The basic problem lies in the system itself and has been known for a long time. Statutory pension insurance is based on the pay-as-you-go system: you live from hand to mouth. This system could work as long as there were many employed people compared to a few pensioners.

But this requirement no longer exists today. In the 1960s, there were more than six employed people for every pensioner. Today there are only about two and a half. In a few decades the ratio will fall to around two to one. This means that fewer and fewer contributors have to pay for more and more pensioners.

The consequences are already visible. The average statutory pension in 2023 was barely more than 1,100 euros per month – close to social assistance in old age. At the same time, hundreds of billions of euros flow from the federal budget into the pension system every year. Almost every fourth euro in the federal budget is used to finance pensions.

A possible solution would be a so-called opt-out regulation. The statutory pension insurance would remain in place. But young people have the option of opting out of the pay-as-you-go system partially or completely and making private, funded provisions.

This is not a radical idea. Such models have long existed in many countries. Sweden, for example, combines a pay-as-you-go pension with funded elements. Citizens invest part of their contributions in the capital market and thus build up wealth in the long term.

Opt Out. Building wealth for minimum wage earners

But why not be able to get out completely? A simple example shows how strong the effect can be. If a minimum wage earner could use an opt-out scheme today and invest the contributions themselves, enormous wealth would be created.

Assuming that the minimum wage earner initially earns 15 euros an hour, has an income of 2400 euros per month and the monthly contribution would be 446 euros (employer and employee contribution).

If all of this is taken into account and invested in a broadly diversified equity fund with an average return of 8.5 percent, then after 35 years there would be a possible capital stock of 750,000 euros, after 40 years one of one million euros and after 45 years one of almost 1.5 million euros.

If the latter were to retire with the average pension drawing period of 20.5 years, the monthly pension would be around 8,000 euros (at 40 years: around 5,600 euros, at 35 years: around 4,000 euros). Of course, income tax also has to be paid. But there should be the same tax exemption for contributions as with the statutory pension.

Opt-out regulations would be deeply social

Even if a disability pension were taken into account in the contribution payment phase, which is available in the statutory pension insurance, one would be light years ahead of a pension from the statutory pension insurance. A minimum wage earner would become a wealthy pensioner instead of being dependent on social welfare in old age.

An opt-out regulation would be deeply social. Because a minimum wage earner is faced with the following situation: 1. increasing contribution rates in the future, 2. he still only receives a pension at social welfare level, 3. the ever higher contribution rates mean that he cannot build up a reasonable pension provision because the state takes away everything.

Therefore, it is of no use to force minimum wage earners into a broken system, but only if they can free themselves from it. He has to finance the boomers through the tax system anyway. But through points 2 and 3 he would become a free person.

Pensions place a triple burden on young people

The example shows a central truth of retirement planning: time is the most important factor. The sooner people can build wealth, the stronger the compound interest effect will be. This is exactly what the current system prevents for many young people.

They are triple burdened. Firstly through rising social security contributions and taxes. Secondly, they only receive a pension at social welfare level and thirdly, the high burden means that they are unable to build up adequate retirement provision themselves.

Opting out would also strengthen the economy

This is a structural disadvantage for the young generation. An opt-out regulation would therefore offer several advantages.

First it would strengthen personal responsibility. People could decide for themselves whether they should remain exclusively in the state system or organize part of their pension provision with capital funding.

Second it would promote capital formation in Germany. A more developed capital market – with more shareholders and long-term investors – also strengthens a country’s economic performance.

Third it would distribute the burden more fairly between generations. The current system forces young people to finance an increasingly expensive pay-as-you-go system without being able to be sure that they will receive comparable benefits later.

It’s about more freedom

If we ignore this reality, the statutory pension will become more and more expensive while at the same time being able to provide less and less. However, if we take it seriously, an opportunity opens up: a retirement plan that places greater emphasis on ownership, capital formation and individual responsibility.

This is not about abolishing the statutory pension. It’s about more freedom for those who are at the beginning of their professional lives today – the debt generation who have to pay for everything.

Frank Schäffler was a member of the Bundestag and is managing director of the Berlin think tank Prometheus – The Freedom Institute. His new book “Generation Debts – The generation that has to pay for everything” has just been published by Langen Müller Verlag.