Sarah Hagberg
INTS 4763
Paper #3

The Challenge to Germany's Welfare State

"In the 1990's and probably well beyond, the German economic model is tested as never before" (Edinger and Nacos, 1998:187) The German economy is confronting the reality that constant and increasing demands on its limited resources require structural adjustments if the collapse of the overall framework is to be averted.  The impact on the current welfare system is a clash between traditional measures of welfare provision, aimed at maintaining social peace, and contemporary demands for retrenchment of such provisions in light of depleted financial reserves.  This paper identifies a range of factors that when combined illustrate why the traditional system of welfare is emerging as the weaker force, and why the government faces a monumental challenge in order to retain comprehensive social provisions.  The factors that are considered include the long-term effects of unification, expanding co-operation and integration within the European Union and the impact upon German productivity, and Germany's increasing old age population.  It becomes clear that these factors are never quite distinct and often overlap and it is argued that this is why the challenge to welfare is so difficult. When a comparison between German and American social and economic statistics is made, Germany appears to be at a demographic disadvantage. The unemployment figures lie at 12% and 4.9% respectively. The percentage of the population over sixty-five years of age lies at 16% and 12%.  View these statistics within a regime-type analysis and the comparative advantage of the U.S. increases further. The U.S. with its predominantly liberal ideology lacks comprehensive social policies and minimal government assistance programs, in contrast to Germany's conservative, patriarchal welfare system which provides social and labor programs dating back to the Bismarck years (Lawson, 1996: 32).  Thus, social expenditures consume more of the federal budget in Germany than in the U.S. despite the existence of contributory programs designed to fund social welfare via taxation.  Currently, Germany is experiencing a pay-as-you-go system due to the lack of federal reserves to fund welfare expenditures.  It is estimated that as much as 95% of social security is run on this pay-as-you-go system which has aroused general concern about placing further demands on virtually exhausted resources (see Collier, 1995; 238; The Economist, Sept 12, 1998:56) This has been exacerbated by additional changes within German society, outlined below, and is contributing the growing dilemma of how to maintain or restructure the current system. Almost a decade later, Germany is still experiencing the financial burden of the unification of East and West.  The incorporation of nearly 16 million people from the East has contributed to a long-term drain on resources for a number of reasons. 

Firstly, it was largely taken as given that West German procedures would remain and that Eastern Germans would be incorporated into the capitalist economic model.  The desire for speedy social unification resulted in the neglect of 'practical aspects' such as how to deal with the large numbers of people that became unemployed following the collapse of the Eastern planned economy (Lawson, 1996:41).

Secondly, large transfers of capital from West to East to assist in the rebuilding of the eastern economy still cost the German government approximately 100 billion U.S. dollars each year (source: ODCI Government Publications).  This has resulted in a 'paradoxical' situation whereby "efforts to introduce a market economy in the former GDR have themselves required a high degree of political control over the economy and society" (Lawson, 1996:40).

A third effect of unification is evident at the societal level. The government's attempts to incorporate the East into the West included the 1993 Solidarity tax that effectively transferred the costs of unification onto the average worker.  The German welfare system is funded largely through contributory schemes and heavy income taxes, a fact that also distinguishes the German economic model from the U.S.  

The traditionally conservative German system emphasized communal responsibility for those temporarily unable to earn a living via participation in the market place.  For example, unemployment insurance provides subsistence income for workers temporarily out of the market. Over the last quarter of a century it is estimated that employee contributions to the welfare state via taxation have risen from a quarter of total earned income to two-fifths of total earned income (Collier, 1995:237).  The addition of  solidarity contributions, first in 1992 via a 3% rise in social insurance contributions to fund the transfer of capital from East to West, and secondly the solidarity tax of 1993, resulted in the reemergence of 'Ossiresentment' towards the East (Lawson, 1996: 41; Collier, 1995: 249).  In the face of economic stagnation, many western Germans were increasingly aware that their taxes were paying for unification.   As Collier argues, "the high burden of taxes and social contributions in Germany have met or exceeded the limits of solidarity felt by the average German" (Collier, 1995:249). Simultaneously with the effects of unification, the German economy has been under increasing pressure to improve efficiency for sustained membership of the European Union.  Furthermore, decreased productivity rates and the high cost of German labor overlap and integrate resulting in the growing challenge of contemporary circumstances on the traditional system of welfare provision.  Increased cooperation between members of the E.U. and the restrictions placed on members participating in the single currency have resulted in the need to trim down social expenditure and curb inflationary tendencies.  Germany, as a leading member within the European Union has experienced challenges to it conservative tradition of 'predictability', 'stability' and 'economic efficiency' due to the external constraints of the E.U. (see: Lawson, 1996: 32).   Although not an obvious indicator of the effects on welfare, the E.U. has 'undermined' this predictability including the traditional separation of power between the national and sub-national governments (Edinger and Nacos, 1998: 183).

