April 21, 2021

Germany: welfare state faces challenges due to demographics, pandemic

Germany: welfare state faces challenges due to demographics, pandemic

Ela Bauer, a reader from Germany, submitted this article.

Since the days of Bismarck, Germany has defined itself as a Sozial Staat or “social state,” granting her people privileges that are now common in most EU countries. The German government subsidizes healthcare, retirement funds, and unemployment benefits. At the same time, German citizens pay between 14% and 45% income tax. (For comparison, American citizens pay between 10% and 35%.) These taxes make it possible for the majority of Germans to not need to pay out of pocket when they need medical care, and they allow for a safety net to support poor and low-income citizens. This system, however, was intended for a different Germany characterized by the nationalistic and militaristic ideals of her people in the late 19th century, and may not be ideal for serving the needs of the current German population in a globalized economy.

When evaluating the effects of this system on retirement, we can see that the German equivalents of Baby Boomers are retiring from their jobs at an average age of 64.3, and are receiving an average of only €1,517 per month to live on after paying at least 14% income tax throughout their lives. The system is supposed to work as a continuous cycle, meaning that the current workforce’s taxes pay for the current retirees’ benefits. In turn, current workers will have their retirement benefits funded by the future tax base when they retire. This system was designed to rely on a steadily-increasing or at least stable population size and relatively early deaths of retirees, to stay sustainable. However, birth rates have been declining in Germany and most of Western Europe in recent decades. At the same time, life expectancy among Germans has increased to 78 years for men and 83 years for women. To keep the system functioning, taxes on the current workforce have been constantly increasing despite the rate of inflation slowing down.

As a result, the German government is continually searching for new sources of income in order to maintain the level of retirement benefits that people are accustomed to. For instance, when Germany opened her borders to the Middle Eastern refugees in 2014, they took in 29.9% more immigrants than in the previous year. Though Germany and other nations portrayed it as a humanitarian move, there was an ulterior motive: bringing more young workers into the country to support the ever-growing retiring population.

Unfortunately, the population cannot sustain the government’s current policy of high taxation and high spending. The Solidarity Principle, an essential part of the German system, states that everyone pays according to their ability and receives as much as they need. But middle class workers are not able to pay as much anymore, since incomes of employees within the unmarried tax bracket sank by an average of €300 a year due to the COVID-19 pandemic. Though all citizens who have paid into the system are still entitled to receive benefits, the money now comes from other sources: mainly, higher income earners. Contrary to popular belief, large corporations are not the only ones footing the larger tax bill. The funding for the benefits also comes from private citizens who earn more than average -- those who have been successful in business and spent more on education.

The United States faces a similar problem, and both nations will be dealing with the side effects of mass migration in the coming decades. The way Germany handles these and other structural problems may reveal differences between the economies, ideologies and mindsets of the two nations, especially as ties between them continue to decline.