The German Reunification and its Impact on the Social Security System

by Johannes Widmann

1. Blooming Landscapes?
At the end of the 80s, the German government achieved an impressive consolidation of its budget and savings on Social Security. The conservative-liberal coalition even saved money on Social contributions in comparison to governments in other countries.
  But this changed dramatically after the reunification on 3 October 1990. The "chancellor of the unification", Helmut Kohl, promised "blooming landscapes" in the former GDR (German Democratic Republic) and improved, rather than worsened, living conditions. The political decision to adjust living conditions in East Germany to living conditions in the West resulted in increased government spendings.
  As to be seen from  Table A ,  the Total Outlay of General Government between 1990 and 1995 increased from 45,1% to 49,8%. Table B shows that government expenditures on Social Security went up over-proportionally after 1990. The outlay on Social Security, in the states in the former GDR,  reached its peak, the highest social security outlay by any government in the world ever, in 1992 with 67,7% (source: Schmidt, 138).
 
2.  Reunification Policy
Politically and economically the unification commenced with the "treaty on currency-, economy- and socialunion" on 1 July  1990 (Staatsvertrag über Währungs-, Wirtschafts- und Sozialunion). This treaty established a market economy in the former GDR. The institutions of the western welfare state were also adopted. In the case of Germany, these socipolitical institutions are social insurance, coexistence of public and private insurances, free wage determination by employers and employees and worker participation.
  Germany's unification treaty (Einigungsvertrag)  on August 31^st 1990 ended this process. Germany was then constitutionally reunited. This treaty contained, due to the feasibility of the changes, some transition laws, but in the case of Social Security, a fast adjustment to western standards was agreed upon.

3. The most important Parts of the Social- and Labour Market Policy in the former GDR
The need for new institutions of Social Security in the "New states" was quite significant. Social policy in the former GDR concentrated on a base security on the lowest level. In particular the retirement system suffered from the fact that something like the "dynamic pensions" in western Germany was not known in the GDR. Besides the very low income of pensioners in the former GDR, a great gap between the amount of pensions in East Germany even existed (see: Böhm, 181). The transition from a low-productive planned economy to a high-productive market economy has brought mass unemployment to the "New States". Therefore, one of the biggest challenges for social policy in reunified Germany was to fight fastly high rates of unemployment.

3.1 Retirement Insurance
The Kohl government focused quickly on adjusting the pensions in the former GDR to the pensions in the old FRG quickly, not only because it was politically profitable. Because of this, the pensioners in East Germany were often called the biggest winners of reunification -- except of course the privileged people in the former GDR like the former emploees by the Staatssicherheit (the intelligence agency of the GDR).Pensions increased and were brought close to the level of the pensions in Western Germany. Table C  shows average pensions amount in Western Germany,  Table D the average in the former GDR. The "dynamic pensions" of Western Germany, in other words an adoption of the pensions to the actual wages, which was previously unknown in the GDR was also introduced to Eastern Germany.
  All the restructuring orientated itself by the established System of Social Security, a "structural conservatism" (Schmid, 9), bringing some functional disturbences and allocation deficits. "The crisis of the retirement system is not only caused by demographic changes, but also because of unification policy" (Schmid, 9-10; original German).

3.2 Health Insurance
As you can see in Table B, the expenditures on Health increased from 9,9% in 1990 to 11,1% in 1992. Offe (1992, page 60-64) counts six reasons for the increasing outlays of the German Health Insurance due to the Reunification:
  Firstly, the medical infrastructure (hospitals and their medical equipments) needed to be raised up to the western standards. The health system of the former GDR was, like the whole economy, in a more critical condition than excpected, therefore extensive investment needed to take place. Secondly, ambulant sellers like doctors with their own practice had to take credits. Furthermore, the creation of a functionable self administration, in contrast to the highly centralised system in the GDR, took a lot of money. In addition, the new states also adopted structural problems of the western system on health insurance, like the compensation of individual medical benefits. A part of this is also the high-priced pharmaceutical products in Western Germany. In the end the vast movements of people from Eastern to Western Germany and "medical tourism" brought increasing expenditures for the Health insurances.
 
3.3 Insurance on Unemployment
Table D shows the still comparatively large expenditures on unemployment aid (Arbeitslosenhilfe) for the "New States". The mentioned mass-unemployment led to an explosion of claims. The government reacted by raising contribution fees to 2.5% in April 1991, in spite of criticism of the justice of this measure(see: Pilz, 173). At the end, a real consolidation of the unemployment insurance budget was not achieved.

3.4  Labour Market Policy
Labour market policy increased and even overreached the amount of active market policy in Sweden at that time (Schmidt, page 140). A way to measure this is to count the people in labour market policy employments as a proportion of the total working population. This number was 15% in 1990 and 23% at its peak in 1991. It declined in the following years, the need of saving money led to a reduction of the labour market policy. This is can be seen by the proportion of workers in labour market policy employments in September 1995 which was only 10% (source: Schmidt, 140).
  All in all the social and labour market policy stabilized social conditions in Eastern Germany during the transition to a market economy. But this happened with decreasing intensity, due to declining labour market policy.
   Unlike the one of the retirement police, labour market policy had a very bad image from the beginning. This reaction was psychologically understandable, because of misunderstandings about the possibility of preserving full-employment like in socialism even during the change to a competition based economy.

4. An Outlook
The Reunification of Germany had a significant impact on the system of social security, an impact which, in my opinion, still exists. Whether this impact is greater than that one of the so-called "globalisation" (whatever this means) needs to be proved in a comparative analysis (see also the paper by Daniel Buhr about Globalization and its impact on the Germany Social Security System). Transactions between the Western and Eastern part of Germany are still negative (seen from western point of view).
 

Appendix:
Table A (pdf-file): General Government Total Outlays (OECD).   back to text
 
Table B:

 
 back to "blooming landscapes"
 back to "Health Insurance"
 Table C:

 back to text

 Table D:

 back to "Retirement Insurance"
 back to "Insurance on Unemployment"

Bibliography:
Böhm, Stefan und Arno Pott: Verteilungspolitische Aspekte der Rentenüberleitung. Eine Analyse ausgewählter Verteilungswirkungen der Übertragung des bundesdeutschen Rentenrechts auf die neuen Bundesländer. In: Schmähl, Winfried (Hrsg.) Sozialpolitik im Prozeß der deutschen Vereinigung. Frankfurt a.M. 1992. S. 166-228.
Deutsche Bundesbank:
Offe, Claus: Die politische Kosten der Vereinheitlichung des Gesundheitssystems. In: Schmähl, Winfried (Hrsg.) Sozialpolitik im Prozeß der deutschen Vereinigung. Frankfurt a.M. 1992. S. 59-91.
Pilz, Frank und Heike Ortwein: Das vereinte Deutschland. Stuttgart, Jena 1992.
Schmähl, Winfried: Sozialpolitik und Systemtransformation. Zur Bedeutung und Veränderung von Sozialpolitk im Prozeß der deutschen Vereinigung. In: Schmähl, Winfried (Hrsg.) Sozialpolitik im Prozeß der deutschen Vereinigung. Frankfurt a.M. 1992. S. 26-59.
Schmid, Josef: Mehrfache Desillusionierung und Ambivalenz. Eine sozialpolitische Bilanz der Ära Kohl. o.O., o.J.
Schmidt, Manfred G.: Sozialpolitik. Historische Entwicklung und internationaler Vergleich. 2. Aufl., Opladen 1998.

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