Opinion: The German Social System in Crisis

No one in Germany would deny that the social welfare system is in crisis, both financially and existentially. The question is how did it end up that way? And, more importantly, how can the crisis be resolved?

Two developments are largely responsible for the financial crisis: the declining population and high unemployment. The population changes started many years ago, but society persistently ignored them until recently. The last time the same number of people were born as died was 1892. Since then, the number of children has been lower than the number of parents year after year.

This development dramatically worsened since the 1960s, when modern contraception became generally available. While in the 1960s, around 90 percent of the children necessary to stabilize the population were born, today 100 parents in Germany only have 65 children. The Federal Office of Statistics estimates that 10 million fewer people will live in Germany in 2040.

Population change

In addition, enormous shifts in the constitution of the population have taken place. That means that ever fewer Germans of working age have to finance the livelihoods of ever more pensioners. The social security system is designed so that benefits are saved up for 90 percent of the population, but the money necessary to cover those benefits isn't saved. On the contrary, one month's contributions are being used to finance current social security benefits the following month. It's not a question of mere pennies either, but of more than €16 billion ($17.5 billion) each month.

Not only is the number of retired people on the increase in Germany, but the average life expectancy is continually rising too, which, on the one hand, is a positive development, but it has serious financial consequences for social security and public health insurance. Older people need a doctor's care more often, and, thanks to medical progress, it is significantly better than in the past, but at a high price. Public health funds spend around €20 billion monthly to protecting their members' health -- and the tendency is rising.

Financing social security and public health insurance presents ever bigger problems because the budget for social services is suffering from high unemployment, which translates into fewer working people paying into the system. High unemployment has also put the unemployment office in a tight spot. With dole payments of around €4.5 billion per month, it has had to turn to the federal government for allocations of billions of euros.

End of the road

For those paying contributions -- one half of which is employees, the other half is their employers --
the ceiling has been reached. Social system contributions make up 42 percent of the wages and salaries of those obliged to pay into the social insurance system. The high non-wage labor costs that firms have to pay are one of the heaviest burdens hindering Germany in international competition. And since the state prevents a further increase through its budget allocations, the tax burden here is also higher than is generally perceived as acceptable.

The putative easy way out of shifting costs -- for financing the infrastructure, for schools, and universities -- to the next generation doesn't work anymore, because, at €1.7 trillion the state deficit is already far too high. The cities and towns would have long ago been deemed not credit worthy as private enterprises. Many municipalities are already taking out loans to pay the interest generated by their mountains of debt.

The fact is this country has been living beyond its means for a long time. It won't be able to keep it up much longer.

The society of entitlement reacts as expected to calls to tighten belts. Most people -- especially the decision-makers and high earners -- try to tighten other people's belts. That's not the way out; it's just a bad example. People must understand that the social welfare state is not just in the midst of a financial crisis: it's in the midst of an existential crisis. All the well-meaning benefits haven't satisfied people. Rather, they have only raised people's expectations for more and higher benefits. Politicians complied much too readily. But it won't work anymore.

People must take more financial responsibility for themselves and, for example, make arrangements for private old age pensions to supplement social security. After all, the children whose job it will be to provide for their elders are fewer. The German social welfare state means well, but it was designed with population growth in mind. Now the crisis has arrived and scaling things down is the order of the day. Society must learn to do without.

Karl Zawadzky