Abstract
Public scepticism towards funded pensions is deeply rooted in Germany and continues to shape the current reform debate. This article argues that the opposition between “safe” pay-as-you-go pensions and “risky” capital markets is misleading. Both systems are exposed to different types of risk, and the economic rationale for partial funding lies in diversification and intertemporal smoothing. The decisive question is therefore not whether capital markets should play a role, but under which institutional conditions they can do so in a stable and sustainable way. Drawing on the Swedish experience, the article outlines an institutional reform agenda for Germany.