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Without Reform, a Massive Spike in Social Security Costs Looms

Economists from WHU and Aalen University call for swift political reform to prevent social security imbalance between generations

As it stands today, the OECD considers Germany a leader when it comes to social security cost. Yet, in their latest research, economists Professor Christian Hagist (Chair of Economic and Social Policy) of WHU – Otto Beisheim School of Management and Professor Stefan Fetzer (Chair of Public Health and International Health Care Systems) of Aalen University have determined that, without reform, contributions to retirement, health, long-term care, and unemployment insurance will skyrocket from 40.9% to 50% of one’s gross pay by the year 2050.

As their report Mehr Nachhaltigkeit wagen shows, this could have dire consequences for both employers and employees alike. There is the risk that “the younger generation could unilaterally ‘revoke this inter-generational contract,’” noted Professor Hagist. In other words, this means people could start seeking ways of avoiding the German social security system altogether—fewer jobs linked to the social security system, more work left undeclared (i.e., performed “under the table”), well-educated workers moving abroad, and a decreased interest in Germany on the part of qualified foreign nationals. The researchers also noted that the German social security system may come to a tipping point.

This report on the sustainability of that system was commissioned by trade association DIE JUNGEN UNTERNEHMER and DIE FAMILIENUNTERNEHMER. In light of the results of this research, Thomas Hoppe (Federal Chairman of DJU) has urged the federal government to reform all branches of the social system before the end of this legislative period. “If the government ignores this need for reform, they will be putting at risk the very industry that millions of insured people in Germany rely on.”

From where Professors Hagist and Fetzer are standing, there are many reasons for the rapid rise in social security costs. In the coming years, there will be a higher number of retirees and fewer younger people on the labor market to offset those costs. Other driving factors include advances in medical technology and the fact that the long-term care sector has not made much progress in terms of its productivity.

The economists are, however, optimistic that “we can meet this tremendous challenge of demographic change through decisive political action.” Their proposal covers a plan for incentivizing people to stay in their jobs longer, lower pension increases for the baby boomer generation, digitalization as a way to mobilize efficiency reserves, legitimate competition in the healthcare sector, and increased patient responsibility. It also sees stable costs for long-term care insurance, made possible in the mid-to-long term through increased capital.

Upon publication, Mehr Nachhaltigkeit wagen – Die Tragfähigkeit der Sozialversicherung in Deutschland garnered attention from several media outlets, including the FAZ, Handelsblatt, Die Welt, and Rheinische Post.

Click here to read the report (in German).

For further information on the study or if you wish to contact Professor Christian Hagist, please contact the WHU Public Relations department at presse[at]whu.edu

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