Welfare States in Europe

I. Introduction

The German proverb that misfortune seldom arrives alone captures completely the essence of present German social economic difficulties.

The decade of vibrant economic growth has become a memory and is not part of the historical experience shared by the generation born in the 70s and 80s, getting in to work now. Most of these young people do not know the right balance between efficiency and equity. Self-responsibility and self-decision-making, on the one hand, and social security to prevent poverty on the other, are both very important features in creating a civil society, as a third sector between the private and the public sectors. The definition of this type of civil society and the avoidance of a liberal model through the Bismarckian conservative social security system, to maintain the status even in the case of an emergency, will be described in the the first part of the second chapter as a basis for liberty and the increase of the national product.

On the other hand, in Ireland between 1988 and 2000 real GDP has grown 132 per cent. It was not only the social pact model which resulted in magnificent economic growth rates, but the whole welfare system was improved to give more incentives, to establish more self-responsibility and to reduce status maintaining features (Baccaro and Simoni, 2004). The beginning and the framework of the Irish success, in terms of efficiency and equity, will be discussed in the second part of the second chapter. The third chapter describes in a detailed way the differences of social security financing and its impact on efficiency and equity in both Germany and Ireland. The fourth chapter is devided into two parts. The first part deals with the unlimited social service provision of health care, disability and occupational benefits in Germany and compares it to the Irish system. In both the first and the second part the impact on efficiency and equity will be discussed. However, the problem of the second part of the fourth chapter is not the unlimited service provision, but the typical difficulties that emerge, especially from the retirement and unemployment insurance and, in a less intensive way, from the carer’s insurance. The fifth chapter deals with, as a consequence of the described problems in the fourth chapter, poverty reduction and efficiency increase, to develop a civil society. Therefore, the first part discusses the effects of increased take home pay due to less social security contributions for both employer and employee, as was achieved due to social pacts in Ireland. The second part relates efficiency and equity, measured in terms of effectiveness to one another and explains that a more efficient management of social security in Germany might be a solution to current difficulties. The better relationship between efficiency and equity in Ireland has led to the conviction that less social contribution revenue must be targetted more exactly.

Finally, it will be explained in the conclusion, that a partial retreat from the outdated conservative system is not avoidable any more. Of course, Ireland seems to be less equitable, but on the other hand it is efficient. Germany’s system is neither equitable nor efficient.

II. Civil Society as a framework for Efficiency and Equity

Most debates of a civil society were started by left wing scientists to describe a third sector which completes the official government and the economy.

Joachin Kolbs, for instance, argues that a civil society is a composition of social groups, initiatives and movements, which are widely independent from the government and their parties, and, on the other hand, private institutions like enterprises. The membership to these groups is voluntary and their organisation is democratic (Zeitung für linke Debatte und Praxis, 2000). In this way, it is understandable that liberal-democratic paradigms sometimes read like left wing political philosophy. What both sides attack are absolute privileges and power to dictate what the majority of individuals in a society are supposed to do. Democracy means transmission of power from a minority to the majority. Each individual should fulfil his/her obligation, but on a voluntary basis, and liberal democracy guarantees a strong commitment to realise these central rights (Touraine, 1999).

A liberal welfare state based on private decision making without any influence from somewhere else guarantees these basic rights. A low level of social expenditure as a proportion of GDP, low social protection from the risks and needs, low replacement levels of income by state benefits and pensions are important liberal features. In this way, there is an important role of self-financiering, family support and care etc (Esping-Anderson,1990). Self responsibility stands in the foreground.

