The German plan to soften the rise in contributions and pay their pensions with a sovereign fund

The German plan to soften the rise in contributions and pay their pensions with a sovereign fund

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Europe is preparing for the demographic winter, it will turn the population pyramid around. The baby boom generation will retire en masse, at different rates depending on each country, and the birth rate is looking down, especially in southern Europe. The economic benchmark country at the community level is also preparing its public accounts to assume the imbalance that will cause the loss of millions of workers whose income will now depend on pensions. His new sovereign fund to pay pensions will soften the planned increase in the rate of social contributions paid by companies and workers: “the Government foresees that the contribution rate will rise to 22.3% instead of 22.7% until 2045 thanks to the new fund”, explains the Affiliate fellow by Bruegel, David Pinkus.

Germany has been the last country to create its particular piggy bank that will fill with 200,000 million in the next decade. It will operate in the markets to generate profitability, alleviate the increase in contributions paid by workers and companies, and thus face the financial impact in the coming decades. It imitates the model that Norway or Japan uses to maintain their standard of living. How is it different from the last pension reform in Spain and our Reserve Fund?

What is the German system like?

The German public pension system is a pay-as-you-go pension system linked to income, similar to the Spanish model. As also happens in Spain and other European countries, German financial culture has also allowed the development of private pension plans, an individual or collective capitalization model to which the worker or professional-sector group can make contributions and ‘rescue’ that savings. in his retirement. The pay-as-you-go regime is the main retirement income for the majority of the population, as Pinkus points out.

“The main challenge for the system is demographic change, similar to that of many other European countries,” explains Pinkus. Eurostat forecasts suggest that the dependency rate (proportion of people over 65 years of age in the working-age population) will increase from 37.3% in 2022 to 49.8% in 2050. “In 2050 there will be almost one elderly person for every two workers in the country. “The proportion is expected to continue increasing significantly after 2050,” says the expert.

A fund to invest

The great news of Germany’s pension reform is the creation of an investment fund that seeks to generate profitability and earn money to help finance pensions exclusively. Doesn’t that sound familiar? The Spanish system has designed a new quota, the Intergenerational Equity Mechanism (MEI) to generate a ‘false sense of savings’. At the same time, it uses that equity to reinvest it in the public debt generated by the State or Social Security.

The German model is different. “In 2024, The Government will transfer an initial amount of 12,000 million euros to this fund, managed by a public foundation that will be created for this purpose. This amount is planned to increase by 3% each year and will be financed with public debt. The Government plans to transfer another 15 billion euros of assets to the fund until 2028. It expects the fund to be valued at more than 200 billion euros by the mid-2030s,” details the expert.

Spain will begin to use its own piggy bank in 2032. In Germany it will be from 2036 when its fund “will have to disburse an average of 10,000 million annually to help finance pension spending and counteract the increase in the contribution rate.”

The sovereign fund will disburse about 10,000 million a year to pay pensions

The philosophy of this latest reform goes in the opposite direction to the Spanish one, where income has been affected through an increase in social contributions without rationalizing spending. “The idea of ​​the fund is to diversify the sources of financing the pension system. Through the fund, the public pension system should benefit from the profits obtained in the capital markets,” summarizes Pinkus.

“The fund will be financed with public debt. This is an important difference with the Spanish fund. It will not be financed with workers’ contributions to the pension system or Social Security, but with public debt. Instead, “It is the purpose of the fund that links it to the pension system: its resources must be used only to finance pension spending.”, indicate from Bruegel. Therefore, this model is different from a capitalization system, where social contributions (contributions) are entered into a fund and invested in the capital markets.

In any case, Berlin is committed to maintaining its particular generosity with the latest legislative changes: it is less than the average of developed countries, understanding this concept as a pension on average salary or prior to retirement. It will ensure that this ratio represents at least 48% of the average salary of German workers.

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