Effectiveness of the Present Social Structure of Germany - Research Paper Example

Welfare State in Germany Table of Contents Introduction: A Welfare State 1 Three Approaches in Forming a Welfare State 3 The German Social Structure 5 The Welfare State in Germany 6 The Welfare State in England (United Kingdom) 9 A Comparison of the Pension Scheme in Germany and England 10 Conclusion: Effectiveness of the Present Social Structure of Germany 12 References 14 Bibliographies 17 Introduction: A Welfare State A welfare state is one in which the government provides for the social benefits of the citizens of the country, be it physical or material. A welfare state can typically exist if the government of the nation is a socialist one that taxes the upper and the middle class groups of an economy heavily in order to facilitate the poorer and the underprivileged section of the society. They redistribute these revenues earned from taxes to provide for social benefits to the poor and the needy. Sometimes however, the benefits do not only go to the poorer section but to the society as a whole, i.e., every citizen of the country is entitled to social services provided by the government (Spicker Paul, n.d., An Introduction to Social Policy). A welfare state though, cannot be formed only out of a socialist economy, but even countries that do not completely idealise socialist views can also set up a welfare state since the main feature of a welfare state is that of a government that takes care of its citizens’ social needs (WiseGeek, n.d. What is a Welfare State? And Encyclopaedia Britannica, The Welfare State). A good example is that of Germany that initially was divided into East Germany and West Germany, but later was merged as one thus forming the German Democratic Republic which was based on principles followed by the West German capitalist economy. Three Approaches in Forming a Welfare State Now, what must be the ideal form of welfare state given the situation and the environment prevailing in a country? There are basically three approaches that can form the basis of a welfare state. These approaches are – 1. Corporatist Approach. The corporatist regime became popular in a number of economies during the later part of the 20th century in Europe. The main proponents of the corporatist regime were the people who found out soon after the French Revolution that the system of an egalitarian society supported by the principles of laissez faire, (government intervention is necessary for the proper functioning of an economy rather than just depending on market forces) is not suitable for the proper functioning of the state. In this kind of regime, the entire society is “corporatized” into a number of groups or classes of the society whose representatives interact with each other to jointly solve or negotiate a problem that might have cropped up between two or more interest groups of the society (Watkins Thayar, n.d., The Economic System of Corporatism, para 2). In corporatist approach, thus the state has the ultimate power. Although it is neither socialism in the sense (that property could be retained privately) and nor hard-core collectivism, yet the state government has ample power to regulate control over its citizens. In this case, social benefits are extended to those people, who have contributed in the production process of the economy and have thus, yielded revenues with which the government can extend its social services. But, those who have not made any contributions to the revenue generation process are excluded from accessing these benefits. Neither are the well-off class, i.e., those people who have ample wealth to take care of their basic necessities included in these services. The corporatist regimes basically take care of those issues and services that are too large or expensive to be undertaken by the private enterprises. In fact, this is the regime that prevails in most economies throughout the world today. 2. Social Democratic Approach. This approach basically means socialism where there is no such thing as a private property and everything in an economy is owned by the government. Hence, the government of such an economy is the sole giver of all services in the country and since the basic building block of socialism is the idea of an egalitarian society, so everyone in such an economy enjoys the right to access those services. Such an economy thus can be said to be one that tends to universal values. A good example is that of the former Soviet Russia and East Germany before its unification with West Germany to form the German Democratic republic (Whitehorn Alan, n.d., Social Democracy). 