Germans must face several inconvenient truths these days. We have traditionally entertained close economic relationships with Russia in every sector from energy to the automotive industry and professional sports.
Russia’s unjustifiable invasion of Ukraine has suddenly forced the new German Chancellor, Olaf Scholz, and the ruling coalition to rethink these ties and our policy positions in a number of related areas. While painful in the short term, these changes—and more—are necessary to ensure the strength and stability of our country and to enable it to provide Europe with urgently needed leadership in times of dramatic global changes.
Scholz’s decisions were shocking to many: freezing the Nord Stream 2 pipeline and abandoning long-held military constraints, with a one-time 100-billion-euro spending package and a ramp-up of annual spending to two percent of GDP. Germany’s new government has also given in to the rising pressure to exclude Russia from the SWIFT payment system and to impose harsh sanctions on the country.
However, if Chancellor Scholz is serious about tackling the latent systemic problems awaiting our children, he should address another big one: our pension system.
Germany’s population is aging due to one of the lowest birth rates in the world. The ratio of pensioners to working people continues to rise. This is a real problem because, unlike in the U.S., the German state pension is paid directly by employers and employees (via contributions to German social security, where a percentage of salary is paid) and government subsidies. Contributions are redistributed to pay for existing pensioners rather than saved or invested.
The system is already sputtering, with inadequate funds for current pensioners, and young people are giving away an ever-larger share of their income. Contributions have gone from 10% in 1955 to 18.6% today. This figure is expected to continue rising.
The absence of large pension funds in Germany and their ability to deploy capital also means that less money is invested in high-yield asset classes such as public or private equity. The real economic nightmare looming behind our 19th-century pension system is the persistent lack of capital to fund tech innovation and entrepreneurship.
The unprecedented development of the world’s first COVID-19 vaccine by the Mainz-based company BioNTech at “the speed of light”, in partnership with U.S. pharma giant Pfizer, has put German science, technology, and engineering into the limelight.
Germans are openly dreaming of the country becoming the “world’s pharmacy” again, a title it lost after the 1980s. With almost 50 billion euros in revenue in (2019), Germany is Europe’s largest pharmaceutical market and a strategic gateway to the EU single market for international companies. If you make it there, you can make it anywhere. Foreigners are also seeing the potential for innovation and growth in the country.
Elite universities such as Munich Technical University boast increasing numbers of applications from top international students with over a third of the student population now coming from abroad. While the success of BioNTech founders Ugur Sahin and Özlem Tureci may surprise some, they are an express product of a strong German university system known for its creativity, engineering skills, and entrepreneurial spirit. Young entrepreneurs are eager to capitalize on their innovations in a range of other fields, such as quantum technology and artificial intelligence.
However, Germany’s capital-intensive high-tech industries and talent pool cannot continue to flourish without the main fuel for innovation: Capital. Fortunately, conditions may gradually change under the new government.
The unexpected new political coalition of Social Democrats, Greens, and libertarian Free Democrats documented their willingness, in an agreement published last November, to take a first step towards a capital-based pension system: They plan to invest 10 billion euros of taxpayer money “in the capital market”.
A step, perhaps, but a tiny one, with only three percent of the annual pension payments invested. Divided by Germany’s population, the figure is equivalent to about US$ 130 per capita. The U.S. figure is around 750 times higher at $100,000 per capita! The US$ 35,000 billion in capital stock managed by U.S. pension funds results in over 10 times as much venture capital invested annually on a per-capita basis. This, in turn, is largely what makes it possible to finance the rapid development of tiny startups into unicorns within a few years.
Germans are reluctant to change the current pension system. A key reason is their reliance on conventional wisdom: It has worked well so far, so why change anything?
When the German pension system was introduced 150 years ago, the younger population far outnumbered the elderly. In the 1980s, it became clear that the baby boomers born just before the introduction of the birth control pill would be the last generation to outnumber the prior one. Despite these demographics, German officials continue to cling to the notion that “pensions are safe.” Regardless of the circumstances, “someone” will pay these pensions. This is misleading, if not deceiving, the public.
Many Germans believe the current system of redistributing money from the working population to pensioners is a responsible distribution of resources. But while pensioners undoubtedly worked hard in their day, their income in retirement doesn’t reflect the value creation to which they contributed. Rather, it reflects what their country can afford to pay based on the shifted ratios between old and young. This is irresponsible.
We are also notoriously skeptical about owning equities. This may have changed somewhat during the pandemic, but on average Germans believe their money is safer in a savings account or with the government.
The new coalition government should seize the current political will for change to tackle the pensions problem. Why not increase the percentage invested in markets to 10 % short-term and even more long-term? It would ensure the future strength and stability of Germany.
Matthias Kromayer is managing partner at MIG Capital.
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- It’s not a Great Resignation–it’s a Great Rethink
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- The Great Business Retreat matters in Russia today–just as it mattered in 1986 South Africa
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