GERMANY - The German institute for retirement provision DIA has presented research revealing the state pension plan leaves pensioners bearing more risk than a funded pension plan.
Researchers Reinhold Schnabel (University Duisburg-Essen) and economist Adrian Ottnad were commissioned by the DIA to compare average pension benefits from both the state pension and investments on the capital market over the last 30 years.
They found while in the 1970s workers who paid into the state system could expect to receive benefits at retirement to be significantly higher than what they paid in, longevity and other demographic as well as economic challenges have rendered these high payouts unpayable for the state.
Thirty years ago workers would see their pension benefits grow by around 5% annually, today this figure has dropped to 2% - "realistically going towards zero", the authors found.
However, a 100% equity portfolio invested over the same time horizon would have yielded a minimum return of 3.5% with the maximum being as high as 10% and the average at 7%.
"The likelihood of getting a negative rate of return in a 30-year equity portfolio is practically zero as historical data shows," Schnabel pointed out.
The calculations include the difficult years of 2000/2001 when markets crashed after the e-commerce bubble had burst.
"The return risk in the state pension system is considerable compared to the risk of investments," Schnabel added.
He noted the worst risks were demography and political interference such as increase of retirement age and contribution rates as well as pension benefit cuts.
The authors calculated the return risk in the state pension system to be 1.14% compared to 1.1% for a mixed portfolio of 50% equities and bonds respectively.
While the risk is rather similar, the rates of return for someone born in 1930 are 2.6% and 5.4% respectively and for someone born in 1970 they are expected to be 1.44% and 5.4% at retirement.
According to the DIA, the mixed pension system of two-thirds state pension and one-third private or occupational pension provision, which is sought by the German government, reduces the return risk by another 40%.
"As the share of the state pension in the system has been fixed by legislation, the leeway for supplementary pension provision is limited which means possible further secure returns cannot be exploited," suggested Bernd Katzenstein, spokesman for the DIA.
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