Generational theft – Greta 2.0

European countries that have pay-as-you-go pension and care systems are beginning to show signs of generational theft that would be dramatically accelerated by belief in a post-growth ideology.

If the youth of today have to fund the pensions of the massive baby boomer generation (1955 to 1969) in 15 years, their after-tax earnings will have to decrease more and more. This is even more serious because in addition to the housing shortage and crumbling housing stock caused by a failed housing construction policy, the youth of today are also suffering from high taxes and an ongoing zero interest-rate policy that makes it difficult to accumulate wealth.

To make providing for old age even more difficult, a number of European finance ministers are planning to follow the bad example set by France and levy a tax on equities. The tax was intended to be a “financial transaction tax” and still bears this name today. It was originally aimed at reducing derivatives trading and speculation in order to make the financial markets more stable. Due to pressure by French banks, however, derivatives, bonds and high-frequency trading were exempted.

The tax now being planned will only affect upright equity investors and all of the investments used to provide for old age (insurance, investment funds, pensions). This will reward gamblers, while penalising long-term investments used to provide for old age. It is impossible to imagine a more absurd (re-)design of a tax. The youth of today will once again be affected the most. Resistance should, however, not be expected. On the contrary, the few young people who know about it likely believe the tax affects the unpopular banks, not them, and is therefore “good” – an impression that the German Federal Ministry of Finance (Bundesministerium der Finanzen [BMF]) is also doing its best to promote. We therefore sent a strong letter of protest against this investor and generational theft directly to the BMF.

The BMF unfortunately responded as expected to our first letter of 12 August. It was essentially not a response, but instead a statement that failed to address the subject, emphasising the original noble intentions of the tax and stressing that France had already introduced it without any major negative effects. We followed this with a second letter. We are still waiting for an answer.

It is the duty of the older generation to prevent redistribution that has a negative effect on the youth. Both the baby boomer generation and the youth of today have the right to a proper pension. Although generous pension packages for the older generation may appear socially appropriate, demographic change makes them a huge burden for today’s youth.
Affordable housing is desirable, but instead of creating new housing, old housing that was previously sold cheaply is being bought back at high prices – at least this has been happening in the German capital.

The youth have little power over elections and they are fully occupied with the dangers of climate change. That makes them easy prey for politicians who don’t need their votes, but can spend their money. Those in favour of redistribution therefore cannot be faulted if this generational theft is obscured by the omnipresent climate issue. A better understanding of economic interrelationships could help to change this.

A Greta 2.0 is needed, who is able to not only show the young generation how election tactics and client politics are threatening their future, but also be able to reach voting adults. This was shown by the yellow-vest protests in France, which made more of an impression on Emmanuel Macron than Greta Thunberg’s accusations. Due to the protests, the government deferred its plans for a balanced budget, knowing full well that the younger generation would pay the bill.

Greta Thunberg can be happy she will benefit from the Swedish old-age pension model in the future, which has set up funded pensions for Swedes. Young Norwegians also don't have to worry about poverty in their old age. Norway's sovereign wealth fund has almost EUR 1,000 billion in assets, with around 70 per cent invested in equities. That is mathematically equivalent to a capital buffer of EUR 185,000 for each Norwegian, something that the citizens of most other European countries can only dream of. This shows that the economic and social effects of climate change differ from country to country. This makes it very difficult to imagine a global movement led by a heroine or hero at the top.

The interest-rate environment has also changed. The European Central Bank’s (ECB) decision to reduce the deposit rate from minus 0.4 to minus 0.5 per cent has destroyed all hopes for an interest-rate turnaround (towards higher rates). Although some of the burden on the banks has been relieved, since they no longer have to pay penalty interest on part of their deposits, they likely feel under increasing pressure to pass on the negative interest that has now been introduced with no time limit to their clients.

That, in turn, is difficult to reconcile with the situation faced by savers, who already see themselves as suffering greatly. Since there is hardly any other industrialised country in the world where so few people have real estate or equity holdings as Germany, most Germans also take no pleasure from the low level of interest rates. The German tabloid newspaper Bild Zeitung, adept at identifying society sentiment, recently showed an illustration of ECB President Mario Draghi as a vampire who sucks savings accounts dry. This gave a face to the change in the interest-rate environment, although the face of a scapegoat, not that of a hero. A number of politicians saw this as an opportunity to take the vacant position of the hero and demand a ban on negative interest rates for bank deposits. This is ironic to a certain extent, since the government is the biggest beneficiary of negative interest rates and, as we will soon see, has absolutely no compunctions about filling its own pockets. The low level of interest rates creates sufficient maneuvering room to relieve the burden on citizens and invest in education, infrastructure and more efficient climate protection, thereby improving generational fairness. Funding, however, is actually mainly
going towards generous pension commitments that place an unbearable burden on the under-40 generation due to demographic change.

In 2008, the Federal Republic of Germany (not including the German states and municipalities) paid a good EUR 40 billion in interest, representing around 14 per cent of the federal budget at the time. This year, interest expenses are expected to be around EUR 11 billion, or just around three per cent of the budget (see Figure 2). Although the German
national debt has increased from EUR 941 billion to EUR 1,085 billion since 2008, federal interest expenses have decreased by 73 per cent or EUR 29 billion. Considering the abundance of tax revenues in previous years, one has to ask where all the money went. It is hard to imagine the condition of government finances in the eurozone if interest rates
were not so low – and, in particular, what would happen if interest rates rose to their previous level again.

Dr. Bert Flossbach
Dr. Bert Flossbach

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