The “early start pension” is an opportunity to gain initial experience in the capital markets
ResearchCritical to success is how the standard investment solution is implemented when no active investment option is chosen
On 12 August, the Federal Cabinet approved the “early start pension”. The initiative is designed to help young people in Germany build retirement savings early and to become familiar with the opportunities of capital markets. Children whose parents do not enter into an individual contract for their child are also included through a so‑called collective investment, so that no starting capital is lost.
In a recent study, financial economists emphasize the importance of clear and independent structures for this automatic default investment solution. The authors Tabea Bucher‑Koenen (ZEW Mannheim and the University of Mannheim), Christine Laudenbach (SAFE), Ulrike Malmendier (University of California, Berkeley and SAFE), Claudia Schaffranka (SAFE) and Milena Schwarz (German Council of Economic Experts) – recommend investing exclusively in equities and following a passive, broadly diversified, rules‑based strategy. Their guidance derives from their long‑standing research on retirement savings, equity market participation, and financial education.
Capital‑Market experience shapes investment behavior
Ulrike Malmendier, director of the O’Donnell Center for Behavioral Economics at UC Berkeley and distinguished policy adviser at the Leibniz Institute for Financial Research SAFE, summarizes: “Research shows that people learn from experience, and personal experience with capital markets strongly influences later investment behavior. In Germany, simple access to broadly diversified equity investments has been lacking.”
Christine Laudenbach, head of the Household Finance department at SAFE and finance professor at Goethe University, stresses: “A major hurdle is the belief that one must know a lot about financial markets to avoid mistakes when investing. That perceived complexity can deter people from starting to invest at all. By automatically enrolling every family, the early start pension can bring in the broader population. It is a fresh start that offers enormous opportunities to change Germany’s equity culture sustainably.” For a lasting financial market experience, high transparency and low complexity are essential for the early start pension.
Political requirements vs. implementation
“Experience from Sweden shows that the design of the standard portfolio shapes the investment behavior of the vast majority for decades,” says Tabea Bucher‑Koenen, head of the ZEW research area Retirement and Sustainable Financial Markets. She also notes that separating political mandates from operational execution is important: “A transparent and stable system requires long‑term, consistent return orientation, professional management, and independent oversight by capital market experts.”
The early start pension will take effect on 1 January 2027. According to the plans of the German government, the legislative process should be completed by November 2026 so that implementation can be prepared in time. The authors argue that the stock‑based investment proposed in the draft bill should be preserved. They see large potential not only to improve financial literacy but, above all, to sustainably support financial behavior. The prerequisite is that diverse segments of the population gain firsthand experience with broadly diversified, low‑cost, and thereby high‑yielding investments, supported by targeted educational offerings.
Broadly diversified equity portfolio
Equities have historically delivered the highest real returns about 7 percent per year – far above bonds. Over a long investment horizon, these differences have a significant impact on the eventual pension amount. A passive, rules‑based strategy keeps costs low and guards against attempts to time the market or to succumb to short‑term political influence on investment decisions.
Market‑capitalization weighting is the established and transparent standard in the market. Alternatives, such as weighting by economic performance (GDP weighting), can further reduce concentration in individual countries and firms.
