LABOR PAINS

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

    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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    Audio

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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.

That’s what has been happening since 2012, and most parties campaigning ahead of the September 24 election are promising more social spending rather than less.

While the business community is concerned about rising welfare contributions, trade unions say the solution lies in increasing wages. Frank Bsirske, chairman of the powerful Ver.di service workers union, said many people aren’t earning enough to receive a decent pension, which would force them to use the welfare system later in life.

On Tuesday, he and fellow unionists visited the Berlin transport company BVG, which operates buses, streetcars and local trains. “We’re a public company, but still there are some colleagues among us with families who earn so little that they have to top it up with Hartz IV,” one BVG staffer said, referring to Germany’s basic welfare payouts.

germany social spending

Wages at BVG have been declining as deregulation has spawned private-sector competition. A bus driver earns about €2,100 per month, just €1,500 after tax.

“These people are at risk of poverty in their old age,” Mr. Bsirske said. “And that’s going to become a mass phenomenon.” If the state pension level keeps falling as planned, someone who earned €2,500 per month while working will receive just €800 in 2030 in today’s money. Currently, half of all workers are earning €2,500 per month or less, he said.

“We mustn’t allow the pension payout to keep on falling if we want to avoid old-age poverty on a massive scale,” said Reiner Hoffmann, chairman of the German Trade Union Confederation. He said it was unacceptable that employees were being asked to pay ever-higher pension contributions for an ever-decreasing future pension payout. The unions and the Social Democratic Party are also demanding that employers be required to pay half of their employees’ health insurance contributions.

Meanwhile, hiring has never been stronger in Germany. The Ifo business climate index reached a record high in July. “The strong German economy constantly needs more workers,” Ifo expert Klaus Wohlrabe said. The lack of experienced workers is especially hurting the growing construction industry.

The Institute for Employment Research in Nürnberg said about 1.1 million jobs were open in the first quarter of this year. The total number of employed people in Germany also reached a new record, with 44.2 million people in the workforce.

In the decade following reunification in 1990, Germany was called the “sick man of Europe” because it had become uncompetitive. So Germany enacted labor-market and welfare reforms that spawned a low-wage sector, and its unions agreed with employers to keep wage growth down, so German firms would become more competitive. In recent years, German wages have indeed been increasing, by 2.3 percent last year. Unemployment is below 4 percent, and both individual job hunters and union bosses have a strong hand in negotiations.

 

Daniel Delhaes reports on politics, transport and airlines. Dietmar Neuerer covers domestic politics for Handelsblatt. 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: delhaes@handelsblatt.comneuerer@handelsblatt.com, specht@handelsblatt.com and thelen@handelsblatt.com.

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