Concern about high inflation: the euro is falling – a guarantee on the old-age pension not adjusted for inflation

Poverty in old age
The Euro, the European Central Bank, and the Future of Prosperity

Guest contribution from Andreas Beck

There was always high inflation, even in the days of Mark D. This time, however, the inflation rate was not accompanied by higher interest rates on long-term government bonds. The reason is known. The consequences for citizens are extremely worrying.

Currently inflated 7 percent? Anyone who has now set up their own retirement benefit with a return of 0.25 percent per year and has mastered the calculation of compound interest must feel pretty weird. But who would be crazy enough to do that? Unfortunately, this applies to the vast majority of Germans, especially those with low incomes. All citizens who have relied on consumer protection and policy over the past few decades have invested their old-age benefits in guaranteed products such as capital life insurance, Riester pensions, or classic company pension plans.

Dr. As an independent financial mathematician, Andreas Beck evaluates the quality of asset management. He also chairs Index Capital, which develops science-based portfolio models for banks and investment firms.

One can object that the guaranteed interest rate is higher for older contracts, but in fact this interest rate refers only to the savings portion of the insurance policy. If you look at the actual yield, you are much lower. If we take the policies taken in 2019 as an example, a guaranteed 0.9 percent return on the savings portion after taking costs into account results in a 0.14 percent return on savers’ contributions (source: Assekurata rating agency accounts for 30 years insurers). This data relates to insurance, it is still harmless compared to the average cost burden of Riester pensions.

The reality of the life of future retirees

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Guaranteed interest rate for German life insurance companies on new contracts concluded from 1986 to 2022.

(Photo: Statista)

Warranty products were specifically recommended because of the warranty. Unfortunately, this is not adjusted for inflation, but is nominal and has nothing to do with the reality of the life of future retirees. With an annual inflation rate of 3 to 5 percent, the cost of living doubles every 15 to 20 years. The nominal guarantee then means that you lose at most half of your purchasing power, that is, your real assets. our end.

The European Central Bank, with its policy of low interest rates and expansion of the money supply, is largely responsible for this. For regulatory reasons, bread and butter investments for secured products are long-term, fail-safe government bonds. Due to the massive ECB buying programs, interest rates have been negative in recent years and to date the 10-year Fed yield is only about 0.5 percent.

Thus, the euro becomes a soft currency

EUR / USD
EUR / USD 1.06

While the US Federal Reserve announced early on that it would take action against inflation, the European Central Bank remained in a state of self-shock. Thus the euro becomes a soft currency. While the German Mark is getting stronger against the US Dollar in the longer term with its volatility, the Euro is currently collapsing in a way we are used to seeing with currencies like the Italian Lira. In the past 12 months, the exchange rate loss between the euro and the dollar has been around 12 percent.

It is remarkable how little this type of wealth tax is discussed for the general public in public. The wealthy are not affected by any of this, they own tangible assets such as company shares (both directly and in shares) and real estate and have benefited from the policy of low interest rates by being able to leverage their tangible assets with cheap loans. It will be interesting to see how long inflation lasts and how low the Euro will be before anyone in politics feels responsible for it.

Dr. As an independent financial mathematician, Andreas Beck evaluates the quality of asset management. Among other things, he has tested the wallets of Germany’s leading private banks with n-tv for more than ten years. His latest book, Successful Scientific Investing, can be downloaded free of charge from www.globalportfolio-one.de.

(This article was first published on Sunday, 01 May 2022.)

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