The result is a high level of income inequality. Hayek, as an anti-egalitarian philosophy believed that inside this pattern unequal rewards, generated by the market, are a necessary condition for a civil society. Imposing equality through state intervention on society is economically damaging and political fatal for liberty. The government’s attempt to apply justice to economic distribution does not work because, like is has been explained before, each time it leads to a greater tyranny. Therefore Hayek was hostile to much of the post-war development of the welfare state (Hayek, 1969; 1976). On the other hand, an individual decision, and its importance for the development of a civil society, and the state decisions taken for people are not completely dividable. If someone chooses not to insure and a case of emergency occurs all emerging costs would fall upon the taxpayer. Alternatively, if there is no help given starvation or even death of the affected person could occur. Furthermore, this described fate might have consequences for dependants as well. As the community support for old, sick and unemployed has broken away in modern societies, a compulsory insurance scheme is very necessary to get the wealthy to contribute to the system. Therefore, it would be an unconditional right to benefit when the necessity of emergency arises. If these social risks are ignored it could result in an increase of crime, which is not healthy for the development of a civil society either. Therefore there must be caution against cutbacks and competition among social welfare systems (Sinn, 2000). Despite Moral Hazard, the welfare state can bring Pareto economic gains. Protection indicates peoples willingness to take independent risks which are associated with an enlargement of the national product (Bird, ,1998).

Hence, it is very important for the development of a civil society to maintain a healthy balance between these two contradictory patterns. On the one hand, there is the liberal movement of each individual and, on the other hand, the avoidance of social riot and civil commotion because too many people fall through the cracks. Finally, it seems that there is a trade-off between efficiency, in terms of self-responsibility and a cheap social security system to make independent decision-making easier, and equity to guarantee at least the possibility of private decision-making (Sapir, 2005). In other words, a social security model will be considered equitable or effective when it keeps the risk of poverty low. It is efficient when it provides contribution income with low contribution rates and simultaneously high levels of incentives to work. Equity can be a result of efficiency and vice versa.

In this way, it is worth discussing whether the governments of Ireland, as a representative of a liberal welfare state, and Germany, representing the conservative so called “Rhineland” Model, increases efficiency when it wants to increase equity to develop a civil society. Hence, the next two paragraphs show the historical and sociological framework of the welfare system in both Germany and Ireland and their contributions to developing a civil society as it was described above.

II.1 The German conservative Social Security System

Unlike in Ireland, in Germany a liberal movement fought successfully for economic freedom and against absolutistic power. State intervention was only supposed to be accepted to guarantee safety and equality of opportunity. However, after the establishment of the German Empire in 1871, responsibility was more and more removed from society. Liberal welfare ideas came under attack by both socialists and conservatives. The liberal model was supplemented by a male breadwinner policy, institutionalized gender discrimination in provision of services and benefits etc (Lewis, 1992, pages 159-73). The church and its commitment to the maintenance of traditional family forms influenced the creation of the Bismarckian German welfare state, which was once heralded as the most stable in the world. Indeed, Bismarck’s idea was not to address economic welfare problems inside the liberal framework, but rather to change the whole frame. The opposition criticized Bismarck’s welfare ideas as a march back from the open civil society organized and created during the 19th century. This conservative government policy was not to enable the working class to build up resources for their own secure wellbeing, but rather to keep them dependent on states rent (Baum, 2005). This is the reason for the persistent and deeply ingrained present day German belief in an unlimited and inefficient competence of German social security government.

In West Germany the Christian Democratic Union (CDU) supported this “Rhineland” system due to the afore mentioned Catholic Social Ethics, whereas the social democratic party of Germany (SPD), on the other hand, founded its commitment upon social justice and social democracy (Lawson, 1996). A principal feature of this type of social insurance system is to keep the government at a distance but not in a liberal way. The German welfare system is corporatist, meaning that several interest groups are incorporated into the administrative process and policymaking. Insurance-based schemes are administered by trade unions and employers organized in private bureaucracies (Wilson, 1993). This self-administration principle is enforced by the principle of subsidiarity where the state intervenes only to the degree that the lower unit, for instance the government of the Federal State or a family or community, is restored or maintained. In this way, it is richly organized with wide support coverage for the traditional family unit (with children) rather than to individuals and their personal capacity.

