2000 euros in starting capital for each child from the state: This is how it should work

In the future, the state should provide all children and young people in Germany with starting capital in order to introduce them to the topics of investing and retirement provision at an early stage. The Expert Council of the Five Economists is now presenting a concrete proposal for this proposal.

According to this, the state should give every child from their sixth birthday a monthly fund share worth ten euros. By the time of their 18th birthday, state-financed starting capital of 1,560 euros had been collected. If you assume an average annual return of four percent, this would be around 2,000 euros by your 18th birthday.

This is how child benefit is supposed to work

This is what the Expert Council’s model for child start-up allowance looks like in detail:

• The state pays ten euros a month into a fund for every child between the ages of 6 and 18.
• The monthly amount is automatically adjusted by the inflation rate of the previous year.
• Participation is automatic for all children and families, i.e. not only upon request.
• Eligibility is linked to receipt of child benefit.
• All children who turn 6 years old by September 1st of the respective year would be regularly included in the program. This means that all school children would start the savings phase at the same time.
• Parents should be informed about the child start-up allowance a few months in advance and given the opportunity to choose a fund for their child. If the parents do not decide, the child will be assigned a standard product.
• The savings phase runs until your 18th birthday. During this phase, no money can be withdrawn from the deposit.
• Once you reach the age of majority, the payment can be made without any earmarks.
• The young adults should also be able to continue saving from the fund. The child start-up allowance could therefore serve as the basis for private, eligible retirement provision.
• The implementation of the child start-up allowance should take place via the family funds.
• The child start allowance should not be paid out retroactively for children and young people, but should begin with the introduction for the first time with the then current school year group.

Initially only low costs

This slow start would also initially limit costs. The child entry fee costs the federal government 120 euros per child per year. If it were introduced on September 1, 2025, around 760,000 six-year-olds would be included in the program. This would result in expenditure of 91 million euros in the first year. “Despite the strained budget situation, this amount should be affordable for the federal budget,” write the economists.

In subsequent years, costs would increase due to new vintages and adjustments to inflation. In 2023 they could be around 604 million euros. If all children and young people between the ages of 6 and 18 were included in the program in 2037, economists expect costs of 1.5 billion euros for the federal government.

The program should be kept as simple and general as possible in order to keep the effort for testing and administration as low as possible.

Start-up capital for every type: For more financial education

Regular deposits give children, young people and their families a practical experience of building long-term wealth. The council cites Israel as a model, where the state pays the equivalent of twelve euros a month into a fund as starting capital for each child.

The proposal is primarily aimed at improving financial education and enabling low-income families to build wealth. “Numerous studies show that financial education has a positive effect on building wealth, dealing with debt, retirement planning, capital market participation and investment decisions,” the council wrote in its annual report.

In order to improve pension provision, in addition to child start-up capital, the Council also proposed that Germany set up a publicly managed pension fund based on the model of Scandinavian countries. The starting capital for the young generation could also be paid into such a pension fund.

The Council believes it is urgent that Germany mobilize more capital for investments. The background is also the diagnosis that Germany is losing its growth power. The growth potential is dwindling to the historic low of 0.4 percent per year. The most important reason is to avoid the volume of work due to the change in society and shorter working hours.

Not with that too

Economics are lowering the entire forecast and sounding the alarm: Germany is quickly wasting its power to grow

In order to secure prosperity, Germany must invest more money in technology and modern systems. One key to this would be open capital markets. In Germany, companies are still financed too much through bank loans. On the other hand, too few households had access to the capital market. The proposals are being pushed in the Council primarily by economics professor Ulrike Malmendier, who researches in the USA and has been a member of the Council of Experts for around two years.

Building block for better retirement provision

In order to mobilize more capital for investments, two changes would be central: more financial and economic education and a reform of pension provision. To increase financial education, economists also suggest that children’s start-up allowance be included in schools. Capital market and stock market games should be included in the curricula. Teachers should be better trained in economics and finance.

“A central component for increasing participation in the capital market is the reform of supplementary private pension provision,” wrote the council. In this way, everyone could automatically be required to take part in a private pension plan in advance. If you don’t want to make private provisions, you have to actively decide against it. This opt-out model significantly increases participation in the capital market. This is shown, among other things, by experience in Great Britain, where 86 percent of all private sector employees have taken part in a company pension plan since the introduction of the opt-out model.

The Council of Experts for the Assessment of Overall Economic Development is the Federal Government’s most important advisory body for economic issues. It has five members. Currently, Veronika Grimm, Monika Schnitzer and Ulrike Malmendier are female professors in the majority for the first time. Ulrich Trüngen and Martin Werding complete the council. Since October 2022, Monika Schnitzer has been the first chairwoman of the committee, which is also called “the five economics”.

Not with that too

Retirement at 68: Economic experts want to increase the age limit according to fixed rules as life expectancy increases