German pension system under reform: pension funds to be invested in the capital markets

Germany’s future government plans to let the country’s pension system invest in the capital markets for the first time, what would be a small revolution in how Europe’s largest economy manages money for its growing ranks of retirees. Germany’s pension system is about 10% of the country’s annual output and is currently financed by taking a small part of workers’ wages, with the state making up any shortfall. According to the data presented on the German pension website, the state collected about EUR 328 billion in 2020 from workers and then paid out EUR 333 billion to pensioners. Therefore, the system is badly in need of reform as the population ages.

Negotiators for the Social Democrats, Greens and the market-oriented Free Democrats are to hammer out details that would allow the USD 400 billion pension system to start investing some of its reserves into stocks and bonds, which would bring it more in line with other advanced economies.

The potential ruling coalition would bolster the system’s resources with EUR 10 billion (USD 11.6 billion) “as a first step,” according to the 12-page political roadmap statement agreed last month by the three parties. Investing even a small portion of pension reserves would break a taboo for Germany’s risk-adverse approach to managing money and bring the country closer to the likes of Norway and Canada, which have state-run funds that buy stocks and bonds to generate returns to bolster retirement reserves.

Germans are generally suspicious of capital markets, and the country has one of the lowest rates of household stock ownership in Europe, however, the prospective government is intending on finding ways to help offset inflation.