New beginning. Departure. There are big words that the traffic light negotiators in Berlin have been trying for weeks to give a possible red-green-yellow federal government a narrative underpinning. A good indicator of how much reality these words actually unfold is pension policy.
There are few policy areas that are so in need of reform. Old-age insurance in Germany is on crutches. Although Germany is a rich country, more and more pensioners are affected by old-age poverty. The number of seniors who lead a life at the limit and receive basic security in old age is increasing continuously, from 767,000 people in 2008 to more than 1.1 million in 2020.
And these are just the official numbers. In fact, according to experts, around two thirds of those eligible do not apply for any basic security at all. Out of shame or worry that their relatives will then be asked to pay. No wonder that the Federation of Industrialized Countries, the OECD, describes the federal government’s pension policy as “completely inadequate” and has been calling for fundamental reforms for years. But that will be difficult. Retirement provision is simply about a lot of money – and the field is occupied by numerous stakeholders.
Klaus Müller has been a member of the board of directors of the Federation of German Consumer Organizations (vzbv) since May 2014.
(Photo: Ralf Hirschberger / dpa)
The last major pension reform was introduced by Red-Green with the Riester pension. The aim was to lower social security contributions. The result is a gigantic gift to the finance and insurance industry. The state has subsidized the Riester contracts with around 50 billion euros since 2002 in the form of allowances or tax relief.
The financial sector in particular benefited from the Riester pension
Consumers have benefited too little from this type of private provision. Many financial products are too expensive and inefficient. In a typical Riester insurance policy, according to the Finanzwende citizens’ movement, 24 percent of the payments are spent on fees and administrative costs. On the other hand, the finance and insurance industry, into whose pockets a large part of the billions in funding has flowed, has hit the mark.
The traffic light would have a chance to correct this mistake. The solution could be a centrally and publicly organized pension fund that invests widely and with strong returns in stocks. Countries like Sweden or Great Britain have long shown how much better old-age provision can work on the capital market – if there is a public offer and not every individual has to find their way through the fine print of their financial contracts.
The problem is that the big hit is not yet in sight. The declarations of intent in the exploratory paper are too thin. Specifically, it should only be checked whether Riester should go into the second round or be replaced by a publicly organized pension fund. This is too little.
More is just not possible because the coalition partners have got stuck: The FDP wants a share pension in the statutory pension insurance. The aim is to stabilize the pension at today’s level in the long term. The Greens are relying on a new start in private pension provision through a citizen fund. The SPD, on the other hand, prefers supplementary provision in the guise of company pension provision.
The company pension system makes employees dependent
The liberal ideas do not yet answer where the money for their stock pension should come from. It should not come from the current pension contributions, as otherwise there would be less money for the important social compensation in the form of disability, widow’s and orphan’s pensions. And the proposed tax subsidy of ten billion euros will not be enough to build up serious funding, even if it came every year.
Proponents of occupational pension schemes ignore the shortcomings of the second pillar. First, the conversion of earnings free of social security contributions weakens the statutory pension because employees and employers pay fewer pension contributions. Second, consumers often pay for their occupational pensions alone and without employer subsidies anyway. Third, the company pension scheme makes employees dependent.
Since the contract belongs to the employer, you cannot simply take it with you when you change jobs. If things go bad, they have to sign new contracts – to the delight of the insurers and insurance brokers, who are doing new business and collecting a lot of commissions. All of this raises the question of whether future retirees shouldn’t save privately. Given this political starting point, good advice is expensive. Germany urgently needs a central and public pension fund to replace the failed Riester pensions.
It is unfortunately unclear whether the traffic light will manage this in view of its antagonists. But more years of standstill, as in the grand coalition, would be fatal for consumers. After all, good private money and tax money have been badly invested for years and the potential of a smart equity investment has not been used.
Coalition negotiations are a time of compromise. The SPD, the Greens and the FDP should come to an agreement. The aim was to sound out what a public pension fund should look like that would directly help employees, consumers and even medium-sized businesses and at the same time bring the various positions together.
One scenario could be the introduction of a cross-pillar public pension fund, which would be located directly at the Deutsche Rentenversicherung. In addition to their previous retirement account, consumers would receive another account that can be used to save directly on the capital market. Broadly diversified with stocks and at low cost. The deposits could then come from different directions. Additional tax subsidies from the federal government could be invested profitably in the fund in order to stabilize the statutory pension, as provided for in the exploratory paper.
Companies such as the baker or the master hairdresser around the corner could, in turn, use the fund to provide simple and inexpensive operational provisions for their employees, albeit with full social security contributions. And consumers could also pay in themselves, ideally via an automatic inclusion through the employer, as long as they do not object. Money that is currently in Riester contracts should be able to be transferred to the fund along with funding. Upon retirement, the capital stock would be paid out or annuced and thus provide an additional pension to the statutory pension. That would be a traffic light-fair compromise that could be built on.