Some politicians say the welfare state is exploding, others call it underfunded. These are myths that stand in the way of necessary reform, writes economist Georg Cremer. He teaches as an adjunct professor of economics at the University of Freiburg and is the former Secretary General of the German Caritas Association – and currently a member of the Federal Government’s Pension Commission.
The Debate on the welfare state in Germany is determined by two competing myths: one says that welfare state explode unchecked, the other one, it has been destroyed for a long time. This polarization makes it difficult to explore cross-camp compromises, without which reform cannot succeed.
The explosion myth seems to have an effect on citizens. Two thirds of those surveyed in a recently published Forsa magazine survey star believe that the welfare state “in its current form” can no longer be financed. So you seem to share the view of Chancellor Friedrich Merz (CDU), who had repeatedly commented on this.
However, it is more than questionable whether the broad majority really thinks like the Chancellor. Because with high levels of support, citizens want as surveys have showna further expansion of the welfare state: more money for old age security, healthcare, care and people with disabilities. If they consider the welfare state to be no longer affordable, this has no impact on the expectations they have of it. At the same time, they want to be relieved of taxes and duties. But no policy can do justice to these contradictory expectations.
Anyone who wants to effectively support the narrative of the explosion often points to the increase in the social budget over the long period of the Federal Republic’s history. The social budget covers all social benefits that are publicly financed or have a legal basis, such as social insurance. It rose from the equivalent of 28 billion euros in 1960 in the old Federal Republic to almost 400 billion euros in the first year of reunification to 1,345 billion euros by 2024 (PDF). Every year an all-time high is announced, combined with the worrying question of whether the welfare state can still be saved.
An all-time high every year
But the comparisons made based on these numbers are grossly misleading. Nominal values are shown, i.e. values that are not price-adjusted. Since 1960, all prices have risen – and of course also those of material goods that are financed from the social budget, such as medicines, hospital treatment or rents for social welfare recipients.
In addition, a significant portion of the social budget is used to pay the salaries of doctors, nurses, educators and social workers. If the social budget were to only increase in line with the inflation rate, these employees would have to receive constant salaries in real terms for the calculation to work, while the purchasing power and wealth of other employees would increase more sharply. This would lead to skilled workers fleeing the health and social sectors in droves and hardly anyone would want to work in these professions. There is a good reason why things are different – with the consequence that the welfare state is naturally growing.
You therefore need a measure that describes the development of the welfare state in relation to economic performance: This is the social benefit ratio, i.e. the share of the social budget in gross domestic product. However, this rate does not show an explosion, but rather a continuous expansion of the welfare state over a very long period of time.
In 1960, in the still young Federal Republic, the social benefit rate was 18 percent; A far smaller proportion of the then much smaller economic output was therefore spent on social issues. Today, social benefits account for almost 31.2 percent of economic output. Since the corona pandemic, the rate has increased by another 1.6 percentage points. With a gross domestic product of 4.3 trillion euros, this latest increase corresponds to a further increase of almost 70 billion euros.
Although this is the case, the myth that the welfare state has been dismantled in the last few decades also shapes the public debate. The demand is to further expand its financing at the expense of the “super-rich” and to protect the middle. The President of the Workers’ Welfare Association, Michael Groß, recently said: “The welfare state is not too expensive, it is underfunded. Since the wealth tax was suspended in 1997, the state has foregone billions every year.”
