by Claudio Grass (claudiograss.ch)
For quite some time now, I have been closely following news and reports out of Germany regarding the country’s pension system and the immense pressure it is under, placing those who support it and depend on it at great risk. Germany might be widely celebrated as the economic powerhouse of the EU and as its higher net contributor, supporting countries like Greece and Poland, and yet it would appear that the German state is now struggling to keep the promises it made to its own citizens. Old age poverty is on the rise, while the German pension system is steadily marching towards the edge of a cliff.
To get a better understanding of the factors that led up to this upcoming pension crisis and the systemic flaws that made it inevitable, I turned to Carlos A. Gebauer, who kindly agreed to share his insights and perspective on the matter.
Carlos A. Gebauer has studied Philosophy, Modern History, Linguistics, Law and Musicology. In addition to his work as a solicitor and specialist lawyer for medical law in Düsseldorf, he is a judge in the second senate of the Higher Lawyers‘ Court of North Rhine-Westphalia and also serves as deputy chairman of the Friedrich A. von Hayek Society. As a Fellow of the Liechtenstein Academy, he teaches legal theory and rhetoric. Apart from his numerous scholarly legal texts in academic journals, he also writes for the FAZ, the NJW, the ZRP, Schweizer Monat, Schweizerzeit, the magazines Cicero and Pardon, Novo Argumente, The European, Achse des Guten, while he is a regular columnist for Freie Presse Chemnitz, Wirtschaftswoche and the Eigentümlich Frei magazine. He has published a number of books, among them „Warum wir alle reich sein könnten und wie unsere Politik das verhindert”, “Der Gesundheitsaffront” and “Rettet Europa vor der EU”.
Claudio Grass (CG): In order to understand much of what is wrong with the German pension system, I think it’s important, especially for our international readers, to understand its core foundations. Could you summarize for us the basic principles and the structure of German pensions?
Carlos A. Gebauer (CAG): There are still multiple and variously shaped methods to ensure one’s income in old age in Germany. As a rule, the starting point is the way someone earns his income during the time of his professional life. Apart from some exceptions, like certain freelancers or public servants, who run their own pension schemes, all other common employees have to take part in a compulsory and state-run retirement system. Thus, signing a labor contract automatically causes the employer‘s membership to the community of all compulsorily insured persons. And it is nearly impossible to circumvent this automatic and mandatory participation.
Central to this concept, stands a pay-as-you-go system, i.e. an unfunded retirement plan: A so-called intergenerational contract coerces today’s professionals to pay contributions that finance present retirees. The rights and obligations that result from this entitle all members to have their own chance to get pensions out of this community coffer one day in the future.
CG: What are the historical roots of the government pension system and what was the political situation and the reasons for its implementation?
CAG: The idea of having such a state-run pension system goes back to the founding of the imperial “Deutsches Reich” in 1871. Only a few years after its formation, the ruling elites were increasingly confronted with the emergence of social disturbances. The spearheads of the working class challenged the state’s power. It then was Chancellor Otto von Bismarck who strived to diffuse this situation. As he wrote in his biography later, to achieve this, he corrupted his opponents by launching a system of so-called social security: „My leading thought was to win over – or should I say: to bribe – the working class by making the workers look at the state henceforth as an institution that in fact exists for their sake and is meant to care for them.“
CG: Can Germans still count on the government’s promises about their pensions?
CAG: Well, as with all promises, only time will tell if they will be honored or not. However, an increasing number of experts tend to forecast that we will see a shattering breach of this promise. First of all, the number of citizens paying into the system is dwindling, since we see cohorts with a low birth rate coming into their professional lives. Thus, the ratio of the aged taking from the community coffer compared to those paying into it, is getting more and more out of balance. Secondly, our legal system is not yet ready to hold into account those politicians who implemented and maintain such a dysfunctional and unsustainable system.
CG: What do you identify as the main contributing factors that led to this upcoming pension crisis and what does it mean for the future?
CAG: Some say we should blame contraceptive techniques for the decline of birth rates in Germany, as the core reason of unsustainable second-generation magnitudes. However, I think this explanation is missing the mark. We should instead be looking at the root of the problem, namely at the motivation patterns that this compulsory system creates for all its participants. This view will lead us to different findings: Human beings tend to become complacent (and, as a rule, rather too comfortable) as soon as they sense a chance to profit from certain circumstances that they do not have to create or support themselves but that exist nevertheless.
