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Germany is one of the countries that are often chosen as a classic example of a high-welfare state. Thus, the citizens enjoy unemployment benefits, pensions, and comprehensive health insurance covers. Notably, welfare provision in Germany is the largest element of public expenditure, and it is considered an integral element of the social market economy too. However, despite significant expenditures, the structure and extent of social welfare policy in Germany have come been increasingly challenging. As a result, these challenges have necessitated a retreat from several established policy positions even though it has been quite gradual. Moreover, the reforms in the welfare state have become the single most contested policy issue among Germans. Therefore, this paper will explore social welfare policy in Germany in terms of reforms, the challenges faced in enacting the reforms, and weigh the factors in favor of the reforms against the opposition.

Causes for Reforms

The challenge to Germany’s welfare state cannot be separated from its demographic development. Therefore, the effectiveness of pension systems, such as ‘pay as you go’, is limited. Essentially, as long as enough children are born, such pension systems do not create financial problems. However, the reality is that in the last decades, there has been increase in life expectancy, which in return increases the number of years, during which elderly Germans receive their pensions. At the same time, there are fewer births, which reduces the number of people who work to finance the rising demands for pensions. For example, between 1980 and 2008, the average duration of an individual’s retirement period increased to 15.5 and 20.4 years for men and women respectively. Most likely, this trend will worsen as many Germans reach the retirement age, and this number only increase over the next decades.

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The most recent social reform was in 2007, and it was driven by the political will of German leadership. In addition to reducing the costs, the Grand Coalition of CDU/SCU and SPD had to reconcile their ideologies for financing the health care systems. Thus, the SPD wanted to introduce universal citizen’s insurance schemes to bring individuals with high income to go into the private system under the statutory insurance schemes. On the contrary, the CDU/CSU adopted the policy of flat contribution rates to the statutory schemes to reduce the non-wage labor costs. Unfortunately, the outcome was extremely complex with bureaucracy that hindered the effective management of health care funds. On a further note, the reforms that have been undertaken in the German welfare system have similar trends. First, they have measures, such as capping budgets, that aim at reducing the costs. However, they tend to have a limited effect because there is the need to overcome the opposition from producers. Second, there has been an increasing emphasis on private contributions in the statutory schemes. It was not successful too because it caused protests from the voters who were accustomed to the universal insurance coverage, and the initial move to shift the financial responsibility for health care away from the insurance contributions was hindered by the recession of 2009.

Factors in Favor of Reform Versus Those Opposing It

There are significant cost pressures in the welfare state. Practically, these costs must be met by raising the rates of contributions, a move that increases the total costs of employment too. On a further note, the civil servants in Germany live much longer; therefore, they require longer retirement periods. However, the civil servants do not make contributions for pension schemes because they are funded by the government. For example, so many Germans work at the Land level that it is estimated that by 2020, about 10% of the total revenue collected on land tax will be spent to fund the pensions of the former employees in this level. Similar pressure, which is caused by the rising costs, is also evident in the health insurance system because it is also financed by the ‘pay as you go’ principle. Additionally, other factors have significant negative influence. For example, the majority of citizens earn their living by the provision of health spa service, while clients can spend up to more than six weeks on paid sick leave for a wide array of aliments at numerous spas. As a consequence, any attempts of the government to cut such expenses are met with great resistance, especially from the regional politicians.

Moreover, the statutory health care delivery is a major challenge too in this system. In other words, the majority of medical professionals have privately owned health care facilities, thus creating room for the duplication of these services. In this case, both the institutional and individual providers are responsible for determining the amount they demand from insurance companies. Furthermore, doctors, who treate patients in statutory insurance schemes, usually bill insurance companies through clearing houses. As a result, there is no transparency in the relationship between the costs and the medical services provided by individual doctors. Unsurprisingly, fraud becomes a common problem in healthcare sector in German. Secondly, health care providers and hospital owners constitute one of the best organized and powerful interest lobbies in German politics. This has made it almost impossible to introduce changes that are against their interests. Over the years, these groups have been successful in defending their financial positions and weakening the political efforts to make reforms in the social welfare system of Germany. However, despite the opposition from health care providers and hospital owners, some reforms have been realized.

