What happens with the government's pension fund – who bears the responsibility?

Inquiries and Responses - The government safeguards retirement funds - who assumes financial responsibility?

The federal government has made significant strides towards approving a new pension reform plan, dubbed Pension Package II, which is set to benefit around 21 million retirees in Germany as well as young people. This plan, which has been a subject of fierce debate for several months, aims to ensure a stable and reliable pension for all generations while fostering fairness in the workforce.

What's the main objective of the reform?

According to the latest updates, the new reform package seeks to increase pensions in line with wages which are common across most industries. The goal is to keep the pension level at 48%, and maintain it at that level until mid-2040. To achieve this, the government intends to introduce a new mechanism to regulate the pension level.

One other key aspect of the reform is the creation of what's known as "generational capital." This is essentially money invested in the stock market, managed and processed through pension funds. The aim is to keep pension contributions more stable and not have them increase significantly.

Which part of the package will affect retirees first?

The immediate impact for retirees will be the stabilization of the pension level. This will be achieved through the introduction of a fixed pension level, which will be upheld in the pension adjustment formula until 2039. After mid-2040, the government will present a report showcasing the expected level of pensions.

What's the mission of this generational capital?

The generational capital is being introduced to reduce the burden of pension contributions on future generations. As it stands, pension contributions are set at 18.6% of income, and if no action is taken, they may reach 20.2% by 2030 and 21.3% by 2040. However, with the introduction of generational capital, the contributions could stay at 22.3%, instead of increasing further.

What is the generational capital?

In simple terms, the generational capital is a concept of the government taking on additional debt that will not breach the debt brake. This year, the government aims to allocate initial funding of 12 billion euros for this project, with the amount rising slightly in the following years. Additionally, certain federal assets will be transferred to the generational capital.

By the mid-2030s, the government envisions an investment of around 200 billion euros into this project. From 2036 onwards, the plan is to regularly withdraw approximately ten billion euros for the pension fund, while maintaining a safety net for asset protection and loan repayment.

So what's next in the pipeline?

The Federal Cabinet has pushed for a swift passage of this newly proposed pension reform, requesting that the states in the Federal Council speed up their deliberations to ensure the Council of States can discuss the matter as early as July 5. As it currently stands, the coalition has yet to reach a final decision on the entirety of the reform package. The FDP, a coalition partner in the government, has already revealed some misgivings toward the future contribution burden on the younger generation.

The FDP's viewpoint?

The Liberals have expressed their concerns about the future contribution obligations for young citizens, stating that current reform plans don't provide equitable solutions. To them, the package does not yet do enough to secure long-term financial security for all generations.

A positive response, however, came from FDP parliamentary group leader Christian Dürr, who referred to the pension package as a "centennial reform." This plan will make millions of German citizens "benefit from the capital markets for the first time in the nation's history."

The Greens' viewpoint?

The reform is applauded for guaranteeing a dignified lifestyle for the elderly and preventing them from experiencing poverty. Green party member Andreas Audretsch told dpa that it was "relief, better protection in old age, and less burden for private retirement plans." However, the Greens are uneasy about the generational capital, specifically referring to the unpredictability of financial markets.

The stance of the SPD and FDP?

Despite some initial tension, between the SPD and FDP over the reform package, Green Economic Minister Robert Habeck was taken by surprise when he discovered a mutual agreement on most aspects of the budget and pensions. He outlined that there had been scepticism in his own ministry due to the financially risky nature of the stock market pension scheme. "Not with the result, one can live with it," Habeck stated.

Biggest winners and losers?

In this scenario, social unions and trade unions are positive about the pension level stabilization technique, applauding the resulting relief to many people facing old age. They also call for a higher level of pensions to fight old-age poverty. Meanwhile, Germany's employers are against the most expensive social law in decades, arguing that all the costs of ageing will be shifted to the pensioners of the future instead.

The employers' leader, Rainer Dulger, regrets the projected increase in social contributions, describing this shift as a major burden for Germany's economy. "Huge promises are being made that will not be financially viable in the long term," he said. These increased contributions could lead to economic stagnation, according to him.

Will the coalition react to the criticism with a third package?

Lindner and his FDP had requested specific measures, like offering incentives for a longer working life. The coalition is considering ways to make retirement financially more attractive, as mentioned in their circles. Additionally, there's still the need to fulfill their pledge regarding better retirement security for self-employed people, which Heil refuted.

In terms of private retirement savings, the coalition also plans to address issues. Heil refused to confirm if there would be further pension announcements until the next federal election. "No, that's a massive reform as we are constantly adjusting the pension level," he claimed in an interview with dpa.