Stock reserves: Will stocks and ETFs save the German pension system?

Every second German over 60 years of age is right to think about poverty in old age, according to a recent survey by Banking Association shows. At the same time, however, fewer and fewer people are preparing for retirement.

Why should the share reserve be introduced?

So far, the statutory pension has been financed purely according to the so-called pay-as-you-go principle. This means that pensions are paid from workers' pension insurance payments. However, demographic change is putting a lot of pressure on this system, as this means that, in the long term, a contributor will receive more and more pension recipients. The so-called share reserve should now help to leave the purely pay-as-you-go system. Because without comprehensive reform, the federal government could have to spend more than half of the budget on retirement in 25 years.

What do the new pension plans look like?

The planned share reserve is the successor to the originally planned share pension. As late as August 2022, the Scientific Advisory Board recommended to the Federal Ministry of Finance that contributions should be paid out from the share pension income at some point. The plans provided that the share pension should directly protect and increase the pension. The Liberals' promise back then was: “Through our model, all contributors — in particular low-income earners — will in future acquire real property for their retirement plans and receive higher retirement pensions.” Some European countries, such as Sweden, have been doing this successfully for decades.

But the FDP's plans failed. The share pension therefore becomes a share reserve, which is intended to help contributors and the pension fund. According to a concept by the Federal Ministry of Finance, the share reserve would exploit the “return opportunities” of the global capital market, reduce the federal pension subsidy and raise pension levels in the long term.

The capital stock required to start funding is to be built up with debt. To this end, budget funds would be added in the form of loans of ten billion euros in 2023. According to the concept, “a globally diversified, long-term and continuous capital investment is planned to generate income in order to be able to bridge negative capital market returns, which pose a risk, especially in short-term investment horizons.” The income from the securities should then flow into pension insurance from the mid-2030s onwards in order to strengthen it financially.

The credit-financed increase in capital stock probably also has a clear advantage for the federal government: from a budgetary point of view, the financing is considered an asset transaction. The federal government is thus acquiring claims against the fund. The loans taken out should therefore not be classified as debts within the meaning of the constitutional debt brake.

What criticism is there regarding the share reserves?

The share reserve is not yet a done deal, but there are already increasing critical voices who rate the concept as insufficient or too speculative. Christian Lindner (FDP), for example, said: “We need a three-digit billion sum in the medium to long term so that equity investment income can have a noticeable effect on stabilizing pension contributions and pension levels.”

The consumer portal Finanztip has also had it calculated that the Federal share reserves should amount to more than 210 billion euros instead of ten billion eurosto prevent a contribution increase of one percent. It is assumed that the stock market can generate returns of eight percent per year on average over the long term. An assumption that would not be sustainable in weak stock market years such as 2022.

The German Trade Union Confederation criticized the plans for another reason. For example, DGB board member Anja Piel referred to the poor exemplary character of the share reserve on a credit basis: “Every private investor is advised against financing share portfolios through debt.”

Politicians at least see the problem of the pension gap and must act decisively now. The development of the statutory pension with the newly introduced share reserve is at least a start. But the next step should be to make long-term wealth accumulation even more attractive for private retirement provision. The Federal Government also wants to contribute to this with the “Focus Group on Private Retirement Provision,” but private investors should not wait for the results of this.

Because one thing is clear: The longer the time horizon for personal wealth accumulation, the greater the potential return potential of an investment. To close the pension gap and ensure a correspondingly carefree retirement, a diversified investment mix consisting of securities, (tokenized) tangible assets such as real estate, classic cars or art, and private equity is generally recommended. All forms of investment that are available to private investors and with which you can already benefit individually and flexibly from attractive return opportunities.

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