Stories
Stories
Podcast
30.8.2021
A small studio, a camera in front of which a presenter and Federal Finance Minister Olaf Scholz are sitting, with the audience spread out all around. It could be one of many such rounds in which politicians and ministers get through the minutes with a few phrases. But on this day, Olaf Scholz is so clear that even the presenter has to pause for a moment, looks incredulous and is at a loss for words.
"Pension model Norway" is the topic of a Focus Online talk that landed on the web almost two years ago. It was presumably intended as a discussion about when Germany would get a pension fund based on the Norwegian model. But Scholz is not at all concerned with when. When the presenter asks what we can learn from Norway, Scholz's answer is clear: "Nothing at all." Because, according to his two-part answer: on the one hand, Germany has no oil from whose sales profits such a fund could be set up. Secondly, the statutory pension scheme is much better anyway because it yields higher returns. And at the time, Olaf Scholz didn't think much of the idea of taking some of the already scarce money for shares. "I don't think that's a good suggestion." Or is it?
It is likely that Germany will sooner or later have a problem financing its own social security system. A report by pension expert Axel Börsch-Supan recently predicted "shockingly increasing financing problems" for old-age provision. The authors suggested that people should work longer. However, most parties are not prepared to accept this, which is why other solutions need to be proposed, such as a pension fund.
In any case, the topic is likely to be back on the agenda in the current debates ahead of the general election. The FDP has been advocating the Swedish model since the beginning of the year, i.e. a pension fund to supplement a person's own pension, the CDU/CSU wants a generational pension in which the state invests 100 euros per child from birth to the age of 18, while the Greens want a citizens' fund instead of a Riester pension. And even the SPD wants a new, "standardized offer" for private pension provision based on the Swedish model.
Looking outwards is obvious, after all there are good examples. The sovereign wealth fund in Sweden generates an eleven percent return, in Norway the average is six percent and other countries such as Japan and Canada also rely in part on the idea of funded pension provision, albeit in very different forms.
And in Germany? A lot has been put on the table, but nothing has been implemented yet. Many models have been discussed recently, all of which have their small snags. For example, there was the Deutschland-Rente, which the CDU and Greens from Hesse wanted to revive back in 2015. All employees should automatically pay into the fund unless they explicitly decide against it. This would be known as an opt-out procedure. Unlike the Riester pension, however, there would be no guarantee of repayment, which means that this type of pension would probably be no more than a supplement in a welfare state like Germany. The concept has been revised several times and has been somewhat lost in recent discussions.
From 2017, but still relevant, is the proposal by Giacomo Corneo from the Free University of Berlin, who suggested a social dividend by setting up a fund with a volume of around one trillion euros and then paying Germans around 600 euros per month from the proceeds. This would lead to a proportional increase in low incomes, which should reduce inequality, and because the dividend would be perceived as a civil right, it would be impossible for political parties to misuse the fund for their own purposes.
Somewhat more recent in the debate is the idea that the German state should use its extremely good credit rating to help its citizens with their pension provision. To do this, it should take out loans in the form of federal bonds, invest them in the stock market and pay out the returns to its citizens. If money is invested in this way over 50 years and assuming only a yield difference of three percent compared to the interest rate of the borrowed money, each German would receive around EUR 30,000 when they retire, the ifo Institute calculates.
Other academics, such as Hanspeter Grüner from the University of Mannheim, described the idea as a "devastating mistake" during the discussion about a sovereign wealth fund in Germany, which had already flared up in 2019: the risk was too high, the impact on Germany's credit rating too great, and the desires of politicians were also a danger. Bert Rürup and Dennis Huchzermeier took a similar view, criticizing state control in particular.
The question remains: How do Sweden and Norway do it - and can we learn anything from them?
In Norway, they are pretty happy with their sovereign wealth fund. Driven by the gushing oil revenues, which the country wants to invest profitably in order to pay for people's lives and pensions, a veritable giant of a fund has been created there. Originally, Norway was a country that was not too wealthy, almost poor, but then oil came along at the end of the 1960s and the question arose: what do we do with the money? The idea for the "Statens pensjonsfond" or "Oljefondet", i.e. the State Pension Fund of the Kingdom of Norway, now the largest sovereign wealth fund in the world, was born.
So far, the state fund has achieved an average return of around six percent, which gives the average Norwegian a pension of 1,600 euros per month, plus the money from the state pension scheme and possible company pension plans.
The system there is therefore collectivist, with everyone receiving the same amount and not a proportion of what they have paid in plus returns. However, as Finance Minister Olaf Scholz rightly points out, wealth comes from the extraction and export of oil - and Germany has nowhere near enough of it, which is why it is worth taking a look at Sweden, which is also poor in oil.
