Financial literacy, stock market participation, and hybrid pension systems. A quantitative analysis of the relationship in the context of current pension reform plans in Germany

Demographic change will place an increasing burden on pure pay-as-you-go pension systems, such as the one in Germany, which are not designed to accommodate the changing needs of an aging population. As the baby boomers approach retirement, the ratio of workers to retirees will deteriorate, resulting in a growing need for pension payments to be met by a shrinking number of people in the labor force. The retirement age in Germany is 67, and those aged 67 and over currently represent about 20% of the total population, while those aged 20 to 66 make up about 61% (Statistisches Bundesamt, 2024). This means that there are approximately three people in the workforce for every retiree in 2024. After the retirement of the baby boomers, this number will drop to about 2.2 by 2044 and as low as 2.0 by 2064. Furthermore, life expectancy is increasing continuously, necessitating the disbursement of pensions to retirees for a more extended duration (Statistisches Bundesamt, 2023). As a result, in Germany, those born after 1987 are among the losers of the welfare state, as they will contribute more to financing it over their remaining lifetimes in today's values than they will receive in social benefits, including old-age pensions (Stiftung Marktwirtschaft, 2024). The state already contributes more than 100 billion euros per year from tax revenues to the German pension system (Bundesministerium der Finanzen, 2023), while social security contributions still average just under 40% of gross income (Deutsche Rentenversicherung, 2024). Consequently, political reforms are necessary to mitigate the need for ever more tax revenue and higher contributions to finance the social security system and maintain pension levels.