Germany comes off rather poorly in an international comparison of pension systems. The FDP seems to have an answer: a statutory equity pension. What are the opportunities, what are the risks, and what could Germany learn from the Nordic countries?
The recently published Global Pension Index (GPI) is a ranking of the best pension systems in the world. Germany currently ranks 14th – hardly satisfactory for an industrialised nation with a strong export sector.
Iceland is on the winner’s podium, followed by the Netherlands and Denmark. Sweden also ranks well ahead of Germany – a nation that, apart from its pandemic policy, is often held up as a role model.
The best pension systems all have one thing in common – but more on that later. First, let’s take a look at Sweden, since its pension model is apparently a source of inspiration for many reform enthusiasts.
On first glance, the Swedish pension system is very similar to the German one. „It is built on three pillars: the state pension, a company pension and private provision,“ as Julia Wäschenbach states in the Magazin der Deutschen Versicherer. Yet there is also a significant difference: part of the pension contribution is not paid into the classic pay-as-you-go pension, but rather into the so-called premium pension.
Specifically, Swedes pay 16% of their gross income „into the statutory pension fund according to the same principle as in Germany“. However, they are also obliged to invest a further 2.5% of income into funds on the capital market.
Citizens of the Scandinavian state certainly have a number of options to choose from. There are around 500 state funds available, and everyone puts together their own individual premium pension. Meanwhile, anyone who doesn’t make an active decision automatically receives the state equity fund AP7.
Risks and Side Effects
Swedish citizens were able to profit considerably from the recent rally on the stock markets. That said, it is by no means certain that prices on the stock markets will continue to soar. Securities are extremely volatile, especially in the short term – something the Scandinavians are of course also aware of. The AP7 fund invests 100% of its capital in shares – but only until the insured person is 55 years old. After that, a steadily increasing share flows into fixed-interest securities.
Regardless of this strategic decision to minimise risk, imponderables remain. The truth is, however, that the German system is not free of risks; there’s a chance that the current pay-as-you-go system cannot be financed forever.
The Voices of Critics
Sceptics of capital markets never tire of emphasising that it is negligent to speculate using people’s pensions. References are often made to the stock market crash of the 20th century or, even more drastically, to wars that could drive entire industries to ruin. Whereas the former hangs over the system like a sword of Damocles, it is highly questionable whether a comprehensive pay-as-you-go system would be advantageous in the case of the latter, since the consequences of such an event cannot be reliably assessed.
However, a look back at the past decades is much more revealing. As the performance of the Dow Jones demonstrates, the index has only ever moved in one direction, despite all temporary setbacks: upwards. Thus from 1928 to 2021 the index rose by 14,824%. There is a danger that critics of a partially equity-based pension system overestimate the short-term risks and underestimate the long-term opportunities.
Ralf Kapschack, spokesperson on pension policy for the SPD parliamentary group, called the FDP’s proposal to implement a pension scheme covered by capital markets – the Liberals advocate that 2% of gross income should be channelled into equity-based funds – „original at least“, although in reality the idea is neither exceptional nor original: it is enough to dare to think outside the box.
Sweden is not alone in relying on a capital market-backed pension system: other countries ranking highly in the Global Pension Index for their pension systems are Iceland, the Netherlands and Denmark, all of whom have a similar policy. In concrete terms, occupational pension provision is a more significant pillar in these countries, with the employer contributing a portion and money invested into funds.
Contrary to the soothing words of a few political decision-makers, pensions are not entirely secure, either in Germany or anywhere else. Yet participating in capital markets offers the chance that on balance more will come out than is paid in. This is an opportunity involving comparably low risks that the Federal Republic of Germany should not miss out on, while setting a good example by investing only in socially and environmentally compatible investments.