HOW HIGH WAS THE INFLATION?
Let´s first look at the annual inflation figures since 1960 to get an idea of the true magnitude of the problem. This gives us, perhaps somewhat surprisingly, the following picture:
In the period from 1960 to 2024, i.e. for 64 years, the inflation in Germany was:
- during 27 years below the target of the European Central Bank of p.a. 2% (green)
- during 19 years within a tolerance range of 2 to 3 % p.a. (grey)
- and thus during 46 years (72%) in an acceptable range.
The average within this period was 2% p.a.
Inflation was only too high and therefore unacceptable during 18 years (28%). The average within this period was 5,3% p.a.
* For those interested: The reasons for these relatively short term but high inflation rates see below.
The average inflation over the entire period under review was 2,7%.
Since company pension schemes are predominantly NOT concluded with savings contributions that increase automaticly annually (dynamic), the problem of the loss of purchasing power in capital investments still remains. Here some calculations:
A capital investment of e.g. € 238,- per month (which at a company pension plan corresponds to approx. € 100,- net savings contribution from the employee after subsidies from the state and the employer, a frequently chosen value) results in a term of 35 years until retirement and a conservatively assumed return on investment (ROI) of 3,9% in a capital of
€ 212.887,-
The purchasing power of this capital, after taking into account an average inflation rate of 2,6% p.a. over the terms, is only
€ 86.694,-
This will naturally not be enough to protect your assets when you start your retirement. But what can you do as a company pension saver to manage the problem?
The solution is not difficult and it is reasonable but it requires a certain amount of discipline and a functioning follow up:
For example, the saver increases the net savings contibution once a year by a barely noticible amount of € 10,- (which is arounf € 23,80 gross in the company pension plan incl. subsidies).
This results in a calculated capital of
€ 503.225,-
Adjusted for inflation this capital represents a purchasing power of
€ 204.929,-
and the inflation effect has been eliminated up to about € 6,000.-.
* Reasons for inflation
1971 End of the Bretton Wood system. The US dollar`s link to gold was abandoned and many currencies, including the German D-Mark, were pegged to the dollar. Currencies began to fluctuate more freely which led to uncertainty and inflation as the dollar, as the reserve currency, was devalued.
1973 The first oil crisis. The Organizaion of Arab Petroleum Exporting Countries (OPEC) imposed an embargo of Western nations, including Germany, that supported Israel in the Yom Kippur War. This led to a dramatic four-fold increase in oil prices. This price increase led to higher production costs in many industries and to severe inflation in Germany and other countries.
1997 The second oil crisis. It was triggered by the Iranian revolution which severely affected the flow of oil from one of the largest oil exporters, Iran. The political upheavals and the subsequent Iran-Irak war led to a significant decline in global oil production, so that oil prices doubled again.
1990 Costs of German reunification. Massively government spendings led to increasing inflation.
2019 Covid 19 pandemic and Russian agression war against Ukraine (2022). Supply chain problems, raw materials shortages and energy crisis. Massive government stimuli (expensionary fiscal policy) simultaneously increased the demand for goods and services resulting in sharply rising prices.
