It's a “paradigm shift,” as German Finance Minister Christian Lindner put it, but also a great paradox: the country that invented the pay-as-you-go pension system has decided to introduce a capitalization pillar so that the market can help pay for public pensions.

 

The German government presented a bill to create a capitalization fund that will invest billions of euros in company stocks to bolster the current pension system, whose foundations were laid in the 19th century by Chancellor Otto von Bismarck.

 

The German capitalization fund draws inspiration from the pension funds conceived by José Piñera in Chile. Over 40 years, the returns achieved by Chilean pension funds in capital markets have accounted for two-thirds of total savings, while the contributions from contributors make up only the remaining third.

 

Germany must allocate nearly a quarter of its federal budget to subsidize its pension system, with $115 billion every year. And it anticipates severe fiscal strains because the baby boom generation born after World War II has already begun to retire.

 

The capitalization fund will start with assets of $13 billion. The money will be managed by an independent foundation created for that purpose. And the state contribution will grow by 3% every year. The official plan estimates that by the mid-2030s, the fund will have assets of $215 billion and that capital returns should contribute about $10.5 billion annually to cover public pensions starting in 2036. Germany thus joins several countries that are turning to capitalization.