May 17, 2015

Overseas, Underfunded: The German Welfare State Pt. 1

Welfare is one the great debates of modern American politics. Those who lean toward the left tend to advocate for more expansive and encompassing government welfare systems which the poverty-stricken masses can live off of. More conservative folks would argue for fewer government handouts and would more than likely make a reference to Social Darwinism. American welfare policies that you should be familiar with include Social Security, unemployment insurance, Medicare, Medicaid, etc. Despite the ongoing disputes over welfare in the United States, Europe, particularly Germany, has developed a general consensus that welfare is a necessary government responsibility. In order to understand the German welfare state in its current form, it’s imperative that you know the origins of government welfare.

History

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Otto von Bismarck

Augustus, the first emperor of the Roman Empire, provided a grain ration for citizens who could not afford it. The Roman social welfare system was later expanded by Emperor Trajan.  In China, the Song Dynasty supported programs that provided retirement homes, public clinics, etc. The medieval Roman Catholic Church also operated an extensive welfare system. In England, the English Poor Law of 1601 gave churches the responsibility of providing welfare payments. However, it was not until the late 19th and early 20th centuries that organized state welfare systems were introduced to other countries. Otto von Bismarck, Chancellor of Germany and renowned bad-ass who single-handedly unified the Germanic states, introduced the first welfare system for the working classes. In the 1880s, his rudimentary state social insurance scheme made Germany the world’s first welfare state.

Following the collapse of the Third Reich and the ousting of the Nazis, the welfare system was steadily reinstated throughout Germany, albeit in different ways which will be mentioned later. When you recall the fate of the Weimar Republic (the last government prior to the Nazi Regime), it becomes very understandable as to why the welfare state was resurrected and how it became so ingrained in German culture.

Just to jog your memory, the Weimar Republic was the government established following World War I. It was the first democratic government of Germany, but lacked internal support, later being dubbed “the democracy without democrats”.

As a result of corrupt governing and the economically devastating effects of the Treaty of Versailles, unemployment was rampant and hyperinflation devalued German currency. Naturally, poverty and desperation spread like wildfire throughout the country. This opened the door for the rise in power of the Nazis, who led the public to pinpoint the root of their problems on the Communists, Jews, gays, etc.

It is believed by many Germans today that had the government been able to provide adequate aid to its citizens, poverty would have been limited and, thus, mitigating the popularity of the Nazis.

An Overview of Welfare

The goal of a government welfare system is unique for each country as they all intend to provide differing amounts of financial assistance. Generally, they are categorized as one of the following types: Liberal, Conservative, or Social Democratic. A Liberal welfare system relies on optional charitable donations for a majority of its economic aid. Ideally, the government would only intervene in order to alleviate poverty and provide for the most basic human needs. As a result, there are significant fiscal differences between the rich and the poor within such a society. The United States would be the most relatable example of such a system, but it is also represented by the welfare programs in Australia, Canada, Japan, and Switzerland.

A Conservative model, also known as the Christian-Democratic model, relies upon subsidiarity, social insurance schemes, and a medium level of decommodification. Those words probably mean absolutely nothing to you. In layman’s terms, there is a separate government agency that deals with each individual factor of welfare, and it is the government’s stance that its citizens are entitled to all of these services.

For instance, in Germany, there is a Federal Ministry for Health which provides universal health insurance, a Federal Ministry of Employment and Social Affairs which deals with pension insurance, disability insurance, etc., and so on. Evidently, Germany is an example of the Conservative welfare state model, along with Austria, Belgium, France, Spain, and Italy.

The most far-reaching welfare system is the Social-Democratic model. This is based on the principle of Universalism, in which the goal is citizen autonomy. A citizen’s benefits and services, as a result, are far less dependent on their performance in the market. This reduces social stratification and guarantees what the government believes to be essential services to all of its citizens. This system can be particularly fickle, though. It is an incredibly expensive and bureaucratic endeavor which guarantees incredibly high tax rates. Countries that employ this type of government welfare include Denmark, Finland, the Netherlands, Norway, and Sweden.

Everyone has their own opinions on the effects of welfare and how government aid affects the economy. Researchers, who, ideally, are objective in their studies, have found that “welfare considerably reduces poverty in countries whose welfare states make up at least a fifth of GDP.” For instance, between 1960 and 1991, before implementing social welfare policies, the United States held a 21.0% absolute poverty rate. After implementing social welfare policies, the absolute poverty rate nosedived to 11.7%. Additionally, economists and researchers have found little correlation between a country’s economic performance and social expenditure.

German Welfare State

We have already determined that the German welfare state falls under the classification of the Conservative model. However, these groupings are so broad that each individual system has their own oddities and nuances. Many Americans tend to generalize the Europe ideals of welfare and associate them with socialism. Ironically, the German welfare state was started in order to combat socialism. Otto von Bismarck, who was mentioned before, determined that providing the workers with some amount of monetary assistance in the event of an injury would lessen the appeal of socialism and its idealistic entrapments.

The German welfare state provides the German people with an enormous amount of services and insurances. The social insurance it provides includes pension insurance, health insurance, long-term care insurance, accident insurance, and unemployment insurance. This program is financed by both employees and employers. This system relies upon the employed to finance the unemployed, and the young to pay for the old. This is known as the Inter-generational Contract and it makes the German welfare system incredibly fragile.

Currently, due to low German fertility rates, the population is becoming Picture1top heavy, meaning that there are more old Germans than there are young Germans. This can be seen in the chart on the side. That simply cannot be sustained.

For instance, in terms of health insurance, a 60-year-old costs the government 2.8 times more than a 30 year-old. So, if a majority of the population is near or above the age of 60, the young population cannot financially support them. When it comes to the pension system, today, 100 contributors fund 58 pensioners. It is estimated that by 2050, 100 contributors will be paying for 78 pensioners. So, either each contributor will have to pay more money into the system or each pensioner will have to expect to receive less money from the system.

Additionally, the German welfare system depends on a strong German economy and low unemployment. If some event or economic evolution drew jobs away from Germany and significantly increased unemployment, there would not be enough employed people to finance the unemployed. The welfare system would quickly go bankrupt.

The German welfare state is fully funded by taxes collected from the German people. Specific services that are provided include daycare, college education, full health coverage, family benefits, and much more.

If the modern German welfare state sounds to you like a cross between the Conservative and Social-Democratic models, you’re not wrong. Following World War II, allied-controlled West Germany created a system based on the Conservative ideals while East Germany followed the Social-Democratic set of values. When Germany reunified following the fall of the Berlin Wall in 1989, compromises were made in creating the new, singular welfare system.

You can go on to Part 2 by clicking here.

If you would like to see my sources, let me know. Make sure to check out my past posts at the following link: http://voices.lafayette.edu/category/james-onorevole/

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