Summary of the October Monthly Report

German households’ saving and investment behaviour in the low-interest-rate environment

Since the outbreak of the financial and economic crisis, nominal interest rates, particularly on bank deposits, have fallen to historically low levels. This has affected German households in particular, which traditionally hold a significant portion of their financial assets in the form of these deposits. Some are therefore publicly questioning the wisdom of saving in the first place.

In actual fact, however, bank deposits are not the only form of investment in households' portfolios; insurance claims and securities also make up a significant portion of their financial assets. Limiting the discussion to deposit interest rates therefore oversimplifies the issue. Furthermore, looking at nominal interest rates is only partially suited to adequately assessing investment income. Indeed, in this context it is necessary to look at real yields, which take into account the erosion of purchasing power as a result of inflation as well as other income components such as valuation effects and dividends.

Taking into account all major investment forms in the financial assets of households, the real yield in recent years was higher than the deposit interest rates suggest. One reason is that financial assets also include other, higher yielding forms of investment. Furthermore, the real total return of households was also low at times in the past, sometimes even much lower than in recent years.

However, these real yields have at best only marginally influenced the saving and investment behav-iour of German households since the beginning of the 1990s. Instead, it is likely that income and asset-related factors, as well as demographic factors and the institutional framework, are much more important determinants. Furthermore, preferences with regard to the liquidity and riskiness of forms of investment seem to influence behaviour. Even in the low-interest-rate environment, it is unlikely that this has changed in any substantial way. In actual fact, the continued high risk aversion eclipses yields even further as a determinant of investment behaviour.

Government payroll spending: development and outlook

The German government currently employs around 4½ million staff. These employees provide public services, particularly in the areas of education, childcare, internal and external security, justice, and general administration. Annual payroll spending recently amounted to over €250 billion, thus accounting for roughly one-fifth of government expenditure.

Growth in spending on current staff has distinctly trailed that of economic output since German reunification, chiefly as a result of staff reductions. However, this trend has tailed off in the past few years, especially in the areas of education and childcare, on account of somewhat stronger salary increases and recruitment of new staff. By contrast, spending on pension recipients expanded substantially over the entire period owing to growth in their numbers.

The number of government employees ultimately depends on the desired number of services that they directly provide. The indications are of a slight increasing trend in the coming years – not least in connection with the large influx of refugees.

Wage and salary developments can probably be expected to more or less track the private sector, as in the past few years. Pension payments will increase more steeply owing to the current age structure of civil servants, even if restrictions on benefits and a rising retirement age have a dampening effect. The broad base of pension reserves and funds formed are, in principle, a welcome development. In general, it appears desirable to comprehensively include retirement provisions for civil servants in the budgets in order to reflect the full costs of current staff. Future budget relief would only be achieved, however, in the absence of any additional borrowing for this purpose.

Going forward, a review of the pension rules and regulations – including looking at raising the standard retirement age above 67, as for the statutory pension insurance scheme – is likely to remain on the agenda.

Of the various levels of government, the federal states are seeing the most significant staff costs, especially including the prospective increase in pension payments. In 2020, the debt brake, which requires a (structurally) balanced budget, will have fully entered into force for the states. Should any consolidation still be necessary before that date, spending on current staff and pension benefits, given their major weight, would represent a prime starting point. There is the option here of differentiating in greater measure between the federal states with respect to salaries and potentially also negotiated wages, for example. Here, differences in pay could be justified by differences between states with regard to price levels.