Germany’s AAA sovereign credit rating could come under threat in the years ahead, according to credit rating agency Scope.

In its most recent report on the country’s financial stability, Scope named “future pension liabilities” as the top source for credit weakness in the future, ahead of “low domestic investment” and “adverse demographics”.

“The combination of a lack of investment and an ageing population points to an emerging imbalance between younger and older generations, which will have a lasting impact on the economy,” Scope said.

It added that “rising unfunded pension liabilities” and an increase in age-related spending could “dampen government revenue generation on the back of weaker economic growth”.

“To help mitigate this, further adjustments to the social security and pension systems are needed,” Scope urged. “If no action is taken, the debt ratio, including future liabilities from health and pension expenditure will bring Germany back into the realm of highly indebted countries in the euro area.”

However, the analysts cautioned that the government would likely be met with resistance from the electorate if it sought to reform the pension system.

Last month, Scope criticised the German government’s plan to guarantee current pension payout levels and replacement rates from the first pillar. 

Ein Staatsfonds für Deutschland?

Meanwhile, German economist Volker Brühl, managing director of the Centre for Financial Studies in Frankfurt, proposed the creation of a sovereign wealth fund to ensure sustainability of the state pension system.

The current government plan for financing the first-pillar guarantee only dealt with budgetary needs up to 2025, he said.

“It is as yet unclear what a sustainable pension concept for the time after 2025 could look like,” Brühl said.

The economist added that the government had estimated the annual top-ups needed for the state pension system would reach “well above €100bn by 2031”, compared with €67.8bn in 2018.

“This has to change,” Brühl said. “Therefore, the current debates on the future financial security of the pension system should assess whether the existing ‘pay-as-you-go’ system should be extended by a funded component.”

He proposed the creation of a “Rentenfonds Deutschland” – effectively a sovereign wealth fund for pensions, to be financed from tax money and, if necessary, “a moderate debt level”.

“If the assets in such a state fund are invested in a… long-term portfolio with a high equity share, it will yield attractive returns that can help to absorb some of the pension liabilities,” Brühl said.

According to his calculations, such a fund could reach €1trn by 2050 “without damaging the solidity of the public finances”.

There have been calls for the creation of a sovereign wealth fund in the recent past, but these were mainly aimed at creating a funding basis for infrastructure investments. 

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