The Bundestag on Friday passed the so-called early-start pension. Children born from 2020 onwards will receive ten euros a month from the state from their sixth birthday until they come of age, paid into a retirement provision contract and invested on the capital market. The CDU/CSU and SPD parliamentary groups voted in favour of the bill, as rp-online.de reports. The Greens and the Left voted against, the AfD parliamentary group abstained. The law is due to come into force on 1 January 2027 and still has to pass the Bundesrat.
The funding begins with the 2020 birth cohort, whose children turn six in 2026. From 2027, the next cohort of six-year-olds will be included each year. No state funding is envisaged for children born before 2020. The state support applies retroactively for the initial cohort, as rp-online.de reports, citing the Finance Ministry.
What parents and grandparents need to know
Parents can take out a certified standard custody account contract for their child with a bank, insurer or another approved provider. The contract is in the child’s name. The provider automatically applies for the funding at the central allowance office for old-age assets, which is based at the Deutsche Rentenversicherung Bund. Parents are not required to submit a separate annual application, as t-online.de reports.
If parents decide against a contract of their own, the federal government invests the ten euros a month in a special fund called the “early-start pension”, managed by the Deutsche Bundesbank. Following an amendment by the Finance Committee, the funds may only be invested in broadly diversified global equities or equity funds. No specific return is guaranteed, and the federal government does not compensate for any losses.
Parents and grandparents can top up the account with voluntary payments. Payments of up to 6,840 euros a year are permitted. However, these private payments cannot be deducted for tax purposes. Until the child comes of age, providers may not charge any acquisition or distribution costs. The Finance Committee has extended this rule: for the part of the account based on state funding and the returns generated from it, the ban on such costs now applies until the start of the payout phase.
The funded capital is earmarked for retirement provision. It may not be pledged, sold or seized. Payout as a pension is generally envisaged only from the age of 65. Similar to the “Wohn-Riester” scheme, however, the funded assets may also be used for owner-occupied housing after the child comes of age. The right to the accumulated start-up capital from the collective investment can be claimed up to the age of 35. Funds not claimed subsequently flow back into the federal budget.
Model calculation: 53,000 euros by the age of 65
In a model calculation, the Finance Ministry outlined the potential assuming a return of seven per cent a year. On that basis, the state payments would amount to about 2,200 euros by the 18th birthday and about 53,000 euros by the age of 65, if the money continues to be invested after the child comes of age and no additional contributions are made. If parents add 10 euros a month, according to the ministry the account can grow to around 107,000 euros by the age of 65 – with a 50-euro top-up it would be around 320,000 euros. These are purely model assumptions. No return is guaranteed, and the figures are nominal and take neither inflation nor later taxation into account.
The federal government expects funding expenditure of 198 million euros for 2027. As another birth cohort is added each year, this is set to rise to an estimated 411 million euros by 2030. Administrative costs come on top. Overall, the Bundestag’s Budget Committee calculates expenditure of around 1.2 billion euros for the years 2027 to 2030.
Criticism from the opposition and trade unions
The coalition speaks of a historic decision. SPD financial policy spokesman Michael Thews said the early-start pension would have a long-lasting effect: “This will help many people build up sensible retirement provision.” Fritz Güntzler, financial policy spokesman for the CDU/CSU parliamentary group, said: “This coalition works and we will not be talked out of it. We deliver, and we are showing that today too.”
Criticism came from the opposition. Green MP Stefan Schmidt spoke of a two-tier system. Those who are lucky in the “parent lottery” could make far more out of the early-start pension than a small start-up aid for retirement provision. Left MP Sarah Vollath also criticised the law, saying it did not create equal opportunities.
The German Trade Union Confederation describes the early-start pension as a con. “It is not a pension and it conceals the social and ethical risks of the capital market,” it says in a statement. “The early-start pension is above all a state-financed way of acquiring customers for private financial service providers, banks and insurers.” Dorothea Mohn of the Federation of German Consumer Organisations said that on financial education, politicians fall short of their own standards: “Information from financial providers is important. But it does not replace independent financial education. Children and families need quality-assured educational offerings instead of advertising material.”
The German Banking Industry Committee welcomes the plans. The early-start pension complements the planned retirement provision account with an offering for children and young people and makes it easier to enter capital-funded retirement provision at an early stage. “It can make a significant contribution to introducing young people early to long-term wealth accumulation via the capital market,” it said in a statement.
Editor’s note: The early-start pension is one building block of black-red pension policy. Whether it actually strengthens private provision depends largely on whether parents take out the contracts and whether the capital markets deliver the assumed returns. The ministry’s model calculations are not a guarantee.
Earlier coverage: Bundestag to vote on state-funded ‚early start‘ pension
