As Germany prepares to overhaul how it pays for old age, a member of its pension commission has a warning. Keep politics out of the money. Tabea Bucher-Koenen, an economist on the commission, cautioned that as the country moves to invest statutory pension funds in financial markets for the first time, the choice of what to buy must be driven by returns for retirees, not by whatever projects the government of the day would like to favor.
The reform behind the debate is significant. Germany's pension system has long rested on a pay as you go model, in which today's workers fund today's retirees, known as the first pillar. The commission now proposes adding a mandatory, capital funded layer that would, for the first time, put statutory pension money to work in equity and bond markets. It is a structural shift for a country that has been famously cautious about tying retirement security to the swings of the stock market.
Bucher-Koenen's concern is that a large, state controlled pool of investment capital is a tempting target for politicians. She argued the funds should flow into diversified portfolios, with a reasonable preference for domestic and European assets, but chosen on merit rather than as investments in politically desired projects. She singled out the risk of steering pension money toward critical infrastructure, warning that dressing up policy goals as investments would quietly trade the security of retirees for the priorities of the state.
The commission's blueprint tries to build in guardrails. It looks to Sweden's premium pension system as a model, recommends holding management costs to a strict ceiling of around 10 basis points, or a tenth of a percent a year, and suggests giving savers some choice of provider. Among the candidates to run the money are the Bundesbank, which already manages about 140 billion euros in public sector capital, and Kenfo, the fund that handles Germany's nuclear waste liabilities. The underlying message from Bucher-Koenen is a plain one. Once the state begins investing citizens' retirement savings, the hardest discipline may not be picking good assets but resisting the temptation to spend them on something else.
