By Pierre Briancon
Friedrich Merz seems ready to break an old German taboo. To ensure the continued funding of his aging country’s onerous pension system, the German chancellor has agreed to create a dedicated public pension fund to supplement the main pay-as-you-go scheme. This could channel up to $35 billion annually into stocks and bonds, Deutsche Bank reckons. The impact on Europe’s capital markets could be bigger if countries like France and Italy take notice.
The proposal is only one of 33 proposals put forward by a state-appointed commission, which Merz and his coalition government agreed to implement in full. They also include a gradual rise in the retirement age and a broader range of contributors to the state pension. But the public fund is the real innovation. Whereas most pension financing is now borne by the state’s budget, an extra 2% mandatory contribution on wages will in the future be paid into a central pot, split between workers and employers.
Besides its fiscal benefits, the reform is a step towards Europe’s for-now fledgling savings and investment union. German savers, who tend to keep their cash in low-yielding bank accounts, would see more of their money invested into higher-yielding shares and bonds, which may boost the region’s capital markets. The actual impact will however depend on how the money is managed. As it is, the proposal is that the fund be invested broadly across asset classes, countries and regions. The commission also wants it to be protected against political interference. The aim is to maximise returns, rather than support domestic investment.
As limited as it may be, the reform marks a shift away from a pure pay-as-you-go system. And the potential is huge if other countries follow. Pension scheme assets amount to more than 200% of GDP in Denmark and 78% in the UK, but only 6% in Germany, 12% in Italy and 13% in France, Allianz economists reckon. If these last three countries, along with Spain, Poland and Austria, had the same level of pension assets as the UK today, an extra €8.8 trillion of long-term capital would be available. That’s twice the current market capitalisation of the companies included in the Euro STOXX 50 index.
France and Italy, whose pension systems face the same challenges as Germany’s, are likely to watch closely what happens in Berlin. In Italy, pension reform has stalled since a populist government in 2019 rowed back on changes enacted 8 years earlier. In France, President Emmanuel Macron has appointed three prime ministers in the last four years who all proved powerless to enact even limited changes to the retirement system. In both countries, opening up the state pension to market-based schemes remains anathema. A bold German reform, however, might focus minds in Rome and Paris.
Follow Pierre Briancon on Bluesky and LinkedIn
CONTEXT NEWS
A commission appointed by German Chancellor Friedrich Merz on June 23 proposed a Swedish-style pension fund and a gradual increase in the retirement age to help stabilise the country's pension system as the population ages. The commission's report will form the basis for a major overhaul of Germany's pension system which the government aims to present to the Bundestag, the country's Parliament, in the autumn.