Social Security Expenditures: A Historical Perspective5
Social Security Payment System.7
Income Distribution among the Aged Population..9
Structure of Social Security Tax, Employers & Employees Contribution.9
Structure of Social Security Benefits10
Retirement Age and Benefits11
List of Figures and Tables
Dependency Ratio in Germany over time13
Germany is a federal state. Federalism entails assigning tasks to those layers of the government which are best fit to solve them. For example, issues of local nature are decentralised to the local level, where relevant information is most likely to be available and local preferences can be voiced. Municipalities are tasked with the duty of administering local public goods and addressing local problems such as social welfare (Siebert, 2005). Once the responsibility of ensuring social security of citizens is devolved to the municipalities, it is their responsibility to ensure that all citizens are adequately protected and access assistance should they have any problem. To help reduce the disparity between the rich and poor members of its society, the German government has implemented several social security measures to cushion the less fortunate members of its societies from high expenditure on health and education of their children. This policy wherein the society takes full responsibility for its members is referred to as solidarity or solidarita`t.
As noted by Sierbert (2005), the German social security system is self-administered. For example, while the unemployment insurance is administered by the social partners including trade unions and employer’s associations, health insurance is administered by public insurers and the Association of Statutory Health Insurance Physicians. A special category of administrative courts, social courts handle all legal disputes arising from social security plans. The court system is structured vertically with three tiers; local, state and federal levels. The Federal Social Court has the final say and its decision cannot be appealed in any social court.
This paper highlights the types of social security programmes implemented by the German government. An analysis of the periods during which the discussed programmes were introduced has been provided. Clear analysis of all programmes has been conducted and recommendations for future improvements made. The role of Otto Van Bismarck in the development of social policy in Germany has been analysed.
Social Security Expenditures: A historical perspective
Social security expenditures include income maintenance programs such as sickness benefit, old age pension as well as public spending on education, health and housing (Tomka, 2013). There are several categories of social security benefits. To begin with, nursing or long-term care insurance was introduced in 1995 to cater for the interests and needs of patients who are taken care of in nursery homes and by their families (Sierbert, 2005). Contributions to this kitty amount to 1.7 % of the gross wage. Prior to the introduction of this benefit, all contributions totalled 1.0 %. To cover the extra 0.7 %, the government implemented a half financing with wagers and employers and it. The second social security platform is the health care which covers cost for medical treatment by physicians and hospital, and for prescription drugs except for a flat fee per prescription (Sierbert, 2005). This type of insurance covers the entire family of the insured individual. In cases where both the wife and husband are employed, the government calculates the amount of contributions to be made by each of them. All individuals must contribute monthly remittances to the health insurance; whether employed, unemployed or retired. For the unemployed members of a municipality, the unemployment insurance picks up the contributions to the health insurance. Furthermore, municipalities pay health insurance for all citizens who receive social welfare. And would even pay direct health costs for its citizens who are not covered by health insurance. To further cushion individuals with long-term illnesses, they would receive disability insurance. The government pays between 50 and 80 % of health costs for all civil servants depending on their marital status. As a result of changes introduced in 2006, sickness benefits would no longer be half financed by employers and employees. The employees would pay 0.5 % of their wages. A maternity benefit is paid by public health insurance as a substitute for workers’ gross wage six weeks before and eight weeks after giving birth (Sierbert, 2005). By increasing the scope of health insurance, the government ensures that very few citizens are not covered by health insurance. Only 0.2 % of the population has no health insurance. Third, unemployment insurance is mandatory for all employed individuals who must remit monthly contributions ceiled at € 5,100. Legislation passed in 2009 permitted employees earning salaries exceeding EUR 52,000 per year to contract out of the health scheme after paying for private medical scheme (Gruber & Wise, 2008). The fourth type of social security, mandatory insurance for all accidents occurring at the work place was introduce by Bismarck in 1884 (Sierbert, 2005). The insurance covers all work related accidents to which workers are subjected during their work. This insurance scheme aims at limiting costs to firms in cases of legal suits. All social security expenditures are of social nature and are destined to ensure that the less privileged members of a society are assisted to lead lives of higher quality. This arises from the fact that the beneficiaries of social security benefits do not pay contributions to the pension scheme or to unemployment insurance (Gruber & Wise, 2008).
Germany has changed its social security programs over time. In January 1973, Germany introduced the German Social Security Register Data (GSSRD), an integrated notification procedure for health, pension and unemployment (Drechsler, 2011). With the introduction of this system, employers can notify the social security agencies about all employees covered by social security. As such, social security transfers grew much faster than the nominal Gross Nominal Product. By the end of 1982, social security had reached almost 18 % of GNP up from 13 in 1973 (Drechsler, 2011). The increase imposed more burdens on wage earners and employers who were compelled to increase their monthly contributions. Wage earners and employers contributed more than 80 % of the total social security funds with the federal government topping up the 20 %. This arose from the fact that the two groups financed a major part of the social security expenditures. With the promulgation of a coalition in 1982, the increase in social security expenditures slowed in relation to the GNP.
