Experts suggest “child start-up allowance” – how useful is that?

The Economic Advisory Council advocates a state-financed “child start allowance” for all children aged six and over. How useful would that be – and could it strengthen financial education in Germany?

Ten euros a month via a stock fund: The so-called economists have proposed a state-financed “children’s start-up allowance” for all girls and boys aged six and over. At the age of 18, they should then be able to have it paid out or continue saving with it, explained the Economic Advisory Council (SVR Wirtschaft) in its new policy brief. Through this experience with capital market investments, financial competence was strengthened. But what is the state of financial education in this country?

“The level of financial education in Germany is good – compared to many other countries,” explains Lukas Menkhoff, who researches the effects of financial education at DIW Berlin, in an interview tagesschau.de. This is also shown by a study by the Organization for Economic Cooperation and Development (OECD). In comparison with 38 other countries, Germany takes first place. But a ranking is not the right benchmark, says Menkhoff. “The right benchmark is whether people have the knowledge and skills to make really good decisions that are important for their lives.” In this sense, there are big gaps.

Federal Government Attachment Financial education strategy

The Federal Ministry of Finance (BMF) and the Federal Ministry of Education and Research (BMBF) had already launched the Financial Education Initiative in March 2023 and commissioned the OECD to submit a recommendation for a financial education strategy. The organization then identified serious deficiencies in an inventory in May of this year. Only a little more than half of all adults are confident about their financial plans for old age, and a quarter would not be able to cover living costs for three months if they lost their main source of income. People with low incomes and low levels of education, as well as women, had low financial literacy.

On September 24, the OECD handed over the proposal to the ministries. In it, she calls on circles to strengthen financial education, especially “in five priority areas”: participation in the capital market and capital market, long-term savings and retirement provision, prevention of over-indebtedness and responsible use of credit, strengthening of digital financial literacy and implementation of sustainability preferences. Now “a federal financial education strategy should be developed in a timely manner,” the BMF tells us tagesschau.de with. It is unclear whether the “child start-up allowance” proposed by economists will be part of the strategy. “We cannot comment on the SVR Wirtschaft’s proposal.”

Children and parents could “experience different financial cycles”

“The child start-up allowance can usefully complement the national financial education strategy,” says the Council of Experts. It aims to strengthen financial behavior by learning from experience – rather than theoretical knowledge. The instrument is intended to “anchor participation in the capital market early in life and thereby enable long-term experience with corresponding investments and their potential returns for broad sections of the population,” argue the economists.

The program is also based on the financial competence of the parents, as they initially take on the investment for their children and can select the fund according to certain criteria. From the age of 15, children should finally be able to decide for themselves. Over the course of twelve years, both could “experience different financial cycles and benefit from the advantages of a broadly diversified investment”. At school, the children should also learn everything they need to know until the end of the savings phase so that they can then make decisions independently.

The “indispensable core element” is a broadly diversified UCITS fund with a high share of equities and shares in fixed-interest securities. This enables a “solid return with low risk” over a long investment horizon. If the parents do not make an “active” investment decision, the payments would flow into a fund with a 100% equity share. On average, a portfolio value of over 2,100 euros will be achieved after twelve years. With an equity quota of 75 percent it would be worth 1,990 euros to the SVR Wirtschaft, with 50 percent it would be worth 1,867 euros.

Costs of 1.5 billion euros per year

“It is important that something happens. The SVR’s proposal is interesting and could make a difference in the long term,” says Andreas Peichl, head of the Center for Macroeconomics and Surveys at the Munich Ifo Institute tagesschau.de. It increases the incentive to deal with the topic. In addition, “accompanying educational measures” would certainly be crucial. “In principle, I understand the motivation for the proposal,” says DIW expert Menkhoff. Promoting access to the capital market through your own experiences makes sense.

When it comes to concrete implementation, however, the question arises as to whether people will actually engage with it thanks to the “children’s start-up allowance”. “At ten euros a month, you might think that you don’t have to worry about it,” says Menkhoff. In other countries it has been shown that the standard option is often chosen for similar mechanisms. “Then nothing has really been gained.” In its policy brief, the Council of Experts refers to countries such as Israel, the United Kingdom, the USA and Canada, in which long-term wealth creation is already being promoted through so-called Child Development Accounts (CDA).

According to Menkhoff, another problem with the design is the investment horizon. “The period of time that it takes for the risk-adjusted return to improve is very long. However, in the Advisory Council’s proposal, the investment is time-weighted for less than six years due to the monthly savings rate of ten euros.” In addition, the researcher is not sure whether the timing is right given the current problems in the federal budget. According to “Wirtschaftsweise”, the concept would cost the state around 1.5 billion euros annually in the long term.

“Low connection to the reality of life

For this reason, other economists also consider the “child start-up allowance” to be unrealistic. “The technical aspects of the concept are not the problem of the proposal, but rather its lack of connection to real life,” says Christoph M. Schmidt, President of the RWI – Leibniz Institute for Economic Research, in an interview with tagesschau.de. It is well known that public budgets are currently unable to draw on an overflowing reservoir of financial resources. In the other countries, the funding is counter-financed by charging tuition fees. But the proposal in this country does not provide for that.

“If the main aim is to illustrate the effects of portfolio decisions on the course of the saved capital, then this can undoubtedly be done without using any financial resources in mathematics lessons,” says Schmidt. Instead of the previous learning units in school that establish economics, teachers are offered further training in the basic principles of economics and the use of learning materials with a practical connection to economic life.

For Axel Plünnecke from the Institute of German Economics in Cologne, the subsidy is also questionable “as a measure to change behavior, even if there could be positive effects.” The head of education, innovation and migration also emphasizes that it would make more sense to directly strengthen financial education in schools. “Simulation games could also be used here in the long term to simulate the effects of investments on the capital market and to classify opportunities and risks. With an additional 1.5 billion euros per year, individual support for teaching in the education system could have a greater impact.