The FT reports this morning that:
Germany to create €200bn fund to support strained pension system
The German government will invest billions of euros in capital markets and use the proceeds to shore up the country's embattled pension system, according to a draft law unveiled on Tuesday.
The legislation will see the creation of a fund for investing in stocks, backed by loans taken out by the federal government, that is forecast to be worth at least €200bn by the mid-2030s.
And the reason for this? They say:
Proceeds from the investments will be used to keep the pension system stable and ensure that payments remain at 48 per cent of an average wage until the end of the next decade while avoiding steep increases in social security contributions.
I have in my time read some really crass ideas, but this one takes some beating.
A government that cannot run deficits according to its own state law is about to create money out of thin air to undertake what are, in effect, off-balance-sheet transactions to pump up the Ponzi scheme that all financial markets represent.
That is because that government very obviously realises that a tipping point has been reached where the demand for pension withdrawals from newly retired people might sufficiently match or even outstrip the inflow of new funds from pension savers. This then means that the whole basis of market valuations, which are entirely dependent upon new funds continuing to flow in at rates bigger than outflows so that demand for a fixed (or declining) quantity of shares is ever-growing, will fail, and a market crash is likely. Rather than face the reality of this, the German government is willing to risk losing €200bn to pump up the markets.
You have been warned, is what I will say: the whole edifice of market-based pension saving is at risk, is what this plan is saying.
In reality, it cannot be saved: the crash can only be deferred.
But like all cowardly politicians, the German government is not facing up to the tough decisions it should be facing and is instead creating an even bigger nightmare for some new government a few years hence when the current officeholders hope to be enjoying their own pensions.
Gross foolishness to the point of knavery is rarely announced with more money attached to it than is happening in the case of this plan. I feel sorry for the Germans involved.
But, the real question is, how long will it be before Rachel Reeves announces something similar?
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Thank you, Richard.
Off balance sheet transactions, eh! These were in fashion in the run-up to monetary union as EU member states struggled to meet the criteria.
Goldman Sachs was particularly active in, er, helping states, not just Greece*. Goldman is still active advising states and has employees seconded to the German government and the UK’s shadow Treasury and Business teams. With regard to Reeves, just wait and invest in popcorn.
*The Greek lady who led the team has run Goldman’s UK-based insurer spin off for some years.
People forget, but in 2007, The sovereign borrower of the year award was given to The Hellenic Republic of Greece.
Thank you, Stuart.
I wasn’t aware.
As the Eurozone crisis moved up a gear, a bankster from, I think, Barclays said the bank had noticed the stresses in Greece as early as the early noughties and begun to reduce exposure.
But where is the money coming from? As a non-fiat state (Germany being tied to the Euro and the ECB), this must be un-funded borrowing – a case of “slap it on the credit cards and we’ll worry about payments later”.
Which does, as you suggest, point to a bleak future for the people of Germany.
Causes: ageing population, coupled to an unfinished Euro project (in which Euro zone countries have a financial status similar to……UK county councils).
I agree it is a Ponzi scheme, but like the person that paints the floor and ends on in the corner – opposite the door – the German state WANTED things that way (Euro controlled by unaccountable/unelected bankers – hmm – that phrase is oddly familiar).
Elements within the European Commission are aware of the population problem and “how do we pay for social stuff” (of which pensions is a subset). Ideas are embryonic but there are some ways forward. But as long as the neo-liberals call the shots – particualrly in the ECB, then I am sure more national ponzi schemes will surface. Europe faces a multi-faceted existential disaster – climate disaster, social funding disaster, ageing & unbalanced pop (each year the native population of Italy declines by 1.5 million, Poland? 0.25m – immigrants keep things stable – but we don’t like them – do we?). Italy will doubtless be the next Ponzi contestant, cue the right-whingers in Italy making a big dogs dinner of it. One wonders who they will blame? probably immigrants.
Last comment: let’s not forget – the German state would be Euro30bn (+++) better off were it not for CUM-EX and the activities of the bankers, turned tax-robbers who stole that amount from the German state (CUM-EX started end 1980s, prosecutions… only now).
