Educational Savings Plans: Models for New Ways of Financing

Earning the right qualification and keeping it up to date are decisive factors for a successful career. However, Germany is only in mid-table in the current OECD education study on lifelong learning. To support people as efficiently as possible in their lifelong learning, the Federal Ministry of Education and Research has commissioned two studies, which have now presented their results. In their studies, the experts have developed a model, which provides for three new support programmes.

Employees' skills are among the main production factors. The success of individuals on the labour market as well as the success of companies in international competition depend on the best possible qualifications and on keeping them up to date by means of continuing training. In Germany, participation in continuing training programmes has, however, decreased nationwide since 2000.

The Federal Government has recognized that there is a need for action and defined in its coalition agreement that continuing training savings plans should be introduced as a new financing tool for continuing education and training. Two experts were commissioned with the development of a viable model which pursues the aim of mobilization and a change of mentalities: Prof. Bert Rürup on "The economic and social policy significance of continuing training savings plans" and Dr. Dieter Dohmen of the Institute for Education and Socio-Economic Research and Consulting (FiBS) with an "Analysis of possible models and the development of a concrete model for educational savings plans".

Analysis of Problems

The expert report of Prof. Rürup provides data on continuing training and the consequences of deficiencies in lifelong learning. In brief, the decline of the working population in Germany - caused by demographic change - and the decrease in continuing training are mutually reinforcing: There is too little continuing training, we are aging and, in this combination, we are continually losing knowledge. This means that we are falling behind in a comparison with other nations. For an export nation like Germany, with its emphasis on quality, Prof. Rürup believes that this is a highly undesirable development. He therefore believes that the state as well as all citizens must become committed to the social and individual benefits of continuing training. He sees the financing of continuing training as the chief obstacle for individuals. The model for continuing training savings plans proposes a solution.

Continuing Education for All by Means of Continuing Training Savings Plans

The declared objective of continuing training savings plans is to facilitate the financing of continuing education for as many people as possible and to thus mobilize in particular those population groups who have so far not been able to improve their individual opportunities on the labour market due to lack of money. Provision for old age is not to be affected by this "new" savings motivation. The experts therefore propose to build on existing ways of saving.

The experts have developed a model based on their studies which provides for three new support programmes: a continuing education bonus, an amendment of the Capital Formation Act (VermBG) and a loan for more comprehensive continuing training.

A state-funded continuing education bonus is proposed in the studies as central instrument of continuing training financing. The maximum bonus is to be 154 Euro. It will be granted to anyone who contributes the same amount from his/her own funds. Including the minimum amount of 30 Euro, the budget for continuing education is thus 338 Euro. With this amount, the fees of over 75 percent of all continuing training measures currently taken by individuals can be paid. The particular incentive is that almost half of all costs are covered by the state in the form of the continuing education bonus. A comparable model has triggered a continuing education boom in Great Britain. The participation rate was three times higher than expected. This shows that a relatively small contribution can have a considerable impact. On the other hand, the British experience seems to indicate that the effectiveness of funding can be much increased by obligatory counselling.

The bonus is particularly attractive for those who cannot deduct taxes for continuing training because their taxable income is too low or because their education expenditure is below the blanket deductions. Those who finance their continuing training measures from their current income or existing assets have been able to claim the costs under their individual income tax return for quite a while.

The second possibility of continuing training financing is an advance withdrawal under the Capital Formation Act (VermBG). Depending on savings amount and interest rate, about 500 Euro are available after one year and 3,500 to 4,000 Euro after seven years under the current conditions of the Capital Formation Act. With this amount, even more comprehensive continuing training programmes could be paid for. The experts propose that participants in continuing training should be allowed to use the amount saved for continuing training even before the end of the blocking period without losing their claim to the state bonus granted to small and medium income groups under the VermBG.
As a third possibility, the model provides for a low-interest continuing training loan which provides funds for continuing training after obligatory counselling without examination of individual financial standing. This can be a valuable option in particular for continuing training programmes which entail higher cost of living - for example because of a temporary change of location. More expensive measures could thus also be financed.

The experts assume that the education bonus under the model presented would burden the public budget with about 30 million Euro p.a. if the users were entitled to a bonus every two years. Referring to international experience, they recommend obligatory counselling before the continuing training savings plan can be accessed. This is to ensure that the envisaged continuing training is likely to increase career opportunities and that the best option for financing is chosen. It thus enables each and everyone to invest his/her money sensibly and minimizes the risk of possible abuse.

A Comprehensive Model

The continuing training savings plan model presented in the expert opinions provides a possibility of financing for almost all those groups of people who have not been able to finance continuing training programmes from their current income or existing assets. The three elements, i.e. the continuing education bonus, withdrawal under the VermBG and continuing education loans, will cover small, medium-sized as well as more comprehensive continuing education programmes. Furthermore, combining them should be possible. The continuing education bonus alone enables the financing of a large part of the continuing training programmes currently chosen in Germany if it is complemented by the envisaged 50 percent individual contribution. The experts therefore believe that the use of this seemingly moderate bonus will have a considerable mobilizing effect.