In other words, the E.U. has affected traditional structural patterns of government.  The federal government has become increasingly autonomous to secure the conditions necessary for membership within the E.U.  and this has filtered down to changes in the workplace.  Increased vulnerability in the workplace is expressed through demands to retain and ensure access to unemployment benefits, and conversely, demands are made to lower taxes and secure wages.  These contribute to the growing fiscal challenge upon the government. The German economy, therefore, faces a series of dilemmas. Firstly, the high unemployment of the former eastern economy.  Secondly, the demands to keep wages high are confronted with the need to remain competitive in a European market.  Thirdly, and as a result of these two factors combined, the workers are increasingly hostile to increased taxes and any proposals to reduce benefit levels.  The government for all intents and purposes does not seek to eliminate the social welfare system. The tradition of social provision is embedded in the governments responsibilities.  It is generally observed that the irony of the government's role,in order to preserve welfare, is that it must intervene and make the necessary cost-reductions to guarantee continuity (The Economist, May 4, 1996; Lawson, 1996).  Under the government of Chancellor Kohl, proposals were introduced to cut pension levels from 70% of pre-retirement income to 64% in an attempt to relieve the burden of a scheme that 'devours nearly 11% of GDP (by American standards, this is still a very generous program) (The Economist, Sept 12, 1998).   Add to the equation the fact that Germany's population is aging faster than the rate of fertility and the problem becomes more complicated.  Collier summaries what is probably perceived as a truism regarding the future? "The demographic mountain of seniors after 2015 constitutes a genuine, long-run threat to the feasibility of the existing German welfare state" (Collier, 1995: 246).

In terms of current workforces, the danger is that they are pricing themselves out of the competitive market and encouraging the government to cut benefits where possible.  For example, the system of 'Mitbestimmung' or co-determination facilitates considerable worker influence within large companies and employees, by law, comprise 50% of the supervisory boards responsible for hiring managers (The Economist, May 4, 1996). Participation at this level guarantees considerable influence in negotiations over wages, hours and so forth.  The problem, however, concerns the dilemma over accepting lower wages, longer hours and decreased benefits in a bid to stay competitive versus maintaining existing levels and power in the face of increased capitalist, money saving pressures.  On the whole, German labor is expensive but productivity no greater than Poland of Japan.  This has a detrimental effect on the German economy as it tries to encourage foreign investment and capital, increasingly deterred by Germany's rising costs.  In 1994 The Federal Union of German Employer Associations proposed a series of cuts in social policy including restrictions on sick pay in a program designed to enhance German businesses competitiveness and reduce costs for the employers (see Collier, 1995).  The government, employers and employees are faced, with the task of reaching a compromise that addresses the concerns of all sides.

What will become of the German welfare system?  Certainly, as the factors presented here suggest this is not an easy question to answer although it is increasingly apparent that changes to the existing system will have to be made.  The government faces the task of reducing its expenditure on social programs whilst maintaining its guarantee to provide assistance to those who deserve it.  The question of deserving versus undeserving recipients of social assistance has not been explicitly addressed.  However, the factors outlined in this paper contribute to the increasing sentiment within German society regarding who constitutes 'deserving' and who is 'undeserving'.  With the increased competition for jobs, the continued costs of unification, rising taxes to fund the pay-as-you-go system, and the aging population, the current system is under fire.   The challenge to the Germans therefore, is how to maintain the tradition of conservative, subsidiary and contributory welfare system in light of contemporary pressures on this structure. 

References

1. Collier, I.W. (1995) "Rebuilding the German Welfare State", ch.13 in Conradt, D.P., et al., eds., _Germany's New Politics_ (Tempe; German Studies, Arizona State University)
2. Edinger, L. J., and Nacos, B. L. (1996) "From the Bonn Republic to the Berlin Republic: Can Stable Democracy Continue?" _Political Science Quarterly_, vol. 113 no.2, pp.179-191
3. Lawson, R. (1996) "Germany: Maintaining the Middle Way" ch.2 in George, V., & Taylor-Gooby, P., eds., _European Welfare Policy: Squaring the Circle_ (New York: St Martin's Press)
4. Thimann, C. (1996) "Germany's Social Assistance Program: the Dilemma of Reform" in _Finance and Development_ September, v.33, no.3, pp.40-43
5. Wurzel, E. (1996) "Germany: the welfare system" in _OECD Observer_, Oct-Nov, no.202, pp.45-47

Newspaper Articles
1. _The Economist_ (1996) May 4, vol.339, no.7964, pp.17-19
2. _The Economist_ (1998) September 12, vol.348, no. 8085, pp.56-57