FiBS-Forum 56 Education Investment Fund – an innovative approach to financing additional educational expenses

Germany and Europe are facing huge challenges. After the economic and financial crisis and the resulting increase in (youth) unemployment in most countries, the current influx of refugees is forcing additional public spending. Both together, the elimination of youth unemployment – which is high in many countries – and the admission of refugees are central prerequisites for at least alleviating the foreseeable shortage of skilled workers due to demographic change. This requires billions of euros in investments in education, which must be financed in addition to other public tasks!
The starting point: 18% of 15-year-olds in Germany are functionally illiterate, unable to calculate, write and read properly. That's over 150,000 young people in each age cohort. The same applies to 7.5 million adults. It is not surprising that the latter figure is almost identical to the 7.2 million adults aged 20-65 who have not completed vocational training.
The fundamental significance of these figures becomes clear when they are compared with current forecasts regarding the demand for skilled labour: they indicate that there will be a considerable shortage of qualified skilled workers in the coming years and decades, both among university graduates and among those with vocational qualifications. The number of new university entrants would have to be increased in the short term from the current 500,000 to 575,000, and the number of new training contracts in the dual system from 520,000 to up to 675,000. However, it will only be possible to fill such a high number of training and study places if the education system – in conjunction with other areas such as social work and youth welfare – does a better job than before of helping all young people to acquire sufficient preliminary qualifications to be able to take up and successfully complete a training programme.
According to the rough calculations of the present study, such an education offensive would cost more than €50 billion per year over a longer period of time, part of which would be one-time investment costs and the other part ongoing costs for additional personnel, etc. In view of the challenges described above, and of course other challenges – e.g. combating the general reluctance to invest, the impending debt brake, etc. – it cannot be assumed that public funds will even come close to covering this amount. Private funds are therefore needed!
The solution proposed in this study is therefore the concept of an Education Investment Fund, which collects private capital – e.g. from (life) insurance companies, foundations, corporations, private individuals – and makes it available to public institutions (federal, state and local governments and, if applicable, the Federal Employment Agency) for the financing of educational measures. In return, the fund will receive a share of the fiscal returns resulting from these measures in the medium to long term. To put it simply: if the fund finances 100,000 university places, for example, it will receive a share of 35 or 50 per cent of the additional tax revenue generated by these additional graduates. With 10 million people in employment with a university degree, this would correspond to around 1% of the total income tax paid by graduates. Ideally, the fund would also participate in the additional social security contributions and the social benefits saved (parenting assistance, Hartz IV unemployment benefits, housing benefit, etc.). The latter would be the case especially with otherwise low-skilled and unskilled people.

On the basis of the fiscal returns estimated by us in an earlier study of up to 27% in the university sector and over 20% for investments in early childhood education, etc., a share of the fund of one-third of future fiscal returns would yield a return of up to 9% per annum, at a relatively low risk given the demographic change and shortage of skilled workers. Depending on the area of education, the investment starts to pay for itself after three to five years, although in early childhood education it takes almost 20 years. On the other hand, the repayment period of 40 to 50 years or more is comparatively long.

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