This year saw the biggest pension increase of all time. But what comes after that? The Freiburg pensions economist Bernd Raffelhüschen has uncovered a trillion euro deep financial hole in the statutory pension insurance system with an analysis. His appeal to the federal government will shock many retirees.
FOCUS Online: In 2022 the pension increase was higher than ever. Was that appropriate?
Bernd Raffelhüschen: The pension increase should actually have been one percentage point lower. Basically, statistical tricks were used to reactivate the catch-up factor afterwards. And the trick is: What should have had a negative effect on the level of pensions, namely the sustainability factor, was trimmed from negative to positive through trickery. In addition, it is the wrong signal to increase so massively at a time when the pension insurance system has used up all its reserves during Corona. Providing pensioners with the highest pension increase ever would not have been necessary, 3 or 4 percent would have done it.
The federal government also promises that the pension level will remain stable at 48 percent for decades. That sounds great for pensioners, but your evaluations show that it’s not that easy.
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Raffelhüschen: That’s true. Keeping the pension level at 48 percent forever would mean that we are now neglecting the fact that future pensioners have not had the children we need to be able to do so.
Today, however, the problem is hardly visible. To illustrate the burden that young people will have to bear in the future, you calculated the implicit national debt. What is it exactly and why is it a problem?
Raffelhüschen: National debt is actually not a well-defined statistical parameter. Only the securitized government debt, e.g. state bonds or local government debt, is included in the state’s income statement. What we are neglecting is that we still have debts that are invisible because we have made promises for the future that we have not built up reserves for.
Do you have an example?
Raffelhüschen: The best example is the civil servant who we know will eventually receive a pension of a certain amount. The state does not make provisions for this, as a respectable businessman would have to do. That’s why we have to finance these pensions from the current budget in the future. When the civil servants then retire and the budget is already in deficit, as is the case with most state budgets, the states have to print even more state bonds to get the money for it. This means that the missing provisions are still invisible national debts, but will become visible as civil servants retire. And that’s exactly how it is with pension insurance.
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How much money is missing from pension insurance to keep the promises made by politicians?
Raffelhüschen: If we keep the pension level at 48 percent and at the same time want to keep the old contributions, the pension insurance system will lack almost three trillion euros in pension provisions. That means the government will not be able to keep its promise.
Doesn’t the federal government keep an eye on this implicit national debt?
Raffelhüschen: Yes, the federal government should definitely keep an eye on it, and it’s not as if this national debt is completely unknown in Germany. There are sustainability studies that collect this number. But we don’t act on it. Norway, for example, is following suit by trying to fund it with the Norwegian sovereign wealth fund. It’s similar in Denmark and Sweden and the Netherlands, where the right course is set. Only in Germany do we persist in not taking anything away from pensioners.
What needs to happen specifically?
Raffelhüschen: We have to take countermeasures with the statutory pension insurance. And you can do that in two ways: Either you tell the old guys, you’ll get your level of performance further. Then you have to tell the boys that they have to pay higher contributions. Or you tell the old people that they get less money. But just to make that clear: Hubertus Heil’s stop line would cost the young people about 29 percent of the contribution rate if we did it for eternity. You can’t make that clear to young people. By 2040 at the latest, they will ask: “And what did you old people pay?” And we would then have to say: “We paid 20 percent.” And if the question then arises as to where the difference comes from, we old people would have to admit that we simply had too few children. And by then, at the latest, the boys will no longer want to pay. That’s why we have to get the young people to keep the intergenerational contract with the promise that they will pay what we paid. So we need a stop line, but only for the contributions and not for the pension level, as Hubertus Heil wants. Otherwise, the gift for the pensioners will be even greater than all the gifts that he, Ms. Nahles and Mr. Scholz have already given the pensioners.
That doesn’t sound very optimistic. How do you rate the development of the statutory pension insurance?
Raffelhüschen: The past few years have been a fiasco. We had made the statutory pension insurance fundable in the long term. With the sustainability factor, Agenda 2010 decoupled pension increases from income, so that the increases rose somewhat less than wages. When Müntefering retired at the age of 67, almost everything was back on track. After that, we just started making nonsense.
For example?
Raffelhüschen: As Labor Minister, Olaf Scholz issued the pension guarantee, in other words, in plain English, the pensioners go along with everything when things go up, but when things get worse, the pensioners let the employed people bear the brunt of it alone.
Then came retirement at 63. Müntefering talked about retirement at 67 and Andrea Nahles sent people into retirement at 63 with no deductions. Completely absurd! People who are sent to retire earlier are of course also retired longer and a Minister of Labor should know that.
Then came Hubertus Heil with the double stop line that says we’ll keep the pension level and we’ll keep the contributions and the retirement age. This is mathematically impossible. Then he also financed the basic pension. We now have the old people better off than everyone else in terms of basic security. In the last basic security network, all people are usually equal. Not since Hubertus Heil. All mistakes that add up to three trillion euros in hidden national debt.
