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In the midst of ongoing pension reform discussions, Germany is considering alternative models that could revolutionize retirement provision, inspired by the Norwegian Government Pension Fund Global. This sovereign wealth fund, fuelled by oil revenues, is designed to support an ageing population sustainably.
Currently, Germany operates a pay-as-you-go pension system, with pension points tied to earnings in the public scheme. However, the focus is shifting towards improving and reinforcing the three-pillar system: state pensions, occupational pensions (company pensions or the second pillar), and private insurance (third pillar).
Reforms to occupational pensions are underway, with laws being drafted to increase employer contributions, broaden automatic enrolment in pensions, and allow investment diversification within occupational pension schemes to improve returns and sustainability.
One intriguing development is the idea of a funded state pension component, similar to Norway’s model, which could potentially address demographic challenges by investing accumulated assets, in contrast to the current pay-as-you-go method that faces increasing financial pressure due to a rising old-age dependency ratio and longer life expectancy.
Industry players are urging for stress tests, reduced underfunding, higher risk-taking in portfolios, and better tax incentives to encourage occupational pensions, particularly for low earners.
Andreas Schyra, a member of the board of the asset management company PVV and a lecturer at the FOM University of Applied Sciences in Essen, is among those advocating for innovation in pension financing and investment strategy.
The future development of a German state fund based on the Norwegian model is gaining political recognition, but a decision will not be made until after the federal election in 2021.
Intriguingly, an investment of 200 euros per month in a fund savings plan from birth, with worldwide equity investments, could result in approximately 1.25 million euros at retirement, assuming a five percent annual value increase and continuation of the savings plan once the child becomes employed and parents are no longer entitled to child benefit. It's important to note that this calculation does not account for inflation, but future price increases can be offset by dynamically increasing contributions.
Children investing in a fund savings plan do not bear a tax burden, provided they have a non-taxpayer certificate and a tax exemption order, and their income is below 10,581 euros.
As the debate continues, numerous scientists and financial market actors have proposed alternatives for a German state fund. The success of such a fund would significantly change the current pension landscape, moving beyond the reforms aimed at stabilizing and improving sustainability within the existing framework.
[1] Statutory pension system in Germany [2] Three-pillar model for pension provision [3] Occupational pensions in Germany [4] German state fund based on the Norwegian model [5] Riester pension
[1] As the three-pillar model for pension provision in Germany undergoes reforms, there's a rising interest in exploring alternative financing options, such as a German state fund modeled after Norway's.
[2] In order to address demographic challenges and improve long-term sustainability, industry players are urging for the development of a funded state pension component within this new model, ideally with investment diversification across various financial sectors like personal-finance and other opportunities.
[3] Occupational pensions in Germany, a key part of the three-pillar model, are currently seeing legislation changes aimed at increasing employer contributions, broadening automatic enrollment, and allowing for investment diversification within these schemes for improved returns.
[4] Although the fate of the German state fund based on the Norwegian model remains uncertain until after the 2021 federal election, many financial market actors and scientists are advocating for its implementation, as it could significantly change the current pension landscape, providing an alternative to the existing statutory pension system.
[5] One intriguing personal-finance strategy gaining attention is the Riester pension savings plan, which, if invested consistently with worldwide equity investments, could generate substantial wealth over a lifetime, even without accounting for inflation or changes in tax incentives.
