Financing of Social Protection in Germany: recent developments and debate Philip Manow, MPIfG Cologne
Outline of the talk • Germany as an outlier – a generous welfare state with low taxes and high social insurance contributions • How social insurance contributions came to be so important • Why social insurance contributions came to be so problematic - the unemployment dilemma of the continental welfare state • The current reform debate
How is the welfare state financed? • The more residual anglo-saxon welfare state is financed with a mixture of moderate indirect and direct taxes, social insurance contributions play no significant role. • The generous continental welfare states put the main financial burden on payroll taxes, i.e. social insurance contributions levied on wages and often paid to equal shares by employer and employees. • The most generous Scandinavian welfare states rely on high direct and indirect taxes, social insurance contributions play a minor (if increasing) role.
The tax-mix in Germany as compared to scandinavian or liberal welfare states
How social insurance contributions came to be so important - the German development • Two critical periods – the early 1970s and German unification • Conflicting targets - budget consolidation versus lower non-wage labor costs • German veto structures: German Länder have a veto in all questions of taxation, but (usually) not in social policy
Social insurance contributions as a share of total GDP, Germany 1950-2005
Why social insurance contributions came to be so problematic - taxes vs. Contributions, what are the economic consequences? • Social insurance contributions are particular regressive taxes – they are fully levied on the first Euro and they are not levied on higher incomes (either because there is an upper limit to which contributions are due, or because higher income earners can leave social insurance and insure themselves privately) • Social insurance contributions tend to be levied from a much smaller ‚risk group‘ - the dependently employed only – and tax only one source of income: wages and salaries • As they are levied from wages, social insurance contributions have adverse labor market effects, especially for the low income segment close to the ‚(social) reservation wage‘
The unemployment dilemma of the continental welfare state (Scharpf 2001)
Germany‘s ‚insured employment‘ as a share of total employment, 1974 - 2004
Service Sector Employment – ISIC 8, Finance, Insurance, Real Estate, and Business Services
Service Sector Employment – ISIC 6, Wholesale and Retail Trade, Restaurants, and Hotels
Service Sector Employment – ISIC 9, Community, Social, and Personal Services
The current reform debate – substituting contributions with taxes • Reversing the trend: Green tax, tobacco tax and VAT - and the income tax? • ‚Versicherungsfremde Leistungen‘ or tax-elements within an insurance regime – health insurance and active labor market policies • Employment effects of tax-financing – positive but dependent on wage policy and on types of taxes • Progressive social insurance contributions?
Eco-tax, tobacco tax and VAT - transfers to the social insurance schemes
Employment effects? • Scenarios depend on assumptions about wage policy and on assumptions whether indirect or direct taxes substitute for social insurance contributions • Estimation of employment effects range between -17.000 and +129.000 jobs for a 1 percentage point decrease of social insurance contributions; lowering social insurance contributions stronger for lower wage groups would lead to significantly higher employment effets