The Riester reform as a gift to the financial industry – How an alleged century pension became a goldmine for banks and insurance companies

The history of retirement provision in the Federal Republic of Germany is rich with political promises, profound upheavals and silent redistributions in favour of powerful economic actors. Hardly any reform project has had such far-reaching consequences for the financial future of the working population as the fundamental restructuring of the pension system at the beginning of thetwenty-first century. What was sold to the public as an indispensable salvation from demographic collapse turned out to be, on closer inspection, a gigantic subsidy program for the financial sector that creepingly eroded the foundations of solidarity pension provision. The following explanations trace how this development came about, who of themand who the actual losers of this political decision were. It is a story of broken promises, targeted fear-mongering, and the systematic diversion of public funds into private pockets.

The staging of a major reform movement

In the first year of the new millennium, the then red-green federal government came before the public and announced a reform that would go down in history as a work of centuries. Federal Chancellor Gerhard Schröder and the responsible Federal Minister for Labour and Social Affairs, Walter Riester, presented themselves to the press in a good mood and were literally beaming.solemn words, there was talk of a major reform work that would secure the pension provision of the population for the coming decades. The citizens were promised that the pension would also remain affordable for the young generation and that future pensioners would even receive more money than under the previous legal situation. The crucial sentence that proves the true character of thisReform, however, was not pronounced on that day.

The secret core of the reform

This unspoken sentence would have said that the newly created Riester pension is primarily a generous subsidy for the financial industry and in no way pursues the noble goals announced in the press conferences. For many decades, the question has been discussed in the political debate as to whether the statutory pension is actually safe and whether the existingSystem can withstand the challenges of the future. The warnings of a terrible demographic development, in which more and more older people had to be financed by fewer and fewer young contributors, increasingly dominated public discourse. The assessment that pension contributions would increase immeasurably without countermeasures or that significantPension cuts were inevitable, prevailed in the public perception and created a climate of fear and insecurity. This mood formed the fertile ground on which the reform could flourish.

The True Intent Behind Contribution Stability

The government under Gerhard Schröder officially wanted to keep the contributions to the statutory pension insurance stable and thus provide citizens with planning security. In fact, however, the reform helped financial service providers achieve a strong growth spurt, which was intended to secure their business for decades to come. It was already clear at the time that this would happenthe adoption of the reform for attentive observers. A fundamental change in the construction of the intergenerational contract, i.e. the principle of solidarity between the generations, was never seriously under discussion. ideas regarding a genuine solidarity system in which each person with an income raises the necessary funds and in which a broaderTax base without the cap provided for by a contribution assessment limit, were not politically enforceable and were not seriously pursued in the first place.

The new adjustment formula and its consequences

A new adjustment formula stipulated that future pension increases would be permanently lower compared to the increases in employees’ net wages. This change de facto meant a creeping reduction in statutory pension entitlements, which was to add up to a significant loss over the years. To compensate for these de facto cutsbrought the financial world on board and opened up a completely new field of business of enormous scale. Banks and insurance companies were offered a promising business model based on funded private pensions for ordinary employees. From now on, private pension provision should no longer be regarded as an exclusive model for high earners, but as an additionalPension package across the entire population.

The lure of government grants

As a special lure for citizens, state subsidies were introduced to make the conclusion of a private pension contract attractive. Experience has shown that the German citizen reacts as if he were electrified when he receives something from the state, and it was precisely this psychological effect that the architects of the reform relied on. The combination of allegedly imminent old-age povertyand government funding formed an irresistible offer that millions of people could hardly escape. However, it was concealed that these subsidies were ultimately nothing more than a diversion of taxpayers’ money into the coffers of the financial groups. The citizen paid his contributions, the state added a supplement, and the financial industry earned from eachindividual contract.

The long investment horizon and the risks of the capital markets

With a funded supplementary pension, one must logically assume a very long investment horizon that extends over several decades. Those who opt for such a product will usually have to make regular contributions for two to three decades before the first withdrawals can be made. The financial sector primarily focuses on securities fundsbased products that are supposed to be high-yielding and promise the investor an attractive return. This raises undaunted hopes for functioning and rational capital markets, which supposedly generate eternal growth and give savers a secure return. One coughs before the supposedly terrible danger of a threatening development of the age structureof the population, however, hardly takes into account the unforeseeable risks on the capital markets.

The impressive numbers of the Riester contracts

According to the responsible Federal Ministry, there are now well over ten million Riester contracts that have been concluded by the citizens. This means that since the introduction of the Riester pension, a huge number of new customers have knocked on the door of banks and insurance companies and been covered with corresponding products. After a parliamentary question, it became publicly knownthat the financial industry has received a commission volume of about six billion euros from the million-fold conclusion of these contracts. This is offset by around eight billion euros in state subsidies, which are financed from the tax revenue of the general public. Almost three quarters of public funds thus flowed directly into the pockets of the financial groups and not intocitizens’ pensions.

The losers of the reform

The brave new world of private pension provision finally collapses when you include an additional factor that has gained considerable importance, especially in recent years. We are talking about the rapidly increasing number of low-income earners, low-paid employees, temporary agency workers and people who have to make a living in low-wage industries.People are hardly able to afford a private pension that could result in a sufficient pension in old age. The winners of the Riester reform, on the other hand, are the relatively well-off individual households and families in which even the non-earning spouse can collect state allowances through their own contract. In this way, you not only cement theoutdated image of the single-earner family, but at the same time causes increasing inequality in society.

The Pride of Reformers

Walter Riester himself only marginally touches on all this criticism, and he is still proud of his reform and what he believes he has done for retirement provision in Germany. Hans-Adalbert Rürup, who is generally known under the name Bert Rürup and under whose direction, as chairman of a commission specially named after him, anotherPension product has been launched. The so-called Rürup pension was designed as a funded basic pension for the self-employed and equipped with generous tax benefits. Due to the even more pronounced tax advantages, this model not only pays off for wealthy freelancers and merchants, but also for well-earning employees whoWant to reduce the tax burden. Numerous providers of corresponding products are also active in the area of the Rürup pension, which are similar in structure to the Riester contracts.

The modest number of Rürup contracts

The number of Rürup contracts concluded is modest at around one and a half million compared to the Riester pension and is far from reaching the same distribution. Despite this relatively small number, however, this model should also pay off for the financial sector, as one has to assume much higher investment amounts and thus correspondingly more lavish commission participations.The target group of the Rürup pension consists primarily of the self-employed and high-income earners, who are willing to pay significantly higher contributions than the average employee. The financial industry has thus created two parallel systems, both of which rely on public subsidies or tax advantages and both of which primarily benefit the corporations themselves.and Rürup have thus rendered services to the financial industry to a degree that can hardly be overestimated.

The personal connections of the reformers with the financial sector

If industry representatives feel the desire to express their sincere thanks for these merits, then the path to the two former architects of the reform is not far away. Walter Riester is a member of the supervisory board of a large fund provider and regularly appears as a speaker at various financial services companies that have directly benefited from his reform. Bert Rürupafter giving up his position as chief economist at a large financial service provider, he founded his own consulting company together with the former founder of this company. This company advises banks, insurance companies and also states in matters of old-age and health care and thus moves exactly in the field that has been significantly affected by the reforms of the two gentlemen.a few years ago, the founder of the financial service provider himself referred to the profit potential created by the introduction of private retirement provision for his peers with the extremely plastic concept of an oil well, from which it was only necessary to draw.