Germany sovereign pension fund is sound but small

OK boomer. Cornered by its own electoral pledge to protect country’s pension system, German government has found an original way to stem unavoidable financial crisis its promises will create: a special fund, financed by public borrowing and tasked with investing in global equities. returns will, over time, help finance pensions of Germany’s ageing population. fund, expected to reach 200 billion euros within a dece, is too small to be a panacea. But it could still show or European governments how to mix public and private resources to dress pension problem.

More than 22% of German population was 65 or over in 2023 – highest ratio among major European economies after Italy’s 24%. Like most of rest of continental Europe, country has a “pay-as-you-go” system where workers finance retirees’ pensions through social security contributions or taxes. Pensions financed by  public purse represent 10% to 15% of GDP in Germany, France and Italy – in contrast with UK, where private retirement schemes dominate and state pensions only amount to 5% of GDP.

three parties in Chancellor Olaf Scholz’s centre-left coalition previously pledged y would neir cut benefits nor raise taxes to finance pension deficit. y also do not want to furr raise pension age, which is due to go from nearly 66 to 67 by 2029.

pledges look shaky, as millions of “baby boomers” born between 1946 and 1964 retire, leaving it to younger generations to pay for ir pensions. Germany h six workers for every pensioner in early 1960s. This ratio is now two to one, and still falling. originality of “Generation Capital” fund is twofold. First, it will require public borrowing, despite Germany’s long-standing aversion towards debt. It won’t, however, count towards strict “debt brake” that imposes fiscal discipline on government. second novelty is that fund will invest public money in equities. Finance minister Christian Lindner said he expected returns of more than 3% or 4% – after deducting debt-servicing costs. If so, 8 billion euros a year fund will produce in 10 years’ time would only make a dent in pension deficit, which government is subsidising this year to tune of 127 billion euros – or 27% of federal budget.

Generation Capital will not spare German workers from higher contributions or lower benefits, and government from more pension funding. But it’s a step in right direction, not least because it will be run independently from government and won’t be restricted to German stocks. It could serve as a model for or European countries by showing that public money invested in capital markets may be a funding source for pensions of an ageing continent.