The statutory pension insurance system in Germany is faced with a dilemma: more and more pension recipients are faced with fewer and fewer contributors. So far, the statutory pension system has been structured according to the pay-as-you-go system: the contributions of the contributors are used to pay out the pensions to the recipients.

Statutory pension insurance no longer sustainable

But this money is no longer enough. Last year, taxpayers paid more than 100 billion euros into the pension fund as a federal subsidy via the federal budget. This corresponds to about a third of the total annual volume of pension insurance.

Because more and more contributors are going into retirement in the coming years and fewer and fewer young contributors are “growing up”, the federal subsidy could increase significantly in the medium term – otherwise either pension expenditure would have to be reduced or income increased. The federal government sees little scope for both.

“Riester pension” and Co. not very successful

In previous years, attempts were made to initiate the development of a private pillar of old-age provision with state subsidies. But these measures, such as the “Riester pension”, did not bring the expected success. The traffic light coalition has therefore decided to build up a state capital stock to secure pensions in the future. The project started under the name “Aktienrente”. Now it’s called “generational capital”. Even the new name is intended to signal that it is an addition to the existing pay-as-you-go system known as the “Generational Pact.”

Capital stock to stabilize pension insurance

After the poor results of the Riester pension, significantly more money is now to flow into the state’s planned capital stock. By 2035, that could total 200 billion euros. The fund will start this year with ten billion euros in tax money. In 2024, twelve billion euros are already planned for generational capital. This state contribution could increase by three percent in each of the following years – if the plans of the Federal Ministry of Finance and the Ministry of Labor have their way.

Deposits not government debt, but assets

Federal Finance Minister Christian Lindner (FDP) supports the comparatively high contributions, which should ultimately rise to 15 billion euros a year, because this allows him to comply with the government debt brake. From a formal point of view, the state fund would receive a loan from the federal government and instead of paying interest, would make a distribution to finance the pension. Although the amount is determined in advance, it must be based on the income that the fund generates on the capital market and what is left of the paid-in capital.

Central role of fund management

It then depends on the skill of the fund manager. They have to try to keep their money together even in difficult situations like the interest rate turnaround in 2022. The state fund does not cause any debt for the federal government as long as the expenditure, i.e. the subsidies for the statutory pension insurance, is matched by additional reserves of at least the same amount. The debt brake laid down in the Basic Law therefore plays no role for that long.

Who manages funds for the federal government

When the federal government has to manage large financial assets, it puts its trust in Anja Mikus. The 67-year-old banker is already responsible for the “Fund for financing nuclear waste disposal (Kenfo)” for the contaminated sites of German nuclear power plants. The nuclear fund distributes income from the liquidity to the federal government every year.

Mikus has extensive banking experience and has managed the state nuclear fund Kenfo since it was launched in 2017. Private power plant operators had previously paid 24 billion euros into this. In its first five years, the fund achieved an annual return of around eight percent, which is a comparatively good result. However, 2022 was an unlucky year for the fundin which 3.1 billion euros were lost due to turbulence on the capital markets.

State Nuclear Fund lost almost 13 percent in one year

The “Report Mainz” had uncovered. The ARD television magazine held up to Mikus that Kenfo’s capital stock not only suffered from the falling prices of government bonds and real estate investments, but also performed exceptionally poorly in share investments. Mikus defended her investment strategy in “Private Banking Magazin”: “In an extraordinarily tense market environment, we have ensured that the quality of the investments is maintained and liquidity is maintained. The strategy of a balanced asset structure remains long-term even after a difficult investment year like 2022 correct.”

State fund for pensions from tax revenues

Unlike the Swedish state fund, which served as a model for generational capital, in Germany the contributors are not held accountable. Instead, the federal government wants to use tax funds to stabilize the pension system.

That’s why, from a legal point of view, it doesn’t matter whether the federal government compensates for the annual deficits of the state pension insurance directly from the budget, or whether it pays the money into a fund beforehand. In the meantime, he can try to make more of it with profits on the capital market – or he can also suffer losses. So far, however, not all partners in the traffic light coalition want to share this risk, and there is resistance, especially among the Greens.

Plans disputed in governing coalition

Federal Minister of Economics Robert Habeck, for example, has so far shown little enthusiasm for it. Instead, Habeck expects more money from Lindner for additional economic support for the current economy, for example through subsidies for an industrial electricity price and for plans such as the heating law.

Generational capital or industrial electricity prices and heating transition?

According to observers in the federal government, the projects of both ministries are in direct competition with each other. In the worst case, the FDP and the Greens would block each other. As Minister of Finance, Lindner can prevent the additional spending for Habeck’s economic stimulus program. Without the votes of the Greens, on the other hand, it will be difficult to build up a large capital stock for the state pension fund. And a large volume is needed so that the generational capital can make a significant contribution to relieving social security.

Stabilize social contributions with generational capital

What could still cause the project to fail is not the capital market. What speaks in favor of this is above all the planned stabilization of contributions for companies and their employees. The social partners pay high taxes – not only for pensions, but also for health insurance and care. Rising contributions are also to be feared in these areas of statutory social security. In order to at least keep the pension contribution stable, the Federal Finance Minister wants to use the capital stock.

The additional profit on the capital market that the federal government is hoping for would reduce the state compensation payments for the annual deficit in the pension insurance system. And ideally with stable contributions to the pension insurance. If the calculation works out, it would be a win-win situation for everyone involved. In the Federal Cabinet, Finance Minister Lindner has therefore found an ally in Labor Minister Heil. One of Heil’s most important tasks is to keep the contributions for pensions and unemployment benefits as well as the federal subsidy as stable as possible.

Does generational capital strengthen Germany as a business location?

The FDP in particular sees a further increase in social security contributions as a factor that endangers the competitiveness of Germany as a business location. The location already suffers from the high social security contributions, which together with the comparatively high taxes for companies and for middle and upper income earners lead to a higher overall burden than in many other countries. Proponents argue that generational capital could offset this negative location factor to some extent.

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