DigiPension: Building Capital in the Digital Age

Where should we start saving now? There is much to be said for starting with the spending process instead of income. The reason for this is straightforward: Consumption extends from birth to old age and it is subject to less variability than income.

Even the recipients of transfer payments, whether intra-family or from third parties, consume steadily and consistently. Consumption is simply less dependent on earned income, especially from precarious employment situations.

Thus, the core idea is to deposit, with each purchase, a small percentage for old age. What would have been a bureaucratic monster just a few years ago is already in existence today. The concept proposed here is similar to loyalty point programs such as Payback.

These programs serve primarily for exploring consumer behavior and evaluating it strategically. This is worth a small bonus to retailers, usually 1% of the purchase price, which will later flow back into consumption.

The DigiPension

The logical question to be asked at this juncture is simply this: Why not use a similar 1% of the purchase price to build up a personalized claim on productive assets? This not only makes sense, but also becomes feasible in the digital age. That’s why we call it DigiPension.

But is the retention of 1% of the purchase price for the DigiPension socially acceptable?

It helps to look at real-life evidence. Whenever governments decide to increase indirect taxes, for instance the VAT, in small steps, many consumers take little notice of it in real life.

Even more compellingly, with DigiPension, the deduction is not made as a tax, but as a savings amount credited to a personal account for old age. Better yet, this account is bound to grow, considerably so, thanks to capital gains and dividends.

Can the introduction of such a scheme therefore seriously be considered a social injustice or even a matter of hardship? Compared to statutory pension schemes with their towering effective contribution rates on incomes, a savings rate of 1% on consumption appears pint-sized.

The cashless society

If, in future, purchasing transactions in the digital economy were to be carried out exclusively without cash, the payment service used (such as the EC card, credit cards, PayPal, Apple Pay, Amazon Pay, Google Pay, etc.), as well as the provider of crypto money (Bitcoin, Ether, Libra) would have to retain 1% of the amount paid, the DigiCent.

This amount would be transferred to one or more DigiPension accounts at specified capital collection points. These investment accounts would hence have to be assigned to the payment account.

In contrast to conventional payback models, the highest standards must govern the protection of personal privacy, i.e., information about the structure of consumer spending shall not be passed on by the seller of the good or service that triggered the DigiCent transfer.

A further inducement to making this scheme effective is that the buyer will not even sense the low levy because it is included in all the retail prices shown, just like value-added tax.

On the one hand, this “saving on purchase,” the DigiCent, must be compulsory for everyone who consumes within the scope of the program, for example in Germany (or in the longer term throughout the European Union). This should be possible with a cashless system for the euro.

Imposing this mandatory saving should also only help combat poverty in old age because it is a compulsory form of providing for oneself. In contrast, voluntary schemes typically provoke moral hazard, meaning that negligent people would not provide for themselves, but rely on the state.

The DigiPension account is structured in such a way that the deposited money accrues to private capital collectors who can invest it in shares, ETFs or funds. A globally diversified equity fund under state control such as the Norwegian pension fund is also conceivable.

The returns remain prorated to savers and should remain income tax-free. They may only be used for this purpose after retirement age.

An enormous effect

The effect of such a DigiPension program would be enormous. Assuming the system had already run for a lifetime in the last few decades, people would have saved 1% of the purchase price for the DigiPension with every purchase.

The long investment period and the compound interest effect would create a pool of capital that corresponds to several times the last annual consumption before retirement. And all that by the hardly noticeable contribution of 1% per purchase over one’s lifetime.

At a minimum, this concept constitutes a substantial contribution to the old age security, in addition to whatever public and job-related provisions may be collected for old age.

DigiPension could also replace today’s smaller analogue — and thus mostly unsuccessful — private pension programs (e.g., fund savings plans of various kinds).

If all this sounds unrealistic, it’s only because Europeans, compared to Americans, save so little on shares and have little personal experience with this form of saving. Where people underestimate the effect of savings in equities, they miss one of the most important sources of income for wealth accumulation.

Of course, the earnings opportunities for individual savers in the analogue world were also extremely limited — because of the high transaction costs. DigiPension would have what it takes to overcome this hurdle. It opens, for the individual, the mechanism through which today’s rich have become rich.

Today’s rich often became rich because they had ample access to this form of saving. But it is no longer their exclusive domain. With digitalization, this avenue is suddenly open to everyone. It is the way in which each individual can move away from pure earned income to capital income. And this avenue is promising in many ways.

Bismarck’s example

In the last third of the 19th century, Bismarck made history in Germany not only through the introduction of statutory pension insurance, but through his social programs which proved to be of lasting value as well.

Bismarck created the conditions for people not to be exposed to old-age poverty even when they had to make a living from their hands’ work and, at some point, were no longer able to do so.

What is often overlooked is that Bismarck, with his transnational pension scheme, also brought together the people of the various German countries and blended them into one nation.

Today, the European Union has to face a similar challenge. DigiPension can achieve a similar goal in today’s world.
Better yet, if we were to introduce it throughout Europe now, we would be charging an economic battery that can work in two ways.

First, it involves each individual in the gigantic productivity of digitization, so that we no longer have to fear the displacement of work by intelligent machines.

And second, it creates a positively charged system that can connect people in Europe, just as Bismarck’s pension brought the Germans under the umbrella of a larger political unit.

New momentum

Of course, Bismarck-style politicians have become rare, not only in Europe. Still, we have a new European Commission, and hence new momentum.

Its new president, Ursula von der Leyen, as a former labor minister knows a lot about the challenges of providing old age financing in today’s world.

She thus has the historic opportunity to make a positive contribution to the much-vaunted “Social Europe” — and this even without a transfer union.

Therefore, let’s be ready for the digital world! Every European will then receive a personalized DigiPension in the long term — from only 1% with every purchase.