3. Liberal Approach. In this case, the provision or the right to access social services depends upon the market and the individual’s participation in the market. The benefits provided by the state are minimal in nature and are such that they are provided only in case an individual gets unemployed all of a sudden (unemployment benefits) or becomes old and unable to work (pension benefits). Hence, in this kind of an economy, the state does not forward any social services or benefits to its citizens unless the need arises. Hence, the state’s help in such an environment is like a last resort to its citizens who can turn to it as a safety net in times of difficulties (Scholnick Erin L., March 2005, pp 5). This type of a system is mainly aimed at making the people self sufficient rather than just sitting back and depending upon the state benefits for their subsistence. The German Social Structure Germany soon after its unification, Germany shifted to a social democratic structure where it is the duty of the government of an economy to provide social benefits universally to all its citizens. This was necessary because the unification resulted to a number of structural problems like that of high unemployment and poverty which could not have been dealt with had the government not taken the initiative. But as the economy started gaining control on its situation since its participation in the European Union, was compelled to turn itself towards corporatist views of running the state. This was because the European Union wanted its member parties to conform to certain rules and regulations for their participation in the union. One such rule was to keep their cost of production low in order to stay competent in the world market. However, this was not possible with high unemployment and poverty, the demands for social benefits like unemployment services as well as the demands for high wages by the workers at the same time. Hence, the economy had to adopt a stricter regime of corporatism. As discussed before, this system supports a work-oriented regime dependent on individual contributions and the government mainly provides its services to those who are participating in the production process of the economy excluding those who have not made any contributions as well as those comprising the richer section of the society. The Welfare State in Germany Germany as a whole had forever believed in a conservative and patriarchal framework of the society since the period of Bismarck rule where the government takes care of various social benefits of its citizens. Naturally, this huge responsibility cannot be met without a huge amount of fiscal surplus. In the pre-unification period, the traditional German society gave a number of allowances to its people, e.g. pension benefits to people above 65 years of age that comprised 70% of the total social benefit funds and 11% of GDP, unemployment insurance to workers providing subsistence living to those who are temporarily unemployed in the market as well as sickness allowance that allowed a sick person to get paid when he can’t attend his work because of falling sick (Hagberg Sarah, n.d.). But post unification, this became a bit challenging for the German society due to – 1. The contradictory principles and the policies of the two parts of the newly formed state of Germany. Before its unification in June 1, 1990, Germany was divided into two major parts – the East Germany and the West Germany, which were completely different from every aspect. East Germany believed in a social and a patriarchal society. On the other hand, West Germany believed in capitalist principles. The merging was actually a process of the convergence of East Germany into its West counterpart, so that the entire new state would become a capitalist society (Sheehan James J., October 7, 2001). But the process was not easy, because East Germany actually was suffering from low productivity, high labour wages and poor infrastructure all of which made it very incompetent in the world market. Moreover, before the unification, East Germany also had very strong ties with the “collapsing socialist economies of Soviet Russia and East Europe” (Hagberg Sarah, n.d.). So, when the merging was planned, the Western counterpart thought about privatizing all the East German firms, because incorporating a capitalist element in the production process could at least take care of these problems. However, transforming an entirely socialist society like East Germany was not at all problem-free because – A huge amount of money was transferred from the Western to the Eastern side of the country to rebuild the latter after the unification. A yearly sum of almost US $ 100 billion was required for the purpose. But, the government did not have access to so much of funds with such a huge unemployment rate and high wage demands by the workers. The only way was to impose taxes and hence a Solidarity tax was introduced in 1993. It was found to yield 95% of the total funds for social security. However, the rate of the tax was so high that people adopted a pay-as-you-go scheme where people could pay their taxes in instalments. When the West German firms saw that the prevailing social circumstances for their Eastern counterparts were not conducive for a low cost of production and hence competency in the world market, they decided to reduce production in the eastern side and instead open branches in the Western parts. However, the number of branch increases was never high enough to absorb such a huge population, causing the unemployment rate to rise to a level as high as 12%. This high rate of unemployment resulted to an increased demand from the population for a huge unemployment benefit provision. Again as the workers from the Eastern zone was merged with those in the West, so a demand for high wages was also invoked into the population and the management was faced with the problem of downward wage rigidity. At the same time the workers started demanding for tax cuts when they came to know that a huge part of their income was being spent by the government for rebuilding purposes. However, these demands were not at all favourable for facing the market competition as higher wages imply higher costs of production which becomes a major cause behind high prices. Thus, the demand for German products is bound to fall in the foreign market and with it the fiscal surplus with which to provide for the social benefits. 