No more World Savings Day! A World Smart-Savings Day would be more important

We Germans are and will remain savers. For years, the savings rate in Germany has been ten percent or higher. In other words, we set aside a tenth of the net monthly income flowing into our bank accounts – for lean times, old-age provision or larger purchases. A second constant is the very conservative attitude: 40 percent of the financial assets of private households are “in the bank” or in cash – that’s 2.5 trillion euros. 

Even the negative real interest rate, in view of the continuing low-interest-rate phase, does not deter Germans from stockpiling their money in savings accounts and current accounts. This is precisely where the mistake lies. This mistake can easily be explained in a model calculation. Suppose a saver invests 1,000 euros in his account and receives 0.1 percent interest. With a current inflation rate of 1.2 percent, the purchasing power of his money loses 12 euros within a year. This in contrast with the 1 euro he receives in interest … 

One cannot say it loud enough: the low-interest-rate policy is a creeping expropriation of savers. Politicians and the ECB justify themselves with economic arguments and cause savers to overlook the personal consequences. Or do many savers simply ignore the consequences, in order not to have to act? I don’t know – either way, the consequences are the same. 

The “Genossenschaftsverband – Verband der Regionen” (Co-operative Union – Association of Regions), which represents the interests of around 2,600 member co-operatives in Germany, sounded the alarm as early as 2018, because customers, more and more, seem to be saving in a confused fashion. Last year, customers invested two-thirds of their money practically interest-free as demand deposits – ten years earlier it had been “only” 37 percent. 

It is not surprising that private investors in Germany generate some of the worst returns in Europe. Over the past 15 years, private wealth has grown by 2.8 percent per annum – significantly less than half of the top-ranked Finns (5.9 percent). 

It’s not that Germans are saving too little – they’re simply saving incorrectly. For many Germans, trading shares is too abstract, expensive and risky. The dramatic loss of value in the financial crises of 2000 and 2008 has (all too well) remained in many people’s minds. By the turn of the millennium, millions of Germans were becoming interested in and trying out hobby stockbrokering, investing into Deutsche Telekom’s “Volksaktie” (people’s share). The frustration remains as the number of direct shareholders has fallen by 25 percent in just under two decades, according to the latest figures from Deutsches Aktieninstitut (German Institute for Share Promotion). 

Unfortunately, we Germans have a highly risk-averse attitude when it comes to this matter. The willingness to take a higher risk in order to improve our return opportunities is very low; more than eight out of ten respondents (82 percent) rejected this idea, I read at the Association of German Banks. 

In the end, this has to do with the lack of financial education, because shares are by no means as risky as many believe. Those who bought a representative cross-section of DAX stocks in the past did not make a loss even in the worst case after 15 years. In the best case, on the other hand, the return remained well over ten percent – per year!  

A study by ING-DiBa confirmed that Germans have the second-worst financial literacy in 12 European countries: A good half of all respondents said they knew nothing about finances (only the British were a little more clueless). Surveys commissioned by the Association of German Banks recently revealed considerable deficits. For example, a quarter of Germans did not know what “inflation” means. And hardly more than one in two could explain what an investment fund is. The German Institute for Retirement Provision conducted an online survey to find out where this lack of knowledge comes from. According to the survey, only 13 percent of those surveyed had good financial education during their school years. 

So how can we do better in the future? 

First things first: improve financial literacy. I see this as a duty of education policy: schools need to offer suitable classes on this topic. States like Bavaria or Baden-Württemberg are moving in the right direction with subjects that impart economic knowledge. However, properly trained teaching staff are needed so that it does not get a reputation as a stuffy, boring subject. In North Rhine–Westphalia (NRW), starting from this school year, economics has been taught as a subject in grammar schools. Unfortunately, many other federal states have apparently not yet recognised this necessity. 

In order to change the savings behaviour of Germans in the long term, they must not only be informed in terms of finances, but also offered incentives for investment. One possibility would be to provide incentives for a broader diversification of wealth. The Co-operative Union, for example, called for this as early as 2018 in order to allow savers to benefit more from the long-term development of the stock markets. The Co-operative made a concrete proposal to make certified savings products tax-free from a term of at least ten years. 

Pension provision would also benefit from tax concessions. In 2005, the taxation of pensions was reorganised. Previously, pensions were only taxed at the so-called profit share. Since then, however, the taxable portion has risen continuously until it reaches 100 percent in 2040. The pension will then be taxed in full. The legislator should create framework conditions to promote private old-age provision on the basis of shares or funds and thus guarantee the saver security until retirement age. 

The topic of real estate should also be mentioned. Residential construction must become attractive again. The key concepts here are higher linear-depreciation possibilities in construction and simplified building regulations. After all, an increased supply of real estate provides a greater incentive for investment. 

So there are plenty of possible solutions – it is time for politicians to react. Germany urgently needs to get out of its shell of financial awkwardness. I hope that today’s “World Smart-Savings Day” is a good impetus for this.