To educate M. Piketty on wealth

D’ye recall when Professor Piketty told us all that wealth had become so important to the economy that we were going back to the days of Jane Austen? The wealth to GDP ratio had risen from 300 and 400% and could go to 600 and possibly 700%?

Good times, good times, not so long ago.

Germany is heading for significant job losses and a “massive” rise in old age poverty unless it can curb the runaway costs of its pensions system, according to one of the government’s economic advisers.

Well, everywhere has pensions problems but:

However, Marcel Fratzscher, head of the German Institute for Economic Research (DIW) and an adviser to the economics ministry, said the most pressing task was to rein in a public pensions bill that has reached more than €400 billion a year and is projected to rise substantially in the decade to come.

Well, that’s a lot, yes.

Unlike in Britain, the German system is supposed to be financed through workers’ and employers’ contributions to a national pension insurance system that guarantees the average pensioner will receive 48 per cent of their previous salary.

Ah, the whole pensions system (well, a lot more of it perhaps) is a pay a you go system. In that, it’s like the UK state pension - but much, much, larger.

But there’s also this.

Germany's wealth, defined as private household wealth, was 3.7 times its GDP in 2023 - and that compares to 5.1 times in the UK.

And why is this? Because the British system has much more of pensions wealth in actual wealth. Rather than just a promise that the young will pay us through taxation we’ve got the young by the short and cs because we own the companies they work for. Our pensions are, that is, crystalised and explicit wealth, not vague promises.

Further, in the usual estimations of wealth actual pensions savings - in bonds, shares, property etc - are wealth. Unfunded pensions promises are not wealth.

A difference between Britain and Germany in that wealth to GDP ratio is simply that we bothered to sort out our pensions system into proper savings and investment decades back and they didn’t.

Well, OK, bully for us.

But when the very thing M. Piketty worries is sending us back into the 18th century is also that thing that is just sensible provisioning for the pensions required by longer lifespans then, well, maybe and perhaps we shouldn’t worry all that much about the chauves-souris dans M. Piketty’s beffroi?

Tim Worstall