Economy and Social Matters in Germany – Background

Welfare State Germany

Der Ausbau des Sozialstaats; Copyright: picture-alliance/ dpa-infografikEmployment agency; Copyright: picture-alliance/ dpaA quarter of Germany’s population is classified as poor or is supported by the state in order to ward off the threat of poverty. How does the German state help those in need, what is the cost to its citizens and what problems have to be solved?

Social welfare policy from two centuries - From Bismarck to the present day

“The welfare state, the social market economy are among Germany’s great traditions,” according to the Federal Minister of Labour and Social Affairs. His ministry ensures that the welfare systems run smoothly and to this end it co-operates not only with other ministries but also with the states and local governments. It was Otto von Bismarck (1815 – 1898) who first committed the state to social welfare. As Chancellor of the Reich at the end of the 19th century he initiated the first laws implementing a form of social insurance for workers and the poor to help those in need. The Federal Republic of the 20th century took over this obligation and embedded it in its constitution, in article 20, paragraph 1 of the Basic Law. It has built up a complicated, public or quasi-public system of statutory insurances into which contributions are paid by both employees and employers and are additionally financed by all tax-payers.

The system is designed to help people in need and is thus also known as the “social net”. This is necessary, above all, for poor people, i.e. those with a disposable income of less than 781 Euro a month, about 13% of the Germans. A further 13% are protected from the same fate by means of state benefit payments. They receive welfare aid, housing allowance, maintenance support and other benefits. However, it is not only the impoverished who receive social benefits in Germany, but also old people, bereaved dependants, sick persons and invalids, children, parents, the unemployed and the job-seekers. For all of these Germany has been spending at least 700 bn Euro a year since the beginning of the 21st century. In 2007 it was 706.9 bn Euro, almost 22 times as much as in 1960. Also in terms of percentage of the GDP the costs have risen enormously in the last 40 years. In 1960 just under 21% of public revenue went into the welfare budget, in 1970 it was 23% and in 2007 29%.

Benefits overview

Dismantling the welfare state; Copyright: picture-alliance/ dpa-infografik So-called social insurance agencies are responsible for social welfare and social insurance benefits, while the state is in charge of benefits accruing from the right to social compensation and additional aid. The social insurance agencies include not only pension agencies, health and nursing care insurance agencies but also the employers’ liability insurance associations and accident insurance agencies. They are all financed by the contributions of both employees and employers and are self-governing, but are controlled by the state. The Federal Government has also stipulated that under its supervision social insurance elections are to be held in which the insured and the employers elect their representatives to the agencies’ committees. Thus both contributors and benefit recipients have the possibility of playing a formative role in their social insurance. The state, in turn, is responsible for ensuring a personal subsistence-level income by means of welfare assistance and maintenance support for job-seekers, older people and those who are not capable of full employment. These state welfare benefits are tax-financed, as is the right to social compensation that takes care of people who were injured in war, for example. The state also supports all those who are in need of a temporary supplement, for example in the case of childbirth. Child allowance and parental benefits, maintenance support and tax relief are various elements of this welfare supplement.

Expenditure, revenue and review

Hartz IV: (Amalgamation of unemployment benefit and welfare payment); Copyright: picture-allianceGermany invests the main part of its social budget in old people and bereaved dependants. In 2007 this amounted to over 276 bn Euro. In the same year the “social net” came to the aid of those stricken by illness and invalidity to the tune of almost 242 bn Euro. Children and parents received 100 bn and the unemployed 38 bn Euro. The size of these sums reveals only too clearly the nature of the problem: as soon as the economy is unable to employ and pay enough people, the social insurance agencies lack contributors and the state lacks taxpayers to finance all these benefits. In addition, there is the increasing ageing of society. Today almost 17% of all Germans are over 65 years old. In 2050 it will be 28%. This means there will be many benefit recipients but an ever smaller number of people who are paying for this. The state is trying to solve these problems, for example, by encouraging its citizens to take out private pension schemes alongside the statutory pension, thus relieving dependency on the social insurance agencies.

Crisis and criticism in the welfare state

Who finances the welfare state? Copyright: picture-alliance/ dpa-infografik “Don’t get me wrong, but you can survive in Germany without doing anything – that’s just not normal,” says Edmund Phelps, American economist and winner of the Nobel Prize in Economic Sciences. Due to the demographic development he sees Germany facing a “huge mountain of problems” that can only be solved if job dismissal protection and unemployment insurance were to be scrapped and if trade unions and public banks were to disappear. This is unacceptable to social organisations, trade unions and social movements. They already criticise the laws passed in recent years that have clamped down on citizens’ benefits and claims and, at the same time, increased co-payments and contributions. However, they too lack any really viable idea as to how to finance the high costs. Already each German pays on average around 40% of his or her income to the state and the social agencies. This is almost unique in international comparison. But so are the benefits of the welfare state. Only France and Sweden spend more on those in need than Germany.
Christine Sommer-Guist
is a journalist and author specialising in environmental and social affairs.

Translation: Heather Moers
Copyright: Goethe-Institut e.V., Online-Redaktion

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November 2008

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