Social Spending: Hurting Germany's Growth?

  • Why it matters

    Why it matters

    About 600,000 jobs are at stake by 2040 if Germany doesn’t rein in social spending, according to new research by Prognos.

  • Facts


    • Many political parties in Germany are campaigning with expansions of social spending.
    • Without cutbacks, social contributions will increase from around 40 percent of wages now to 48.8 percent by 2040, damaging German competitiveness.
    • Trade unions argue that wages must increase to prevent people from sliding into poverty in old age and further straining the welfare system.
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german workers, social spending
German workers are facing increased pension contributions but will receive smaller payouts. Source: Daniel Reinhardt/dpa

News this week of a sharp rise in German social spending has triggered warnings that the country won’t be able to afford its welfare state ad infinitum.

A government report predicted that social spending will reach €962 billion, or $1.13 billion, this year, up from €918 billion in 2016, and is set to rise above €1 trillion by 2021 as a result of various benefit increases enacted under Chancellor Angela Merkel.

Nearly 600,000 German jobs could be at risk by 2040 if social insurance contributions keep rising, according to a new study by the Prognos economic research institute. The study, commissioned by the Confederation of German Employers’ Associations and the Bavarian business federation VBW, said that without cutbacks, social contributions will increase from about 40 percent of wages today to 48.8 percent by 2040.

A big factor is the aging population, which creates fewer contributors and more benefit recipients. The study said contributions could even reach 55.5 percent if the costs of healthcare and nursing accelerate.

“We’ve reached a point at which that’s no longer sustainable,” said Michael Fuchs, a senior lawmaker for her Christian Democratic Union (CDU) party. He said more than half the federal budget was now devoted to social spending.

These rising non-wage labor costs will lessen Germany’s economic competitiveness and reduce consumer spending, the study concluded.

“If social spending rises faster than economic output, that can’t work in the long run,” said Reinhold von Eben-Worlée, the president of Die Familienunternehmer, an association of family-owned businesses.

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