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Christian Fastenrath

Welfare States in Europe

A Comparison between the German and Irish Social Security System for developing a Civil Society

ISBN: 978-3-8366-6188-1

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Produktart: Buch
Verlag: Diplomica Verlag
Erscheinungsdatum: 10.2008
AuflagenNr.: 1
Seiten: 70
Abb.: 15
Sprache: Englisch
Einband: Paperback


The German proverb Misfortune seldom arrives alone, captures completely the essence of present German social economic difficulties. The decade of vibrant economic growth has become a memory and is not part of the historical experience shared by the generation born in the 70s and 80s, getting in to work now. Most of these young people do not know the right balance between efficiency and equity. Self-responsibility and self-decision-making, on the one hand, and social security to prevent poverty on the other, are both very important features in creating a civil society, as a third sector between the private and the public sectors. The definition of this type of civil society and the avoidance of a liberal model through the Bismarckian conservative social security system, to maintain the status even in the case of an emergency, will be described in the the first part of the second chapter as a basis for liberty and the increase of the national product. On the other hand, in Ireland between 1988 and 2000 real GDP has grown 132 per cent. It was not only the social pact model which resulted in magnificent economic growth rates, but the whole welfare system was improved to give more incentives, to establish more self-responsibility and to reduce status maintaining features (Baccaro and Simoni, 2004). The beginning and the framework of the Irish success, in terms of efficiency and equity, will be discussed in the second part of the second chapter. The third chapter describes in a detailed way the differences of social security financing and its impact on efficiency and equity in both Germany and Ireland. The fourth chapter is divided into two parts. The first part deals with the unlimited social service provision of health care, disability and occupational benefits in Germany and compares it to the Irish system. The fifth chapter deals with, as a consequence of the described problems in the fourth chapter, poverty reduction and efficiency increase, to develop a civil society. Therefore, the first part discusses the effects of increased take home pay due to less social security contributions for both employer and employee, as was achieved due to social pacts in Ireland. The second part relates efficiency and equity, measured in terms of effectiveness to one another and explains that a more efficient management of social security in Germany might be a solution to current difficulties. The better relationship between efficiency and equity in Ireland has led to the conviction that less social contribution revenue must be targetted more exactly. Finally, it will be explained in the conclusion, that a partial retreat from the outdated conservative system is not avoidable any more. Of course, Ireland seems to be less equitable, but on the other hand it is efficient. Germany’s system is neither equitable nor efficient.


