The Baby Fund
Every working German gets a letter once a year from the Deutsche Rentenversicherung. Mine arrived a few weeks ago. It told me, in three decimal places, what my pension will be at retirement. It also explained in the small print that the system paying it can’t actually afford to.
The federal government already moves more than 100 billion euros a year into the pension system from general tax revenue. It’s the single largest line item in the federal budget. Larger than defense. Larger than education. Larger than all federal investment combined. And it goes up every year, because there are more retirees in Germany every year than the year before.
It is tempting to read this as a difficult engineering problem. I think the more honest reading is that it isn’t an engineering problem at all. It’s an arithmetic one. We just keep refusing to do it.
Germany has about 650,000 births a year. Imagine that on the day each German is born, the state opens a brokerage account in their name and puts 25,000 euros into a low-cost global index fund. The money is locked until age 67. Nobody can touch it. Not the parents, not the child, not the state. It just sits there for sixty-seven years, doing nothing more interesting than tracking the world economy.
The annual bill is 16.25 billion euros. Less than what we’ll spend on the Mütterrente alone starting next year.
If the fund earns 5% a year in real terms (about the long-run average for a globally diversified equity portfolio), the 25,000 euros grows to about 656,000 by the time the child retires. At 3% it’s around 180,000. At 7% it’s closer to 2.3 million. The exact number isn’t the point. The point is that under almost any plausible return, every German born from now on retires solvent without needing the pension system at all.
Compare it to what the state already pays. A typical German pensioner today gets about 1,200 euros a month, or 14,400 a year. Over a normal retirement of seventeen years, that comes to about 250,000 per person. The Baby Fund beats that under almost any plausible return. At a conservative 3% it gets you close. At the historical 5% real it pays nearly three times. The Baby Fund isn’t just cheaper than the current system. It actually pays the recipient more.
Late last year the cabinet passed something in this direction. It’s called the Frühstart-Rente. Since January, the state has been depositing ten euros a month into a private retirement depot for every child between the ages of six and eighteen. The money is locked, tax-free during accumulation, and supposed to compound until retirement. When it is fully rolled out, the program will cost about a billion euros a year. Each child gets 1,440 euros from the state in total.
That’s the same idea at one-thirtieth of the scale. Ten euros a month for twelve years adds up to 1,440 euros. At 5% real, those contributions grow to about 22,000 by age 67. The Baby Fund grows to 656,000. A child who only gets the Frühstart-Rente still depends entirely on the pension system at retirement. The arithmetic doesn’t begin to fix itself at 1,440 euros. It begins to fix itself at 25,000.
So the German state has agreed that the right thing to do is deposit money for children, lock it in a retirement depot, and let compound interest do the rest. Then it has chosen to do this at the smallest scale at which it can plausibly be called a policy. The press release talks about empowering young people and laying foundations. The numbers underneath it talk about a thousand euros, spread over a decade, into a problem that needs hundreds of thousands.
You have to wonder why this isn’t happening at the scale that would actually matter.
Some of it is that politicians are extraordinarily bad at investing in things they won’t live to see. A 67-year horizon is sixteen election cycles. No party in a coalition gains anything from a policy whose payoff arrives in 2093. The Mütterrente, by contrast, pays out next quarter, to people who reliably vote for you. From a politician’s perspective, the choice is rational. From the country’s, it isn’t.
But the deeper answer is structural. Even if a German politician wanted to do this, the coalition couldn’t deliver it. Bold, concentrated, long-duration policy doesn’t fit through the overlap of what three coalition parties can each stomach. It gets ground down into something smaller, then more diffuse, then something everyone can ignore. The Frühstart-Rente is what survives that grinding. A Baby Fund is what doesn’t.
I don’t think Germany will do this. The political economy doesn’t allow it. The same incentive structure that’s failing the pension system would fail the cure. But it’s worth pricing the alternative anyway. The gap between what’s possible and what we do tells you something about us.
For 16 billion a year, less than the cost of a single popular line item, we could close the demographic question for everyone born from today forward. Instead we’ll spend ten times that, every year, for another fifty years, trying to plug a hole that gets bigger as we plug it. The math doesn’t change. Only our willingness to read it does.
I’m going to do this for my own children regardless of what the country decides. The math is too clear not to. And I would, with a smile on my face, pay the taxes to give every German child the same start.