German legislators have introduced draft legislation to reform the country’s pension system to shore up the system as the country’s population ages.
The draft bill, translated as the Pension Level Stabilization and General Capitalization Act, was published on March 5, with the goal of maintaining the state pension, a similar system to Social Security, which all German workers pay into and receive retirement benefits from.
The legislation aims to keep Germany’s statutory pension level, or Rentenniveau, at 48%, which is the pension benefit as a percentage of the average wage in Germany. However, if left unchanged, expected demographic changes would force the pension level to be decreased, resulting in current and future generations of retirees receiving less retirement income. The pension level has declined from around 53% in 2000, according to German labor union IG Metall.
Additionally, the draft bill proposes the creation of a foundation called “generational capital” that would invest in equities and make contributions to the country’s pension system starting in the mid 2030s to maintain the pension level at 48%. The fund would be initially financed by a 12-billion-euro loan from the German government, starting in the 2024 budget year. The fund would be expected to make a 3% return on this loan.
“The aim of the law is to keep the statutory pension stable as a mainstay of old-age security in the long term through a permanent pension level of 48% and to be financed with generational capital in view of the development of expenditure and to ensure that the statutory pension insurance continues to remain reliable for younger generations,” states a translated description of the legislation.
By 2036, the generational capital fund would be expected to have more than 200 billion euros in managed assets, which would be sufficient for the fund to use its net income to stabilize the pension contribution rate, with the draft legislation planning for 10 billion euros of pension contributions to be made from the fund annually, starting in 2026.
The fund is expected to primarily invest in global equities, with the legislation calling for a “return-oriented and globally diversified investment strategy.” Assets in the fund would be managed by the foundation.
The proposed system is not without criticism.
“The financial markets are not a solid basis for statuary pensions,” IG Metall stated in a translated statement. “They sway too much. The pay-as-you-go system, on the other hand, has proven to be stable and extremely flexible for many decades.”
The legislation is planned to be passed before the summer, according to German Finance Minister Christian Lindner and Labor Minister Hubertus Heil, who presented the plan at a conference on Tuesday.
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Tags: Christian Lindner, Germany, Hubertus Heil, Pension Reform, Sovereign Wealth Fund