Struggling to meet future pension payments? Well, just take a punt on the stock market! What could possibly go wrong?
I do wonder whether this nonsense is driven by the ridiculous German Constitutional limits on debt and deficits… but even so!
I would note in passing that to achieve a State Pension at 48% of average earnings in the UK would require about a 1/3 increase on our current Sate Pension.
“the demand for pension withdrawals from newly retired people might sufficiently match or even outstrip the inflow of new funds from pension savers.”
Although for some reason you don’t seem to think such an event happening in the UK would affect your plans to divert “£100bn a year” from pension and ISA savings to your pet projects.
And such events do occur. In 2021, for example, around £37bn was invested into cash ISAs but around £41bn was withdrawn (source Bank of England).
Your claim of a non-stop flow of extra money to invest if only you could force people to do what you want doesn’t stack up unless you plan to ban them from withdrawing, in which case who would invest?
Oh dear….
Why not look at the actual stats I have used that completely contradict all you have said
This is very interesting, Richard. I own a small IFA practice (husband & wife) in Somerset, and most of our work is in the pensions area. We have seen a massive increase in clients entering decumulation in the last three or four years, either through “drawdown” (the choice of which must be seen in context) or, more often, via that ancient insurance contract, the annuity. Clients have spent £12m+ on annuities in the last three years, seeking life-long income security by pooling their longevity risk with others. As interest rates have risen, so has the income from annuities – significantly so.
The point is, that’s £12m taken out of “investments” permanently by those individuals, whether that’s cash, bonds, equities, etc. This can only increase exponentially over the next decade and a half as the ‘boomers’ reach their chosen retirement age. I believe that the pace of change here is rapid and will impact the nebulous valuations of so-called financial assets significantly. I know that this is happening across the financial services sector, particularly in the pension fund area, and as this head of steam builds, people may be very disappointed when they come to exit as the impact of withdrawals affects the prices of their underlying ‘assets’.
Thanks
We agree then…
Why do you say this relates to “private pensions”? Surely this is a state-funded social security system?
It’s invested in private markets
It’s an unfunded system; it doesn’t invest in anything! The whole point of this story is that the government is going to *start* investing in capital markets in an attempt to shore up its *public* pension funding because the current approach is unsustainable.
So, everything I said is correct
Another thing that seems to be happening in the world of pensions as time passes and individuals near the time of wishing to draw their benefits in one way or another is “fund switching” – or, at least, it should be, and there is some evidence that it is. Setting aside the well-known problem of so-called “Lifestyling” switching into long-dated gilts over the last couple of years, any adviser worth his or her salt should be encouraging switching in my opinion.
It can be stated that one of the most important times when a fund switch should be seriously considered is the five years or so before planned retirement. The only way in which any gains made in a “unit-linked” pension plan (or most other types of investments) may be consolidated is to switch to the less volatile, but not fully guaranteed, cash fund where available. Although in a rising market such a move could prove less beneficial, it does at least ensure that any gains made so far are protected against downward fluctuations, and this is of vital importance in the years immediately preceding retirement. Anecdotally, this activity is starting to gather pace, meaning more million’s coming out of the market as those with defined contribution pensions (whether “works” or “personal”) taking benefits increases daily.
This is likely to affect fund valuations as people opt for increased security. Many will argue against such an approach, but long experience tells me that its a good idea!
I agree with you and long have.
I have followed my own advice.
That’s interesting (but private, of course). We have many clients who only hold cash deposits and National Savings Income Bonds in their pensions, so it’s a very secure environment, excepting inflation. I get laughed at by peers when I explain this – I really don’t care, as our clients are happy!
I expect they value the fact that you do not nag them about this
Perhaps there is an argument that any government that runs using a household budget analogy, can not support public services and pensions in a growing population.
If you think funded pensions are an ‘unsustainable Ponzi scheme’ how can you not be challenging unfunded public sector schemes and the state pension itself?
It makes no sense!
By definition this is not going to be funded….
It says everything you need to know about the intellectual wasteland that is mainstream economics that the naysayers posting on this thread (and in general on the site) clearly don’t understand the basic difference between a currency user (Germany, €) and a currency issuer (UK, £)