Firstly, benefits have to be earned by a male breadwinner through employment, whereas the entitlement of women was usually realised through relatives or through marriage. That makes women highly dependent on the husband’s income and at a greater risk of falling into poverty, and that is not equitable. Taxes, transfers and social service policies favour highly paid and full time male employment, and encourage working mothers to leave the labour market.

Secondly, the out of job benefits (all kind of pension and unemployment benefits) received, depend on the amount of contribution financed by payroll taxes which one has made and therefore on the employee’s salary or wage level. The original function of this cash benefit was to replace male wages in case of emergency and to guarantee income security and the maintenance of status differences over a traditional life cycle. As a consequence, this leads to inefficiency due to free-rider behaviour. Redistribution only takes place over a lifetime and so inequalities are maintained in- and outside the labour market. Moreover, the elderly, sick and unemployed are not forced to offer their labour as a commodity.

Another inequitable feature of this “Rhineland” system happens if an applicant does not perform on this labour or marriage market. Coverage is realised through a general, tax-funded social security system, which is distanced – in status and generosity – from the main social insurance programmes ( Lewis, 1992, pages 159-73 ). Due to these three reasons, the principle of equity does not apply at all.

Some of these described features are evident within the Irish welfare system before World War II. The next paragraph, therefore describes social insurance in Ireland.

II.2 The Emergence of the Irish Way of Liberalism

Officially Ireland has a liberal system but its welfare regime before World War II showed lots of parallels with the Bismarckian type. The reasons were that the British protestant rule was overthrown and, additionally, there was no labour movement because there was no industrial heartland. The Irish Free State by the end of the 1920s engaged only five per cent of the population in manufacturing. Ireland was in some way a classless society. Catholic corporatism was the only institution left with a strong male breadwinner policy, which also determined the roles of the women. Women were mothers, carers or dependants whose lives lay at home. Conservatives regarded it as a third way between capitalism and communism. Welfare was a family affair and subsidiarity, as already explained in the German case, was a common feature. The government would not intervene as long as the family fulfilled its responsibilities (Cochrane, Clarke and Gewirtz, 2003). Instead the public administration facilitated and promoted the organization of voluntary work.

However, it resulted in a more economically liberal pattern due to the Church’s pressure on nationalists to realise laissez faire economic policies. Christian charity, instead of social insurance, was very important. In this way, it was not equitable but more efficient than the German welfare system. The church tried to defend its own authority and influence on the family institution and saw itself in the major role to determine the social and moral climate in the Free State (Peillon, 1982). As a result both public expenditure and taxes were lowered. After the war, the Second Vatican Council allowed state expenditure for reasons of social justice. Table 1 demonstrates the increase in coverage of social and income taxation from 1955 on.

Table 1: Coverage of Social and Income Taxation: Thousands of Participants

illustration not visible in this excerpt

Source: Reports of the Department of Social Welfare, various years.

Statistical Information on Social Welfare Service, Various Years.

Statistical Report of Revenue Commissioners, Hughes 1985.

These quantitative features can be added by qualitative new demands on social welfare, which were also realised during the last five decades. More risks were considered in the social welfare system. Various schemes like unemployment or health insurances were introduced or the finance amounts were increased (see appendix table I for further details). However, cutbacks at the end of the 80s were implemented because the social security system was becoming increasingly inefficient. An unemployment rate of 17 per cent and an inflation rate of 12 per cent led to a serious stagflation. Higher tax rates to pay the expensive social security system depressed the economy further (International Labour Organization, 2006). Since 1987, neo-corporatist tripartite agreements, which include the government (unlike in Germany), were developed to compensate the emerging social risks of a society and to achieve the balance between efficiency and equity (see summaries of Social Pacts in the appendix).

