Pension reserves for civil servants in Germany
The German federal government and the 16 federal states provide extensive benefits for their retired civil servants. These are essentially pensions and benefits in the event of illness amounting to around 70% of medical costs. Up to now, the German state and the German federal states have had to finance the necessary pension payments from current tax revenues. As the average age structure of civil servants is higher than that of the population as a whole, there is already an increased wave of retirements. According to calculations by Stiftung Marktwirtschaft, pension expenditure for retired civil servants has risen by around 50% in the last decade to over 75 billion euros in 2020. The aggregate pension costs will rise to 120 billion euros a year by 2060.
Formation of state capital reserves
In order to counteract this development, reserves for future pension expenses have begun to be set aside since the end of the 1990s. There are very different developments and approaches between the federal and state governments in Germany, which each decide independently on the formation of reserves.
In total, the reserves of the German Federal Government and the federal states for their civil servants have increased over the past 10 years from around 19 billion euros to around 82 billion euros as of Dec. 31, 2020. 
Only the civil servants of the Federal Labor Office have been fully funded since 2008. This is to be seen as a reference, so to speak. Here, the rate of funding for the accumulation of reserves is currently 96.6% of the civil servants' salaries. 
Among the federal states, Saxony is the most consistent in setting up reserves and forms a full funding for civil servants newly hired since 1997 and a partial funding for civil servants hired before 1997. Amounts determined according to actuarial calculations are added for full funding. Depending on the pay grade, these amounts range from 35% to 44% of the civil servants' salaries. 
Other states such as the state of Schleswig-Holstein combine a flat-rate contribution of 80 million euros and an additional 100 euros for each new civil servant recruited since 2019. The state of Sachsen-Anhalt is currently not adding anything to its pension reserve; in Thüringen, funds have already been withdrawn again since 2017, as has Bremen. An analysis of payments from 2001 to 2015 also showed that the states reduced their payments by around one-sixth in election years compared with non-election years. 
This shows how much such a lump-sum reserve formation is subject to political influence. Overall, it remains to be noted that current reserves in many federal states represent only a fraction of the actual future burdens.
Different investment strategies
In several German federal states, reserves are invested exclusively or partially in bonds issued by the federal state itself. This offers a stable interest rate. But in this case, when the reserve is liquidated, the bonds become due at the same time, so that the disbursement of reserves is actually financed from future tax revenues. In these cases, it is a hidden pay-as-you-go system. The added value of setting aside reserves is then merely to reflect (part of) the future burdens directly in the state budget.
A number of other states have invested a considerable amount in bonds issued by other German federal states or European countries. However, these are affected by demographic trends to a comparable extent. Thus, the reserves merely shift the demographic burden geographically.
Some German federal states and also the federal government, on the other hand, have noticeably increased their share quota in recent years - in the range of 20% to 40% of the reserves. Most of these are invested in ETFs that exclusively provide for sustainable investments. The high equity investments allow for greater diversification and higher potential returns, but also mean a greater risk of loss and result in higher volatility. Thus, between 2018 - 2021, there were returns in a range of -4.6% and +13.6% for these countries. However, investment in productive capital can lead to stronger economic growth overall. At the same time, global investment is also beneficial from a demographic perspective, as this means that there are no negative effects at the time of repayment/sale and any potential political influence of the state as a shareholder on domestic companies remains limited.
Withdrawal from reserves
The question of whether - and if so, how much - funds will be withdrawn has not even been clearly defined for a number of states and is left to the subsequent decision of the parliaments. In the case of civil servants at the Federal Employment Agency and in Saxony, pension expenses are already being withdrawn in full from the reserves, but the planned additions currently exceed the withdrawals. The state of Berlin, on the other hand, plans to completely eliminate the reserve by 2037. Bremen plans to dissolve the reserve by 2028.
In view of demographic developments, the formation of reserves for pension expenses is generally to be welcomed. Both the extent of reserve accumulation, the type of investment and the rules governing withdrawals are crucial for effective relief. In this respect, there is a wide spectrum between the federal states in Germany.
Different investment strategies show that there is also a tension between return and security for state investors. However, since the reserves do not give rise to individual claims for each civil servant, they do not have to guarantee an interest rate - unlike life insurers, for example. However, this also means that there is a risk that, depending on the political majority or the budget situation, they may decide to forego further accruals or to dissolve them prematurely.
The total volume of reserves set aside to date in Germany for retired civil servants represents only a small part of the actuarially required amount of full capital cover. Yet a stronger build-up of reserves should not burden families with children with more taxes or lower benefits. For parents are raising the future taxpayers with their children and are thus already making the decisive generative contribution.
A more detailed paper was published in German at the Zeitschrift für Versicherungswesen 10/2022:
The paper is also available here:
From Stefan Walter (The author is a doctoral student of Prof. Dr. Martin Werding, Chair of Social Policy and Public Finance, Ruhr University Bochum)
 See Raffelhüschen et. al, 2021, Update 2021. Die Generationenbilanz, Stiftung Marktwirtschaft, Berlin, S. 15 cont.
 See Benz, T. (2015). Ausgabenprojektionen, Reformszenarien und Rücklagenbildung der Beamtenversorgung in der Bundesrepublik Deutschland, Sozialökonomische Schriften Band 49, Frankfurt, p.62 cont.
 Own calculation based on own requested information using federal and state freedom of information laws. Since the exact age distribution is not taken into account here, the calculation is only a rough guide, which nevertheless reveals major differences.
 Own calculation and presentation with data from the Statistisches Bundesamtes on civil servacnts (Fachserie 14 Reihe 6 Tabelle 2.7 - Stand 30.06.20) und Versorgungsempfängern (Fachserie 14 Reihe 6.1 Tabelle II - Stand 01.01.21 and indv. Information on the Federal Employment Agency)
 §1 Verordnung über die Zuweisungen an das Sondervermögen „Versorgungsfonds der Bundesagentur für Arbeit“
 See §1 Generationenfonds-Zuführungsverordnung Sachsens
 Kulawik, J., Rösel, F. und M. Tuhm (2017). Spare in der Zeit, so hast du ... Geld im Wahljahr? Ein Überblick über die Beamten- Pensionsfonds der Länder, ifo Dresden berichtet 24 (4), 3–9.
 Own calculation based on own requested information using federal and state freedom of information laws.