Recently German media often discusses about the pension system. People from different parties debated heavily. Many people want so-called retirement-pension-guarantee. In my opinion, the retirement pension system in Germany, which was designed in 1950′s, is totally out of the reality of the current highly dynamic, highly competitive, and globalized economic. In Germany, young people pay monthly for old people, the money from the young people would be paid to the retired immediately. This is an extremely inefficient way of using young people’s hard-earned money. It is time to make a major update of the pension system in Germany.
First let’s do some math. Let’s say Joe, a typical career beginner in my job branch pays around 300 euros per month as the pension tax. What if Joe can have the freedom of investing this 300 euro somewhere instead of immediately paying it to someone else? A 9% percent annual return (inflation adjusted, monthly compounded) in the equity market is very realistic and doable, if Joe takes the trouble to do his homework of equity market research. What will he get after 40 years of monthly investment of 300 euros into the equity market? The future value FV at t=40 of this annuity (amount = 300 euro) is 300 * { [ (1 + 0.0075)^480 - 1 ] / 0.0075 } = 1685275.30 euro. Please refer to any financial literature for the Future Value/Annuity calculating formula. To make the matter simpler, at t=40, Joe withdraws all the money and use it for the next 30 years, without reinvesting the sum. He can get 1685275.30/ (12*30) = 4681.32 euro per month. With this 4600+ euro available monthly, whether the government is still able to pay at all or not, should not concern him. My conclusion: Everybody should take care of his own retirement pension, be responsible for herself/himself. And the government should grant the financial freedom of organizing one’s own pension fund to individuals, stop taking away the 300 euros from one’s gross income. Currently, a German retired man is counting on other people to pay for his retirement pension. Such social system cannot stand demographic change (there are more and more old people and less and less new born in Germany) and seriously harms individuals’ financial freedom, both to working individuals (they lose the opportunity of investing 300 euro per month for themselves) and the retired individuals (max. 2000 euro per month is too little, IMHO).
This blog entry is not about how to achieve the 9% percent annual return in the capital market. Admitted, it requires a lot of knowledge, dilligence and discipline from an individual. However it is doable. If a person does not want to take all the mundane work of planting his own money, there are so many financial products out there, from extremely risk-averse (T-bill for example) to extremely risk-loving, he could buy some according to his own financial circumstance.
Some parties such as “die Linke” (“the left” in English) advocate a minimum wage in Germany. The minimum wage does more harm to the economic than it seemingly brings. There is already enough socialism currently in Germany, I feel there should not be more. The right thing for a low-paid person to do is to improve his own skills and abilities and find a way out himself, but not to willingly settle down for the current job and hope for the social system to take care of his “money-not-enough” problem. Days ago I listened to a evening talk show program in ZDF ( or ARD? I forget.) A young girl, a hair dresser, was complaining about her 5-euro per hour (or 8-euro per hour? I forget.) wage in the program. I looked at her, she is so young, just around 20. Yes, 5 or 8 euro per hour is a very low wage, one can hardly live on it in Germany. I feel sorry to hear so. My very sincere and sympathetic tip to this young girl: It is much more effective to exert every effort changing yourself than to exert every effort changing the system. You are not likely to change the low-paid reality in your hair dresser career in 3-5 years, but you are extremely likely to prepare yourself for a better-paid job in 3-5 years. You are so young, you are beautiful and you passed the “Abitur” exam, everything is possible. Why you think you have to do the hair dressing all your life? Don’t settle down with your current job if the wage disgust you. Your time for complaining or advocating for a minimum wage is better invested on building yourself further. Say you work for 8 hours per day, there are at least 4 to 5 hours per day you can use to build up yourself. And don’t say “I love hair dressing so much so I want to be a hair dresser!” for now. If you love it, keep it as a hobby but do not take it as a job for now. Address the most basic problem of your life, namely the financial problem, first. Fun etc. can be pursued much more easily after you are financially stable.
Politicians from “the left” always like to talk about the “social fairness”. They think millionaires in Germany should be charged more tax, so the poor people can get more money.
Ideas about fairness can be divided into two groups: fair results and fair rules. Fair-results ideas require income transfers from the rich to poor. Fair-rules require property rights and voluntary exchange. — from CFA curriculum level I volumn 2
What the left advocates is a fair result, it could be a very dangerous thing. Germany will be doomed if all the rich people run away. If you think the millionaires have too much more money than you, try your best to become a millionaire yourself, but do not always think about “How can we share his wealthy?”. IMHO, there is much too much jealousy in the “more tax for millionaires” advocate. Maybe the millionaire just had some luck but maybe he spent so much time and effort running a private business or researching the capital market while you were drinking beers with your friends in a bar. There must be a reason why he became a millionaire. Learn from him. Jealousy only makes yourself crazy. I am no millionaire yet, actually far from. But I’m trying very hard to become one. What Germany needs more is the fair rule, IMHO. What ordinary people in Germany really need is more property rights ( much less tax, oh please! ).