Today, the Irish social policy also shares many features with the liberal model of market enforcement. Low coverage of social insurance and a strong emphasis on means-tested benefits are typical. The proportion of means tested payments was greater than in any other European countries, for instance Germany, and until recently there had been a number of significant gaps in coverage. In 1998, only 75 per cent of those covered were covered for all benefits (O’Donoghue, 2003).

Hence, the following chapter gives a general overview, more in terms of equity, efficiency, financing and the type of benefits an individual can receive in both Ireland and Germany.

III. Equity, Efficiency and Financing of the German and Irish System

Social security contributions are compulsory in both Germany and Ireland (here they are called Pay Related Social Insurance – PRSI) and depend on the type of work and earnings realised. Contribution ceilings for pensions and unemployment insurance are 63,000 Euros and 52,800 Euros per year in the western and eastern part of Germany respectively. For health and care insurance the limit is lower and totals 42,750 Euros per year for both parts of the country (Sozialpolitik aktuell in Deutschland, 2006). In any case, the employee’s income percentage of contribution is only measured up to these limits, i.e. an employee earning above this limit pays a lower percentage. Furthermore, the income threshold for cumpolsory health and care insurance is 47,250 Euros in both the East and the West. According to § 6 of the Code of Social Law, each individual is to be cumpolsorily insured up to this income limit. A person getting more income per year is released from cumpolsory coverage (Sozialgesetzbuch V, 2006). This system is inequitable because in terms of poverty reduction low-income earners have to pay relatively more than high income earners. As it will be discussed in chapter IV.1.1 income limits in the health care sector will lead to adverse selecion and therefore to inefficiency.

In Ireland on the other hand, rates and classes of contribution depend on the nature and type of work, but less on the income earned. The system was changed and made more equal so that most employees who started work after the 6th of April 1995 are members of contibution class A and self-employed of class S. Benefits are paid according to these classes and to the average contribution made. The following bullet points give a short overview of the different classes (Online Access to Services, Information and Support of the Irish Government, 2005):

- Class A contains employees in commercial, industrial or service type employments, with a reckonable pay of over 38 Euros per week from all kinds of employment (including Public Service from the 6th of April 1995 onwards). The employer pays social insurance on the employee’s behalf when earnings are less than 300 Euro (or rather, according to the Code of Social Law, 400 Euro in Germany (§ 8 I Nr.1 SGB IV). However, if an employee earns between 300 and 440 Euros per week, the first 127 Euros of income are ignored, but 4 per cent on anything over that amount must be paid. For somebody earning over 440 Euros per week and 46,600 Euros per year 6 per cent of income must be deducted. The first 127 Euros and earnings over 46,600 Euros are considered with a payment of 2 per cent.

- Class S covers all type of self-employed people or employees working as an employer. They must pay contribution fees, together with local taxes, at a rate of 3 per cent on all income or 253 Euros a year, depending on what is greater.

In Germany, with the partial exception of pension insurance, the self-employed are considered not to join a compulsory insurance (Deutsche Sozialversicherung, 2006). Furthermore, it is interesting to see that Irish civil servants, in comparison to those in Germany (§§ 27 & 28 SGB III; § 6 SGB V, § 5 SGB VI), are covered like anyone else by a general social security system.

There are several more classes which cover either marginal income groups or employees who have started work before the 6th of April 1995. Some of these will now be described:

- Class J is similar to class A, for people earning less than 38 Euros per week no matter which form of employment they choose. Moreover, a small number of employees earning more than 38 Euros are included, e.g. employees aged 66 or over (Department of Social Welfare and Family Affairs, 2006). Class J contributors are only covered for accidents at work. This system of occupational injuries will be explained in chapter IV.1.4 (Online Access to Services, Information and Support of the Irish government, 2006).

- Classes B, C and D cover permanent and pensionable civil servants, dentists and doctors employed as a civil servants and the police, Army Officers and members of the Army Nursing Service and other kinds of employees who were recruited before 6th April 1995.

