ifo Study: “German Citizen Fund” Could Reduce Pension Gap for Low Earners
The ifo Institute presents the “German Citizen Fund,” a new instrument for strengthening wealth formation and pension provision for the entire population. Such a fund could reduce the pension gap for low earners. The Federal Republic of Germany’s excellent creditworthiness as a debtor enables the country to borrow cheaply and to achieve a considerable yield differential with a reinvestment. As an ifo simulation shows, if the federal government were to invest 0.5% of GDP per year for all people of working age starting today, financed by slower reduc-tion of public debt, the return after 50 years with an average yield differential of two percentage points would amount to a good EUR 16,000 per capita, which could be paid out once a citizen reaches the age of 67.
“Many people today find it difficult to build up private wealth because interest rates have been low for years. At the same time, for many people the benefits provided by the pay-as-you-go pension insurance are barely enough to ensure good pension benefits in old age. This is where the instrument of a ‘German Citizen Fund’ could step in,” says Clemens Fuest, President of the ifo Institute and one of the authors of the study. “The fact that citizens themselves would not have to make any additional payments from their income in order to build up their wealth makes the ‘German Citizen Fund’ particularly appealing to people who don’t earn very much,” he adds.
Germany’s national debt has now fallen below the European debt threshold of 60 percent of gross domestic product. As long as yield differentials between German federal bonds and other capital market investments remain high, the federal government could issue debt within the framework of the applicable debt rules or slow down debt reduction and use the funds to make broadly diversified international investments. This takes advantage of the fact that equities and real estate continue to generate attractive returns, albeit not every year due to fluctuations in exchange rates and valuations.
The difference between debt service and investment returns flows into a capital benefit, analogous to a life insurance policy. Simulations with different scenarios and assumptions on the achievable returns assume a credit-financed investment equivalent to 0.5 percent of GDP per year and an average yield differential of two percentage points. After fifty years, the fund reaches maturity with the first cohort for whom income has been accumulating in the fund over their entire working life. In this case, the capital payment per capita at the age of 67 is a good EUR 16,000 (at 2020 prices). If the average yield differential goes up to three percentage points, the capital benefit rises to around EUR 30,000. Disbursements are lower for cohorts closer to retirement age.
Administration of the “German Citizen Fund” should be separated from day-to-day politics and put in the hands of, for instance, the Bundesbank.
Publication (in German)
Fuest, Clemens, Christa Hainz, Volker Meier and Martin Werding, Das Konzept eines deutschen Bürgerfonds, ifo Studie, ifo Institut, München, 2019, 01–31