The Swedes have named their pension fund "Sjunde Allmänna Pensionsfonden". Translated, this means something like "seventh general pension fund". Most people with an affinity for finance know it in abbreviated form and it is also becoming increasingly well-known in the German pension debate: AP7. Swedes pay 2.5 percent of their gross salary into the fund every month, are allowed to choose what they invest in and if they don't, it goes into a standard product, a mix of shares and bonds. In the end, the Swedes get out what they have paid in plus a return, which makes the model the closest to those currently being discussed in Germany under names such as "Deutschland-Rente".
Head Richard Gröttheim and his team manage 800 billion crowns (80 billion euros), and the Swedes' money has so far flowed into 3,000 companies around the world. The costs are more on a par with ETFs, i.e. less than one percent, and the average return is eleven percent. A dream too good to be true? After all, the state fund has even overtaken private pension provision in Sweden, which, according to fund boss Gröttheim, has only achieved a return of seven percent.
Gröttheim recently explained to DIE ZEIT where this comes from: the proportion of equities is higher, as are investments in emerging markets, which brings higher returns - but also more risk. And this is precisely the catch of the Swedish model, which currently seems so bright, but is based on risky investments. Not only are risky investments the order of the day, but the fund also works with leverage, which can of course increase returns many times over, but conversely can also lead to enormous losses.
However, the principle of risk as opportunity applies to the entire fund. This is because there is no guarantee of a specific return, not even that the money invested will flow back to the Swedes. So if things go badly on the stock markets, the wealth saved via the fund may not grow to the same extent as purchasing power, for example. Inflation, i.e. the devaluation of money, would therefore be higher than the return. Retired Swedes might then no longer be able to maintain their previous standard of living. This risk is low, but if Germany wanted to use such a model, it would at least have to be aware of it. In the first few years of AP7, losses were incurred and there would probably be a heated debate in Germany because savers would be worried about their pension provision.
Whether a sovereign wealth fund can ultimately be established in Germany and how it will be structured will continue to be the subject of much debate. To clarify the question of whether this can be a model for Germany at all, it might be worth taking a look at Bavaria: A state fund light has existed there for many years in the form of the Bavarian Pension Fund. Until 2019, the average annual return since its launch was 4.93%, managed by the Bundesbank. This shows that it could work.
Stories
30.8.2021
Nils Wischmeyer
Sweden has it, Norway has it, Germany doesn't: a pension fund. Is this wise - or have politicians failed to improve the German pension system for years?
A small studio, a camera in front of which a presenter and Federal Finance Minister Olaf Scholz are sitting, with the audience spread out all around. It could be one of many such rounds in which politicians and ministers get through the minutes with a few phrases. But on this day, Olaf Scholz is so clear that even the presenter has to pause for a moment, looks incredulous and is at a loss for words.
"Pension model Norway" is the topic of a Focus Online talk that landed on the web almost two years ago. It was presumably intended as a discussion about when Germany would get a pension fund based on the Norwegian model. But Scholz is not at all concerned with when. When the presenter asks what we can learn from Norway, Scholz's answer is clear: "Nothing at all." Because, according to his two-part answer: on the one hand, Germany has no oil from whose sales profits such a fund could be set up. Secondly, the statutory pension scheme is much better anyway because it yields higher returns. And at the time, Olaf Scholz didn't think much of the idea of taking some of the already scarce money for shares. "I don't think that's a good suggestion." Or is it?
It is likely that Germany will sooner or later have a problem financing its own social security system. A report by pension expert Axel Börsch-Supan recently predicted "shockingly increasing financing problems" for old-age provision. The authors suggested that people should work longer. However, most parties are not prepared to accept this, which is why other solutions need to be proposed, such as a pension fund.
In any case, the topic is likely to be back on the agenda in the current debates ahead of the general election. The FDP has been advocating the Swedish model since the beginning of the year, i.e. a pension fund to supplement a person's own pension, the CDU/CSU wants a generational pension in which the state invests 100 euros per child from birth to the age of 18, while the Greens want a citizens' fund instead of a Riester pension. And even the SPD wants a new, "standardized offer" for private pension provision based on the Swedish model.
Looking outwards is obvious, after all there are good examples. The sovereign wealth fund in Sweden generates an eleven percent return, in Norway the average is six percent and other countries such as Japan and Canada also rely in part on the idea of funded pension provision, albeit in very different forms.
And in Germany? A lot has been put on the table, but nothing has been implemented yet. Many models have been discussed recently, all of which have their small snags. For example, there was the Deutschland-Rente, which the CDU and Greens from Hesse wanted to revive back in 2015. All employees should automatically pay into the fund unless they explicitly decide against it. This would be known as an opt-out procedure. Unlike the Riester pension, however, there would be no guarantee of repayment, which means that this type of pension would probably be no more than a supplement in a welfare state like Germany. The concept has been revised several times and has been somewhat lost in recent discussions.
