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Monday, July 23, 2012

Eurozone crisis meets German pensions

It was just a matter of time: The front page of today's Bild warns about the effect the crisis will have on millions of Germans’ pensions.

Under the headline “Euro crisis shrinks pensions”, Bild reports that the occupational pensions of 17 million Germans are threatened by a combination of the low interest rates on the government bonds of the remaining creditworthy nations – which pension funds heavily invest in – and by the low rate of interest (0.75%) set by the ECB in an attempt to stimulate the economy, which it is feared will lead to inflation in the longer term.

In turn, the paper claims, this will erode the value of pension payments, citing calculations by Professor Stefan Homburg from the University of Hannover which show that given an inflation rate of 5%, a €1,000 pension payment would only be worth €614 in ten years’ time (although at OE we think that, given current policies, such an inflation rate is someway off).

Although there is clearly an element of scaremongering here, this is the kind of stuff that brings the crisis to life for people, and angry retirees are not a constituency that any government is advised to take lightly. It also highlights the ever-present tensions between different interest rate needs of the 17 euro economies. Sooner or later, there will be significant pressure from within Germany on the ECB to raise rates, possibly leading to a political tug of war between member states' representatives - this seems inevitable at some point if Germany continues to outgrow other parts of the eurozone so significantly. It also shows that perversely, the record low interest rates on German sovereign debt are not wholly a positive factor for German citizens.

At the end of the day, the outcome of this crisis may be decided in large parts by its impact – be it tangible or perceived – felt by German citizens in their everyday lives.


Rik said...

There is also a problem with the calculation interest. Premiums are now still often based on 4% annual.
Which is much higher than the present market interest in the North. If they cannot get that yield which will be very difficult. Before the (negative) yield difference was often compensated by increases in value of bonds already held.
This way you never get to the amount needed at the pension date. Which would mean either a higher premium or a lower pension.

The problem mainly being that the real interest is negative at the moment. If that continues you need to pay in more than you get out in real terms.
This is the issue presently playing in Holland. Nobody made the Euro-link yet in the way Bild did.
One gets the impression that they are not really Euro-philes. Just focuss on inflation makes the story understandable for the average person. They are really good at that.

Rollo said...

Our altervorsorge will have the same problem unless our treason oriented government stops propping up failed states, just to give a future career to the useless twerps in charge.

Bugsy said...

At last, I've been banging on about the erosion of pensions through this and QE for yonks.

Rollo is right, they are all looking for an exit into some comfortable Euro position soonest.

Rik said...

First comment was probably a bit incomprehensible. My excuses for that.

It de facto reduces pensions in several ways.
After the pensionage. Assuming that remains the same.
1. You need more in nominal terms as it doesnot bring in that much interest (while receiving pension).
2. You need more (in real terms) as there has been inflation eroding it (more than expected).

Which means you need a higher pensioncapital.
3. Which means that your premium has to rise.
4. As at the same time interest is lower than expected the premium also needs to rise as well because of this.

Each of these 4 items stands for 10s% of a pension. Together it could be half or so of somebody's pension. If inflation runs out of hand even (considerably) more.