Early start pension planned: Economist warns of second Riester flop

Economist Ulrike Malmendier demands that the federal government avoid repeating the mistakes of the "Riester" pension with its planned early-start pension. This time , Malmendier writes in a working paper of the German Council of Economic Experts, investment products with higher returns and lower costs are needed. She also advocates for standardized financial products that don't require individuals to make complicated decisions.

The coalition wants to promote private retirement savings with the early-start pension. The government would pay ten euros per month for each child from the age of 6 to 18. This money would flow into an "individual, funded, and privately organized retirement savings account." According to current plans, account holders can contribute additional money after their 18th birthday. The accumulated amount would then be paid out when they begin receiving their pension. The returns would be tax-free until the child reaches retirement.

In addition to the financial buffer that every child will receive for their retirement, the government hopes for a psychological effect. Compared to other European countries, very few households in Germany invest in the capital market. They miss out on the opportunity to invest their money profitably. Therefore, children should learn how to handle financial products at an early age. This approach is also praised by economist Malmendier.

The amount each child saves in their account depends largely on two factors, in addition to the deposits: the costs and the return on the financial product.

An example calculation: Starting at age 6, the government pays ten euros per month into a financial product that has a cost of three percent and an average return of seven percent. After a savings period of twelve years and a further 50 years of letting the money sit, the total at retirement would be approximately 13,000 euros.

However, assuming costs of just one percent and an average return of seven percent, the final amount would be €38,500. If the costs are further reduced to 0.5 percent and a return of eight percent is assumed, approximately €85,000 would be available at retirement.

"The power of compound interest is enormous," says Hartmut Walz, author of specialist books and behavioral economist at Ludwigshafen University of Applied Sciences. He advises paying particular attention to the costs of the financial product. Investments with capital guarantees, for example, are not recommended. These products often offer low returns, and a guarantee is unnecessary given the long investment period of more than 60 years.

Walz warns of the strong lobby of insurers, who are already looking forward to three million new contracts in light of the plans for early retirement. "Capital-forming life insurance policies, for example, regularly have high costs. There's a risk that we're not subsidizing young people, but rather the financial industry."

In her working paper, economist Malmendier outlines two options for organizing investments: either through individual private portfolios or through a collective investment. Private portfolios have the advantage of allowing families to make their own investment decisions and gain individual experience. A centrally managed collective investment, on the other hand, could have a favorable effect on ongoing costs. Furthermore, no child would be disadvantaged because their parents chose a lower-yielding product, the paper states.

An example from Israel shows that both approaches can be combined. Each month, the government contributes approximately €15 for each child. In return, parents are asked after the birth of their child to choose between a savings plan with a bank or a retirement fund with different risk classes. If the parents do not respond within six months, the money is automatically transferred to a standard product—in Israel's case, a savings plan with a fund provider with higher risk and a correspondingly higher return potential.

In Israel, every child receiving child benefit also receives a savings plan. Malmendier recommends this automation for the German Early Start Pension as well. It's currently unclear whether all children receive state benefits or only those whose parents apply for them. The latter approach would have the disadvantage that many children from low-income and less educated households would likely not receive a savings plan – for example, because the application process would be too time-consuming and complicated for the parents.

It would therefore be fairer to have automated registration of all children in Germany as well. Malmendier suggests using either child benefit payments or the tax ID number assigned to every child in Germany at birth.

However, this would also increase costs for the state. Chancellor Friedrich Merz had already calculated during the election campaign that the early-start pension would cost €84 million per year per generation. Assuming that all children receive the benefits, the total annual expenditure for twelve generations would be approximately €1 billion.

The law was originally planned for the beginning of 2026. However, experts say that might be tight.