Equity-based pension (Generationenkapital)

The Aktienrente (share pension, officially: Generationenkapital, "generational capital") is a state-managed capital stock in Germany invested in the stock market to stabilise the statutory pension.

Why is it necessary?

• The statutory pension works on a pay-as-you-go basis: today's contributors finance today's pensioners
• Problem: fewer and fewer contributors, more and more pensioners (baby boomers are retiring)
• Without reform: the contribution rate would have to rise from 18.6% to over 22%
• Solution: investment income from the generational capital is meant to dampen the contribution rate

How it works:

• The state builds up a fund (financed through debt and budget funds)
• Target size: approx. 200 billion euros
• Investment: broadly diversified in shares worldwide (modelled on Norway)
• Income (not the capital!): flows into the pension insurance from ~2035
• At a 4% real return: approx. 8–10 billion euros per year

Comparison with other countries:

• Norway: sovereign fund of 1.7 trillion dollars – the world's largest sovereign wealth fund
• Sweden: AP funds since 2000, successful
• Canada: CPP Investment Board, 570 billion dollars
• Germany: a late start, but better late than never

Criticism:

• 200 billion isn't enough: pension spending is 370+ billion/year – the fund covers only a fraction
• Debt-financed: the state borrows money to invest it in shares – risky?
• Political risk: future governments could misuse the fund