ifo Institute: “German Citizen Fund” to Foster Retirement Incomes

This would be financed by borrowing. If the federal government were to invest 0.5 percent of economic output per year with immediate effect, all citizens born in 2005, for example, would receive EUR 1,270 per year starting in the year 2072.

“Many people find it difficult to build up private wealth because interest rates have been low for years. At the same time, for people with interrupted work histories, the benefits provided by pension insurance will not be enough to ensure good pension benefits in old age,” Fuest says. “The fact that citizens themselves would not have to make additional payments into the fund out of their own pockets would make the German Citizen Fund particularly appealing to people who don’t earn very much.”

The authors including Clemens Fuest and Martin Werding, Professor at the University of Bochum, see the proposal as a response to the challenges of low interest rates and demographic change. Germany’s national debt has fallen below the European debt threshold of 60 percent of economic output. This means the country could take on debt or slow down debt reduction within the framework of the current rules and invest these funds in a broad international portfolio. Equities and real estate continue to generate respectable returns. “Taking on large amounts of new public debt and investing the funds on the capital market appears difficult to reconcile with the insight that it is best for citizens themselves to provide for their old age,” Fuest says. “But from an economic viewpoint, it makes sense to lay down a general obligation to provide for old age in order to prevent individuals from relying on state support in later years.”

The difference between debt interest and investment income flows into the capital benefit – as with a life insurance policy. In its calculations, the ifo Institute assumes a credit-financed investment equivalent to 0.5 percent of economic output per year and an average yield differential of two percentage points. Citizens born in 2005 will reach the standard age limit in 2072. They would receive an annual pension of just under EUR 1,270 (price-adjusted, in 2020 prices). Disbursements would be lower for cohorts born in earlier years. “Administration of the German Citizen Fund should be separated from day-to-day politics and put in the hands of, for instance, the Bundesbank,” Fuest says.