can €10 a month change how people invest?

When Friedrich Merz warned young Germans on YouTube this month not to rely solely on public pensions but to also regularly invest small amounts in the stock market, he provoked an angry response from unions.  

The mighty IG Metall metal workers’ union called the German chancellor’s view “out of touch with reality and dangerous”. Instead of promoting share-based private pension plans, he should strengthen the country’s struggling pay-as-you-go retirement system, it said.

Founded in 1889 by chancellor Otto von Bismarck, the public pension system has survived wars and crises but now faces an even greater challenge as the workforce ages and shrinks.

By 2036, 19.5mn of Germany’s baby boomers will have retired while only 12.5mn young workers will have joined the labour market, according to the Cologne Institute for Economic Research (IW).

This will result in a 9 per cent decline in the labour force. In 2040, 100 workers will have to support 41 pensioners, compared with 30 at the moment, IW predicts.

Merz’s centre-left coalition is shying away from a fundamental overhaul of the state pension system, instead trying to nudge households towards “individual, capital-backed and privately managed retirement savings accounts” as a complement to state pensions. 

The government has promised a new subsidy focused on children aged 6 to 18. From next year, parents can claim €10 a month to invest in a monthly share savings plan on behalf of their offspring. The funds will be ringfenced until the children have reached retirement age. 

An ageing and shrinking workforce poses a challenge to Germany’s public pension system © Michael Nguyen/NurPhoto/Getty Images

Germany’s pension time bomb serves as a warning for other EU countries, with member states already spending an average 12 per cent of GDP on public schemes and many also facing demographic decline.

Merz’s push to encourage the young to invest in stocks echoes similar efforts by countries including the US and UK to channel retirement savings into productive assets, including infrastructure, property and private equity.

The German case is particularly acute. Each year, about a quarter of the federal budget — €117.9bn in 2024 — is used to plug holes in the pension system. Under current policies, this burden is set to rise even more, the Federal Audit Office predicted last year.

The German Council of Economic Experts has frequently warned that the level of pension benefits would have to decline, “while the contribution rate will sharply increase under current rules”.

At present, 17 per cent of the adult population in Germany owns shares, investment funds or exchange traded funds, compared to 39 per cent in the UK and 62 per cent in the US. This reflects a long-standing government promise that the state pension is “safe”, said Andreas Hackethal, finance professor at Frankfurt University.   

The finance ministry said the €10 a month scheme, dubbed “early start pension”, was a priority but remained “at a conceptual stage”. Annual costs of the subsidy are estimated at about €1.5bn by the Council of Economic Experts.

“We want to acquaint the next generation with the capital market early on,” Carsten Linnemann, general secretary of Merz’s CDU party and the chancellor’s confidant, told the Financial Times. The new scheme over time will also help to “mitigate the state pension gap”, he added.

Chancellor Friedrich Merz, left, and Carsten Linnemann © Krisztian Bocsi/Bloomberg

The €10 monthly subsidy was the brainchild of Ulrike Malmendier, a behavioural finance professor at the University of California, Berkeley and one of the five members of the Council of Economic Experts.

“If you invest in a broadly diversified portfolio and take a 30-year perspective, then decent returns are all but guaranteed,” she said in an interview with the Financial Times. 

While this was shown by a plethora of academic research, “many people in Germany have just not really understood this”, argued Malmendier. “As a finance professor, I can explain this theoretically, but it’s better if people experience it themselves.”

German households are sitting on €9tn of financial assets between them — 37 per cent of which is held in cash and low-yielding bank deposits, according to Bundesbank data. 

A survey in May found that 49 per cent of Germans prioritise low risk when investing, 25 per cent flexibility and only 14 per cent high returns.

“To close the pension gap, we need high returns of 6 to 8 per cent a year,” said Christian Hecker, the founder of Berlin-based online broker Trade Republic.

Assuming an average annual return of 7 per cent, the government’s planned “early start pension” subsidy of €10 a month per child aged 6 to 18 years would turn into about €2,200.

Without any additional contributions, it could grow to about €65,000 on paper over the subsequent 50 years. However, Ali Masarwah, chief executive of wealth adviser Envestor, warned that annual inflation of 2 per cent could lower the real value by two-thirds. 

“Judged by the hard numbers, the early-start pension is little more than symbolic policy,” Masarwah said. 

Malmendier and other proponents hope the real benefits will come from behavioural change, as children and their parents might consider ploughing more of their money into investments that potentially offer higher returns.

“When people live through this, it can result in experience effects which can shape their behaviour for decades,” said Malmendier.

However, previous attempts by German governments to provide incentives to private pensions failed woefully. An EU cross-border private pension product launched with much fanfare in 2022 has fared little better.

Former German chancellor Gerhard Schröder’s red-green coalition in 2002 introduced tax breaks for capital-backed pensions, the so-called Riester pension. It compelled asset managers to formally guarantee a pension level similar to the amount of money paid in by the client, resulting in costly hedging of risks and products that are often “underperforming and expensive”, according to Verbraucherzentrale NRW, a consumer protection group. Government estimates showed that up to a quarter of the 15mn policies sold are orphaned.

Merz’s predecessor, Olaf Scholz, planned to fix the flaws. Last September, then-finance minister Christian Linder — a pro-market Free Democrat — unveiled what Masarwah calls an “ambitious proposal that could have put private pensions on a more solid footing”.

But the government fell apart two months later, before the plan could be implemented. Malmendier is urging Merz to get it right this time.

“We botched it with Riester, and I don’t know how many more chances we will get. We simply cannot afford to get it wrong again,” she said.

An earlier version of the household financial wealth chart accompanying this article has been amended. The values should be in tn, and not bn.