Social Safety Net

Big Spender

german social spending pensions
The pension stress caused by Germany's aging population is being mitigated by migration. Source: Jan Woitas/DPA

At the height of the debt crisis, Chancellor Angela Merkel warned Europeans about the Continent’s exploding costs of social care. Europe accounted for half the world’s social spending, even though it had just 7 percent of the global population and 25 percent of global economic output, she warned in 2012.

But Ms. Merkel has not practiced the austerity she preached to her European partners. On the contrary, German social spending is reaching record levels on her watch. Spending on pensions, nursing care and health care will top €1 trillion, or $1.17 trillion, in 2021, according to a draft of a report by the Ministry of Labor and Social Affairs that Handelsblatt has obtained and is due to be approved by the cabinet August 2.

Last year, Germany’s social spending rose by 3.7 percent to €918 billion. That’s up from €400 billion in 1991 and €600 billion in 2000. Labor Minister Andrea Nahles of the center-left Social Democrats expects the total to reach €962 billion in 2017.

Social spending has been outpacing Germany’s GDP since 2012, and economists are not pleased. “With unemployment falling and strong economic growth, one would expect the state to spend less on social benefits,” said Clemens Fuest, president of Ifo, one of Germany’s leading economic research institutes. “In the long run, this expansion of the welfare state will lead to financing problems.”

But with Germany’s general election less than two months away, all parties but one have succumbed to the temptation of wooing voters with promises of more social support. The Social Democrats are promising to keep the state pension stable until 2030 and to extend the period of jobless benefit payouts for unemployed people who are retraining. Ms. Merkel’s Christian Democratic Union (CDU) is offering more child benefits and its Bavarian sister party, the Christian Social Union (CSU), has pledged to include maternity leave in its pension calculations.

The Greens plan to spend some €12 billion on helping families, and the Left Party wants a sharp increase in pensions to 53 percent of average wages from the current 48 percent and a guaranteed minimum payout of €1,050. Only the pro-business Free Democratic Party (FDP), Ms. Merkel’s preferred coalition partner, is opposed to increasing benefits.

“People who complain about social injustice should take a look at the facts,” said Michael Hüther, director of the Cologne Institute for Economic Research, noting Germany is already massively redistributing from top to bottom.

germany social spending

Pensions make up the biggest share by far of the social budget and rose from €217 billion to €294 billion between 2000 and 2016. Spending on health insurance grew from €132 billion to €221 billion in the same period. Civil servants’ pensions and health benefits grew from €51.6 billion to €74.1 billion.

It’s no surprise that the absolute numbers are increasing. Germany is aging, so more people are receiving pensions and using health care. Even though inflation is very low right now, it is also boosting costs. The key question is whether the social spending is in harmony with economic growth and investment. The government claims it is. “The volume of social benefits in Germany is in line with economic performance,” Ms. Nahles wrote to her fellow ministers in a preamble to her report.

But the facts in that report tell a different story. The social expenditure ratio — spending as a proportion of GDP — rose from 29 percent in 2013 to 29.3 percent in 2016, and will reach 29.8 percent this year. Half of the federal budget is now devoted to social spending. Mr. Fuest, the head of Ifo, attributes the rise to measures such as lowering the retirement age from 65 to 63 for people who have paid into the system for 45 years, an increase in the pensions for mothers, the refugee influx in 2015 and the aging population.

The cost of long-term care insurance system will grow fastest this year, by 26 percent or €8 billion, as a result of two reforms. Spending on the statutory health insurance system will rise by 5 percent, while pension costs will rise 4 percent.

German business federations are worried about the spending increases because companies pay half their workers’ contributions to pension, health insurance premiums, long-term care and unemployment insurance. The Confederation of German Employers’ Associations is demanding that total social insurance contributions must not rise over 40 percent of wages because that would weaken Germany’s competitiveness and endanger jobs. German labor costs on average €33.40 per hour, 30 percent above the EU average, and ranks seventh in the EU. Non-wage labor costs account for an additional €28 of every €100 earned in gross terms, but that’s below the EU average of €31.

“People who complain about social injustice should take a look at the facts.”

Michael Hüther, director, Cologne Institute for Economic Research

There’s a simple explanation why Germany’s social system is managing to cover the costs of rising outlays with relative ease: The economy is attracting young, healthy workers from around the EU and the world who are paying more into the system than they’re taking out of it.

The National Association of Statutory Health Insurance Funds (GKV) recently said that health insurance income per person insured rose by 5.6 percent in 2016, the biggest increase in decades, while spending rose by just 3.1 percent. GKV chief Doris Pfeiffer attributed the phenomenon to immigration.

The new workers are also helping the pension system. The number of non-EU citizens paying into pensions increased by 1.7 million – 53 percent – between 2008 and 2015. The number of contributors from other EU countries also doubled to 2 million in that period, according to new figures from the pension insurance system obtained by Handelsblatt. And the momentum is accelerating.

The easing of restrictions on the freedom of movement in the EU since 2011 has made it much easier for EU citizens to work in Germany. “We’re registering a strong increase in the number of contributors with foreign citizenship since 2010,” said Dirk von der Heide of the German Pension Insurance organization.

With the number of contributors outpacing the number of pensioners, net pensions before tax have started rising again, to over 48 percent of wages. “The figures show that foreign immigration into the German labor market is working well,” said CDU lawmaker Peter Weiß, an expert on pensions. “I wish this were emphasized more in the current debate about refugees and immigration.”

At present, though, about half of the more than 1 million refugees who have come to Germany since the start of 2015 are still unemployed. The resulting costs are carried not by the unemployment insurance system but by the federal government, which pays the so-called Hartz IV benefit, the basic welfare payout for the long-term unemployed.

 

Martin Greive is a correspondent for Handelsblatt based in Berlin. Frank Specht is based at Handelsblatt’s Berlin bureau, where he focuses on the German labor market and trade unions. Peter Thelen covers politics and labor relations for Handelsblatt. To contact the authors: greive@handelsblatt.com, specht@handelsblatt.com and thelen@handelsblatt.com.

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