With the desire to increase the amount of taxes raised by the government, the German government passed a new law in 2004 which subjected full pension to taxation (Sierbert, 2005).the proposed change had to be implemented over time to ensure that pensioners do not pay taxes for pensions that were obtained without contribution being exempt from taxation. By taxing pension, the government raises additional funds which would then be used to finance additional social security programmes.
Social Security Payment System
Germany has adopted a mixture of the Pay-As-You-Go and funded social security payment systems. Maatman (2004) describes a Pay-As-You-Go social security system as that in which there are no savings and hence there is no assets formation. It is conceivable that a pension fund will meet all its liabilities falling due in a given year from the contributions it receives from the active member and employers during that year. This type of funding is majorly adopted for unemployment social security benefits. It is believed that the actual number of people employed would contribute sufficient monthly contributions to cater for the needs of all their unemployed counterparts.
In addition, the country implements funded social security payments system in which assets are acquired and would be later used to pay social security liabilities. Examples in this case are the old age social security plan. During their strong years, employers or employees are encouraged to contribute part of the amount they would receive at old age. The government tops up the remaining portion of the fund. As such, individuals who contribute more monthly remittances are entitled to receive higher social security payments at their old ages.
Blake (2003) contradicts the popular belief that a difference exists between Pay-As-You-Go and fully funded social security programmes. According to him, all pension schemes whether funded or not, are in reality Pay-As-You-Go schemes. He contends that would be a strange notion at first sight. However, it relates to the manner in which the current working generation views the already retired generations. In case, one generation builds up a fund of assets for its retirement, its consumption at the retirement depends on the value of the fund at retirement. But the fund can only be used to purchase consumer goods that are produced by the next generation. As such, no generation can store for its retirement the consumer goods that it itself produced, and it certainly cannot store key services that it will wish to consume, such as health care. In summary, each generation is dependent on the next generation, not only for the consumer goods it consumes in retirement, but also for the quality of goods that it is able to consume, since the next generation also choose the prices of goods it produces. Despite having extracted guarantees about indexed pensions, it is impossible for a generation in retirement to ensure the value of its pensions in retirement, because it is impossible for them to pre-commit the next generation to deliver a particular flow of consumption goods.
It is important to note that part of the population remains economically unproductive. Dependency ratio is a comparison between those individuals whom society considers economically unproductive and those it considers economically productive (McKenzie, Pinger & Kotecki, 2011). State of employment is the major yardstick against which the economic productivity of individuals is measured. Under this conceptual framework, unemployed individual would be described as less economic productive while the employed individuals would be regarded as being economically productive. It is assumed that only individual in the age bracket of 15 through to 64 years would be economically productive (United Nations, 2004). The ratio is computed by adding the number of youth and old, divided by the number of persons who are within the working population age bracket. As posted in Trading Economies (2013), the German population has been declining and set to decline by 14.48 by 2050. The country’s population has been constantly ageing with time- implying an increasing number of old citizens who must be cared for by the working population. Hassan (2004) attributes this ageing population to a drop in fertility.
Over the last 10 years, Germany’s dependency ratio has risen from 48.71 % to 51.41 %. Table I provides annual levels of dependency ratio in Germany during the past ten years. These high dependency ratios indicate that there will be relatively fewer people of working age to support children and old-age dependents within the economy. Higher dependency ratios are associated with greater degree of pressure on the public finances and, all else being equal, to a greater burden of taxation on the working age population. If the United Nations (2004) projections pointing to an increase in dependency ratios among developed countries become a reality, German working population would be compelled to dig deeper into their pockets to care for their fellow citizens.
Income Distribution among the Aged Population
The aged citizens in Germany are assisted by the old age social security monthly remittances. Municipalities endure that the aged receive this money promptly as stipulated by the law. As such, the aged can afford other consumer goods produced by the working population within and outside the country.
Structure of Social Security Tax, Employers and Employees Contributions
The German government has emphasised the need to assist its citizens through well designed social security schemes. The federal government levies heavier taxes on the more financially stable members of the society. As noted by Bode (2008), personal taxes and corporate taxes yielded 22.8 % and 4.5 % on government revenue during the 2007 financial year. He further notes how social security contributes the highest proportion (40.7 %) of the country’s total tax.
The German Social Security Register Data enables the government to assess details of all the registered beneficiaries of social security assistance. Employers find it easier to remit information on all their employees.
