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Pension reform 2021: Time for a realignment of pension provision
Find out why the younger generations in Germany need to switch from savers to investors in order to combat rising poverty in old age. Discover how personal responsibility and long-term investments can help secure an attractive pension. #Pension #Provision #Generational Capital #Investment Strategy
Pension reform 2021: Time for a realignment of pension provision
The federal government recently unveiled a pension package that suggests no fundamental changes are planned to the German pension system. However, further development of the system is necessary to ensure attractive pensions for the young generation and to combat poverty in old age. Currently, citizens have to pay a significant proportion of their income into the pension fund over many years without receiving any significant added value later. At the same time, generational capital introduces a financial construct that is based on debt and contributes little to financing pensions.
It is crucial that society changes its passive attitude towards long-term private provision and instead promotes private wealth creation more strongly. This development is particularly important because, despite Germans' comparatively high savings rate of 11.3 percent of income, investments are often short-term and not profitable. There are around 3,000 billion euros in savings accounts, checking accounts, current accounts and cash reserves in Germany, which corresponds to France's gross domestic product but offers hardly any interest.
The low ownership rate and risk aversion of Germans are reasons for the lower wealth compared to other European countries. Only around 15.2 percent of Germans currently invest in stocks or stock funds, in contrast to over 56 percent of the US population. Historical events such as the negative experience with Telekom shares in the 1990s have led to widespread risk aversion and a lack of financial literacy. To change this trend, it is important to create attractive incentives for long-term investments and improve financial literacy.
The transformation towards promoting long-term investments instead of short-term pension insurance contribution increases could be a promising approach. One possible option would be to introduce a graduated capital gains tax exemption for investments that are more than ten years old. In addition, generational capital should be further developed into a mandatory funded pension provision based on the Swedish model. Promoting financial education and provision among younger generations is also of great importance in order to increase long-term prosperity and wealth in society and combat poverty in old age.