poverty in old age

“The pension is safe!” announced Norbert Blüm. Today, people ask, “How much pension is safe?” How political decisions lead to impoverishment.

Old-age poverty is an increasingly frequent topic in the media. What is special about this phenomenon is that it is homemade. According to the impression even put up with. After all, it has been ongoing political decisions for more than 20 years that have reduced the statutory pension level from the former average of 70% of net salary to less than half in the future.

Riester pension as a loss-making business

Albrecht Müller noted as early as 2004 in his book “The Reform Lie” that the switch from pay-as-you-go to funded pensions in Chile has led to the greatest old-age poverty. Chile thus became a role model for other countries, all of which experienced the failure of funded pension schemes. In Germany, for example, the Riester pension, which is subsidised by the state through allowances, has been introduced. On average a real loss deal, unless you get as old as Johannes Heesters or Methuselah. The citizen wonders where the state allowances end up in the end, and learns from the expert that these funds remain with the providers as mortality gains or are spent on costs and commissions, and by the way – with the lucky ones who end up above the subsistence level – are to be paid back as taxes.

From full lawyer to petitioner

The “pseudo-individualisation through pension reform” does not solve the problem of distributing real income between the generations. After all, the policy has managed to increase the low-wage sector from the former level of less than 10% to more than 25% of the working population. The Hartz reforms led to the fact that trained fully-qualified lawyers had to be caringly retrained as welders by the ARGE, or had to work as temporary workers, or had to live with being able to get by with less than the minimum subsistence level through cutbacks. In the opposite direction, up to more than 25% of the population are no longer able to make any savings at all, and up to more than 25% of the population pay so little into the statutory pension that they have the best prospects of a basic security pension. Anyone who has high rent costs of over 358 euros may pay these themselves from the standard rate of 382 euros or move house – often the municipality helps with this and takes over the brokerage costs so that the needy person moves to the cheaper neighbouring municipality. Those who have to think about buying a pack of cigarettes or something to eat every day will not even have enough money left to buy a decent rope.

Is funded pension provision an illusion?

In general, it must be noted that the transition of the largest economies, including China, from the generational model to a funded system is already failing because there are no sufficient investment opportunities in the real economy for such a pension scheme worldwide. Exceptions would of course be investments in financial bubbles or other investments that are only temporarily considered valuable, but which unfortunately have to be written off later, such as bonds issued by Lehman Brothers Bank or many derivatives and certificates. The state can also accept the money for the capital to be invested in the form of national debt – this would mean that the interest and repayments required for pensions would be covered by the tax revenues with which a future generation and the pensioners themselves would pay interest and repay the national debt.

This would also work in the same way as “capital cover”, if the money was accepted in exchange for securitised government bonds and then burned in large fire bowls to warm up the visitors at the New Year’s Eve fireworks in front of the Brandenburg Gate. Investments in wind power and solar energy, including the necessary power grids, also offer such earnings opportunities via the surcharge on the electricity bill with which all, including pensioners, repay the capital for their capital cover themselves.

Some people may have the idea that, in the case of funded pension plans, the money for each pension is already in bags with the name of the future pensioner on a shelf at the insurer.

Wage and pension increases according to productivity progress?

The population has always been able to feed both children and the elderly simply by virtue of productivity gains. If it is true that wages and pensions have been decoupled from this for up to more than 15 years, the number of those with the best prospects of increasing poverty in old age is widening. In any case, some politicians see it as an adequate retirement provision if at least no social assistance has to be applied for in old age. Courts have followed this up by stating that about 350 euros of pension entitlement at the age of about 50 years still seems to be sufficient despite disability, because up to retirement age one can still build up some provision for old age, so that the necessary about 800 euros are reached.

Of dream returns and nest eggs

In addition, no politician dares to say that a 20% contribution rate for the statutory pension alone will hardly be able to maintain your standard of living. What financial advisors hardly dare to formulate is the fact that pensions from private provision have fallen by up to more than 50% compared to the previous outlook. The only reason for this is that since about 1998 Europe has joined an international low-interest cartel, so that in many cases the meagre interest rates can hardly cover the administrative costs of the investment.

eal, however, will melt away by more than half by retirement age due to normal price increases alone. The illusion of getting a high level of pension provision for almost nothing with little investment via dream returns on the capital market and the “miracle of compound interest” is visibly disappearing. Today, you have to hope to get your nest egg back in your old age, as if you had put it aside in a stocking.

nationalisation of private pension funds

It is not only in Europe that numerous states have decided and implemented a return to strengthening state pensions. In return, private pension funds were “expropriated”, for example in Bulgaria, France, Ireland, Portugal, Cyprus, Argentina, Bolivia and Chile.

The background is that in the state pay-as-you-go system, current pensions must be paid. Then, for example, it was decided to have part of the contributions paid to the open pension funds by force, so that the pension as a whole would be more secure through private capital cover. Therefore, the State had to make up for the lack of premium income by taking out government bonds and getting into debt.

These government bonds were then bought by the private pension funds with the contribution money that had been forcibly diverted to them – which, on paper, meant that they were covered by capital. The pensions from this are then no longer to be financed by contributors to a statutory pension scheme, but by the taxpayer, whose tax money is used to service the invested national debt with interest and repayment.

Apparently, however, doubts about the usefulness of this type of capital cover have arisen. This is because such a form of “capital cover” through public debt does not make pension funds any more secure, and the need for more public debt as a result of the diversion of contributions to pension funds affects the creditworthiness of these public debts and ultimately makes pension funds insecure.

The pension funds are not harmed by the “expropriation”, as their obligations are reduced accordingly. Contributors to the pension funds receive pension claims to the state pension insurance for the government bonds confiscated in the sense of a surrender value – this is presumably more secure than a capital cover based on government debt, as in Greece, for example.

National debt increased recklessly

The introduction of pension funds with the redirection of contributions from the public pension scheme to the latter and the replacement of these contributions by public debt has recklessly increased public debt in the countries concerned to such an extent that it has impaired the ability of other meaningful public debt borrowing. The absurdity becomes even more apparent when one sees that the contributions to the pension funds released by the additional national debt have been used to buy up the national debt.

The institutional private pension funds had had their chance. The compulsory contributions to them have attracted foreign investors, who have taken advantage of the system in a way that is no longer justifiable. Wanting to offer their compulsorily insured a funded pension based on national debt is more than an imposition – but of course it is also common practice in Germany. Ending this is no more than a comprehensible and consistent decision. No one could have seriously advocated the continuation of such a state of affairs – quite the contrary. This may also be true for many other forms of “funded” schemes.

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

by courtesy of

http://www.pt-magazin.de/ (Issue 2, 2014)

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.

About the author

Dr. Johannes Fiala
PhD, MBA, MM

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.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.