From this perspective, that can be seen as a form of the “free-rider syndrome”. The public pension system has established a gigantic contract at the expense of third parties: One can later profit from children and their contributions into the community coffer without first investing into it by parenting them. The whole system, however, blatantly disregards the essential “privity of contract” principle, which stipulates that a contract cannot confer rights or impose obligations upon any person who is not a party to it in the first place.
CG: Let’s have a look at the balance sheet of the pension system. What kind of assets are mainly held and what happens if we go deeper into the systemic debt crisis that we already are in?
CAG: Apart from exceptional cases – i.e. an entrepreneur who never worked as an employee in his life and got his pension organized differently – a common retiree inside the state-run pension system of Germany actually holds no assets in the sense of physical securities, shares or other property holdings like that. Only the sheer labor force, that was predominantly yet unborn during his own time on the job, serves as a sort of bailsman to act as a guarantor for his pension payments for the rest of his life.
In case (or should I say: as soon as) the excessive indebtedness of public coffers, as well as that of private banks and insurance companies, becomes obvious and can no longer be ignored, we will certainly, as is always the case in such situations, have to face a period of mass unemployment and go through a systemic crisis until our economies get realigned again. During this interim period, I expect a massive political intervention will be needed to bridge the unavoidable payment gap for all these pensioners. Politicians will have to face a choice between the devil and the deep blue sea: Either they will violate the property rights of private long-time depositors and use their funds to meet the pension obligations or they will hang insolvent seniors out to dry.
In the upcoming second part of our interview with Carlos Gebauer, we discuss the merits and ultimate effectiveness of the measures that were enforced so far to help keep the pension system’s collapse at bay, and we’ll take a closer look at the bigger economic picture and outlook for the coming years.
Claudio Grass (CG): How do you assess the steps taken so far to fend off the collapse of the pension system, like increasing the retirement age? Do you believe such measures will suffice and how do you evaluate their impact on the citizens’ lives?
Carlos A. Gebauer (CAG): Frankly speaking, measures like increasing the retirement age to extend the period of cash-inflow and abbreviate the time of outpayments or, as an alternative at the other end of a person’s lifetime, shortening the mandatory school period from 13 to 12 years, amount to nothing more than a cosmetic repair and mere window dressing. Mathematics functions adamantly and the numbers continue to paint a very stern picture. Quite simply, once the proportions between the young and the old are thrown off balance in a society, it takes decades for the system to adapt and readjust. Hence, the journey through life for all participants of this system and those who live in its periphery and under the state’s jurisdiction will inescapably be affected during that period. For quite a while now, we see some German politicians trying to establish a mass immigration flow of young people from abroad as a compensation measure to absorb the demographic imbalance. I’m afraid they are hoping for a miracle.
CG: At this stage, do you believe that there is a solution or drastic measures that can effectively ensure the sustainability of the pension system, or do you think the entire structure is past saving?
CAG: A couple of years ago, I advised representatives of Seniors in the Liberal Party of Germany (FDP) to pursue a change in tax policy. My idea was to establish a complete exemption from income taxation for all persons older than 58, as long as they would furnish proof of saving the unpaid taxes as reserves for their own old age funds. I speculated that a massive part of democratic voters would agree to such a model of taxation. Through that, we would have been able to see a way out of our systematic problems by decompressing young contributors to the pension coffers and enriching pensioners, all driven by a reliable self-interest of the elderly. Unfortunately, those who received my proposal preferred to let state servants rake in more money, as they always did in the past.
CG: Apart from the obvious economic deficiencies and faults built in the system, do you also believe there is a political aspect that has exacerbated the problem?
CAG: Over the course of the last decades, policy-makers in the so-called modern states have made it their business to offer a kind of all-inclusive package deal to citizens. Voters, on the other hand, appeared to enjoy being seemingly unburdened from the effort to think economically for themselves. Consequently, politicians established public funds not only for the elderly, but also for the sick, the disabled, the unemployed and so forth. Since established politicians who lose their seats in parliament can then easily be provided with leading positions within these funds by their political friends, a shuffling of funds between the many coffers has begun that effectively conceals the real status of each of them and makes it virtually invisible to the public.
