Suggest more financial education from families: Economics suggests “children’s start-up money” in stock funds

More financial education for families
Economics suggests “child start-up money” in stock funds

October 7, 2024, 1:28 p.m

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The Germans are known to be strangers to the capital market. The Economic Advisory Council wants to change that and is proposing a state-financed child start-up allowance: ten euros a month for every child aged six and over; parents can choose the fund.

The Economic Advisory Council has proposed a state-financed child start-up allowance: The state should pay around ten euros a month into a stock fund for children aged six and over – until they are 18 years old. Then the sum saved should be paid out “without earmarking,” as the five economics explain. This would cost the state 1.5 billion euros a year.

The child start-up allowance should “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,” argued the Council of Experts for the assessment of overall economic development. Over the course of twelve years, the children and their parents could “experience different financial cycles and benefit from the advantages of a broadly diversified investment”.

The “indispensable core element” is a broadly diversified fund with a high share of equities. This enables a “solid return with low risk” over a long investment horizon. Parents should be able to choose a fund for their child or children based on certain criteria.

The economist Ulrike Malmendier explained: “The previous financial education programs, not only in Germany, have contributed less to strengthening financial literacy among the population than hoped.” Unlike previous measures, the proposed child start-up allowance aims to strengthen financial behavior through learning from experience – instead of theoretical knowledge. If younger children were included in the program, the child start-up allowance would also have an impact on the parents’ financial competence, as they initially take on the capital investment for their underage children.

Linked to receipt of child benefit

The economists suggest linking the child start-up allowance to the receipt of child benefit. A small monthly contribution is enough, she emphasizes – the program should “not primarily serve to build wealth”. If the parents do not make an “active” investment decision, the payments would flow into a fund with a 100% equity share, according to the proposal. Payouts should generally not be permitted until the child’s 18th birthday.

“Educational policy support for the program in schools” and age-appropriate financial education courses at important points in time, such as shortly before the end of the savings phase, could further support the effect of the child start-up allowance on financial literacy, explains the economists. However, the prerequisite is that the courses are “appealingly designed” and teachers are trained.