99.8 % of the German population is covered by health insurance. These funds cover the costs of medical treatment for the insured beneficiaries together with their families. The government contributes between 50 % and 80 % of the funds which are directed to this kitty. The actual percentage depends on the marital status of the beneficiary. Employees contribute 0.5 % of the employees’ wages to this kitty whereas the employee caters for the remaining amount. In case a wife and her husband are employed, the government would decide the proportions in which they would contribute to the fund.
Nursing and long-term insurance cover which was introduced in 1995 caters for bills incurred in needs of patients. The kitty further covers disability costs for insured beneficiaries. Employers contribute 1.7 % of an employee’s gross wages to the pool. All employees are mandated to cover all accidents or diseases which their employees pick from their places of work. These payments cover sick pay or pension in the event of an accident. Furthermore, they can be reknitted to orphans and widows of deceased employees who die at work.
It is noteworthy that most social security schemes are implemented at the Municipalities which are the lowest level of government in Germany.
Structure of Social Security Benefits
The German government has decentralised its social security programmes. Municipalities are tasked with paying all beneficiaries funds due to them as and when they fall due. This list is generated from the German Social Security Register which is updated regularly.
Retirement Age and Benefits
The statutory retirement age in Germany is 65 years (Gruber & Wise, 2008). However, the government plans to increase its retirement age to 67 between 2012 and 2029. Upon retirement, employees are entitled to between 40 % to 45 % of their monthly income in pension. However, employees are permitted to take up early retirement when they attain the age of 57 years in case, they develop any disability. Disability benefits at 57 are essentially the same as normal retirement benefits at age 65. Survivor benefits are paid to spouses and children irrespective of the age at which the employee passes on. In case, an employee becomes disabled before they attain age of 60 years, only two-thirds of the applicable old-age pension is paid to them. This should be complemented with the payments from accidents insurance in case the accident arose during work. Survivor pensions are 60 % of the husband’s applicable pension for spouses who are aged 45 and over or if there are children in the household and 25 % otherwise.
After the unification of West and East Germany in the 1990s, the government has taken measures to reduce disparities in the levels of income earned by its citizens. One of the measures used to achieve this objective is the use of social security schemes. Through this schemes, the more privileged members of the society are called upon to contribute part of their earnings to cater for the vital needs of the less fortunate; health, education and care in old age. Health insurance covers medical treatment for all insured members and their families. As a result of vigorous marketing, 99.8 % of the country’s citizens have insured their lives. The remittances in respect of recipients of social security benefits are paid by municipalities. Nursing insurance which was introduced in 1995 caters for the needs of patients who might befall long-term illnesses. Unemployment insurance which is contributed by employed citizens assists unemployed members of the society to lead decent lives despite being unemployed.
Once these funds have been collected, they are transferred to the municipalities for objective administration. It is believed that municipalities are closest to the beneficiaries of the social security schemes and would meet their needs more closely than federal government.
The government should reduce the dependency ratio to rates lower than 50 %. This would assist in reducing the tax impact on employed citizens. This involves increasing the age-bracket within which individuals can engage in gainful employment. Since children under the age of 15 years cannot be enrolled in gainful employment, adults should be retained for longer periods in gainful employment. The government should hasten the process of extending the retirement age to 67 years since the country enjoys a high life expectancy of 81 years.
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Bode, S. (2008). Difference in Tax Structure between the UK, Germany and Switzerland. Germany: GRIN Verlag
Drechster, J. (2011). Synthetic Datasets for Statistical Disclosure Control: Theory and Implementation. Nuremberg: Springer.
Gruber, J., & Wise, DA. (2011). Social security and Retirement around the World. USA: University of Chicago
Hassan, A. AG. (2004). Growth, Structural Change and Regional Inequality in Malaysia. England: Ashgate Publishing
Maatman, R. H. (2004). Dutch Pension Funds: Fiduciary Duties and Investing. Netherlands: Kluwer Legal Publisher.
McKenzie, J., Pinger, R., & Kotecki, JE. (2011). An Introduction to Community Health. (7th edn.). Canada: Jones & Bartlett publishers.
Sierbert, H. (2005). The German Economy: Beyond the Social Market. Oxford shire: Princeton University
Tomka, B. (2013). A social History of Twentieth Century Europe. New York, NY: Routledge.
Trading Economics. (2013). Age Dependency Ratio in Germany. Accessed on 18th June 2013 from http://www.tradingeconomics.com/germany/age-dependency-ratio-percent-of-working-age-population-wb-data.html
United Nations. (2004). World Economics Situation and Prospects. New York: United Nations Publication.
Table I: Annual Dependency Ratio in Germany