Almost everyone now knows that the first German attempt to reform its pay-as-you-go pension system by a funded arm, the famous Riester pension, was a total flop. Nevertheless, even before the government was formed, some parties were again discussing the possibility of strengthening the funded part. In the coalition negotiations, the FDP will insist that there must be a second funded pillar of pension insurance because of demographics – and as it looks, no one will make a sticking point out of it. The SPD is open to the idea, and the Greens have already ventilated it themselves with the idea of a sovereign wealth fund.

This time, the state is supposed to step in with a newly created fund because, after all, it has been acknowledged that with the Riester model, only the insurance companies ultimately profited. Nevertheless, the return to this old idea is more than astonishing when one considers how conditions on the world’s capital markets have changed since then.

At the beginning of the century, it was argued that the return on saved capital was higher with a system funded over the capital market than the implicit return with the pay-as-you-go system. With positive real interest rates, one could even expect to finance the pension without having to consume the capital itself at the time of drawing the pension.

After ten years of a global zero interest rate regime, however, one would have to be suspicious. At present, there is little to suggest that interest rates will return to the levels that were common twenty years ago within a foreseeable period of time. As a liberal politician or neoclassical economist, you have to ask yourself why the interest rate level is so low and what this means for the hopes that you associate with a pension based on additional accumulation of savings.

The fact that there is still great confusion about pensions is probably due to the fact that Germany has had large current account surpluses since the beginning of the century. As a result, the simple and absolutely correct proposition that the national economy cannot save has remained alien to the Germans. The current account surpluses, which are now taken for granted in Germany across party lines of potential coalition partners, give the impression that the economy can save after all, because current account surpluses mean that a country spends less than it earns – and that is what is usually called saving.

To avoid this fallacy, one must do what Germans collectively still find most difficult: take a European perspective instead of a national one. Anyone who does not do this is systematically missing the point. In a monetary union, it is imperative to look at the overall economic situation and the economic policy of the entire Union. A purely national perspective is completely misleading because, while monetary policy acts in the same way for all of them together, at the same time one country can do in the other policy areas, especially wage policy, what all the countries in the monetary union together cannot do.

Why are interest rates gone?

Especially for economists, who are explicitly mandated by the state to reveal macroeconomic relationships, the significance of the interest rate level should be perfectly clear. However, Veronika Grimm, a member of the Council of Economic Experts, says, “The expansion of a funded pension system, which the FDP and the Greens have long been calling for, could mobilize additional capital for investment and at the same time give people a share in economic success.” In the current situation on the world’s capital markets, how can anyone support the idea that there is a lack of capital and that additional capital needs to be mobilized in order to invest? If you want to expand the capital coverage of our pensions, you have to trigger a mass movement – presumably with high government financial incentives – that is suitable to increase the savings rate of private households compared to the previous level.

As a neoclassical economist, Grimm must advocate this because she expects additional saving to increase the supply of capital on the capital market, consequently lowering interest rates and triggering more private investment in this way. If this were so, it would open up the possibility for the economy as a whole to move onto a higher growth path that would increase labor incomes as well as pensions and corporate profits in absolute terms.

Even as a neoclassical economist, however, one must take note of the fact that the interest rate level on the capital market in all developed economies is already zero or, as in Germany, even lower. And how does Grimm justify her proposal to today’s savers, who already complain vehemently that they no longer receive any interest on their savings and often have to accept a negative interest rate in real terms if they do not spend their money but forego consumption in order (as the neoclassical economists interpret it) to make the funds available to the national economy for investment?

For neoclassical economists in particular, for whom the interest rate on the capital market is a pure market outcome, the low level of interest rates can only mean that the transmission mechanism from saving to investment has been interrupted. Additional saving triggered by the state will presumably only lead to previous savers reducing their saving efforts because they are suffering (even greater) losses on their investments, or simply shifting their savings investments in order to take advantage of the state subsidy. Consequently, there is much to suggest that the savings amount cannot be increased at all because there is no interest rate that could fall even further without putting existing savers (even more) on the losing side.

Obviously, there is a supply surplus in the capital markets all over the world, which makes the idea of capital coverage obsolete from the outset. However, since the effect of the supply surplus on the interest rate has not been sufficient to create enough demand for capital so that dynamic development of economies would have occurred even without government support, there is obviously no lack of capital supply. In that case, however, any government support for saving for retirement is money down the drain.

Whereas at the beginning of the century it was still hoped that the massive government subsidy for the Riester pension would lead to an increase in the savings rate and to rising investment (neither of which has occurred, however), the basic prerequisite for this idea is now already no longer given, namely the conversion of increased saving into increased investment via interest rate cuts.

The salvation: the central banks are to blame

But instead of admitting that interest rates close to zero make any argument in favor of additional saving absurd, many neoclassics, and especially those close to the Hayekian variant of neoliberalism, have concocted a new and absurd theory. They take up a perfectly correct argument, but use it in a way that is completely inappropriate. They state that the interest rate is not determined by the market at all, but is largely set by the central banks. This then gives rise to the thesis that it was not the smart market that pushed the interest rate to zero, but, as always in neoliberalism, it was the stupid state – here in the form of its central bank. Just because the ECB (and the other major central banks of the world) had forcibly set interest rates to zero and kept them there, saving would no longer bring anything and the whole market economy would be turned upside down.