What else would have to happen to bring the intergenerational contract into balance?
Raffelhüschen: In any case, we need a promise to the youngsters that we will remain with constant contributions in the pension insurance, but also in the long-term care and health insurance. However, all reform proposals in this direction have always been rejected by the federal government.
The second is the principle of equal treatment. We must treat everyone equally in the context of time. To do this, we need to adjust the retirement age. We want all generations, whether grandfathers, fathers or today’s children, to have worked the same number of years for a pension year. This life expectancy factor would then adjust the retirement age as life expectancy increases. We also have this principle of equal treatment of the generations in many other countries, such as Norway or Sweden, only we in Germany still tell people that they can retire early and without deductions. That has to end. We have to reverse all the mistakes that Labor Minister Scholz and his party colleagues made. We need a welfare state that the young can still finance in the future.
Where does development go if it is not limited?
Raffelhüschen: So fictitious, hopefully not everything will happen like that, but if you left everything as it was and didn’t undertake any structural reforms in the welfare state, the welfare state would divert almost two thirds of the income from young people as social security contributions and contributions. And since we have a tax rate of about one-third, that would mean that the young people aren’t basically being deprived of half their income, as is the case now, but between 90 and 95 percent, and of course that won’t be affordable. Therefore there will be no other solution. The point is, the baby boomers either have to say now that they are doing without, or their pension, care and health insurance benefits will simply be cut from the year 2035/40. From then on, the younger generations have no choice but to massively cut benefits.
And why isn’t something happening now?
Raffelhüschen: Economists have been saying for 40 years that you have to make the system demography-proof. But with a few exceptions nothing was done. On the contrary. And the reason for this is relatively simple: in the last federal election, the average voter was older than 55. Moreover, more than half of the people who voted did not live on their money, but on the money of others. And if more than half of the voters are elderly or transferees, then the only way to win an election is to make a lot of promises to elderly and transferees. That’s why we have to change direction now. We have to switch to reason in order to leave the younger generation with a reasonably affordable welfare state.
What would be the alternative for younger generations?
Raffelhüschen: You have to be clear: it is possible to terminate the contract between generations. For example, you can emigrate to other countries, to Switzerland, to England, to Norway, like masses of doctors or academics can do. You can become a civil servant or self-employed, then you can also opt out of the intergenerational contract. It is therefore possible to withdraw from the intergenerational contract and this is already being practiced on a large scale. And it will become more and more attractive in the future.
In Germany, the model of an at least partially funded pension is also being discussed and is even included in the coalition agreement. Do you think this is a good solution to future-proof the pension system?
Raffelhüschen: Based on stocks for private old-age provision is a good idea. If we had done that decades ago, in 1991/1992, like the Norwegians, we would now have capital stock that would easily ensure the standard of living for the German population. But if you talked about a stock-based pension in the 80s or 90s, you were badly insulted as a henchman of the insurance industry.
So can the capital-based pension solve Germany’s pension problem?
Raffelhüschen: This pension comes too late for baby boomers. This generation should have been warned 20 or 30 years ago. A funded pension is only a solution for the young. There is nothing for the elderly. You listened to the wrong advisers, to Blüm and Scholz and Heil and Frau Nahles.
At the same time, the incentives for young people to invest in shares are not necessarily high either. The profits are also subject to a fairly high tax liability and a wealth tax is always discussed.
Raffelhüschen: That is always the case. If there is capital stock somewhere, the temptation is great to reach for it with the help of taxes. That is human nature. We have to live with the danger. That is also the reason why Norway does not join the EU, because then they would have to share the generation fund with the Europeans.
Is the 30-year investment horizon also the time it takes for a German pension fund to take effect? That would mean that every government that doesn’t do it wastes another 4 years.
Raffelhüschen: That is correct. A stock-based pension makes sense, but only for young people. But the young people there also have to trust the state to look after the money sensibly. Only: entrusting politicians with money to watch is like throwing two bones at your dog and saying one is for now and the other for later. This will not work. Capital preservation in Germany has never worked, there was always political covetousness that immediately spent the money. The only sovereign wealth fund that really works is Norway’s. But the special thing about Norway is that their budgets are always in surplus. They don’t need the money from the sovereign wealth fund for their annual government spending. That’s why the following applies in Germany: It’s better to make provisions for yourself and diversify well. But 90 percent of people still don’t understand that.
So the problem is: for some soon-to-be retirees, any help comes too late. So how do we get baby boomers on the side of the younger generation?
Raffelhüschen: One must clearly say to the baby boomers: They themselves are the cause of the problem that they present today. They didn’t give birth to the children they would need today. And instead of making provisions, they’ve spent their money back and forth. But of course you can’t change anything about that now. That is why at least those among the baby boomers who have children, i.e. a good two-thirds, have to act in the interests of their children and reduce their claims. And when they do, they have grateful children. If not, their own children will groan under the burden.
