Every retirement plan on one leg is dangerous

Are state parliamentarians threatened with poverty in old age? Trade union pension experts complained in 2018 that members of a state parliament received 3.675% p.a. of their diets as a pension under the pension law in force until 2007, with a calculated income of EUR 8,220 after five years, i.e. EUR 1,510 as a pension.

 

If, on the other hand, since 2008, MEPs have paid in the EUR 113,700 granted instead as a pension contribution over five years, with a 0.9% guaranteed interest rate, this would result in a monthly pension of EUR 384 from private provision. This is a calculated pension reduction of around EUR 1,100 or approx. 75%.

And those who had fallen from the (average) gross (3,100 EUR) to the recommended 4% (approx. 125 EUR) since 2003 should pay a monthly fee for this. pension rights of around EUR 20.

 

Errors of reasoning by trade union pension experts ?

However, the monthly guaranteed interest rate of EUR 383 after 5 years, calculated at 0.9%, is supplemented by surpluses. In addition, it is also possible to pay into fund-oriented products, so that the projection seems somewhat too pessimistic.

The state parliament administration concerned requires that at least the maximum contribution (i.e. about 2/3 of the subsidy amounting to EUR 1,829 p.m.) be paid into a basic pension (including the German Pension Insurance Association, DRV) for the state payment for the private provision of the members of parliament.

Only 2/3 of the amount there is sufficient to pay the maximum contribution to the DRV: From this alone, more than the aforementioned EUR 383 per month of a private pension can be earned – at least with pension increases.

Then 1/3 or about 600 EUR per month remain for free pension provision, which results in at least another 125 EUR per month, i.e. a good 500 EUR monthly pension after 5 years of payment. Or after 45 years as a member of parliament, as with the corner pensioner, about 4,500 EUR or about 55% of the gross diet.

However, it is also assumed that private provision is also expected from the diets themselves, as with others; for those who want to maintain their standard of living. For this purpose there are not only various pension providers available, but also any other form of investment for later free use, or own rent-free housing.

 

Tax planning and cost comparison

In the 2019 assessment year, up to EUR 24,305 (per spouse) in contributions to the DRV and/or basic pension can reduce the tax burden – of which 88% or EUR 21,388 are then deductible. On the other hand, these pensions will have to be taxed at 100% from 2040. In the case of private pensions, on the other hand, without tax deductibility, up to more than 82% of the payouts regularly remain tax-free.

However, the offers differ considerably in terms of calculation and in terms of risks, opportunities and costs of the investment, including those from abroad. Up to more than 20 % of the payments could have been used for acquisition and administrative costs in the end. In terms of administrative costs, the pay-as-you-go system should be more than 50% cheaper.

Risk diversification due to incalculable risks

The legislator’s wide discretion as to which rules will apply to income tax and social security in the future retirement age is incalculable. It is also uncertain whether capital cover or pay-as-you-go systems will prove more profitable in future. It is equally uncertain whether life expectancy will continue to rise or whether it will tend to fall again (e.g. due to environmental toxins or a pandemic spread by bird migration). How high real interest rates and inflation will be is written in the stars.

The only thing that is certain is that, according to the economic Mackenroth theorem, capital cover has no effect on the demographic problem; nor on generational equity. Just as the option for a Riester contract is out of the question for that double-digit percentage of the population without any savings at all due to a lack of liquidity. The average savings ratio reaches only a smaller part of the population.

To put all your eggs in one basket means an unnecessary risk of lumps. Investors and their advisors more often only realise this after (up to) a total loss on dubious investments – in ships or derivatives, containers and hedge funds, real estate or other tax models.

 

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

 

by courtesy of

www.experten.de (published on 17.07.2019)

Link: https://www.experten.de/2019/07/17/jede-altersvorsorge-auf-einem-bein-ist-gefaehrlich/?utm_source=newsletter&utm_medium=email&utm_campaign=20190717+experts+report

 

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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