Monday, August 22, 2016

German government goes gambling: more pension money to be put into stock buys

The blogster confesses a bad habit: It* regularly skips of any newspaper article on or by Mr. Jens Spahn (aka. Spahnplatte - no idea who coined that), one of Germany's up and sometimes coming young Christian Democrat Conservatives.

A new piece on why increasing social security retirement age to 69 is needed almost fell victim to that habit.

For unclear motives, with boredom suspected as the major driver, the blogster opened the webpage and read. Just as the  PR piece for the job of future chancellor came to its end, a nugget of information popped up: The German government wants to put more money for civil service pensions into the stock market for improved returns **.

Bear with the blogster for an explanation of this typical Germano-feudal leftover in the 21st Century. There are two basic categories of civil service workers in Germany.

1) People who work under the same legal framework as regular employees in the private sector. They pay into social security, they pay health care premiums, etc. They can opt into a supplementary pension scheme, for which they also pay premiums. That supplementary scheme is managed by an independent fund. If the fund does well, swell - if it doesn't, the loss is carried by the enrolled workers if insurance is exceeded.

2) "Beamte", often incorrectly called career civil servants. Workers in the first category can have a career in government, too. "Beamte" stem from the bad old days of the monarchy, and their status is protected in the constitution. The argument goes like this: you are the people who fulfill "critical state functions", and if you forego things like organizing in unions, the state cuts you a deal: no payroll takes, no social security payments, generous subsidy for health care, and a pension that takes good care of you.

3) There is a third category. Paid by the hour "contractors" without any government fringe benefits. Among them, lots of highly qualified university teachers.

Beamte pension payments come out of the government's tax revenues, and traditionally there was no fund for future payouts. it all came out of the tax revenue for the current year. If there was not enough, the government took on some more debt. Over the past decade or so, governments began to set aside some money for future Beamte pensions. The buildup has been slow but it continues.

Now, if you have a few billions of any currency (besides whatever they use in Zimbabwe and other exotic locales), what do you do with them?

Investing them seems like a good idea. At least make it so that the officially non-existent inflation won't eat up their value, right?

It appears, the government looked at the voluntary supplementary scheme for the non privileged workers and said: good idea. Fiduciary duty for the voluntary scheme and some cautiousness means that the money in that scheme went into safer, low return investments.

This is where the statement of Jens, Spahnplatte, Spahn becomes interesting. He clearly states that he is aware of a trade off between guaranteed return and higher yields.

So, more of the set aside cash will be placed in the stock market for those cool higher returns.

The issue, then, is what happens if there are losses? If the principal is negatively affected?

The answer: the gamblers are safe.

Because taxpayers are on the hook for Beamte pensions no matter what happens.

While German social security retirement pensions have been on the decline in relation to the last earned income, from 55% in 1990 to somewhere around 45% today, with further cuts already budgeted, the government goes on a risk-free stock market gambling spree.

Even a crash of a magnitude of 1929 or the great housing bubble recession will not wipe out the obligation of regular taxpayers towards the privileged group of civil servants.

And the blogster won't even mention the opportunities for corruption that arise out of the stock market scheme. Please credit it when the first big scandal breaks.

* Gender neutral is what we do. Also to piss off some folks.

** Source FAZ: Als Beispiel verwies er auf aktuelle Änderungen bei den Pensionen der Bundesbeamten, die künftig zu einem höheren Maße in Aktien angelegt werden sollen.

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