From 2017, but still relevant, is the proposal by Giacomo Corneo from the Free University of Berlin, who suggested a social dividend by setting up a fund with a volume of around one trillion euros and then paying Germans around 600 euros per month from the proceeds. This would lead to a proportional increase in low incomes, which should reduce inequality, and because the dividend would be perceived as a civil right, it would be impossible for political parties to misuse the fund for their own purposes.
Somewhat more recent in the debate is the idea that the German state should use its extremely good credit rating to help its citizens with their pension provision. To do this, it should take out loans in the form of federal bonds, invest them in the stock market and pay out the returns to its citizens. If money is invested in this way over 50 years and assuming only a yield difference of three percent compared to the interest rate of the borrowed money, each German would receive around EUR 30,000 when they retire, the ifo Institute calculates.
Other academics, such as Hanspeter Grüner from the University of Mannheim, described the idea as a "devastating mistake" during the discussion about a sovereign wealth fund in Germany, which had already flared up in 2019: the risk was too high, the impact on Germany's credit rating too great, and the desires of politicians were also a danger. Bert Rürup and Dennis Huchzermeier took a similar view, criticizing state control in particular.
The question remains: How do Sweden and Norway do it - and can we learn anything from them?
In Norway, they are pretty happy with their sovereign wealth fund. Driven by the gushing oil revenues, which the country wants to invest profitably in order to pay for people's lives and pensions, a veritable giant of a fund has been created there. Originally, Norway was a country that was not too wealthy, almost poor, but then oil came along at the end of the 1960s and the question arose: what do we do with the money? The idea for the "Statens pensjonsfond" or "Oljefondet", i.e. the State Pension Fund of the Kingdom of Norway, now the largest sovereign wealth fund in the world, was born.
So far, the state fund has achieved an average return of around six percent, which gives the average Norwegian a pension of 1,600 euros per month, plus the money from the state pension scheme and possible company pension plans.
The system there is therefore collectivist, with everyone receiving the same amount and not a proportion of what they have paid in plus returns. However, as Finance Minister Olaf Scholz rightly points out, wealth comes from the extraction and export of oil - and Germany has nowhere near enough of it, which is why it is worth taking a look at Sweden, which is also poor in oil.
The Swedes have named their pension fund "Sjunde Allmänna Pensionsfonden". Translated, this means something like "seventh general pension fund". Most people with an affinity for finance know it in abbreviated form and it is also becoming increasingly well-known in the German pension debate: AP7. Swedes pay 2.5 percent of their gross salary into the fund every month, are allowed to choose what they invest in and if they don't, it goes into a standard product, a mix of shares and bonds. In the end, the Swedes get out what they have paid in plus a return, which makes the model the closest to those currently being discussed in Germany under names such as "Deutschland-Rente".
Head Richard Gröttheim and his team manage 800 billion crowns (80 billion euros), and the Swedes' money has so far flowed into 3,000 companies around the world. The costs are more on a par with ETFs, i.e. less than one percent, and the average return is eleven percent. A dream too good to be true? After all, the state fund has even overtaken private pension provision in Sweden, which, according to fund boss Gröttheim, has only achieved a return of seven percent.
Gröttheim recently explained to DIE ZEIT where this comes from: the proportion of equities is higher, as are investments in emerging markets, which brings higher returns - but also more risk. And this is precisely the catch of the Swedish model, which currently seems so bright, but is based on risky investments. Not only are risky investments the order of the day, but the fund also works with leverage, which can of course increase returns many times over, but conversely can also lead to enormous losses.
However, the principle of risk as opportunity applies to the entire fund. This is because there is no guarantee of a specific return, not even that the money invested will flow back to the Swedes. So if things go badly on the stock markets, the wealth saved via the fund may not grow to the same extent as purchasing power, for example. Inflation, i.e. the devaluation of money, would therefore be higher than the return. Retired Swedes might then no longer be able to maintain their previous standard of living. This risk is low, but if Germany wanted to use such a model, it would at least have to be aware of it. In the first few years of AP7, losses were incurred and there would probably be a heated debate in Germany because savers would be worried about their pension provision.
Whether a sovereign wealth fund can ultimately be established in Germany and how it will be structured will continue to be the subject of much debate. To clarify the question of whether this can be a model for Germany at all, it might be worth taking a look at Bavaria: A state fund light has existed there for many years in the form of the Bavarian Pension Fund. Until 2019, the average annual return since its launch was 4.93%, managed by the Bundesbank. This shows that it could work.
About the author
Nils Wischmeyer
Nils Wischmeyer writes about financial markets, investments, banks, banking regulation and white-collar crime.
