ifo Researcher Ragnitz Critical of EUR 10 Billion Capital Stock for German Pensions
The ifo researcher Joachim Ragnitz finds the tax-financed pension capital stock of EUR 10 billion proposed by Germany’s new “traffic light” coalition to be pointless. “This is not a suitable way to ensure the sustainability of pension finances,” he says. “Introducing a capital stock in the statutory pension insurance scheme places an additional burden on the working population in particular. If the fund is later dissolved, each future pensioner would receive only about one euro per month. At the end of the day, this idea benefits only the sellers of securities in the short term, because the pension fund is supposed to invest the EUR 10 billion on the capital market.”
Ragnitz added that the larger purpose of capital cover is to build up a capital stock that can later be used to finance pensions when it is liquidated. “Currently, around 41 million insured persons in Germany are entitled to pension payments later in life. With a capital stock of only EUR 10 billion, it will therefore be possible to make a one time payment of about EUR 240 to each pensioner. Even assuming that the pension fund could earn an above-average return on the money entrusted to it, that’s just a drop in the bucket that doesn’t really benefit any of the pensioners.” Actually stabilizing the statutory pension scheme would require building up a much higher capital stock than is currently envisioned.
Germany’s statutory pension insurance scheme (GRV) is organized on a pay-as-you-go basis, Ragnitz adds. The collected contributions are immediately paid out in pensions. This is what makes the switch to a funded system so difficult, as it would double the burden on the generation of taxpayers and contributors: with payments for current retirees and payments to build up the capital stock for their own pensions. “Given the current demographic situation, we can’t transform the system at this point; if we were going to address this issue, we should have done so 20 or 30 years ago. The most important task now is to share the inevitable burdens resulting from the retirement of baby boomers fairly between pensioners on the one hand and taxpayers and contributors on the other, but not to initiate a fundamental system change in the pension scheme.”
