When Friedrich Merz recently declared that Germany can no longer afford its welfare state, he was diagnosing a crisis that extends far beyond German borders. Across Europe and in many advanced economies, ageing populations and rising welfare costs have governments scrambling for solutions. But this crisis is a product of the very 'solutions' we've been pursuing for decades.
Governments have been retreating from defined benefit public pension provision, citing unsustainable costs, and citizens have been systematically pushed toward private alternatives in defined contribution pension funds. Between 2021 and 2022 alone, there was a 115 percent increase in new members joining defined contribution plans with most of the growth coming from France (610 percent) and Sweden (90 percent); the Netherlands is scheduled to transition into a full defined contribution system in 2028.
In this landscape, housing has emerged as the cornerstone of retirement planning, whether through direct homeownership or stocks in real estate companies.
The logic seems sound: property can provide shelter and income, protecting against inflation while generating rental returns. Although the number includes both commercial and residential properties, real estate allocations in pension funds typically range from 5 to 15 percent of assets under management.
But this privatisation of responsibility has created a vicious cycle that undermines its own premises. Property investment does indeed promise rental income, but the collective pursuit of housing as a retirement vehicle drives up prices across the board. House prices have increased 37 percent in the EU since 2010, and rental prices up 16 percent, with some of the largest increases seen in Estonia, Hungary, and Czechia. ‘Medium’ rental price increases include Austria at 41.18 percent, and the Netherlands at 22.94 percent.
The result is that the very strategy meant to secure wellbeing in old age systematically erodes the purchasing power of both current wages and pension payments.
Major pension funds and institutional investors, such as Blackrock which invest on behalf of pension plans, endowments and foundations but are not pension funds themselves, now hold stakes in housing companies, despite their role in making housing unaffordable.
The Norwegian Sovereign Wealth fund, Blackrock, and the Dutch pension fund APG respectively hold 14.48 percent, 8.4 percent and 3.74 percent of Vonovia, the largest private landlord in Germany, with 490,000 apartments and a reputation for being a corporate slumlord.
This extends beyond Germany. Sweden has over 120,000 rental housing units under institutional investment, while the number sits in the 40,000 range in Czechia and the Netherlands, and the 20,000 range in Finland, Denmark and Austria. Yet despite all these investments, affordable housing shortages uniformly persist across these markets.
Beyond housing, Swedish funds AP3 and AP4 have acquired Hemsö and Rikshem, which own and develop social infrastructure real estate, such as schools, medical facilities and elderly care homes in Sweden, Finland and Germany.
Investment funds are advertising thematic investing opportunities in ageing and healthy living. In this picture, elderly care homes may seem an anomaly, but this is precisely what concerns people as they age. Care homes have been privatised for cost-efficiency and have proven to be an attractive investment for private equity, particularly in the UK and German markets due to their ageing demographics.
Usually classed as alternative assets, investments in European care homes have more than doubled from €2.1bn in 2016 to €5bn in 2021. Out-of-pocket costs for a place in a care home in Germany are over €3,000 per month against an average pension payment of €1,600.
Yet even with these astronomical costs, securing a place in a care home is difficult, with an average wait time of over 1.5 years. The concern of how to care for the elderly remains significant. The burden of elderly care often ends up falling on the children of those who need care, who may be in or about to enter retirement themselves, leaving retirees doubly vulnerable.
Aiming to reduce expenditures, governments have embraced this flawed logic on an institutional scale. Over the past decade, governments and pension funds have expanded infrastructure investments, ranging from energy, to water, to transportation, as reliable return generators simply because people simply have no alternatives.
The financial sector has embraced this trend. APG plans to increase its infrastructure investments to 10 percent by 2030, and the German Investment Ordinance (AnlV) introduced a separate 5 percent infrastructure investment quota to encourage more private investment. Controversies, such as the Canada Pension Fund's investment in the privatisation of water and sanitation services in Brazil under the Bolsonaro government, have already occurred.
The pension debates have largely focused on the sum in pension payments. But ultimately, it is purchasing power that matters. Instead of treating housing, energy, and care as investment vehicles, they need to be secured as public infrastructure and services through public investment. This approach shields essential services from profit motives while providing the price stability that makes elderly wellbeing genuinely affordable, reducing pressure on pension funds.
The private sector is taking over key areas for social welfare because governments think it is too expensive. Yet what is not paid by public funding, is paid by individual citizens. The American healthcare system is case in point. And this eats into people’s savings and, in turn, their financial resilience both as workers and as future pensioners.
The viability of the current pension system is highly dependent on the home ownership rate, as housing is one of the biggest expenses in old age if not secured. In Germany, which has one of the lowest homeownership rate in Europe, rental assistance is a major welfare expense and will continue to eat into budgets unless the government intervenes decisively.
It is also worth remembering that barriers towards home ownership have increased exponentially across the OECD, at least partially because retirees depend on high valuation for economic security.
At a time when far-right movements across Europe exploit economic anxiety and social division, abandoning the principle of public provision is both economically shortsighted and politically dangerous.
The cost of public infrastructure pales in comparison to the social fractures that result from treating basic human needs as cost-centers. The solution to Europe's welfare crisis isn't more creative financing, but regulations and removing essential services away from markets.
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Vienne Chan is an associate researcher at Konzeptwerk Neue Ökonomie. She specialises in retirement politics and just transition. She is writing here in a personal capacity.
Vienne Chan is an associate researcher at Konzeptwerk Neue Ökonomie. She specialises in retirement politics and just transition. She is writing here in a personal capacity.