The Rürup fallacy

Why additional private provision is no guarantee of good care in old age


In Germany there are currently 2.5 million people in need of long-term care. About 70% are cared for at home. The benefits of the statutory long-term care insurance in Germany are mostly at the level of a partial cover insurance. Better care can be expected in Denmark, Austria and Scandinavia, for example – financed by the state or local authorities.

In this country, the increase in wages and salaries has been decoupled from productivity growth since the 1990s at the latest. In real terms, workers are, on average, treading water in terms of the purchasing power of wages. The development into a low-wage country with up to more than 25% precarious employment relationships was flanked in terms of labour law by mass temporary employment, including temporary agency work and contracts for work and services for employees. In addition, statutory pensions are rising at a much lower rate than wages, as is politically intended – their purchasing power is declining year by year compared with net wages.


Decline in the labour force limits investment opportunities

If the labour force in Germany declines due to the birth deficit, this not only restricts the pay-as-you-go system due to – missing – contributors, but also tax power due to missing taxpayers and also the possibilities of capital investment. Fewer workers also means less demand, for example, for real estate loans and real estate, including commercial real estate, as well as means of production.

And even nursing homes would have to close, despite the rising number of people in need of care, if there were not enough workers to run them. Policymakers are faced with the task of compensating for the future exit of the baby boomers from working life, for example by promoting immigration, qualifications and integration. The fact that the influx from abroad will not bring a solution to the shortage of labour is easy to see from the fact that this is also the reason why politicians have resigned themselves to the pay-as-you-go system because of the shortage of contributors.

Among the “people of poets and thinkers”, one in four years of schooling ends today without the basic cultural techniques being mastered. It can already be seen today that qualified workers such as doctors are in such high demand internationally that they are more likely to emigrate from Germany to England and Switzerland, for example, than in the opposite direction.

A declining labour force in Germany will therefore limit the demand and the possibilities for capital investment for old-age provision in Germany itself.


Capital export as a way out?

Policy advisers now believe that diversification is therefore needed via investments outside Germany. Equities and fixed-income securities from high-growth regions should increase earnings opportunities, especially for pension funds, life insurance companies and pension funds. This capital cover, however, turns out to be another part of the problem and not the solution.

Capital cover procedures via investments abroad are riskier, and demand there is also increasingly restricted. Today, the Chinese are already looking for investment opportunities themselves, for example by issuing property loans in England. In order to expand the volume of lending or investment opportunities, the requirements for the equity ratio, collateral and creditworthiness of debtors may fall, also in the case of commercial and real estate financing, with an associated increase in the risk of bankruptcy.

In India, small loans were first increased because instead of being able to pay, debtors kept getting new loans – in the end they formed “NO PAY” associations, chased away the debt collectors and set fire to the local bank branches.

It is therefore very likely that instead of expanded investment opportunities abroad, it will be abroad that competes in the search for investment opportunities. The expectation that the Chinese, or whichever emerging country, will secure the returns for funded old-age provision in Germany through their economic strength is countered by the expectation of the Chinese that capital investments in Germany and Europe should also pay off for them.


Capital cover cannot compensate for labour shortages

Be that as it may: even if capital coverage would theoretically make it possible to pay for services, however, if the labour supply is lacking, they cannot be provided – no matter how much money is involved – to the extent required. In this respect, Rürup is completely wrong with his idea of capital cover: money cannot be eaten.

Pensioners are already taking advantage of the alternative of migrating to skilled but even cheaper labour, for example for care in Hungary or Thailand.

It is fatal to see the decline in the labour force only as a problem for the pay-as-you-go system without considering the other consequences of this scenario. In what mysterious way are those who were not born in the first place and are missing as contributors to the pay-as-you-go system suddenly to be available again as a ghost army of workers for whom one simply has to save up the capital to be able to pay them?

Today, roads are sometimes simply closed instead of being repaired. Water pipes in big cities and houses are rotting. Labour shortages mean that something has to be neglected. Children are being neglected because family assistance positions are being cut. Why should not those in need of care also be affected by this in future?

Before leaving them to their own devices, however, it would be worth considering leaving forests and floodplains to their own devices, as resettlement areas for elk, bison and wolves migrating there, by simply not rebuilding settlements after floods or systematically abandoning them and, if necessary, dismantling them, including roads and other infrastructure, the maintenance of which would then be saved.

As a result of the development into a low-wage country with frequent need to top up to Hartz IV level, it is in any case hardly possible for the mass of the population to achieve a significant savings rate. The number of recipients of social assistance or basic security pensions in the event of reduced earning capacity or old age will continue to rise in the future. The personally perceived benefit of Riester, Rürup and occupational pension contracts tends towards zero for many people if they are fully offset against the basic income support.


Old-age and care provision as a question of intergenerational justice?

Incidentally, one could also promote the idea of voluntary euthanasia. Those who voluntarily decide to live only two or three years, for example, could receive a higher pension and better health and nursing care, after which everything would be stopped completely, except for passive and possibly also active euthanasia. On voluntary self-determined will this is allowed in any case. It is already very questionable whether one would like to live in a world, where one would have enough money – if not also that would be missing – but for it the most necessary also at services for lack of offer cannot buy at all any more.

Flanking alternative: everyone who is still able to work at all is obliged to perform corresponding work. Even Berlusconi, at 77, puts in his hours at the nursing home on weekends as an alternative to house arrest.

To encourage this on a voluntary basis, access to certain events, such as air travel, cruises, football matches, the golf course, public transport or car parks (on the model of residents’, women’s and disabled parking spaces) and the like, could be made available on a preferential basis to those who can demonstrate the necessary work commitment or child-rearing or total incapacity.

One does not have to resort to the means of incarceration in a work training camp. However, the maintenance of roads and cemeteries by convicts also has something to it, and of course one should not do without their labour – after all, one does not have to chain them.


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


by courtesy of ( published 07/18/2014)

Link:ürup-irrtum_1edx.html?&highlight=1&keys=The+Rürup Fallacy&lang=1


PT Magazine, Issue 4/2014


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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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