As of: March 6, 2024, 10:55 a.m
By: Amy Walker
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The traffic light government has announced its long-awaited pension package II.
The central building block is generational capital - a kind of stock pension.
There is a lot of criticism about this.
Is it justified?
Berlin – The traffic light wants to put the statutory pension on a more solid footing by reforming the financing channels.
On Tuesday (March 5th), Labor Minister Hubertus Heil (SPD) and Finance Minister Christian Lindner (FDP) presented Pension Package II, the central component of which is generational capital.
The aim is to top up the pension fund in the 2030s with returns from the capital market in order to relieve the burden on contributors.
At least that's the idea - whether the plan works is another matter.
Pension package II: This is how stock pensions should work
The federal government’s “stock pension” is actually not a real stock pension, even though it is often called that.
The FDP had actually wanted the contributions that employees pay into the pension fund every month to be invested directly on the capital market, at least in part.
Sweden should be the model: there, 2.5 percent of contributions are invested in stocks.
The Swedes can decide whether they invest their contributions privately or pour them into the state-run fund.
However, this model was rejected for Germany.
Instead, the state is now taking on new debt and investing 12 billion euros on the capital market; ideally, this capital stock is replenished annually.
In the end, 200 billion euros should be available for the pension fund.
The traffic light expects returns of eight percent, based on past developments on the stock market.
From the mid-2030s, this money, including a return of hopefully around eight percent, will go to pension insurance.
This means that from then on the pension fund has an additional source of income: in addition to the contributions from employees and the subsidy from the federal government, money from the capital market.
Christian Lindner (FDP) and Hubertus Heil (SPD) presented pension package II.
© Michael Kappeler/dpa
But there is a big catch in the story that critics immediately recognized: What if the stock market doesn't develop as the federal government hopes?
In the worst case, the state ultimately makes a loss on its investment - then the pension insurance would have less money than has been invested.
Traffic light pensions are a risk - contributors would have to absorb losses
So it is definitely a risk.
This risk would be smaller if Germany had started stock pensions earlier.
Because basically the government does nothing other than what many savers do: invest money in a long-term and broadly diversified manner.
However, financial experts warn again and again: investing only really makes sense if you do it over a longer period of time.
Then it's not a bad thing if things go bad on the stock market - anyone who invests for 15 or 20 years will sooner or later experience a boom where things are going well and the returns are high.
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But the federal government is not doing that now.
She invests the money for a maximum of ten years.
Experts expect a positive return after 15 years at the earliest - if things on the stock market develop as usual in the past.
If that doesn't work in the end, employees will have to make up for the loss in the 2030s by increasing contributions.
Pension insurance expresses criticism of the traffic light plan
The morning after the pension package was presented, the chairwoman of the pension insurance company, Gundula Roßbach, also reacted negatively to the plans.
“Whether the contribution rate can be stabilized with the generation capital depends on whether the expectations with regard to investment income are met,” said Roßbach.
In a statement, the pension insurance company pointed out that the contribution from the capital stock also depends on financial market developments and the refinancing costs of federal bonds.
According to the pension insurance, a significant capital build-up and thus a noticeable relief is “hardly to be expected” given the relatively short time horizon.
“Not even if the risks usually associated with stock market transactions are ignored.” These risks should not be borne by the contributors.
The pension insurance warned: “If the payments to the pension insurance planned according to the draft cannot be made from the investment income from 2036, the contributors will have to compensate for this additionally.” Contribution funds should neither be used directly nor indirectly for the generation capital.
Economists: Traffic lights need significantly more money
But the whole system could also work.
Then the pension fund would actually have an additional source of income to finance the pensions of the baby boomers and pay them a fair pension.
The pension level should remain at 48 percent of the average wage until 2039.
But even in this best-case scenario, experts say: The money is never, ever enough.
Jochen Pimpertz from the German Economic Institute in Cologne (IW) said he was “absolutely critical” of the project.
The “generational capital” can only make a difference for pension finances if the sums are very large: “If you want to replace pension insurance income to the extent of one contribution rate point - in 2023, according to current pension insurance information, that was 18 billion euros - depending on the return, you would need a capital stock of “400 to 500 billion euros,” he calculates.
So at least double what the traffic light is now planning.