- Class K covers people for the health contributions but their income is not subject to other social insurance contributions. Earnings mentioned include occupational pensions, earnings derived from positions of certain office holders (e.g. judges) and earnings of people aged 66 or over formerly covered within Class S (Department of Social Welfare and Family Affairs, 2006).

People covered under these classes pay a varied contribution.

From the point of view of the aforementioned equity, it is obvious that income differences play a lesser role on a cumpolsory social security contribution scheme than they do in Germany. Due to the lack of self-responsibility (as it will be discussed in chapter IV) contribution rates, which are appointed by the federal government or, in the case of health and occupational injuries insurance, by an independent administration institution, have increaesed in recent years and decades (Deutsche Sozialversicherung, 2006). In 2004, in Germany, both employers and employees paid a fifty-fifty social contributions rate of 17.3 per cent. In the same year in Ireland, the contribution rate was 4.5 per cent and 9.7 per cent for employees and employers respectively. This difference of 20.4 per cent in total and 7.6 per cent for employers suggests that social costs in Germany are a lot higher than in Ireland (OECD, 2004). This lack in efficiency leads also to higher labour costs.

The above demonstrates why the Irish liberal system is more efficient and produces more equity than the Bismarck conservative system. Thus, the next chapter will discuss the five pilars of social security in detail.

IV. The Social Security Pillars in the Framework of Efficiency and Equity

The first part of this chapter describes the social security system, which is not directly related to the question of whether an individual is out of work or not, but rather, whether unlimited services are provided or not. Measurements of efficiency and equity certainly have another approach than they do when problems arise from another source rather than unlimited services. The consequences of social security costs on the job market will be further discussed in chapter V. The second part of the following chapter refers more to care, retirement and job social security in both Ireland and Germany.

IV.1 Limits in the Service Provision of Social Security

The following paragraphs describe health care insurance, carer’s insurance and occupational insurance in Ireland and Germany. All insurances have different organisation of self-responsibility and cost management, which might have a different impact on the balance between efficiency and equity to develop a civil society.

IV.1.1 Health Care contribution

Health care is an input. The output is improved health which is difficult to measure due to problems in gathering information. Patients cannot anticipate their future needs and claim health care services infrequently, often at a time when their ability to aquire information is limited (Arrow, 1963, pages 941 – 73). Consumers are poorly informed about the quality and quanitity of their treatments, because sometimes there is no link between treatment and improved health. Due to equity reasons, a social health care system might be very necessary. On the other hand, patients have an endogenous influence, and are therefore responsible themselves (see Hayek’s statement in chapter II), for their health care status or, as the case may be, they know about their status before claiming insurance, which leads to the following problems of efficiency (Akerlof, 1970, pages 488-500). These cases of information asymmetry, called Adverse Selection and Moral Hazard, are quite distinctive for the health care sector. Responsibility incentives and cost organization in both countries, with unlimited service provision in Germany, are described in the following paragraphs.

IV.1.1.1 Adverse Selection

Two main features of the German way of financing the health fund have to be understood: Firstly, in 2006 3,937.50 Euros per month was the maximum income, which could be allocated to health care payments (this income ceiling was already explained in chapter III). Secondly, an average contribution rate of 14.3 per cent on the employees’ salaries could vary depending on which health fund the employee is a member of (Deutsche Krankenversicherung, 2006). The differences between compulsory insurance and private health insurance are often even bigger. A private health insurance mostly offers a better and cheaper service for applicants above this income ceiling, as well as for civil servants and the self-employed. The risk is calculated for each individual case (PKV Content, 2006). In this way, Adverse Selection occurs where an individual can conceal the presence of a risk from the insurance company before being insured. Employees and also the self-employed who are a good risk and are either above this income ceiling or are not automatically insured by the health fund have no incentive to use the voluntary health care payment opportunity. Furthermore, civil servants have no right to join (§§ 6 & 9 SGB V).

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