Welfare Costs

Failure to Reform

German Chancellor Angela Merkel, right, and former German Chancellor Gerhard Schroeder, left, pose during a photo call prior to the book presentation of Schroeder's biography in Berlin, Germany, Tuesday, Sept. 22, 2015. (AP Photo/Michael Sohn)
German Chancellor Angela Merkel, with former Chancellor Gerhard Schröder, whose government made reforms to the social welfare system. Ms. Merkel's government is being criticized for not doing enough of the same.
  • Why it matters

    Why it matters

    The German government, while exhorting Greece and other high-debt nations to reform their welfare systems, has neglected to reform its own, warn economists and business leaders.

  • Facts

    Facts

    • Germany’s pension, health, unemployment and nursing care insurance contributions are projected to rise over 40 percent of gross wages next year — despite years of strong economic growth.
    • Business leaders have accused Chancellor Angela Merkel’s government of failing to prepare the welfare system for upcomic demographic change — and of making expensive welfare handouts instead.
    • In a letter seen by Handelsblatt, a senior economic advisor has urged Economy Minister Sigmar Gabriel to refrain from any further increases in state pension payouts.
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    Audio

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Chancellor Angela Merkel’s government has been putting future economic growth at risk by boosting welfare spending at a time when it should have been reforming the social security system to stop social insurance contributions from rising, business leaders and economists have warned.

German employers have sounded the alarm at the prospect that contributions are about to exceed 40 percent of gross wages, a level which they said could hurt the economy and deter job creation and consumer spending.

Germany’s welfare system is funded by shared contributions paid by employers and employees. At present, workers pay 39.8 percent of their gross wages for pension, health, unemployment and nursing care insurance. And they need to pay tax on top of that.

In the early 2000s, Germany was labelled the “sick man of Europe” because of chronic weak economic growth and a top-heavy welfare system that was draining the economy of funds.

Successive governments had neglected to reform the system despite consistent warnings that the social security system was becoming unaffordable.

But there is a mood to tighten the belt. With a general election due in the fall of 2017, Chancellor Angela Merkel’s coalition of conservatives and Social Democrats has already started wooing voters.

A center-left government under former Chancellor Gerhard Schröder finally tackled the problem with cuts in social spending and a reform of the labor market in 2003 and 2004, and the measures gradually bore fruit, pushing social contributions below the 40 percent level in 2012, seven years after he was voted out of office by an electorate groaning under the impact of the cutbacks.

But now contributions are rising again. The Confederation of German Employers’ Associations (BDA) has calculated that the level will rise from 39.8 percent at present to 40.2 percent next year due to increases in nursing care and statutory health insurance contributions.

But there is a mood to tighten the belt. With a general election due in the fall of 2017, Chancellor Angela Merkel’s coalition of conservatives and Social Democrats has already started wooing voters. Last week, the government announced that state pension payouts would increase by the biggest percentage in 23 years — 4.25 percent in western Germany and as much as 5.95 percent in the east.

Advisors to the German Economy Ministry have warned the government to refrain from “electoral gifts” to pensioners that will drive up contributions even higher for those in work.

In a letter to Economy Minister Sigmar Gabriel seen by Handelsblatt, Swiss economist Hans Gersbach, the chairman of the economic advisory council to the ministry, warned “urgently” against increasing payouts in the state pension system.

Doing so would “inevitably lead to an increase in the tax and contributions burden in the foreseeable future,” he wrote. He urged Mr. Gabriel to point out the “broader economic consequences” to his cabinet colleagues.

 

08 p9 Expensive Social Welfare-01

 

Doris Pfeiffer, chairwoman of the Association of Statutory Health Insurers (GKV), complained that the rise in contributions was largely due to the “expensive laws passed in recent years.”

The BDA employers confederation said Ms. Merkel’s coalition had been lulled by Germany’s economic upturn “into an expensive and partially backward social policy whose full costs will only become visible over time.”

It added that the coalition had done virtually nothing to prepare the welfare system for demographic change.

“The social insurance burden must not exceed the 40 percent level.”

Hans Peter Wollseifer, president of the German Confederation of Skilled Crafts

The letter has put Mr. Gabriel, the leader of the center-left Social Democratic Party, in an awkward position because he has already called for an increase in pensions. So has Bavarian governor Horst Seehofer, leader of the Christian Social Union, the small Bavarian sister party to Ms. Merkel’s conservative Christian Democratic Union.

The left wing of Mr. Gabriel’s SPD even wants to increase the pension payout to 50 percent of previous net wages before tax deductions. That would amount to a level last seen in 2009. At present, the pension stands at 47.7 percent and increasing it to 50 percent in a rapidly ageing society like Germany would cost many billions of euros in contributions or taxes.

The business arm of Ms. Merkel’s conservatives has warned that social contributions are on the increase at a time when the welfare system is brimming with cash thanks to a surge in new contributors as employment has increased steadily in Europe’s largest economy in recent years.

“If the contributions burden rises above 40 percent when the economy is doing well, Germany’s competitiveness as an economic location will suffer,” warned CDU lawmaker Christian von Stetten, head of a parliamentary group representing small and medium-sized businesses.

In the health insurance system alone, the surge in job creation since 2010 has brought in additional contributions of €30 billion. But health insurance contributions have started rising anyway, to the annoyance of statutory health insurers.

“On the contrary, the billions of euros in payout increases in the pension, nursing care and health insurance system represent a considerable burden on the long-term ability to finance these social insurance arms,” the BDA said.

According to the BDA, the government has pledged welfare payout increases totalling almost €87 billion for the years 2014 through 2019. Of that, €51 billion are improvements for pensioners, €24 billion for the invalid’s insurance and €12 billion for the health system.

The president of the German Confederation of Skilled Crafts, Hans Peter Wollseifer, said: “The social insurance burden must not exceed the 40 percent level.” He said that in his industry, which is labor intensive, rises in non-wage labor costs had a major impact on employment.

Labor and Social Affairs Minister Andrea Nahles of the SPD is in a difficult position. On the one hand her party has promised to pay pensioners more money. On the other hand, she’s responsible for the long-term viability of the pension system.

Ms. Nahles was to launch a round of pension talks Friday with economists, employers, trade unions and welfare organizations. She’s believed to be intent on avoiding further expensive pension increases, and wants to boost private pension contributions and company pensions instead. She is expected to present reform proposals on that in autumn.

 

Dana Heide is a correspondent for Handelsblatt in Berlin, focusing on energy policies, small and medium-sized companies and innovation. Frank Specht writes about the jobs market and labor unions from Handelsblatt’s Berlin office. Peter Thelen writes about social security systems, the job market and labor topics. To contact the authors: thelen@handelsblatt.com, d.heide@vhb.de, specht@handelsblatt.com

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