social security

How those paycheck deductions work and how they may decrease

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Shoveling cash into government programs. Source: DPA

Germany’s nearly 33 million full-time employees may soon get a bigger cut of their paychecks – though it may be hard to spot.

A handful of politicians are pushing to reduce paycheck deductions that are taken to fund the country’s generous social welfare system, which would mean more take-home pay for employees. The elected officials say bubbly global economies as well as surpluses in both the health insurance and pension schemes demand cuts. Opponents counter that planned reductions already go far enough.

Don’t get too excited – the changes are minor compared to the 20.525 percent that is carved out of gross pay for health, long-term care and unemployment insurance as well as for the country’s public pension scheme. Employers contribute 19.425 percent of an employee’s salary to the same programs. The differing levels are explained by a variable supplemental fee charged by public health insurers that currently averages 1.1 percent and must be paid exclusively by employees.

The current coalition of the center-left Social Democrats and center-right Christian Democrats agreed to eliminate the uneven social health insurance, or Krankenkasse, contributions by January 1. The equalization will save workers an estimated €6.9 billion, but cost employers. But Health Minister Jens Spahn, a member of the CDU, wants to go further because of the record €19.2 billion surplus in the bank accounts of the country’s 112 public health insurance companies. Mr. Spahn would like to force any health insurer with a surplus larger than one month’s costs to lower their supplemental fee, which would lead to an average reduction of 0.3 percentage points, or a total €4.4 billion savings for workers.

For employees with private health insurance, employers can pay up to half of the fee, depending both on the insurer and the employer.

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In addition to equalizing the health insurance contributions, Berlin’s “grand coalition” government also agreed to lower the deduction for unemployment insurance (Arbeitslosenversicherung) by 0.3 percent. Again, some are calling for a bigger reduction since the unemployment agency – known here as the BA – is expected to have a surplus of €22.5 billion by the end of the year. Even with a 0.5 percentage point reduction in the 3 percent unemployment contribution, that slush fund would grow to €28.3 billion by the end of 2022.

“Which is why a reduction in the deduction beyond the 0.3 percentage points agreed in the coalition agreement is not only possible, but necessary,” said Peter Clever, head of the BDA German employer association. Left-leaning politicians, however, prefer to keep the money piling into the scheme to fund training. If the coalition remains with the agreed 0.3 percentage point reduction, the BA will still have an estimated €37.9 billion surplus in 2022.

Compulsory contributions to the government’s pension scheme, the Rentenversicherung, were lowered to 18.6 percent in January and are expected to remain stable until 2020, according to the program itself, which has a slush fund of €30 billion. It should climb to 18.7 percent in 2023 and then 19.8 percent in 2024 as Germans age. The contribution should cross the psychological 20 percent threshold to 22.9 percent in 2040.

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As is so often the case with governments, if one hand giveth, the other taketh away: The contribution for the compulsory long-term care insurance program, known as Pflegeversicherung, has suffered after it was widened in 2017. The program was expected to show a €1 billion deficit by the end of the year, but that shortfall is now expected to come in at €3 billion. “The long-term care insurance contribution will have to be increased, at the latest next year,” Mr. Spahn said.

Pflegeversicherung is usually applied to nursing home care for the elderly but covers anyone with extra care needs, as determined by a doctor. Mr. Spahn hopes to increase the contribution by 0.2 percentage points next year – it climbed the same amount in 2017 to 2.55 percent. Don’t have children? Then you pay an extra surcharge of 0.25 percent, or 2.8 percent total. To keep up with the aging population, the German Economic Institute expects the figure to climb to 3.2 percent in 2040 and 3.7 percent in 2050.

Andrew Bulkeley is an editor in Berlin for Handelsblatt Global. Frank Specht covers the jobs market and labor unions from Berlin. Peter Thelen writes about social security systems, the job market and labor issues. Gregor Waschinski is a Handelsblatt correspondent in Berlin. To contact the authors: a.bulkeley@handelsblattgroup.com,  specht@handelsblatt.comthelen@handelsblatt.com,  G.Waschinski@handelsblattgroup.com

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