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Provisions of the Social Welfare System

The German social welfare tradition divides entitlement programs into three types. The first and most common type consists of contributory social insurance programs that protect those who pay into them from loss of income and unplanned expenditures because of illness, accident, old age or disability, and unemployment. The second type consists of noncontributory social compensation programs that provide tax-financed social welfare (such as health care, pensions, and other benefits) to those--civil servants, for example--who perform a public service to society. Tax-financed social compensation is also provided to those who have suffered from income loss or disability as a result of military or other public service, and allowances are provided to their dependents in the case of death. Since 1976 victims of violent crimes have also been eligible for social compensation. In addition, social compensation can consist of payments to all members of society and includes tax-funded child, housing, and educational allowances. The third type of social welfare programs provides social aid, or assistance, to persons in need who are not eligible for assistance from the other two kinds of social entitlement programs or who need additional aid because they are still in need--for example, if their pensions are too small to provide them with decent housing. Aid can consist of general income maintenance payments (including payments for food, housing, clothing, and furniture) and assistance for those with special needs, such as the disabled, and individuals without health insurance (0.3 percent of the total German population).

In order to better measure the extent of social welfare expenditures, since 1960 the Germans have used the concept of a social budget to lump together all forms of social spending, whether by the government, by the country's large social insurance programs, or by other sources. The steady expansion of social welfare programs and the increased costs of such items as pensions and medical care caused West Germany's social budget to increase tenfold between 1960 and 1990, from DM68.9 billion in 1960 to DM703.1 billion in 1990. The West German economy expanded greatly in this period so that the social budget's share of GNP increased from about one-fifth in 1960 to about one-third by 1990. Roughly two-fifths of the 1990 social budget went to pension payments and one-third to health care. By 1992 the social budget had grown to about DM900 billion, a sharp increase caused by the unification of the two Germanys. Unification meant an increased population and many special needs of the five new states (Lšnder ; sing., Land ) in eastern Germany.

In 1990 the public sector (federal, Land , and local governments) paid for about 38 percent of the social budget, employers for 32 percent, and private households for about 29 percent. The remainder was financed by social insurance and private organizations.

The cost of the social budget for an average wage earner is difficult to assess. By the mid-1990s, however, a typical wage earner was estimated to pay about one-fifth of his or her income in direct taxes (only part of which went to the social budget) and another one-fifth for the compulsory social insurance programs. In addition, there were many indirect taxes, which accounted for about two-fifths of all tax revenue. The most important of the indirect taxes is the value-added tax (VAT--see Glossary), set in 1993 at 15 percent for most goods and at 7 percent for basic commodities each time it is assessed. Given Germany's demographic trends, the cost of the social budget is certain to increase in the coming decades.

Social Insurance

The social insurance program was established in 1889 and provides retirement pay. Although the central government has always formulated social insurance policy, the implementation of the program is decentralized. In unified Germany, control over the blue-collar insurance programs remains in the hands of twenty-three Land -based insurance agencies and four federal insurance agencies. In the old Lšnder in western Germany, eighteen Land -based insurance agencies serve people in geographical districts that conform to those established in the nineteenth century, not to the geographical entities created after 1945. With the assistance of staff from the West German insurance agencies, five Land -based and self-governing insurance agencies were established in the new Lšnder .

Four federal insurance agencies serve four groups in unified Germany: federal railroad workers, merchant marine seamen, miners, and white-collar workers. Civil servants and their dependents are covered by a separate retirement program financed by outlays from federal, Land , and local governments. Other retirement programs provide retirement income for registered craftsmen, agricultural workers, and self-employed professionals.

Because of population trends that indicate a worsening worker/retiree ratio and the likelihood of solvency problems in the next century, the pension reform of 1992 increased the usual retirement age from sixty-three to sixty-five, beginning in 2001. Whatever the legal retirement age, many Germans retire early for health reasons on disability pensions.

The amount of retirement pay is determined by the length and level of the insured person's contributions. Contributions in 1995 were scheduled to amount to 18.6 percent of an employee's annual gross income up to a maximum of DM93,600 in the old Lšnder and DM76,800 in the new Lšnder , with the employee and employer each paying half. In the early 1990s, the average retirement pension amounted to about DM1,600 per month for retired persons over the age of sixty. This meant that Germany had the fourth-highest pensions in Europe, surpassed only by Luxemburg, France, and Denmark. In 1957 legislation was passed that required pensions to be indexed, that is, raised according to average wage increases.

Data as of August 1995

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Germany Table of Contents