Update: This article has been revised, as of July, to include the most up-to-date information on the early-start pension contained in the Finance Ministry's draft law.
With the planned introduction of an early start pension (Frühstart-Rente), the federal government wants to encourage school children in Germany to think about saving for retirement from an early age.
Originally described in the black-red coalition agreement between the conservative Union and the centre-left Social Democrat parties as something the new government “wanted” to do, it now looks set to become a reality.
On July 22nd, the Finance Ministry published a new draft law, which reveals that payments for the early-start pension could commence as early as this year. The payouts will then be backdated to January, when the scheme was originally supposed to start.
The announcement raises a number of questions for international residents in Germany – not least whether children who attend German schools, but don’t have German citizenship, will be eligible for the scheme.
What exactly is being proposed?
The plan is that every child attending school in Germany will get €10 per month paid into an individual pension portfolio in their name. Originally, the plan was to make payments to all school children; because of budget constraints, the plan was susequently revised so that pension payments will only be made to children who turn six and start school in Germany next year.
Over the course of their childhood years, the government will pay in €1,440 on behalf of the child – though this could translate into a lot more money over time. Parents can also bolster the pension pot by up to €6,840 per year.
When children turn 18, the government contributions would stop but individuals could make further contribution on their own if they wish.
Savings in the accounts will remain tax-free until the age of 65, when individuals with accounts in their name would be able to access the pension funds.
Will foreign children who attend German schools be included in the scheme?
Under current plans, all children aged six to 17 who are enrolled in a German school – regardless of nationality – are expected to qualify for the new pension accounts.
This is consistent with the way other child-related benefits in Germany are structured, where residency and participation in the German education system are the key criteria, rather than citizenship.
Do I have to opt in and can I opt out?
Ultimately, parents will be responsible for opening a pensions savings accounts for their child, which the government will then pay into. According to the Finance Ministry's draft, this must be a standard pensions savings account – or Standardprodukt, in German. These are standardised, state-regulated pension accounts, which invest in a diverse portfolio of products, from gold to EFTs. Costs are capped at one percent of the account balance per year.
For parents who don't open one of these accounts, the government will step in and invest the money on the child's behalf. If they then decide to open a pensions savings account later – or if the child does, once they turn 18 – the accumulated funds can then be paid into this new account.
Of course, there's no obligation to set up an account for your child if you're only planning to be in Germany for a short time. It may, though, be worth seeing if you could transfer any government funds to a pension savings account in your next country of residence.
EXPLAINED: Is it worthwhile to set up a private pension plan in Germany?
What is the scheme supposed to achieve?
Beyond giving the next generation something of a financial boost, the early start pension aims to improve the financial literacy and financial education of the population. An analysis by the economic policy publication Wirtschaftsdienst suggests that the plan could also strengthen the private, capital-covered pension provision through the use of compound interest effects. Under current plans, the capital can only be accessed upon reaching retirement age.
Some commentators have suggested the plan could further widen inequality in Germany, offering substantial additional benefits to people who can continue making contributions once the state stops (when the child reaches the age of 18).
However, the SPD-led Finance Ministry said the investments could offer "significant opportunities for wealth accumulation" and help "secure one's standard of living in old age".
If no further payments are made after the age of 18, and assuming a rate of return of six percent a year, the account holder would have access to €36,320 on their 67th birthday.
However, the beneficiary can look forward to receiving €374,520 if an additional €100 is added to the account each month from the age of 18.
This assumes, of course, that the statutory retirement age in Germany remains 67. There are no current plans to raise the age of retirement in Germany again, but it is impossible to say what will happen over the next 61 years.
A similar point holds true for the impact of inflation over the same period.
Under current plans, the account holder will be able to access the savings when he or she reaches the age of retirement, whenever that is.
Will it work?
In some respects, it won’t be possible to answer this question until 2087.
In other respects, the first real test of the scheme will come 12 years after it begins, when data becomes available on the number of people who continue paying into the accounts.
Israel and the UK have both previously introduce similar schemes, but their focus was a bit different: Those were designed primarily to provide young adults with a financial cushion, with funds generally accessible from the age of 18. (The UK discontinued it's scheme in 2011, nine years after it was introduced in 2002.)
Currently, money that is paid into pension pots today is used to pay at least a portion of the pensions drawn by people who have already retired. This situation is projected to become increasingly unsustainable as the average age in Germany continues to rise.
Estimated to cost less than €1 billion per school cohort, the Frühstart-Rente scheme can be seen as a relatively inexpensive, long-term attempt to mitigate the impact of this trend.
With reporting by Imogen Goodman
