Government subsidies are intended to promote equity culture

The Germans – similar to the Swiss – are a people who don’t like stocks and capital markets. German households hold almost 43 percent of their financial assets in the form of cash and bank deposits, while only 27 percent are invested directly on the capital market in the form of bonds, stocks and investment funds. In the USA and Sweden this proportion is significantly higher at 55 percent and 46 percent. The low level of “stock culture” in Germany not only makes it more difficult to raise capital on the stock market, but households also forego potential income.

Key points of the proposal

The Economic Advisory Council (“Wirtschaftsweise”), an independent but influential advisory body, would like to counteract this with a state-financed child start-up allowance. In a paper published on Monday, he refers to the investment behavior quoted at the beginning and argues that with a child start-up allowance, “participation in the capital market can be anchored early in life”. It would enable “long-term experience with corresponding investments and their potential returns for broad sections of the population”.

The proposal provides for a state payment of “e.g. 10 euros a month” into a selected fund for 12 years for every child from their 6th birthday. In the first few years, the parents would make the fund selection; from the age of 15, the children could make their own investment decisions.

A payout of the saved capital would only be possible upon reaching the age of 18 at the earliest. It should be done without any specific purpose. However, it should also be possible to continue saving through the fund and, for example, use the money as a basis for private retirement provision.

According to the economists’ proposal, the child start-up allowance would not be invested in individual stocks, but rather in liquid, broadly diversified funds with a high share of stocks and low costs. Which funds are available for selection could be determined through certification according to certain criteria or a tender model. Parents would be informed a few months before the deadline and asked to make a fund selection for their child. If you don’t give any feedback, your offspring would be assigned a standard product (default option).

Learning from experience

All children would be automatically recorded from the age of 6. According to the proposal, eligibility should be linked to the receipt of child benefit. An investment period of 12 years allows children and parents to experience different financial cycles and benefit from the advantages of a broadly diversified investment, the economists argue.

In their view, the program, which is based on a model established in Israel, is not intended primarily to build wealth. Rather, it is intended to acquire practical knowledge. The previous financial education programs, not only in Germany, have contributed less to strengthening financial literacy than hoped, explained economist Ulrike Malmendier. Unlike previous measures, the child start-up allowance aims to strengthen financial behavior through learning from experience. According to the proposal, the program could be accompanied by learning units in schools and age-appropriate financial education courses.

costs for the taxpayer

While strengthening the stock culture and financial knowledge have long been widely shared goals, achieving the goal through a new subsidy instead of “just” through more financial education in schools is unlikely to remain uncontroversial. Michael Hüther (Institute of German Economics) and Clemens Fuest (Ifo Institute) have already criticized the proposal in this sense to the “Frankfurter Allgemeine Zeitung” on Monday.

What would the project cost taxpayers? In 2022 there were around 10 million children between the ages of 6 and 18 in Germany. The economists advocate a gradual introduction of entry fees for children who reach the age of 6. The costs for the federal budget would then gradually increase from 91 million euros in the first year to around 1.5 billion euros from 2037 (at an initial rate of 10 euros per month and taking into account an inflation adjustment).

You can contact Berlin business correspondent René Höltschi on the platforms X and follow Linkedin.