A new proposal for an additional pension provision to help combat poverty in old age called “Deutschlandrente” may imply big challenges for those looking to save. Dr. Sebastian Grabmaier, CEO at Jung, DMS & Cie., has criticized the proposal identifying “three big mistakes” that would make this new concept a “nightmare” for citizens.
According to the new concept, a central fund run by the state would administer the standard product at your own expense. All employees who do not object (opt-out model) would have to pay into the system each month and the government would distribute funds to pensioners. Three Hessian Ministers developed the proposal:
- Economy Minister Tarek Al-Wazir
- Social Affairs Minister Stefan Grüttner
- Finance Minister Thomas Schäfer
Mistake #1: The responsibility of the state
The most significant mistake of the “Deutschlandrente” proposal is that the responsibility lies on the state. It is a misconception that a state pension is more profitable than a private provision. “Unfortunately, there has not been a single example of the state beating the market in the long run throughout history,” says Sebastian Grabmaier. There is also the risk of government abuses of the general populations’ capital.
Mistake #2: The same concept for all
The second weakness is the fact that all who pay into the pension fund are subject to a uniform investment policy, regardless of their personal situation. “Especially young workers and their employers are thus denied an opportunity to choose a relevant age-adjusted risk structure for their investment capital, a high equity exposure,” says Sebastian Grabmaier. “Life cycle models of the investment are an essential feature of all modern pension systems.”
Mistake #3: State fund holds tremendous power
Sebastian Grabmaier says the new concept would also create an enormous state fund. “The state can then choose which company it wants to promote through capital and which not to. In the worst case, the investment policy can then change with the government every four years.”
Most significantly, the competitiveness of the companies concerned and the freedom of the market would be severely compromised and political intervention would have a negative impact on the return course.
No advantages over the Riester pension
Sebastian Grabmaier cannot identify any benefits of the new proposed pension over existing concepts such as the Riester pension. Any benefit would be quickly eaten up by administration costs and inefficiencies of the investment.
The CEO at Jung, DMS & Cie. is not alone with his rejection of the proposal. The business wing of the CDU considers the introduction of the concept in Hessen unreasonable due to the evident weaknesses. Its implementation in the current form, therefore, appears to be unlikely.
Opt-out model is better than forced payments
The proposal is aimed to provide in option so that employees can disagree to pay into the “Deutschlandrente” pension scheme. The so-called opt-out model is better than an extension of the compulsory pension insurance, according to Grabmaier, but it is still “a kind of compulsory retirement.”
“The concept can indeed on paper indicate a freedom to make payments to state funds or not, but most citizens do not know there are even deposits in their payroll already today and therefore it is not making a free choice.”
Sebastian Grabmaier: Proposal misses the target
To combat poverty in old age, the concept is ill-suited says Grabmaier. For financial advisors, there are consequences of the new “Deutschlandrente” pension idea. The “opt-out” model will indeed give well-advised customers a meaningful retirement variant. For the majority of citizens, however, “it is in the long run almost as uncertain as the current statutory retirement”.