There we have a fine example of a perfectly correct argument, but one that is absolutely counterproductive in a certain context. The hatred of central banks and, in particular, of the ECB that can be found in ultra-liberal and right-wing circles is fed precisely by this argument. People suspect that an explanation via the markets will not work and gleefully reach for the way out, which is actually offered by many heterodox economists with their statements about the interest rate and central banks.

The more and the more sharply the ECB is attacked from the corner of liberalism and declared the sole scapegoat, the less it is noticed that in one’s own world of imagination there is no way to plausibly justify capital cover. In such an environment, even capital cover can be successful again: All one has to do is disempower the central bank and the situation is right again, because the market has never failed, only the state.

If one were to concede that, as a rule, central banks pursue policies that lead exactly to the neoclassical outcome, the matter would not be so simple for the neoclassicist. After all, central banks do not pursue zero interest rate policies simply out of the blue, but because they observe that there is “too much capital” and too little real investment momentum.

Central banks are not to blame

Even a central bank like the ECB, whose main goal is a certain inflation rate, observes the entire economic development for precisely this reason, because the inflation rate does not fall from the sky, but depends on the overall economic dynamics via unemployment and wage development. If a constellation occurs which can be described as excessive saving by private economic entities, including companies, the central bank must lower interest rates as much as possible. What else should it do? There is no serious theory that would recommend it not to lower interest rates in a situation of excessive saving. If the ECB then finds that the rate cut has not helped because businesses are still not investing enough, it cannot raise rates back to the previous level. That would further strengthen the corporate reluctance to invest.

The central bank can easily recognize the instability of the situation from the fact that the state must repeatedly intervene throughout the currency area (Germany, with its current account surplus, is the exception that proves the rule) to stabilize the real economy. Furthermore, it observes high unemployment and low private investment dynamics. This is exactly the constellation that neoclassical theory would also have to assume if it had to explain an interest rate on the threshold of zero without the intervention of the central bank. Even from a neoclassical point of view, there are obviously constellations in which saving is generally detrimental.

Precisely for this reason (which, by the way, is what a convincingly arguing central bank would have to do, too, instead of making a fictitious fallen real interest rate the basis of its considerations, as the ECB does), in order to be able to argue against the neoclassical view of the perfect market, one has to resort to the consideration of fiscal balances. No one can plausibly argue that an economy in which, despite extremely low interest rates, the potential investors and debtors, namely firms, have themselves become savers, additional saving will lead to profitable investment. The opposite is true: Additional saving will either force the state to incur even greater debt or, if the state does not react quickly enough, it will lead directly to a recession in which everyone loses.

There is still no doubt that the proposition holds true: the national economy cannot save, even if in Germany, which has a permanent current account surplus, people believe they can escape the logic of this proposition. Consequently, to argue convincingly, one must insist that the European interest rate is proof that the national economy cannot save, and one must defend the ECB against the absurd attacks to which it is penetratingly subjected from Germany (including explicitly those coming from the German Constitutional Court). For academics, but also for politicians in coalition negotiations, it is true that if you do not understand EMU, you cannot understand anything else.

What is to be done?

So in the end it is quite simple: Additional money saved today does not promote today’s business of all entrepreneurs of this world, but spoils it. One euro that we do not spend today on goods and services that companies produce directly reduces the turnover of all companies by exactly one euro. Because the interest rate does not fall, only the turnover and thus the profit of all companies has fallen. The incentive to invest has clearly decreased. The whole debate about demography and saving proves to be a chimera.

Every pension is funded. It is covered by the real capital that yields returns at precisely the time when the pension is to be paid from the apportionment or the interest on an investment. There is no other capital cover. If we have many more pensioners than active people in 30 years’ time compared with today, and pensioners are to enjoy the same level of coverage as today, then we will have to pay for it one way or another. Higher contribution rates, which German politicians have declared a taboo without any sense or reason, are not the devil’s work but the normal way of dealing with this structural change.

However, it may be possible to put the higher burdens on younger people into perspective by the fact that a great deal is being invested in physical capital today and that, as a result, we will be so rich in 30 years’ time that companies and employees will be able to cope well with a higher pension contribution. If the younger people still don’t want to pay it, they have to work it out with the future pensioners and explain to them that they will have to get by with even less pension compared to their income than today’s pensioners, i.e. they will be relatively poor despite greater prosperity. This is a distribution issue and – like all distribution issues – difficult to solve. However, telling people today that they can get around this distribution issue by keeping their pennies together is charlatanry.

Consequently, there is a real problem called shifting age structure for 20-30 years in the middle of the 21st century. One can solve the real problem by real measures. Population policy with more births at home is the most obvious one. But a real solution is also immigration of more young people from countries that may have reversed population ratios. Extending working lives is also conceivable, but this has many natural and social limits.

All of these real measures, however, necessarily presuppose that Germany and Europe are in a position to eliminate unemployment completely, because otherwise none of these measures can take effect. That, in turn, presupposes a new economic policy based on wage and demand dynamics instead of redistribution in favor of corporations. There is no financing trick that could solve the real problem. If you introduce more capital coverage and people actually start saving more, you jeopardize both the acceptance of the distribution solutions and the chance of achieving full employment.