Outdated officials and a lack of reserves
“What advantages does double-entry bookkeeping afford the merchant! It is one of the finest inventions of the human mind and every good steward should introduce it into his economy.” Goethe, 1795, Wilhelm Meister’s apprenticeship, 1st book, 10th chapter.
What Goethe already knew is only slowly reaching those responsible in the local authorities. The cameralistics, which are sometimes mocked as “carnivalistics”, are sometimes extended to become state doubles, which in principle follows the private sector doubles, but is intended to take into account the characteristics of state administration. Although balance sheets are sometimes prepared, cash-effective, actuarially correct provisions for their own civil servants are not formed at state level.
The burden of utility spending
The state budgets are faced with enormous challenges due to the demographic aging of their civil servants. Due to the doubling of the number of civil servants in the 1970s and 1980s, the financial scope of the federal states is limited today. The high supply expenses mean that there is a lack of financial resources elsewhere. Whether the discussions revolve around the financing of cheaper local public transport, investments in education and research or public safety: significantly more funds would be available today if appropriate reserves for civil servant pensions had been formed in good time.
The attempt of pension funds
So-called pension funds have been set up at state level, but neither their scope nor their institutional structure are convincing. Figure 1 shows that the volume of the pension funds of the federal states – with the exception of Saxony – would only suffice for one to two years if the pension expenses of the respective pensioners were to be financed solely by them.
With regard to the institutional design, the countries have taken different paths. The negative example of Rhineland-Palatinate and Saxony as a model are presented below.
Rhineland-Palatinate as a negative example
As early as 1996, the state of Rhineland-Palatinate set up a fund to finance pension expenditure. The allocations and the resulting income from the capital investment of the pension fund should be earmarked for full capital cover for future pension benefits and should be financed exclusively through savings in the state budget. However, things turned out differently. By investing exclusively in state-owned government bonds, the additions were booked as loans from the state budget from 2006, which made credit financing possible. In the course of the introduction of the debt brake in 2010, the state constitution stipulated that the financing balance of the core budget must not be negative due to the ban on new borrowing. In order to move from the core budget to the structural budget, the balance of the core budget was corrected by the balance of the pension fund. Put simply, if the pension fund had a positive balance, the country could borrow in the amount of this surplus.
Saxony as a role model?
In this way, the state government reported payments as investments and was thus able to avoid the debt brake and at the same time report a high investment rate. As a result of this system, payments to the pension fund could be taken out in the same amount as a loan, so that all payments by the pension fund to the core budget led to corresponding repayment obligations. This was criticized in 2014 by the Constitutional Court of Rhineland-Palatinate. To correct this situation, the state law for the pension fund was amended in 2014 by abolishing the objective of actuarially correct capital cover. Instead, at least EUR 70 million should be loaned to the pension fund every year. However, the Constitutional Court of Rhineland-Palatinate decided in 2017 that the additions to the pension fund in the form of loans and their financing were not compatible with the financial constitution and called on the state legislature to dissolve or adjust the pension fund. The state of Rhineland-Palatinate then decided to dissolve the pension fund.
The previous handling of pension funds has shown that funds are not always withdrawn exclusively to finance civil servants’ pensions. This fact may seem surprising at first glance, since the legislature, which set up the pension fund in the form of a special fund, built in a earmarking clause intended to ensure that withdrawals are only permitted if they contribute to financing pension expenses. The reason for the possibility of circumvention lies in the design of the earmarking clause. This can be circumvented by the state parliaments by reversing the establishment of the pension fund, which means that the funds flow back into the budget. Only if the earmarking clause were integrated into the country’s financial constitution would it be made more difficult for Parliament to dissolve it. Saxony embarked on this path in 2013: According to Art. 95 Para. 7 of the Saxon Constitution, the pension obligations for civil servants should already be met during their active phase. As a result, Saxony has created the most legally tenable and thus also the most credible rule binding. The Saxon state government is therefore also exemplary from a political and economic perspective. The extent of the Saxon pension fund, which has by far the highest reserves per active civil servant, shows that this binding rule works. The Saxon generation fund
The temptation to raid the savings account
The incentive problem of the current institutional structure of the pension funds consists in the observed declines in payments before state elections or when budgetary situations are tight. Kulawik et al. (2017) were able to show that allocations to pension funds decrease by up to 18 percent during tight budgetary situations and before state elections. Such abuse is possible because the civil servants have no individual claim against the special fund, as is the case, for example, with the statutory pension insurance. Without personalized – in the best case constitutionally protected – pension accounts, discretionary leeway for the state governments in making payments to pension funds can be used to relieve budgets in the short term – at the expense of future taxpayers. However, it is not just the ongoing transfers to the pension fund that are actually planned that can be used for other purposes. As the example of Rhineland-Palatinate shows, if there is insufficient institutional protection, the pension funds can also be dissolved completely and theoretically spent in one budget period. The resulting incentives should not be underestimated, especially since binding rules would be difficult to implement, since budget preparation is the highest right of every parliament.
Conclusion
Overall, a look at the current supply reserves of the federal states is sobering. The mistakes in structuring pension funds should also be avoided for future reserves. In the discussion about stock pensions, one major point of criticism is often overlooked: the lack of individual allocation of assets. In contrast to Sweden and the USA, there should be no individual account management. Anyone who now thinks that the state should have more trust after all can continue the discussion about suspending payments to the nursing care fund read. Partly becomes one complete resolution required for today’s cash injections, although the costs will only be incurred in the next 30 years increase massively become.
Notice: For a more detailed discussion of the countries’ supply funds, see the series Arguments about the market economy and politics the Market Economy Foundation.
Literature:
Kulawik, J., Rösel, F. and M. Thum (2017), Save time, so you have… money in the election year? An overview of the state pension funds for civil servants, ifo Dresden reports, 24(4): 3-9.
Foundation Market Economy Berlin