Report of July 9, 2018
„Future of capital funded old age provision in Germany – sovereign wealth funds versus individual retirement accounts“
Editors: Timm Bönke, Markus M. Grabka and Carsten Schröder
In May 2018, the German Federal Ministry of Labour and Social Affairs duly convened the pension commission “reliable inter-generational contract (Verlässlicher Generationenvertrag)”. In brief, the ambitious mission is to present “a roadmap to ensure a sustainable safeguard and advancement the old age security systems for 2025 and beyond and to build the foundation for a new and reliable inter-generational contract”.
The challenges for the German old age-security system are large. The replacement rate of the statutory pension insurance (Gesetzlichen Rentenversicherung) is today already less than 50 percent and scheduled to decline even further to 43 percent in 2030. According to estimation of the Federal Statistical Office, the old-age dependency ratio – the ratio of persons 60 and older to persons between 20 and 60 – will distinctly rise form 49.7 in 2013 to 74.5 in 2030. A development at a time where the federal grant to support the budget of the statutory pension insurance is around 91 billion Euro and hence the largest position within the annual budget of the German Federal Ministry of Labour and Social Affairs.
In the past, the Rürup-Commission introduced a course for an inter-generational balanced financing of public, company and private based old age benefits. In particular, an adjustment of the German 3-pillar-system (public, company, and private old age provisions) was agreed to and with the introduction of subsidies for private old-age provisions – the so-called Riester- and Rürup-contracts – established. Albeit the number of Riester-contracts reached 16.5 million, the effectivity of Riester products is questionable and subject to fundamental critic: the products are deemed to complex, realize only low rate of returns and administrative costs are high. Further, low-income earners, a group especially threatened by old-age poverty in the future, show very modest participation rates. Therefore, many analyst assess the policies to stimulate private old age savings as insufficient. However, there is a pronounced interest to have a strong and profitable capital funded pillar next to unfunded public pillar in the German old age security system.
One possibility to broaden the basis for old age security are sovereign wealth funds in the form of pension funds. Here, the view abroad is revealing. Many countries established sovereign wealth funds for this purpose. Pension funds invest in capital markets in order to supplement rising future pension obligations due to demographic change with the realized returns from the investments. Since the 1990, several reserve funds were established at the state and federal level in Germany to counter rising pension obligation for civil servants. These pension reserve funds can be regarded as first beginnings of pension funds in Germany.
Another path is to establish government administrated individual retirement accounts or government regulated standard old age savings products to ensure easy access to capital markets while simultaneously keeping costs to a minimum, ensuring transparency and yield high rate of returns. Again, several international role models exist (e.g. Sweden).
Aim of the envisioned Quarterly Journal of Economic Research issue is to present experiences with capital funded sovereign wealth funds and individual retirement accounts as well as hybrids of both and to establish, which international role models provide interesting solutions for the German context and what are the challenges of an implementation in Germany. Scrutinized aspects are covered individuals, the necessity for obligatory participation and basis of funding, rate of returns and investment strategies, administration, etc.
Welcome are both empirical and theoretical contributions. Political implications of presented findings should be explained and discussed. In addition, we are interested in position papers from organization, policy makers and business. The emphasis is on examples of currently existing or former sovereign wealth funds and capital funded individual retirement account schemes.
The editorial team is responsible for the issue of the Quarterly Journal of Economic Research. Authors who consider a contribution (German or English) are asked to submit an abstract (maximum 1 page) until August 31, 2018 to Markus M. Grabka (firstname.lastname@example.org). Authors will receive a timely response if the contribution will be considered. Final contributions should not exceed 30.000 characters and have to be submitted by December 15, 2018. Final contributions will be subject to copyediting and a review process. The issue is scheduled to be published in spring 2019.