Making social systems fit for the future

BDA AGENDA 20/21 | Topic of the Week | 9 September 2021

The parties' election campaign is entering its final phase. Right now it is up to the parties to provide answers to the most urgent questions, namely how we can make our social systems fit for the future. Here we can see that some of the proposals in the parties' election programmes would harm the welfare state if they were implemented, instead of giving it stability for the future.

One of the greatest challenges is undoubtedly demographic change. The ageing of society is obvious and will become increasingly noticeable in the coming years. The baby boomers are retiring from working life, while fewer and fewer younger people are facing more and more older people. According to the Federal Statistical Office, by 2030 we could have more people over 65 than under 20 in Germany's workforce. Our social systems will also reach their limits in the coming years. Germany already has particularly high social security contributions on wages and salaries. Of the average gross labour costs for a single average earner without children (62,460 euros), according to OECD calculations, only just over half was received by employees on a net basis. With this difference between labour costs and net wages of 49 percent, Germany is far above the OECD average of 35 percent.

The majority of the German welfare state is financed by wage-related social contributions. Currently, the contribution rates for pension, health, unemployment and long-term care insurance already add up to 39.95 percent. They are thus only just below the 40 percent mark promised in the coalition agreement.

The one-sided wage-based financing of the German welfare state is the decisive reason why the labour factor in Germany is more heavily taxed than in almost any other country.

Rising social security contributions are detrimental to growth and employment. As the burden of social security contributions rises, labour becomes more and more expensive - but this makes Germany less competitive and less attractive as a place to work. It is therefore crucial that the 40 percent limit on social security contributions be made permanently and reliably binding. Even without further increases in benefits, there is a threat of significant increases in contribution rates in all branches of social insurance over the next few years. An increase in contribution rates to 43 percent by the end of the next legislative period is quite likely.

It is therefore all the more important to tackle the necessary reforms quickly and resolutely so that social security contributions do not rise above 40 per cent in the next few years. Any new coalition government will have to face up to this task. That is why we now need a competition of ideas between the parties in order to secure viable concepts for the future of social insurance. The employers have already come forward with proposals from a commission they convened to show how the social security system can remain affordable and efficient in the long term. There are certainly other good ways to achieve this important goal. What is clear, however, is that this requires the will to act and reforms - now.