1 Dr. Heinz Stapf-Finé Department of social policy DGB (Confederation of German Trade Unions, executive board) Financing of social protection in Germany: recent developments and debate

2 Commission: Sustainability of financing of social security commission installed end of the year 2002 by the minister of health and social security Publication of the Report in August 2003

3 Assumptions: Population development years -15 years age ratio (scale on the right) 65+/15-64 years

4 Assumptions: Labour market balance hidden labour force unemployed economically active population unemployment rate (right scale)

5 Proposals of the commission Pension Scheme Raise of the legal retirement age from 65 to 67 (One month per age- group beginning with the age group born in The first age group with the legal retirement age of 67 would be the persons born in 1969) Introduction of the so called sustainability-factor in the pension formula: The factor takes into account the relation of contributors and pensioners. The factor influences the adjustment of the pensions: An increase in the number of contribution payers would lead to a higher adjustment, an increase in the number of pensioners would lead to lower adjustments.

6 Consequences for the pension level

7 Proposals of the commission Health Insurance No common proposal – presentation of two alternatives: insurance for all citizens versus flat-rate payment Insurances for all citizens: - compulsory insurance for all types of the working population (inclusive self-employed and civil servants) - larger contribution basis: inclusion of capital income - elevation of the upper contribution limit Flat rate payment: - flat rate contribution, each insured pays the same amount in the same health insurance fund - the employer part of the contribution shall be paid out as part of the gross wage - introduction of a tax financed system for compensation of contributors that cannot afford the contributions

8 Path of Social Politics Pension scheme Pension reform of the year 2001: new formula for pension adjustment, adjustment of pension along the development of gross wages corrected for the contributions for the contributions for the pension scheme and corrected for the (hypothetical) contributions of the supplementary pension scheme (result: pension level falls from 69% to 63% in the year 2030) Reforms of the year 2004: - introduction of the sustainability-factor - postponed taxation of pensions (from 2005 on the contributions are gradually exempted from income tax until 2025, the pensions will from 2005 on be gradually taxed, beginning with 50% of the pensions until reaching 100% in the year 2040) (result: pension levels falls from 69% to 52% in the year 2030)

9 Path of Social Politics Pension scheme coalition contract: - the dynamic of the federal subsidy shall be stopped - the legal pension age of 67 shall be introduced (faster than proposed by the sustainability commission) - Another factor shall be introduced to contain the pension adjustment: due to the fact that a special provision in the legal framework prevents negative pension adjustment, the sustainability-factor cannot fully be applied. This effect shall be postponed.

10 Path of Social Politics Health insurance last reform that came into force in 2004: - additional payment of the insured of 10% (min. 5€, max. 10 €) - entrance fee of 10€ per ¼ year for visits of doctor’s consults percent point of contribution solely to pay by the employee (this broke with the rule of parity of the contributions) - pensioners of company pensions have to pay the full contribution (part of the employer and the employee) for health insurance - the same applies for the contributions for the care insurance for all pensioners (consequence: from the planned economies of 15.3 thousand millions in 2005 the patients and insured had to finance 10.8)

11 Path of Social Politics Health insurance coalition contract: - reduce the federal subsidy stepwise to 0 - no decision in the question of financing of health insurance, a concept shall be worked out until mid of the year - some measures to improve the efficiency of services

12 The philosophy behind Reduction of the non wage labour costs a study published in the journal of the German pension fund (10/ ) comes to the following conclusions: - it is possible to create new jobs by reducing the contributions - but there are too many contrary effects (alternative financing with taxes, need for private provision for old age, with better employment the trade unions would require more wages) - in the consequence it is not possible to make a quantitative estimation of the employment effect - the effect should neither be under- nor overestimated

13 Another way of interpretation Distribution of burdens among labour and capital income The share of wages as compared to national income has been decreasing from 55.8% in 1960 to 48.1% in 1991 and to 41.5% in 2004 (measure for the potential purchasing power of wages) Reasons: - high unemployment - increase in low wage jobs - only small wage increases (wage moderation) - restrictive public spending policy increase of the income tax burden on wages (1960: 6.3%, 1991: 16.3%, 2004: 17,7%), decrease of the tax burden on property income and entrepreneurial income (1960: 20%, 1997: 3.4%, 1004: 5.3%) In 2004 taxes on income and consumption amounted to 76.5% of the total tax yield, taxes on profit 15.1%

14 More fantasy is necessary All factors of the social security balance formula count: receipts = expenditure receipts: wage per employed x contribution rate x number of employed expenditure: benefit per insured person x number of insured persons Until now politics concentrated too much in the stability of the contribution rate and the reduction of benefits In the future we must concentrate more on the wage development, the number of insured persons and the inclusion of other income sources