested in the stock market, one would have a colossal amount of capital. The Norwegian Sovereign Wealth Fund, established in its current form in 2006, boasts an annual average return of about five percent and now has a fund volume of 1.2 trillion (!) US dollars – with just 5.5 million inhabitants. A German counterpart, based on population size, would equate to a fund volume of 18 trillion US dollars, making it roughly twice the size of ‘Blackrock,’ the world’s largest asset manager. This would give Germany – the German state – an extreme position of power in the international capital market and could, for example, enable targeted investments in markets in other countries or protect domestic companies from foreign investors. Especially from the perspective of domestically oriented capitalists, it would be a significant advantage to shield local companies from foreign investors.
Of course, the libertarian will not be entirely satisfied with the sovereign wealth fund solution, as it is still the state that controls the citizens’ pension assets. A legitimate objection, illustrated by a quip from the economist Joseph Schumpeter: ‘A dog is more likely to stock up on sausages than a democratic government is to build up a budget reserve.’ The most important task would not even be to maximize the return of the sovereign wealth fund, but to politically and legally structure the sovereign wealth fund in such a way that the state ultimately has no access to it and cannot withdraw capital even in a crisis. The ideal solution from a libertarian perspective, genuine privatization of pensions, certainly doesn’t have this problem, but it is hardly feasible from a real political perspective, especially because average Germans, and especially the state-dependent underclass, have been deprived of independent and responsible action in recent decades.
The reality
Germany is a poor country, and many citizens are beginning to feel it. More and more retirees have to search for returnable bottles in the trash, rely on food banks, and be supported by their relatives. The introduction of the pay-as-you-go pension system was arguably the biggest economic crime in the history of Germany – caused by the CDU. Even the end of the gold-backed monetary system does not weigh as heavily in reality – especially since the Federal Republic had hardly any influence on it. However, it could determine the pension system itself – and made the wrong decision. Reverting to a capitalized pension system is economically extremely expensive, as annual pension payments of over 300 billion euros would need to be compensated for. Nevertheless, a gradual introduction of capitalization as an additional pillar of pensions over several decades could be implemented. Unfortunately, the AfD has largely abandoned this approach, and the FDP – the only party to advocate for a stock-based pension in the 2021 federal election – was able to partially prevail here. This year, a capitalized supplementary fund, the so-called ‘Generational Capital,’ is planned to be introduced in the form of a public law foundation with an initial sum of 10 billion euros. However, anyone who thinks that the stage is set for a ‘stock-based pension’ is far off! The Federal Ministry of Finance website states: ‘We are forming a capital stock to stabilize pension contributions and mitigate the increase in federal subsidies from the mid-2030s onwards.’ The ever-increasing subsidies from the federal budget to the pension fund – over 100 billion euros – are intended to be cushioned by the returns from this fund. Currently, it seems that Lindner has simply pulled a bookkeeping sleight of hand: Instead of having to incur debts in the future to meet the growing pension burden, money will be invested in stocks in the medium term, hoping to fill the pension gap with dividends. Instead of leveraging the compounding effect, the returns will thus be skimmed off. Moreover, it is questionable whether a larger fund can actually be built up if the financing from federal funds has to be renegotiated every year.
Conclusion and outlook
The pension issue is the biggest economic problem of our time, especially because generations are pitted against each other, making clear majorities nearly impossible. The difficulty of a transition was aptly described by MIWI economist Dr. Hendrik Hagedorn in Issue 35 of the Krautzone journal.
Nevertheless: For every economic problem, there is also a solution. The state budget would have to run on a low flame over several decades to invest tax surpluses long-term into a stock-based pension for future generations. This is unlikely but possible, especially considering the areas where money is being thrown out the window. Germany still (!) has its ace in the hole: being one of the strongest economies in the world. Money has always been and will always be there – the question is only whether it is used intelligently and for the benefit of its own people.