Germany to set up 200 billion euro fund to support strained pension system

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The German government will invest billions of euros in capital markets and use the proceeds to shore up the country's troubled pension system, according to a draft law released on Tuesday.

The legislation would create an equity investment fund backed by federal government loans, expected to be worth at least €200 billion by the mid-2030s.

Investment earnings will be used to keep the pension system stable and ensure that payments remain at 48% of average wages until the end of the next decade, while avoiding a sharp increase in social security contributions. Finance Minister Christian Lindner said the reform amounted to a “paradigm shift” in pension provisions.

The plan is aimed at easing pressure on the pension system, which is expected to come under huge pressure in the coming years as the entire baby boom generation, born in their 50s and 60s, enters retirement age.

The federal government already provides up to 110 billion euros in annual subsidies to Germany's statutory pension funds – almost a quarter of the entire national budget.

“The system must remain fair to future generations, to those who benefit as pensioners and others who fund the system,” Lindner said. “So our pension regulations need to be updated.”

As a first step, the government will raise 12 billion euros in debt this year and transfer it to a new fund, which will be managed by an independent public foundation. This amount will increase by 3% annually and will be increased by proceeds from the sale of state-owned assets.

The Treasury forecasts that the size of the fund will reach €200 billion by the mid-2030s, with investment returns resulting in annual allocations of €10 billion to statutory pension funds from 2036. Finance Ministry officials expressed hope that Germany would eventually join Sweden and Norway in the direction that individuals can invest in capital markets within the framework of their state pension systems.

Lindner said the reform was “long overdue.”

“It's long past time for us to start taking advantage of the opportunities in capital markets to build a statutory pension system,” he said. “This is not yet the only solution to pension funding challenges in the longer term, but it is an important first step.”

Some critics say the reform will introduce elements of “casino capitalism” into Germany's pension rules.

Christiane Benner, head of Germany's largest trade union IG Metall, said it was “a step into the unknown.” “[It] It doesn’t make German pensions any more secure,” she said. “It’s a debt-financed bet on some vague income in the future. . . [and] Bringing pensions closer to the risks of financial markets. ”

Labor Minister Hubertus Heil dismissed the criticism. He said: “This money is worthy of long-term investment.” Personal pension contributions will not be used to buy stocks and shares, but will be “the country's money”.

However, the reforms will not prevent pension contributions from rising. According to the draft law for the new fund, these fees will rise from the current 18.6% to 22.3% of wages in the coming years. Without new investment funds, the bill says contributions will rise to 22.7% by 2045.