2. Convergence of Germany into the European Union leading the German government to face huge fiscal challenges. The convergence of Germany in the European Union required it to abide by certain rules and regulations being specified by the Union to be followed by its member nations. One of them was to keep the cost of production low. But, as discussed above, with high wage and tax-cut demands, it is not possible for the economy to go by the rules and thus the government decided to cut down its social benefit provisions. But this too was against the wish of the public. Hence the government was sandwiched. The Welfare State in England (United Kingdom) United Kingdom has been very liberal in providing social benefits to its citizens on a universal basis. According to Asa Briggs (1961 cited in Spicker Paul, n.d.) the main elements that comprise the social structure of England are – (i) A minimum income would be provided to the citizens of the nation to maintain the minimum standards for subsistence. (ii) The country also guarantees the provision of social protection in times of insecurity or emergency. (iii) Apart from the above two, the government of the nation also guarantees the provision of various welfare services like unemployment benefits, sickness allowances and pension schemes. However, the services although universal in nature and have an extensive coverage are not flawless and are often accused of being provided at a minimal level. The social benefits being provided are meant for the entire population and not only for the poor and needy – they are accepted as a normal part of the lifestyle of the society. Yet, the services being provided are quite patchy in nature. A Comparison of the Pension Scheme in Germany and England As discussed before, pension provisions in traditional Germany used to be as high as 70% in the pre-unification period, which also comprised of 11% of the economy’s total GDP. As an employee it is also mandatory for the Germans to contribute 19.9% of their gross income in pension benefit scheme (University of Bielefeld, n.d., Pension Scheme). Besides this problem of a huge amount of funds going out as pension benefits, another problem although not a major one was that of lowering fertility which results to a reduction in the number of productive population (Kreyenfeld Michaela & Scholz Rembrandt, July 2009, pp 5). Added to it is a lowering mortality rate leading to a rise in the number of people living above 65 years of age and adding to the government’s need for funds to provide for their pensions. Because of the problems discussed above, it became so difficult to persist after unification that during the reign of Chancellor Kohl, it was proposed to eventually lessen it to 64% of the total funds allotted for social benefits. Even today the problem has not been solved completely, although its intensity has lowered. The employed German has to contribute as high as 19.5% from his wage for state pension benefit schemes, rather than the government contributing to pension funds from its own pockets, i.e., from fiscal surpluses (Newman S.L., The German Pension System, pp 1). However, as far as 2000 survey is concerned, the contribution to pension scheme out of the total social benefits scheme has gone up from 11% of GDP to a little above 12% which is expected to grow still. However, England had never been very strict and particular about its social benefit schemes and the government never made any special attempts to find out if the benefits being provided were sufficient for the people or not, except once in the 1960s. Although the results of the survey were never disclosed, the contributions to the pension funds were increased after that as was found by Veit and Wilson (1999 cited in Ditch John, pp 100). At present, UK spends 5% of its GDP on pension benefits post retirement – 3.6% of these benefits spent for basic state pension. “The remaining 1.4% of GDP that gets spent by the state on providing retirement income comes partly through spending on income support .... partly spending on the .... State Earnings Related Pension and partly on various allowances for pensioners.” (Miles David, October 2002, pp 3). However, as found in the graph, it is projected to grow above 6% by 2040. Figure 1 – OECD Health Data 2004, 3rd Edition Conclusion: Effectiveness of the Present Social Structure of Germany At present Germany is based on a corporatist social framework that does not entirely believe in collectivism or on socialism, but in which the government has ample power to have a control on its citizens. In this type of social structure, the government provides benefits to just those that are in some way involved with the production process and thus the revenue generation process for the government as well as the poor and needy lot, but excludes those comprising the richer sections of the society. One of the most important and major social benefit schemes is the pension benefit scheme. As discussed before, Germany allots 70% of its total social benefit funds to its pension funds which comprises of more than 12% of its GDP. However, the country together with the whole of Europe is suffering from the problem of low