Germany's pension crisis: New strategies amid sustainability fears
The German pension system is on the verge of being stretched to its limits, primarily due to an ageing population. New initiatives have been proposed to ensure the system's long-term viability. However, critics argue these measures fall short of the expected outcomes.
The baby boom period of 1955-1969 has now reached the retirement phase. With Germans living longer and the workforce growth not keeping pace, pressing questions arise about the sustainability of pension payments - reports "Deutsche Welle".
Established in 1889, the German pension system operates on public pension insurance, drawing parallels to Poland's model where pensions are funded through the workforce's insurance contributions, often referred to as the "inter-generational contract".
In the 1960s, the ratio of workers contributing to the pension system compared to retirees was 6:1. Currently, this ratio has dropped to 2:1 and continues to decline, points out "Deutsche Welle".
A substantial part of the national budget is directed towards the pension system. In 2024, the pension fund is set to receive roughly £110 billion, accounting for one-third of all government spending. It’s predicted that by 2050, this figure will nearly double.
Consequently, pensioners are emerging as a key voter demographic, driving the issue of pension system protection to the forefront of political debate and action.
New proposals for pensioners
The SPD, Greens, and the liberal FDP-led government is reluctant to cut pensions, increase pension contributions, or extend the retirement age beyond the previously determined rise to 67 years by 2029.
Addressing these challenges, Finance Minister Christian Lindner from the Free Democrats (FDP) proposed a strategy for the federal government to initially borrow around £10 billion and invest it in the stock market, according to "Deutsche Welle".
This strategy involves establishing a "Generational Capital" fund, overseen by an independent public foundation, with a focus on investing in a globally diversified portfolio of stocks aiming for high returns. The profits garnered will be channelled back into the state treasury.
Lindner shared on the social media platform X (formerly Twitter) that "For over a hundred years, the benefits of the capital market have been underutilized. Now, we are investing in the society's future.
Projected 3% annual increase
The plan anticipates that the initial investment of around £10 billion will grow by 3% annually. By the mid-2030s, it's expected that the funds amassed to bolster the statutory pension scheme will be worth at least about £173 billion.
Nonetheless, the plan has faced criticism from the main opposition party, the conservative CDU, calling it ineffective. Axel Knoerig, deputy chairman of the labor and social affairs committee in the Bundestag, conveyed to the media group Ippen.Media that the so-called pension package II "does not assure long-term pension stability."
Knoerig warns that the scheme could lead to higher future contributions, imposing an extra financial burden on workers. While not completely opposed to capital market investments for yielding additional interest income, Knoerig believes the current proposal "will not result in significant returns to counterbalance the increased debt".
Despite the risks associated with stock market investments, the German Finance Ministry assures that a "safety buffer" will safeguard the foundation’s assets.
The German Stocks Institute (Deutsches Aktieninstitut, DAI) suggests that well-diversified capital investments typically yield annual returns of 6 to 8 percent. Finance Minister Christian Lindner is optimistic, expecting "returns higher than 3 or 4 percent".