When Schroder was elected the Chancellor of Germany, he faced challenges in relation to the reforms in the pension system. Thus, the SPD’S well-developed reform plans, which contradicted his understanding of the modern social policy, hindered his attempts. The reform was to take effect to reduce benefits gradually. In the second step, the SPD implemented the most important measures: tax-financing and widening base of contributors. These measures aimed at ensuring the financial stability of the public pension contributions in one big step. Therefore, under the commission led by Peter Hartz, several recommendations were endorsed by Schroeder. In essence, the Hartz commission argued that the long-term unemployment benefit and means-tested income should be combined. These two recommendations became the cornerstone of the Hartz IV law. Consequently, when these two elements of the welfare state were merged, there were drops in benefits. Nevertheless, the calculation was that the laws would provide a financial incentive for the long-term unemployment. In such a way, those without work for over one year would return to the active labor markets. It meant that the commission advocated that the workfare policies should be introduced in Germany.

Difficulties in Enacting Reform

Unfortunately, because of the nature of German politics, enacting these reforms had proved to be difficult. Thus, any means or proposals to cut the benefits of the members of society living in poor standards, regardless of the reasons, will always face controversies. The enacting of the Hartz IV law was not an exception. Schroder faced considerable opposition from both within his own party and the trade union movement. Eventually, the law was passed through a conciliation committee. Therefore, although the law had been commonly credited with increasing the overall number of persons in employment, it had some disadvantages too. First, there was a complex organization and a different range of allowances and sanctions to be administered. Consequentlu, there have been many legal challenges in making decisions over the level of assistance to be granted by the authorities. In addition, in 2010, the Federal Constitutional Court also found that some of the provisions were not constitutional. In financial terms, a further unexpected side effect had been seen since more people applied for assistance under the new framework than had originally been estimated. This mistake placed a heavy burden on the federal budget in 2008, and it was set to continue over the coming years.

Changes are not Likely to Occur in Social Welfare Policy in Germany

Although, the SPD is a part of the grand coalition, it has experienced fierce attacks on social benefits and wages have continued to increase significantly. This means that there is an urgent need to reform the social welfare system in Germany, even though there is no likelihood of political reform to ensure that it will be transformed. First, the government should develop initiatives to increase the rates of employment. In other words, it is imperative to develop the programs, aiming at reducing long-term unemployment among the German population. On the one hand, the Hartz Law has facilitated gradual transformations in the quality of the welfare state, but there are issues that need to be solved to enhance the effectiveness. Notably, the political aim of cutting the costs associated with non-labor wages was to promote employment and stimulate consumer demands. Therefore, the only way to achieve this goal is by capping the benefits or privatizing the costs. However, as the experience has shown, it has taken significant political efforts to achieve even a slight reduction of non-wage labor costs.

Furthermore, the recent reduction in unemployment contributions has been partially jeopardized by the rising contributions to other statutory insurance schemes. Thus, it shows that even in the future, the federal governments will continue facing pressure to reduce the costs. At the same time, Germany is so extensively committed to long-term welfare that there is little room for public spending even in other strategic areas such as defense and education. Consequently, the welfare state reform is set to remain the single most dominant political issue in Germany in the future years. Secondly, the party politics in this field has also been supplemented by powerful interest groups that stage successful opposition to proposals to reduce benefits. Thus, some interest groups are persistent opponents of welfare reforms in Germany.


In conclusion, Germany is a welfare state with social policies forming an integral interest in the labor markets. It is also one of the areas that receive the highest public expenditures. In addition, with the Hartz IV Law, the social welfare reforms aimed at reducing the universal benefits, especially the non-labor wage costs. However, the enactment of these reforms has not been successful since the nature of politics in Germany has been a significant obstacle. First, there are powerful interest groups that vehemently oppose any attempts to reduce the benefits provided to the German citizens who are perceived to belong to the low class. Therefore, despite the need to make changes to the social welfare policy in Germany, it is not likely that there will be political reforms to facilitate these much-needed transformations. As a consequence, the future governments will continue struggling with the challenges of the rising costs in social welfare at the expense of other strategic areas such as education and defense.

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