Politicians yield to the temptation of handling big money on the one side, while voters on the other side are happy to let them do so, as they succumb to the convenience of being ruled and having their finances “taken care of”. This misguided trade-off had fatal consequences, particularly because, according to present German law, politicians who force citizens to participate in these systems are not personally liable for the debts and losses of the funds. I have been advocating to change this and to establish personal liability of politicians for their administrative decisions.
CG: After hearing and reading so much about Germany’s leading role in EU and its economic prowess, do you see its ailing pension system as an indication or a warning sign of deterioration from the inside?
CAG: It goes deeper than that. It is not only the pension system that is ailing in Germany these days. The long-term care insurance that was established in the late 1990’s and the National Health System teeter on the brink of disaster as well. The circle of citizens that were forced to be compulsorily insured was enlarged repeatedly, every time the system needed more money. But enlarging the system always had a rebound-effect as well: The more people you oblige to pay in, the more people acquire a claim to receive benefits out of it shortly after. This created a vicious circle and it’s unlikely that we can get out of it without a collapse. In fact, my concern is that we will even have to face another enlargement of these systems, this time throughout all member states of the European Union, because scaling up the funds and magnifying them can once again help mask the real over-indebtedness and postpone the inevitable for one more legislative period.
CG: Do you believe German citizens have understood that they can no longer count on state pensions and this is the reason why private individuals in Germany hold a record of 8.918 tons of precious metals, with 4.925 tons in bars and coins, and approx. 4,000 tons of gold in the form of jewelry?
CAG: Wealthy people might have shifted their reserves into precious metals to these extents because they know that investing in zero-interest Central Bank money is no longer a good idea. But I doubt that there are already noteworthy groups of people who have begun to stockpile metals in order to replace their at-risk pensions. Maybe the wisdom of the crowds has envisioned already that the day of the collapse of the German pension system will anyway be the eve of an unprecedented deprivation of private reserves, so that it makes no difference if you hold assets or not. The day after, you will find yourself dispossessed either way.
CG: Overall, what would be your advice for a currently working and contributing citizen to ensure that their retirement years will be comfortable and to protect himself against these risks?
CAG: As far as I can see (and as far as I have understood the history of mankind), the outlook of our future as individuals and as part of a society has never been as uncertain and confusing as it is today. Since the dawn of our species, human beings collected the best information they could get and adjusted their actions according to that knowledge. However, digitalized information systems have increased the speed of information and made it accessible to everyone, everywhere and at all times, to an extent never seen before. That makes it virtually impossible to make immovable, long-lasting decisions usefully. Even if you decide for yourself to stay the course that you have chosen, you have no guarantee that your partners or fellow citizens will see things the same way. The more insecure and uncertain a situation is, the more flexible and adaptable one has to be. Diversified portfolios may never have been so useful and essential as today and thus, a far-sighted and prudent investor does not have to fear inconsistencies.
CG: Do you believe gold and silver will once again prove their worth as a store of value over the coming years and in particular during a harsh crisis scenario, when our debt-based monetary system needs to adjust?
CAG: As I said: Times are confusing and puzzling and the future is more unpredictable than ever. In the short term, I believe, the price of gold and silver is subordinated under the market control of our established central banks and their cooperating institutions. In the long term, I expect that the state powers that will establish their rule after the coming crash will not be willing to accept the distribution of metals, as seen since 1971, as a fundament of a new general world-monetary system. Only in the medium term, in between the outbreak and the overcoming of the collapse, I could imagine that these metals will become important as an auxiliary to push economies into new life.
CG: What is your outlook and your expectations for the next couple of years, not just for German pensions, but for the economy as a whole?
CAG: Blooming decades of a relaxed and unwound economic growth will come to an end. The widespread misconception of economies that can sustainably be run on the grounds of debt will painfully be restored and traced back to a fundamental natural rule. And that rule will not only mandate that “you can’t have a cake and eat it“. That rule will teach mankind even more, by saying: “You can’t eat a cake that has not even been baked yet!”.