An adequate pension is no longer secure for many citizens in Germany. On the one hand, this is due to the increasingly unbalanced ratio of pension contributors to pensioners, which increases strain on the pay-as-you-go system of the statutory pension. On the other hand, persistently low interest rates make funded occupational and private pension schemes with guaranteed contributions unattractive.
The three pillars of the statutory pension in Germany (contribution rate, retirement age, and financing from the state budget) cannot be extended any further against economic, political, and social resistance. Even the so-called Riester pension in its current form no longer offers any scope for an attractive and sustainable pension model. However, measures can be taken that can be implemented quickly and effectively with a view to the statutory pension insurance, a “equity pension from birth,” an improvement in the Riester pension, and active support for pension planning.
Lump sum payments for delaying retirement
First, one possibility is to improve incentives for voluntary later retirement in the state pension system. Research shows that older individuals would be much more willing to voluntary delay retirement in exchange for an actuarial fair lump sum payment instead of an increase in monthly pension income (as in the current status quo). Such a technically simple but effective measure does not involve pension cuts or additional costs for the state pension system, while at the same time providing a demonstrable benefit in that more people take advantage of this offer and work longer.
Equity pension from birth
In the case of a “equity pension from birth”, a state-financed single premium is paid into an individual retirement account for all newborns. The funds from this custody account are invested in a fiduciary capacity in globally diversified equity-portfolio and funds and are not paid out until retirement. Thanks to the enormous long-term earnings of international productive capital, substantial assets can be built up for later life even with very small investment amounts and irrespective of the individual’s employment biography. The very long-term investment horizon allows short-term fluctuations in returns to be balanced out over time. The bottom line is therefore a substantial additional pension for each and every individual in society, which at the same time avoids old-age poverty in future generations.
Improving Riester pension accounts
To ensure that current cohorts also participate in productive capital for old-age provision, the mandatory money-back guarantee for the Riester pension should be adjusted. If the minimum payout at the end of the accumulation phase for personal contributions remains guaranteed, but not the government subsidies, significantly higher equity exposures and returns can be achieved, even within a persistent low interest rate environment. A reformed contribution guarantee in combination with standardized risk-based investment strategies could make the Riester pension more attractive not only at the national level but also at the European level if, as in the case of the Pan-European Personal Pension Product (PEPP), risk-equivalent investment strategies such as a lifecycle fund are permitted as an alternative to the contribution guarantee.
Pension planning support
Finally, people also need more transparency and support in their pension planning. The “Central Office for the Digital Pension Overview” (Zentrale Stelle für die Digitale Rentenübersicht, ZfDR) planned under the umbrella of Deutsche Rentenversicherung as an application for transmitting digital pension information is a promising first step. However, limiting the pension puzzle to a tabular representation of insurance-type benefits leaves gaps. Alternatively, data trustees can be promoted that offer people a meaningful overall view and encourage concrete decisions at an early stage.
Andreas Hackethal is director of the department Household Finance at SAFE and Professor of Finance at Goethe University Frankfurt.
Raimond Maurer is Professor of Investment, Portfolio Management, and Pension Finance at Goethe University Frankfurt and SAFE Fellow.
Blog entries represent the authors‘ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
References
SAFE White Paper 75 (in German)
SAFE Policy Letter No. 90 (in German)
Prof. Dr. Andreas Hackethal
Coordinator Pension Finance Lab
Prof. Dr. Raimond Maurer
SAFE Fellow
