It used to be said that pensions are safe. You haven’t heard much about that lately. Rather, employers are demanding that the retirement age be further increased. But that will not be enough, writes Professor Christian A. Conrad for FOCUS Online.

The pension contributions are no longer sufficient to finance the pension. The Federal Minister of Social Affairs is making 121 billion euros available from tax revenue to co-finance the statutory pension insurance and for reimbursements from the federal government for basic security in old age and in the case of reduced earning capacity. Financing your pension is becoming increasingly difficult. From 6 to 1 in 1962, the ratio of contributors to pensioners is now 2 to 1, and life expectancy has risen to 78.5 years for men and 83.4 years for women, while the birth rate has fallen to 1.58. More and more so-called baby boomers are now retiring, which makes it even more difficult to finance their pensions.

It can’t go on like this. The state is reaching its limits and will be able to do less and less for the citizens, who will therefore have to help themselves more and more. Growth, on the other hand, is not to be expected, since the demographic development of the population is leading to fewer employable people who have to finance the increasing number of pensioners who are getting older, without being able to expect a corresponding pension themselves in the future.

Christian A. Conrad has been a professor of economics at Saarland University of Applied Sciences since 2010. He studied economics at the Eberhard Karls University in Tübingen. He was a research intern at the EU Commission in Brussels and a visiting researcher at Georgetown University in Washington D.C., USA. After completing his doctorate, he worked in the national and international corporate customer business of a major bank. He teaches economic policy, macroeconomics and business ethics at Saarland University.

The generational contract has failed. Why should the young pay the high pension contributions if they cannot expect an adequate pension and are also supposed to pay the debts of the previous generation? Then there is the climate-generational injustice. A contract between generations can only work for people with children. The families invest in the future of their children, who later financed the pensions of the older generation. If employees without children had been allowed to provide for themselves, i.e. exempted from paying pension contributions, or if they had paid into a funded pension insurance scheme, both the childless and the parents would be better off today. The fact that the childless are then financed by the few children of the others cannot work. This has helped to shift and magnify the pension problem by shifting the problem of funding into the future. In the medium term, pension cuts can no longer be ruled out. Ultimately, everyone is in the same boat of poverty in old age. And when the retirement age increases and the state’s financial leeway becomes ever tighter, it will also affect civil servants. You would have had to change course earlier, then the effects for the coming generations of pensioners would not have been so bad.

There is a risk of poverty in old age. If the state has to take care of more and more people in need, those who have sufficient income will have to support themselves more in old age. The state has just set the wrong incentives for private old-age provision. Pensions will soon collapse and there will no longer be any possibility of private provision for old age, since the tax exemption of life insurance and shares was abolished after a holding period or speculation period. The small Riester pension does little to change the problem. There is a nominal interest taxation with a negative real interest rate. Roughly estimated, savers are missing out on old-age provision by EUR 70 billion per year as a result of the ECB’s long-standing zero interest rate policy.

Finance Minister Lindner’s plans are a step in the right direction, but they fall short. Higher exemptions when selling shares and funds and 10 billion for an equity fund from the federal budget for 2023 are far too little to solve the pension problem. Against the background of the strained budget situation, this is understandable, and it is all the more important to use all options for old-age provision.

For example, one could use the Target claims of around 1.2 trillion euros, which arose from services provided by the Deutsche Bundesbank for other countries, for old-age provision and thereby balance the balances by having the Bundesbank buy shares, corporate bonds and buy real estate. The sovereign wealth fund created in this way could support state pension schemes and would promote the economy in the affected countries through the investments. In order for the Bundesbank not to pay out the return on investments itself, however, the target system would have to be reformed.

Our PDF special edition provides answers to all questions on the subject of old-age provision – from the statutory pension to the Riester subsidy to private pension insurance. Sample invoices show the tax implications and explain the advantages and disadvantages of the individual products.

You can download the guide here for €9.99.

Above all, it would be important to make the retirement age more flexible and to lower it, combined with the promotion of private old-age provision, e.g. by making life insurance and shares tax-free after a holding period, as was the case in the past. Everyone’s situation is different in old age and forcing people to work until they die is inhumane. In order to counteract the demographic change, the immigration of qualified employable people directly into the labor market would be necessary. As in the days of guest worker recruitment, the state and employers must actively advertise here and – unlike in the past – should also pay attention to the integration of people into society. This would at least cushion the threat of poverty in old age.