Pension reform: How is private provision still possible?

It will still be interesting to see what the new concept for private pension savings will be called, but the voices are getting louder and louder saying: The coalition wants to finally present it soon and get it through parliament this year. She wants to reorganize private retirement savings. This would be the long overdue reform of Riester savings and was previously known as retirement provision depot. And on the one hand, it would be extremely gratifying if the government really turned on the turbo here. Because the pension system now desperately needs it. On the other hand, however, the coalition is only reaping the lowest-hanging fruit that can be found in the entire pension reform debate.

As a reminder: For years, economists, experts and many financial market participants have been warning about how poorly the Riester pension works and that private pension savings therefore require urgent reform. It was practically on the table of the previous government ready for signature and the CDU’s approval of the retirement provision deposit was also considered certain. Only the traffic light broke faster than she could wave it through. That’s why the grand coalition now wants to make a new attempt.

The core of the idea is that in the future everyone should be able to save privately for old age in a separate account. Preferably with funds and index funds that enable him to make a lucrative return. But also with more conservative methods such as insurance if desired. There are subsidies from the state – but in the future without the previously highly complicated detailed calculations – and the income from the portfolio should remain tax-free during the savings phase until retirement. That would be a big advantage because the compound interest effect could be fully developed because the annual gains along the way would not be reduced by taxes. Reallocations should also be possible in the depot. So no one has to stick to their chosen funds or ETFs forever just because they decided on them once.

The state could also make it easier for citizens to choose the right products, economic experts emphasized again recently: The state could make a pre-selection of suitable funds and procure them centrally. Savers could then buy them via the state platform. And a state authority could even manage a fund itself that is intended for precisely this goal. That would be cheap and practical. The Swedes are already doing this and they are working brilliantly. And in Germany there is already the state fund Kenfo, which has so far managed the money for the nuclear phase-out. He has achieved considerable returns so far. All of this has nothing to do with speculation, but rather with serious, long-term and prudent investments.

All of this would be so incredibly better than the current rigid Riester contracts of many insurers, with which the vast majority of customers do not even manage to compensate for the increase in inflation. The insurance industry had 20 years to prove its effectiveness at Riester. She didn’t take advantage of this opportunity. Now it would finally be the fund industry’s turn, meaning savers would have significantly more lucrative ways to save on a long-term basis in the future. And hopefully much more flexible payout options. It should be possible to withdraw larger one-off amounts from the retirement savings account at the start of retirement, for example if a property still needs to be paid off. Or converted to suit the age.

Many details about the retirement account have not yet been finalized. That’s why we have to wait and see what exactly the coalition will present and what changes the committees will then agree on. But one thing is clear: for everyone who has enough money to make private provisions for old age, it would be a revolution and a great relief if this retirement savings account actually came into being. Whatever it ultimately means.

But it must be said just as clearly: this new regulation would not be a great success for the German pension system. The reform of private savings contracts would be completely separate from the statutory pension system – which is known to be facing enormous financing difficulties in the foreseeable future. The government has so far done nothing about this, on the contrary: it will even worsen this financial crisis if it pushes its pension package II through parliament. This is the reform that would not only mean the expensive expansion of the mother’s pension, but would also maintain the 48 percent holding line beyond 2031. But that would deprive all younger contributors of the opportunity to finance the steadily increasing pension income of older people with future wage increases. In recent years, pensions have not fallen, but have risen enormously. It is therefore logical that some young politicians oppose the pension package.

But if younger people have even less of their salary left in the future because they have to pay even higher contributions to the pension fund – which the pension package inevitably leads to – then this will essentially torpedo the pension fund. How are employees supposed to provide more privately if they have less and less money available for it? Most employees do not experience the large wage increases – after taxes and contributions. Inflation and rising rents eat up some of it, the rest goes to higher health insurance and pension contributions. According to representative surveys, only 57 percent of German citizens already say that they are saving for old age. There will probably not be more if the really necessary reform of the statutory pension system is further postponed.

Our stern columnist Nadine Oberhuber is now starting a newsletter in which she answers all questions about money every Friday.