Venturing into the realm of stock market: Pondering Sweden's pensions as a guide for Germany
- Written by Nadine Oberhuber
- Approx 4 Min Read
Exploring the Possibility of Adopting Sweden's Pension Model in Germany? - Lessons Germany Might Glean from Sweden's Pension Strategy
For years, Germany has been wrestling with enhancing retirement savings and expanding the populace's involvement in the stock market. However, little progress has surfaced, and lately, two promising proposals - the introduction of retirement savings account and generation capital - have faltered with the demise of the traffic light coalition. Instead, the SPD has proposed raising the capital gains tax on stocks from 25 to 30 percent in coalition negotiations.
Such a move would significantly impact millions of citizens saving independently for retirement via mutual funds, ETFs, and individual stocks. Conversely, economists, pension experts, and politicans have called for citizens to take more responsibility for their retirement, relying less on the state, particularly during old age.
Sweden exemplifies the effectiveness of stock savings across a broader demographic. As Matthias Voelkel of the Stuttgart Stock Exchange affirmed at an event of the German Stock Institute (DAI), Swedish citizens boast higher involvement in the stock market across all three pillars of retirement savings: statutory pension insurance, occupational pension schemes, and private savings. "Germany lags behind in all three pillars," Voelkel contended, "which makes the overall situation critical." Swedish savers, on average, boast a financial wealth of €172,900 per capita, compared to Germany's half.
The Capital Market: A Vital Core for Competitiveness
More small and medium-sized enterprises (SMEs) are listed on the stock exchange in Sweden, according to a joint assessment by DAI and the Stuttgart Stock Exchange. Approximately a third of Swedish SMEs sport a market capitalization of less than €5 million. Shares of these businesses are categorized into low nominal values, making them accessible. By obtaining debt capital for new business ideas and future growth from institutional investors and private savers, companies can foster their competitiveness. "Capital market isn't a luxury, but an essential component for a nation's competitiveness," says Peucker.
Investors contribute palpably to the profits and economic success of companies through shares. "One out of every five Swedes own shares in Swedish companies, hence bolstering their own economy," Voelkel asserts. In Germany, institutional investors primarily hold the shares of leading Dax companies.
Sweden's Stock Pension: A Worldwide Example
Sweden accredits the capital market even for the first pillar, statutory pension insurance, also known as the premium pension system. Numerous experts consider Sweden's model a gold standard worldwide: 2.5 percent of the gross salary of every employee flows into capital investment products, with approximately 450 equity, bond, and mixed funds to choose from. The renowned Standard Fund AP7 Safa is particularly popular, having yielded an average annual return of 6.4 percent above inflation, as Voelkel points out.
Moreover, there's a roughly 40 percent equity share in the second pillar - i.e., occupational pension schemes. Many German company pensions, on the other hand, lean heavily on insurance-based solutions with minimal returns.
Sweden's Investor Savings Account entices people to save money tax-free and set up quickly, with minimal bureaucratic obstacles. "In Germany, steep entry barriers abound as well," Voelkel believes. In Sweden, over 3.8 million individuals have already saved €134 billion in stocks and funds through this account. The equivalent was supposed to be the Retirement Provision Account in Germany, but it wasn't implemented following the end of the SPD, Green, and FDP government.
The German Association of Investors (DAI) expects the next federal government to revisit this issue: "We require more stocks in all pillars of retirement provision," Peucker emphasizes. "Sweden teaches us that all we need to do is craft an environment conducive to a high proportion of shareholders." DAI CEO Voelkel is critical of the German debate: "It's all about state money, but we also need an 'Agenda Capital Market' here to support the investments in the economy and infrastructure this country necessitates."
From a private investor's perspective, it would be advantageous to increase stock ownership across all three pillars of retirement provision. "Stock investments prove profitable, serving everyone. But we still shy away from doing it in Germany," says Voelkel. Discussing a higher capital gains tax of 30%, however, might hinder progress: "Such demands would propel us to continue moving in the wrong direction," in Voelkel's view. "Sweden demonstrates that tax attractiveness is a key driver for private investor savings." Sweden's returns are taxed at a flat rate of just 1%, pushing millions of private savers to accrue savings there, with each individual investing around €35,000. In Germany, however, investors would have to surrender nearly a third of their returns to the government under the SPD's proposals.
In France, over 10 million individuals have been created shareholders in just a few years by implementing a simple retirement provision system based on stocks with tax-free trading. "It works there too," Voelkel adds. "We just don't do it in Germany."
- The proposed increase in the capital gains tax on stocks from 25 to 30 percent could be counterproductive, as it may hinders progress in encouraging more citizens to invest in stocks for their retirement, like the case in Sweden where a flat tax rate of 1% on returns attracts private savers.
- Vocational training programs could enable Germans to understand the stock market better, thus facilitating their involvement in it, similar to the broad demographic of Swedish citizens who are actively invested in stocks across their three retirement savings pillars.
- A mixed approach of policies that support investments in the economy and infrastructure, along with measures that encourage the populace to take responsibility for their retirement savings through vocational training and investment in stocks, could effectively foster a more competitive economy, akin to the success seen in Sweden.
