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Reforming the Social Welfare State

Recent efforts to modernize healthcare -- a mainstay of the country’s social welfare system -- illuminate the minefield awaiting would-be pension reformers. The latest plan offers small relief.


Tomorrow's pensioners may not have it so easy.

The Rürup Commission, a special government panel convened to address the healthcare and pension crisis facing Germany, filed their first report on April 9, consisting of their recommendations for Germany’s ailing healthcare system.

The plan is expected to reduce the cost of the public health care system -- which has ballooned over the past decade -- by €24 billion ($25.9 billion). Taxpayers and patients would have to take on additional costs, such as paying a €15 co-pay for trips to the doctor.

The road to compromise was plagued by problems, with the panel’s 26 members battling to reconcile competing visions of the future.

Gesundheit Reform Ruerup Kommission

Bert Rürup (left) and Karl Lauterbach have different visions of the future.

Notably, the commission’s head, Bert Rürup, was involved in a very public debate with another member of the panel, Karl Lauterbach, an advisor to Health Minister Ulla Schmidt. Lauterbach lobbied to preserve but reform the current system, while Rürup wanted more fundamental changes.

As the public debate raged, Chancellor Schröder threatened to dissolve the panel, as a trickle of news stories in the press -- such as a suggestion to introduce a €200 flat rate premium -- was alarming the public.

The sensitive nature and political volatility of health care reform and relative light hand taken with this latest round of efforts demonstrates the difficulties that lie ahead. The system needs to change -- most experts agree -- but its not clear that politicians have the political muscle to make it happen.

A 19th century relic

Germany’s pension system is a product of the 19th century. At that time the world was still a relatively orderly place: Employment increased from generation to generation -- as did the number of children.

The working generation could comfortably finance -- as part of the so-called “contract between the generations” -- the retirement of those who preceded them. And they were happy to do so, confident that the following generation would bankroll their twilight years.

And so, in the 1950s, the “pay as you go system” evolved, with each generation devoting a percentage of their income to finance the public statutory pensions of the generation that preceded them. At the time the contribution consisted of about 7 percent of an employee’s gross income -- a very manageable figure.

In fact, the German pension system was so good, that the Allies felt no need to fiddle with it following WWII. But time marches on, and now this model, which was largely dependent on consistent growth and high employment, is under stress -- a demographic and economic crisis are the culprits.

System under stress

Over time, German citizens have become largely dependent on publicly funded statutory pension schemes -- as opposed to taking out private insurance or relying on company schemes. By 2002, 80 percent of retired Germans relied on public pensions, while only 15 percent turned to private plans and an even smaller number (5 percent) to company schemes.

Yet the price the current working generation pays to sustain these benefits has steadily increased. As opposed to the original 7 percent of an employee’s gross income, today that figure is 20 percent. “Things are worse than suggested even a year ago,” says Christian Zahn, a board member of the BfA, Germany's social security office.

“If you go according to the government’s own figures about economic development, the contribution rate will remain steady at about 19.5 percent over the next few years (not decline, as many politicians are promising). And if economic circumstances change for the worse, one can’t rule out even higher rates by 2006.”

What’s more, the pay-as-you go system has been stressed by rising unemployment, falling birthrates and increased life expectancy. And the costs of German re-unification have compounded the problem. When the pension system was conceived in 1957, one hundred working age citizens financed the benefits of 31.4 retirees. Today that figure is 52.

The pension system only functions today because it is subsidized by the federal government and the benefits paid out have been decreased, changing from a percentage of one’s (considerably higher) gross pay to a percentage of net pay. Despite all the problems, change has been slow.

A sacred cow

“Take note: pensions are safe.” So goes the familiar quote from Norbert Blüm, the long-serving Labor and Social Minister under Helmut Kohl. These words became the mantra of other politicians, eager to secure their place in the hearts of voters. Health care and pensions were largely considered hallowed ground.

But when Blüm vacated his post in 1997 cracks in the façade were clearly visible. A year later Gerhard Schröder was elected chancellor, and a coalition of Social Democrats and Greens made tentative steps to tackle the issue. Expectations were high, and many political observers wondered if the new government had the necessary backbone to push through change.

First efforts at reform

One of the new governing coalition's first acts was to introduce an “environmental tax” on energy, electricity, and, most importantly, gasoline. They hoped the proceeds from this tax would help decrease pension contributions, and, as a consequence, the percentage deducted from each working person’s salary. And indeed, it did -- if only slightly. The percentage deducted sank from 20.3 percent of gross income in 1998 to 19.1 percent in 2001.

But it soon become clear that this trend would not continue, and further reforms were necessary. Next the Social Democrats and Greens proposed the so-called “Riester Rente” in 2001, named after then-Labor Minister Walter Riester. By offering incentives, the reform was meant to encourage people to take out private pensions or turn to company options.

Two years later, in March 2003, Chancellor Schröder commended them as a benchmark of change.

“The pension reform of 2001 is the most important pension-related decision since the introduction of the pay-as-you go system in 1957. By the end of last year, the number of private pension programs taken out by individuals has grown to 3.4 million, and the number of company pension schemes has increased to 2.4 million. Of the 35 million workerrrs in this country, these figures represent 15 percent. That’s surely not enough, but given that it’s only been a year, these are impressive results.”

The latest efforts

However, critics claimed the Riester reforms were too confusing and complicated for the average citizen, and low-income families were at a disadvantage. Thus, after the November elections in 2002, Schröder and the SPD voiced a new commitment to further reform, subsequently establishing the Rürup Commission and empowering its members to come up with solutions to finance Germany’s unwieldy social welfare system -- both healthcare and pensions.

But if the recent report is anything to go by, progress will be slow.

“You can only sell reform to politicians when you can guarantee results within their term. Holding onto and extending power takes priority over problem solving,” Bert Rürup recently told the German weekly Stern.

That's why -- instead of proposing revolutionary change all at once -- Rürup says he prefers incremental steps, hoping each will take hold and pave the way for further reforms: “I would rather put through powerful reforms in small steps than propose a ‘brilliant concept’ likely to end up in the history (but not the law) books.”

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