Providing decent pensions in an ageing society, overcoming the affordability crisis driven primarily by skyrocketing housing costs, and creating more reasonably paid jobs for non-college-educated workers are essential to securing social peace and democracy in our societies.

A compulsory, state-owned second-tier pension fund—required to invest its capital exclusively in social housing—addresses all three challenges simultaneously. Yet, it demands a fundamental shift in mindset.

For years, the financial industry has successfully advocated shifting from state-run, pay-as-you-go systems to private, capital-funded pension models, and from defined-benefit to defined-contribution schemes. In capital-funded, defined-contribution systems, all investment risk shifts to retirees. This enables pension funds to promise high returns and venture into ever riskier asset classes—from bonds to stocks and, more recently, private equity—without facing losses when markets turn. Retirees may lose their pensions, but the funds’ business remains unscathed.

As pension funds accumulate capital, they act as continuous investors, fuelling asset inflation by channelling vast sums into equities, real estate, and other assets—often pushing prices beyond fundamental values. By contributing to inflated real-estate prices, they exacerbate the affordability crisis, making homeownership nearly impossible for many young people and forcing the poor—and increasingly the middle class—to devote ever-larger shares of income to rent. In pursuit of high returns, funds have increasingly invested abroad, exporting capital from the societies where pensioners and contributors live and instead gambling in the global financial casino. Moreover, the administrative costs of competing private pension funds far exceed those of efficiently run compulsory state funds. Competing funds need an army of salespeople to lure customers, they siphon off a portion of contributions as profit, and because they lack economies of scale their administrative costs tend to be higher.

Rising asset prices disproportionately enrich those who own stocks and real estate, helping the wealthy grow wealthier. A financial-market-focused pension system provides, as a side effect, “social assistance” to the rich and the very rich. Yet the dynamic of overvaluation cannot persist indefinitely. As funds mature, more pension payouts must be made, while at the same time demographic shifts will result in fewer contributors. Pension funds—owning between 15 and 25 per cent of the global stock market—will increasingly transition from net buyers to net sellers of assets and will thus contribute to stagnating or even falling share prices rather than rising ones. Private investors can quickly relocate assets or switch from assets to cash. This is not an option for large institutional pension funds, which under such conditions will likely deliver lower rates of return than are currently promised.

It will be far safer and more sustainable for pension funds to allocate resources towards real investment rather than portfolio investment. There is a massive need for social and affordable housing in most societies, particularly in larger cities. Many people must either spend a large share of their income on housing, live—even as families—in tiny apartments, or move to distant suburbs and satellite towns. Given the catastrophic housing shortage, linking a supplementary pension fund with the financing of social housing construction is an obvious solution. Capital would no longer flow into speculative portfolio investments or foreign markets but would instead be invested in municipal, cooperative, or other non-profit housing associations. These different non-profit housing cooperatives could apply on a competitive basis for investment capital from the pension fund. A decentralised model is a safeguard against creating huge conglomerates that dominate the housing market. It opens possibilities for tenant participation and innovative housing initiatives while avoiding the cluster risks associated with companies too big to fail.

In the early years, no pension payouts occur; they only grow gradually as the system matures. During the initial phase, all contributions and returns on investment can be channelled into building houses. The continuous rental income from the housing stock will guarantee solid, stable, low-risk returns of around 3–4 per cent. With a monthly income of 4,000 USD, a 2 per cent contribution should—assuming that nominal wages rise at least with inflation—generate after 40 years a supplementary pension of roughly 800–1,000 USD in real terms. In addition, pension capital would create affordable housing and reduce skyrocketing rent levels. This approach would particularly benefit younger generations—not only by building a supplementary pension for their old age but also by immediately helping to make housing more affordable. By funding decentralised local housing associations, it also offers opportunities to involve local communities in urban planning and housing policies, thereby strengthening local democracy and rebuilding social cohesion.

Construction is one of the industries least affected by globalisation and can serve as a powerful source of employment generation. The building trade tends to offer better-paid jobs than low-skilled service work and provides non-college-educated workers with decent incomes. Stagnating or declining real wages among non-college workers have been among the most important factors driving the rise of right-wing populism, particularly among younger male workers. Creating more jobs and building affordable housing would therefore have a dual positive impact, especially on low-income families.

In Germany, for example, at least 100,000 to 150,000 social housing units must be built each year over the next few decades to reverse the trend of rising rents, which are contributing to poverty. This will require annual investments of around €22–33 billion. With a compulsory pension fund contribution of 2 per cent from all income earners—including civil servants and the self-employed—revenues of approximately €33 billion per year could be generated.

Unlike subsidies for private investment in social housing, where owners are only obliged to rent out living space at low prices for a limited period, non-profit housing associations create permanently affordable housing.

The massive expansion of social housing particularly helps the younger generation and less affluent people, who typically rent rather than own their homes. Especially in metropolitan areas, this allows ordinary people to continue living in their cities instead of being literally pushed to the margins by gentrification. In the German case, building 150,000 new social housing units per year has a cumulative effect on rent levels over time—not only creating affordable housing but also lowering rents overall. This effectively increases real wages for tenants and reduces the burden on public budgets for housing subsidies and basic income support for poorer people. Strengthening domestic demand makes the economy more resilient in difficult geopolitical times—not to mention the positive employment effects of an expanding construction sector. The losers from the innovative combination of jobs, housing, and pensions are the financial sector, real-estate speculators, and rent-seekers. Everyone else wins.

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