BOrse Express – Why the German pension system for many contributors wealth in old age is impossible!

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It is a topic that affects many Germans. And it's about our pension system and what we have to expect later on pension. For many, it's down the ante when they receive their annual pension information, because they read a pension amount that they know they can not possibly live from when they get older.

So let's take a look at the current situation and try to explain why our pension system more or less prevents pensioners from living a prosperous life.

The allocation process has disadvantages

The so-called pay-as-you-go system, on which our statutory pension system is based, actually sounds fair. Those who are currently working, through their pension contributions, finance today's retirees, who in turn have contributed to the scheme while they were still working.

However, as a retiree, the pay-as-you-go system makes you dependent on the population (demography) and the number of employees in our country. If too many retirees come up with too few contributors, the system is in trouble and there are threats of either higher contributions or lower pensions for future pensioners. According to a report, as many as 36 retired people were employed by 100 working Germans in 2017. And this value is expected to increase rapidly in the coming years and decades.

Retirees and contributors are thus inseparably linked in this system, and as a result of the pay-as-you-go system, pension contributions may rise as well as pension levels decline. Therefore, the opponents of the current system are happy to bring into play a funded option. Of course, this is hard to do, but it could perhaps add value to people.

Paid contributions towards later pension

In my opinion, that is the main problem for most pensioners. Because the relatively high contributions paid in the course of life are compared with only low pension benefits in old age.

Let's take a closer look. A 22-year-old employee today with a gross salary of 2,200 euros pays a share of the employee's current contribution of € 204.60 per month to pension contributions. But of course you also have to include the employer's share, which is due in the same amount. Because even this was indeed earned by the employee with his power and does not come from the private account of the company owner.

So here we have rounded up 409 euros, which are transferred every month to the pension fund. If we now assume 45 years of age, which our employee will still be working until retirement, the total contribution paid will add up to 220,860 euros.

Of course, it is now difficult to predict what he will later receive as a pension. I once used a pension calculator and got about a gross pension of 1,700 euros. Adjusted for inflation, however, this amount shrinks to 685 euros. No nice prospects for the employee from our example.

Higher pension on a funded system?

So what would happen if these contributions did not flow to the statutory pension insurance as at the moment, but could be invested for one's own pension?

Take again our example above and imagine that the 409 Euro the next 45 years are paid into an equity fund. Although equity investments have brought more income in recent decades, we once again assume only an annual return of 5.5%. After 45 years, such a capital stock would have formed a good 931,000 euros.

And this money would now be available for the pension payment. If the same conditions continue to apply there, and if a "perpetual" pension is paid out of it, which does not attack the capital but receives it in full, an amount of 4,162 euros per month is paid here.

This, of course, is a world of difference and impressively shows us what would be possible through a funded system or what will be lacking in terms of money in our old age, since we are bound by the legal pay-as-you-go system.

(For reasons of simplicity, all calculations did not take tax aspects into account.)

Conclusion

As you can see, sizable pension payments could be saved on the capital market. But most of them will not be able to do this because of the high contributions to the statutory pension insurance.

After all, one could also act alone and invest the necessary capital for it. But I fear that for most ordinary income citizens it will be difficult to set aside from their net salary every month around 400 euros for such purposes.

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