Almost a year ago, during the coalition negotiations, the SPD, Greens and FDP made it clear that the “social guarantee” issued by the previous government, according to which the total contribution to social security should not exceed 40 percent, would not be upheld.
Even before the outbreak of war in Ukraine, with all its negative macroeconomic consequences, it was planned to exceed this upper contribution limit. Without even higher tax subsidies or increases in contributions, the expansion of benefits in almost all branches of social insurance, which the two previous grand coalitions had decided on, could not be financed.
In early summer, Health Minister Karl Lauterbach (SPD) felt compelled to put together an ad hoc package of cuts and rising contributions in order to prevent otherwise threatening double-digit billion deficits in statutory health insurance.
The situation in social long-term care insurance is only slightly better. The general contribution rate in this latest social security system is now 3.05 percent and 3.4 percent for childless people. According to the National Association of Statutory Health Insurance Funds, a total of 7.3 billion euros in tax revenue would be required in order not to have to increase these contribution rates by a further 0.35 percentage points by the end of 2024.
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In the statutory pension insurance system, it is foreseeable that the previous promises of a permanently stable pension level and the waiver of a further increase in the statutory retirement age cannot be financed with the currently very low contribution rate of 18.6 percent.
In early summer, Karl Lauterbach (SPD) fomented an ad hoc package of cuts to prevent billions in losses in the statutory health insurance system.
(Photo: dpa)
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The overall economic situation has clouded over month by month since Russia invaded Ukraine in February. At the moment, no one seems to believe that the German economy will not slip into a real recession this winter. The open question is how deep and how long the downturn will be.
According to the current forecast by the Handelsblatt Research Institute (HRI), economic output is likely to shrink for at least three quarters. At the end of the first quarter of 2023, overall economic output will have fallen to almost the level of autumn 2017 – which would ultimately correspond to a good five years of stagnation.
Times of an economic downturn are usually also difficult times for wage-based social security funds. If economic output falls, the overall wage bill usually falls along with employment, and with it the income base for pension, health, nursing care and unemployment insurance.
Expensive energy drives up consumer prices
But this recession will be different from its eight predecessors in reunified Germany. Because the order books in industry are still well filled, the real order backlog in the manufacturing sector was higher in the summer than at any time since records began in 2015.
Theoretically, the companies could produce eight months with constant sales without new incoming orders in order to work off the existing order backlog. Moreover, the labor market has practically been cleared. Although domestic demand is price-sensitive, there is no sign of a collapse so far.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
At the same time, expensive energy and production costs are driving up consumer prices, which reduces purchasing power and thus slows down real economic growth – while nominal gross domestic product is rising sharply at the same time. According to the HRI forecast, the nominal total economic output should increase by at least 8.5 percent this year and by at least four percent next year – to well over four trillion euros.
The already existing shortage of labor and the considerable increase in the minimum wage mean that wages are rising comparatively sharply, but are still lagging behind the marked rise in prices. In their current joint report, the four economic research institutes involved expect an increase in earnings per employee of 4.3 percent for this year and 5.7 and 5.9 percent for the two following years.
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These numbers should sound like music to the ears of those responsible for budgeting in the social security funds. After all, every euro of salary increase increases the revenue from social security contributions by 40 cents. At the same time, social insurance spending only reacts to the current surge in inflation with a delay. In the health and care sector, most prices are regulated by the state and are usually only adjusted to general wage developments with a delay.
The ignored problem: the aging of society
Drug manufacturers and pharmacies should even grant health insurance companies additional discounts according to the plans of Federal Health Minister Lauterbach. The case flat rates that hospitals receive for treatments have only risen by 2.3 percent in the current year.
It is quite possible that the deficits of the cash registers will be significantly lower than last expected. In pension insurance, the development of pensions – also with a delay – essentially follows wage developments.
Inflation-related wage increases therefore ensure additional income in the short term, which is only followed with a time lag by corresponding increases in expenditure. Unemployment insurance recently registered an increasing number of people who were registered as unemployed. However, the background is that since the summer, refugees from Ukraine have had to register with the job centers in order to receive social benefits.
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However, their basic security is not financed by the Federal Employment Agency (BA), but by the state. The number of unemployment benefit recipients, on the other hand, continues to point downwards.
In September there were 698,000 people, 51,000 fewer than a year ago. Moreover, according to the BA, economic short-time work did not play a significant role – at least in the summer. In short: Social security should be a short-term winner of inflation.
This should actually clear the view of the proverbial “800-pound gorilla” in the room: the aging of society, the mega problem of pay-as-you-go security systems. Although this development has been known for a long time and has been well researched, it is just as negated by the current federal government as in the two previous governments.
It is inevitable that the number of people in work will peak during this legislative period and then begin to shrink. Fewer and fewer workers will then have to finance a significantly increasing number of retirees. The shortage of skilled workers will continue – and the political dispute and the distribution battles over scarce resources for the energy transition, for infrastructure investments and for social policy will become sharper.
Bundesbank predicts fatal consequences if politicians turn a blind eye
Long-term simulation calculations, for example by the Bundesbank or other scientists, have long shown what fatal consequences a continuation of the status quo – i.e. politically looking the other way – would have.
Of course it won’t be the same. However, experience has shown that reforms are only tackled when the acute financial pressure has become great enough. The fact remains that performance reductions are all the more painful the later they are made.
To make matters worse, the population’s understanding of any cuts decreases the older the majority of voters are. Waiting is the worst, but probably the most likely alternative – unfortunately.
More: Four risks that could turn a mild recession into a severe one.