Chapter IV.2.2.2, Demographic Reasons for Inefficiency: The second reason for an increase in contributions is the German demographic time bomb. Germany’s fertility rate of 1.37, compares badly with the Irish rate of 1.99 which is near ideal. As demonstrated in the population pyramid the demographic situation makes a pay-as-you-go-system in Germany very sensitive to reductions. Diagramme 2 demonstrates the composition of the age cohorts in both Germany and Ireland. Irelands population, on the other hand, is still quite young but aging very quickly. Therefore, after the 6th of April 2012, 520 payments must be realised in order to qualify for retirement benefits. The most evident reason for the differences is that the birth rate in the German Democratic Republic fell to one of the lowest in the world and by 1971 the population was failing to reproduce itself. That occurred due to a weak breadwinner model and due to leaving women in labour force, while still having primary responsibility for domestic work. Despite one established household day per month for women, the situation did not improve. The problem was imported with reunification. Furthermore, Germans have a higher life expectancy and a lower fertility rate of children. My own calculations, derived from the population pyramid , demonstrated in diagramme 3, show that the percentage rate of retirees, compared to the potential workforce of people between 20 and 64, in both Germany and Ireland, is 29.87 and 18.37 per cent respectively. Due to this disequilibrium, an equity problem arises in Germany, rather than in Ireland. Future generations must pay more pension contributions, although they are not responsible for this demographic problem. In terms of poverty reduction this is not equitable. Thus, the current generation should pay contributions for their own retirement. To change this, depends not on whether women go to work or not, but rather on whether women can have children and work at the same time, argues Ms von der Leyen, Germany’s family minister. Both men and women must be forced to stay at home to take care for a new-born child. With distinct assumptions, the common characteristics are that both countries have a pay-as-you–go system so that full pension rights can be built up quickly. What kind of system is the most efficient for each of both countries? Samuelson and Aaron already discussed this problem. These two economists always prefer a pay-as-you-go-system when the sum of the increasing rate of income and labour force is higher than the interest rate itself. If it is the other way around, a funding principle system, for instance through savings, is more efficient. Operating this system in these two countries means, firstly, investigating the real income and labour force growth between 1995 and 2005. The increasing rate of the former in Ireland was 19.4 per cent and 0.9 per cent in Germany. The latter rate in the same period in Ireland was 13.2 per cent and in Germany 0.8 per cent. On the other hand, long term interest rates in the same period (in recent years they seem to equalize due to the European Monetary Union) in Ireland and Germany were 4.91 per cent and 5.31 per cent respectively. It is evident that the sum of the income increase and labour force in Germany is smaller than the interest rate. A funded system is therefore very advisable and more efficient if individuals can be easily informed about market risks and how much money they have to save to cover their life expectancy. On the other hand, in Ireland it is the other way around. Hence, a pay-as-you-go system is the right system for Ireland, as the real value of economic growth has increased. This is remarkable for Ireland as a country with a liberal welfare system, where a funding scheme would be more appropriate. In Germany, on the other hand, with a pay-as-you-go pension system, as it was in 1992, 11 million immigrants are required, the contribution rate must be doubled from 20 percent to 40 per cent until 2035 or pension payments must be halved. The problem is that pension benefits continue to be based on the principle of guaranteeing achieved living and status standards, but it neither guarantees efficiency to save costs, nor equity. The only innovation in the pension system is that benefits are now also dependent on the number of children. Aditionally, a two year parental means tested benefit and more childcare benefits were put in place. However, more must still be done to raise efficiency and to prevent future pensions from falling to the level of social assistance: Firstly, the childlessness in Germany makes the economy grow in the short term because people concentrate more on their careers. Employees with a better career in their working life earn more money and therefore contribute more to the pension scheme. However, this gain in pensions must not necessarily be paid out to pensioners, but could finance a more family and fertility friendly policy. Secondly, Jenkins argues that savings must be realised on a company level. Employers must be allowed to hold a portion of the employee’s monthly salary. At the end, retirees receive a lump sum complete with about 5 per cent annual interest (as it was calculated as an average interest rate in the past 10 years).This means equitable treatment for men and women, sick or healthy, as this scheme provides everyone with a non discriminatory lump sum. Moreover, the company obtains a lot of extra cash to realise investments with an interest rate half of the commercial rate. However, this idea is not without its problems, because the company cannot control the flow of working capital. It flows, independent of whether the employer wants it to or not. There is also the risk that a former employee, who left the company to work somewhere else, could not claim the benefit. Finally, and most importantly, until 2030 pension levels will be lowered from 70 per cent to 60 per cent, through Riester Savings, to restrict the rate of contribution to 22 percent of gross income. This framework is like a new pillar where private savings are promoted by state subsidies. It is a very successful plan as the amount of selling has risen 270 per cent for Postbank in 2004. Something similar is already planned for Ireland because there are almost one million people working in the Republic, who have not made private pension plans. Money could be afford up to 254 Euro into a special account for with some tax incentives. Additionally, the so-called Rürup commission will suggest a normal retirement age of between 65 and 67 from the beginning of 2011. A sustainable factor to adjust future pension increases, due to changes in the labour force as well as adverse changes in the age composition, is included in the pension index formula. This framework is demonstrated in table 5. There would be 4.7 percentage point increase in the contribution rate forecast from a simple scenario of keeping the current system as it was in 2003. A forty year old German with an average income, who reads the Rürup report, will maintain a pension equal to almost half of the average labour earnings in 2030 by starting to put 4 per cent of his/her labour earnings aside for the Riester pension. This is heading in the right direction as it was already demonstrated by Samuelson and Aaron. The real return rate of the German pension system is 1.7 per cent while about 5 per cent could be earned on the capital market. Some economists argue that those funds are insensitive to changes in demography and, in this way, more efficient, but this is not necessarily true. If there is a large accumulation of pension funds while the workforce is declining, the high level of spending by pensioners out of their savings reduces the rate of savings in the economy. The excess of pensioner consumption over any pensioner production, in this case, is greater than savings by workers. This causes demand inflation, which erodes the purchasing power of pensioners’ accumulated funds and hence their consumption. However, the crucial variable is output. Higher productivity, through better education in Germany, is good to get more production. Through increasing the macroeconomic output, some extra savings can be realised. This is a good opportunity to increase employment participation by women with coexistent facilities for childcare, as is the case in Ireland, and to decrease high unemployment rates in Germany. Thus, the next chapter discusses unemployment, its insurance and its impact on the social security efficiency in both countries.

Über den Autor

Christian Fastenrath, born in 1977, has studied Economics and holds a Master Degree in Social Sciences. His studies were realised in Trier, Zaragoza, Mexico and Dublin. His scientific investigations were focused on increasing the economic welfare for each individual. The Mexican Social Security Institution appreciated these results as being an outstanding contribution for the development of a civil society. He gives lectures to several academic organizations and is member of the Royal Institute of Philosophy, London.

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