fertility rates along with a low mortality rate, thus leading to a shortfall in the production potential of the economy. If production falls, the inflow of revenues will fall as well. But, the country is also obliged to provide retirement benefits to its citizens at the same time. So the question is where will this huge sum come from? The country cannot keep on taxing its working class to an extent that it becomes unbearable for them. Hence, one obvious solution is that the country invests its funds in the stock market. (Inman Phillip, May 26, 2009) Now, investing in the stock market, as is widely known is a very volatile and risky business. In the recent phase of downturn, when all the economies throughout the world are experiencing recession, Germany has not also been spared. The country officially announced itself to be in a recessionary phase in 2008 after it experienced contraction in its GDP growth for two consecutive quarters. This was mainly because of the economy’s high dependence on imports and reduction in its export growth (Espinoza Javier, Recession Hits Germany, November 13, 2008). This recession is bound to be reflected in the economy’s stock exchange market, and thus it became very difficult for the economy to derive its pension funds. Now, there is another source of raising funds, through the selling of Government securities or G. Sec bonds. However, at a recessionary period, the interest payments on such bonds becomes quite a headache for an economy and it tries to find out ways to reduce its rate of interests. However, Germany that had gone through a phase of inflation previously in 1992, had always been against any interest rate cuts and have maintained high rates of interest even when it was experiencing recession. This resulted to a shortage of funds for the government and it had to rely on taxes basically thus creating an intense pressure on the common people. However, the economy decided to inject $679 billion into the economy so that the market could revive a bit (Spiegel Online International, Fighting the Financial Crisis, October 13, 2008) and in fact it did revive after that thus relieving the common man in Germany. But, this does not prevent the economy from staying vulnerable to economic fluctuations and stock market volatility and thus the country’s citizens from enjoying social benefits. References A Briggs, 1961, The Welfare State in historical perspective, European Journal of Sociology Ditch John (ed). 1999. Introduction to Social Security: Policies, Benefits and Poverty. Encyclopaedia Britannica, The Welfare State, [Online]. Available at http://www.britannica.com/EBchecked/topic/639266/welfare-state. [Accessed on August 9, 2009] Espinoza Javier, November 13, 2008, Recession Hits Germany, [Online]. Available at http://www.forbes.com/2008/11/13/germany-recession-gdp-markets-equity-cx_je_1113markets07.html. [Accessed on August 9, 2009] Hagberg Sarah, n.d. The Challenge to Germany’s Welfare State. INTS 4763. [Online]. Paper 3. Available at http://tiss.zdv.uni-tuebingen.de/webroot/sp/spsba01_W98_1/denver9.htm [Accessed on August 8, 2009]. Inman Phillip, May 26, 2009. Pension system handicaps British businesses, study says. The Guardian. [Online]. Available at http://www.guardian.co.uk/money/2009/may/26/pensions-deficit-private-business. [Accessed on August 9, 2009]. Kreyenfeld Michaela & Scholz Rembrandt, July 2009, Fertility and Mortality Data for Germany: Recent Progress and Future Challenges. German Council for Social and Economic Data. Working paper No. 110. [Online]. Available at http://www.ratswd.de/download/RatSWD_WP_2009/RatSWD_WP_110.pdf. [Accessed on August 9, 2009] Miles David. October 2002. Where is the UK Pension Problem? London. Imperial College. Newman S.L. July 17, 2007. The German Pension System: An Expat’s Guide. Associated Content – Business and Finance. [Online]. Available at http://www.associatedcontent.com/article/307210/the_german_pension_system_an_expats.html?cat=3 [Accessed on August 8, 2009] Scholnick Erin L., March 2005, Is Esping-Anderson’s Liberal Regime Adequate: Health Care in the United States, United Kingdom and Canada, Western Political Science Association Conference, San Francisco State University Sheehan James J., October 7, 2001, The Unification of Germany. World Book Online Americas. [Online]. Available at http://www.cybergerman.addr.com/unification.html. [Accessed on August 9, 2009] Spicker Paul, n.d., Introduction to Social Policy [Online]. Available at http://www2.rgu.ac.uk/publicpolicy/introduction/socpolf.htm#Institutional [Accessed on August 9, 2009] Spiegel Online International, October 13, 2008, Fighting the Financial Crisis, [Online]. Available at http://www.spiegel.de/international/europe/0,1518,583739,00.html. [Accessed on August 9, 2009] Watkins Thayar, n.d., The Economic System of Corporatism, Department of Economics. San Jose State University. [Online]. Available at http://www.sjsu.edu/faculty/watkins/corporatism.htm [Accessed on August 9, 2009] Whitehorn Alan, n.d., Social Democracy, The Canadian Encyclopaedia [Online] Available at http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1ARTA0007520 [Accessed on August 9, 2009] WiseGeek, n.d., What is a Welfare State? [Online]. Available at http://www.wisegeek.com/what-is-the-welfare-state.htm [Accessed on August 9, 2009] University of Bielefeld, n.d., Pension Scheme, [Online]. 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