When Friedrich Merz recently declared that Germany can no longer afford its welfare state, he was diagnosing a crisis that extends far beyond German borders. Across Europe and in many advanced economies, ageing populations and rising welfare costs have governments scrambling for solutions. But this crisis is a product of the very solutions pursued for decades.
Governments have been retreating from defined benefit public pension provision, citing unsustainable costs, and citizens have been systematically pushed toward private alternatives in defined contribution pension funds. Between 2021 and 2022 alone, there was a sharp increase in new members joining defined contribution plans, with most of the growth coming from France and Sweden. The Netherlands is scheduled to transition into a full defined contribution system in 2028.
In this landscape, housing has emerged as the cornerstone of retirement planning, whether through direct homeownership or stocks in real estate companies. Property can provide shelter and income, protecting against inflation while generating rental returns. Real estate allocations in pension funds typically range from 5 to 15 percent of assets under management.
But this privatisation of responsibility has created a vicious cycle. Property investment promises rental income, yet the collective pursuit of housing as a retirement vehicle drives up prices across the board. House prices have increased 37 percent in the EU since 2010, and rental prices 16 percent, with some of the largest increases seen in Estonia, Hungary and Czechia. Medium rental price increases include Austria at over 40 percent and the Netherlands at nearly 23 percent.
The result is that the very strategy meant to secure wellbeing in old age systematically erodes the purchasing power of both current wages and pension payments.
Pension funds in slumlords
Major pension funds and institutional investors now hold stakes in housing companies, despite their role in making housing unaffordable. The Norwegian Sovereign Wealth Fund, Blackrock, and the Dutch pension fund APG together own significant shares of Vonovia, the largest private landlord in Germany with nearly half a million apartments and a reputation for exploitative practices.
This extends beyond Germany. Sweden has over 120,000 rental housing units under institutional investment, while Czechia and the Netherlands are in the 40,000 range, and Finland, Denmark and Austria each around 20,000. Yet despite these investments, affordable housing shortages persist across these markets.
From housing to infrastructure
Beyond housing, Swedish funds have acquired companies that own and develop social infrastructure real estate, such as schools, medical facilities and elderly care homes in Sweden, Finland and Germany. Elderly care homes, privatised for cost-efficiency, have become an attractive investment for private equity, particularly in the UK and German markets due to ageing demographics.
Investments in European care homes have more than doubled from €2.1bn in 2016 to €5bn in 2021. Out-of-pocket costs for a place in a care home in Germany are over €3,000 per month against an average pension payment of €1,600. Even with these costs, securing a place remains difficult, with average wait times exceeding 18 months. The burden of elderly care often falls on children of those who need support, many of whom may be approaching retirement themselves.
Governments have embraced this logic on an institutional scale. Over the past decade, governments and pension funds have expanded infrastructure investments, ranging from energy to water and transportation, as reliable return generators. Pension funds plan to increase such investments further, and several countries have introduced incentives to encourage them. Yet controversies, such as the Canada Pension Fund’s investment in the privatisation of water and sanitation services in Brazil, have already raised alarms.
Purchasing power, not payment amounts
The pension debates have largely focused on the sum of payments. But ultimately, purchasing power matters most. Instead of treating housing, energy and care as investment vehicles, they should be secured as public infrastructure and services through public investment. This shields essential services from profit motives while providing the price stability that makes elderly wellbeing genuinely affordable.
The private sector has taken over key areas of social welfare because governments claim it is too expensive. Yet what is not paid by public funding is paid by individual citizens. The American healthcare system is a case in point, where costs eat into savings and erode financial resilience both for workers and future pensioners.
The viability of the current pension system is also highly dependent on homeownership rates, as housing remains one of the largest expenses in old age. In Germany, with one of the lowest homeownership rates in Europe, rental assistance is already a major welfare expense and will continue to strain budgets unless the government intervenes decisively. Barriers to home ownership have also risen across the OECD, partly because retirees rely on high property valuations for economic security.
At a time when far-right movements across Europe exploit economic anxiety and social division, abandoning the principle of public provision is both economically shortsighted and politically dangerous. The cost of public infrastructure pales in comparison to the social fractures that result from treating basic human needs as cost centres. The solution to Europe’s welfare crisis is not more creative financing, but regulation and removing essential services from markets.