How can social security be taxed

Social policy

Prof. Dr. Benjamin Benz

Born 1973, graduate social worker (FH) / political scientist. 2007 to 2011 Professor of Political Science at the Evangelical University of Freiburg, since 2011 in the same position at the Evangelical University of Applied Sciences Rhineland-Westphalia-Lippe, Bochum. Professional focus: Poverty policy in the political multi-level system and political interest representation in social work. Contact: [email protected]

Prof. Dr. Ernst-Ulrich Huster

Prof. Dr. Ernst-Ulrich Huster

Born 1945, teaches political science at the Protestant University of Applied Sciences RWL in Bochum and at the Justus Liebig University in Giessen. From 2001 to 2010, together with the other authors of this issue, member of the EU Network of Independent Experts on Social Inclusion of the European Commission. Main areas of work are general social policy, distribution policy - including poverty and wealth research - and social ethics. Contact: Ernst-Ulrich.Huste[email protected]

Dr. Johannes D. Schütte

Born 1982, qualified social pedagogue, qualified social worker (FH) / political scientist. Research assistant at the Institute for Social Work Münster e. V. in the state model project “Leave no child behind! Municipalities in North Rhine-Westphalia take precautions ". Lecturer at the Protestant University of Applied Sciences RWL in Bochum and at the University of Osnabrück. From 2008 to 2010, together with the other authors of this issue, member of the EU Network of Independent Experts on Social Inclusion of the European Commission. Specialist focus: Theory of the “social” inheritance of poverty, strategies of inclusion and social exclusion in Germany. Contact: [email protected]

Prof. Dr. Jürgen Boeckh

Born in 1966, graduate social worker (FH) / political scientist, has been teaching social policy at the Ostfalia University of Applied Sciences in Wolfenbüttel at the Faculty of Social Work since 2007. Professional focus: general social policy, distribution policy, poverty and social exclusion in Germany and Europe, political lobbying in social work and development of social services.

Social policy should secure life risks, alleviate difficult, socially conditioned life situations and guarantee old age provision. It is mainly financed by social security contributions and taxes, so it is based on a wealth that must first be earned and then distributed. Uncertainty factors are trends such as changes in employment careers and demographic developments.

What does the social cost us? - The social budget

Above all, the German security system offers protection against the uncertainties of the labor market. It is therefore supported in its central pillars by contributions from employers and employees (subject to social insurance). This protection is expensive: In 2013, around 780 billion euros were spent in Germany on pure social benefits (excluding tax breaks). That is almost a third of the total value of the goods and services produced in Germany in one year and about two and a half times as much as the entire federal budget. This sum is so large that it can hardly be imagined. To put them together in a pile of 500 euro bills, 44 trips with a 40-ton truck would be necessary. Laying them on top of one another would result in a stack more than 156 kilometers high that would weigh around 1750 tons (cf. Österreichische Nationalbank, www.oenb.at/Bargeld/der-euro/banknotes.html). But from whom does this money come and where does it go?

The social budget according to institutions and functions

The social budget, which the federal government publishes annually as part of the social report, provides an overview of all expenditures for social benefits and their sources of funding. It is structured according to functions - in which benefits are grouped according to their respective security purpose - and according to the institutions - i.e. the individual social security systems.

The institutions in detail:
  • The social security systems, consisting of health, accident, pension, unemployment and long-term care insurance, are the institutions with the highest expenditure. They include all employees subject to social insurance contributions and their relatives as well as pensioners.
  • The support and welfare systems include child benefit and family benefits, childcare allowance / parental allowance, basic security for job seekers according to Book II of the Social Code, other employment subsidies, training and advancement support, social assistance according to Book XII, child and youth welfare according to Book VIII and the housing benefit.
  • The employer systems record the direct expenditures of the companies. These are continued payment of wages in the event of illness, company pension schemes including supplementary public service benefits and other employer benefits. The company's contribution to social security is not taken into account here, but for social security.
  • The public service systems include (civil servant) pensions, family allowances and health care allowances.
  • The special systems include occupational group-specific systems such as old-age insurance for farmers and pension funds as well as the benefits of private old-age provision and private health and long-term care insurance.
  • The compensation systems record the expenditure for social compensation, the so-called burden sharing, reparation and other compensation. They are intended to provide financial compensation for the consequences of political events as well as for loss of property as a result of flight and displacement, as well as providing for war victims.
Building blocks of the welfare state (& copy picture-alliance / dpa, Globus 10 012; source: BMAS)
In addition, there are tax reliefs such as spouse splitting or surcharges for Sunday, public holiday and night work, which, however, are not included in the social budget. Around 28 billion euros were spent on this in 2013.

The weighting of the various areas can be seen in a percentage representation of the expenditure. According to the Federal Ministry of Labor and Social Affairs (BMAS), more than half of the social benefits, i.e. a total of around 458.6 billion euros (= 53 percent), flow within the statutory pension and health insurance. In relation to the economic output of our country, this corresponds to 16.6 percent of the total gross domestic product (GDP *) of 2735.8 billion euros. This expenditure complex is clearly different from the share of child and youth welfare with 3.5 percent (= 30.5 billion euros) or the basic security for job seekers according to SGB II ("Hartz IV") with 4.6 percent (= 39.8) Billion euros).

When broken down according to functions, the allocation is based on the facts or risks on which a social benefit is based. Ten functions are distinguished in the social budget, which in turn are grouped into five main categories:
  • Old age and survivors,
  • Illness and disability,
  • Children, spouses and maternity,
  • Unemployment,
  • Housing and general life support.
The social network (& copy picture-alliance / dpa, infographic. Globus 5813. Source: BMAS)
The so-called employee risks are covered by social insurance - i.e. risks that endanger the existence of an employee and result from an employment relationship, such as unemployment or occupational accidents. In addition, there are general life risks such as illness and giving up gainful employment for reasons of age, some of which are also covered by social insurance and also by other institutions / functions. The social budget shows which risks are considered worthy of protection in Germany. This does not answer the question of how effective these social benefits are.

Living expenses (& copy picture-alliance / dpa, infographic. Globus 4618. Source: Federal Statistical Office)
A look at the people in Germany who can only earn a living with the help of state support shows how important these social benefits can be: Although their own gainful employment is still the main source of income, a growing percentage of residents are on pensions and pension payments as well as another dependent on the benefits according to SGB III unemployment insurance and SGB II basic security for job seekers.

Source text

Taxes and social security contributions in a country comparison

[...] Does an industrialized country like Germany have to lower taxes in order to promote growth? Or does the state not need higher income in order to be able to carry out its tasks to finance education, child care and social compensation? And can't this in particular get the economy going, because a location cannot thrive without a functioning public infrastructure?

[...] The OECD, an organization of wealthy countries around the world, regularly compares how much each state claims for itself. In 2012, the tax authorities in Germany retained around 23 percent of economic output, based on gross domestic product (GDP). With this tax rate, the German state is significantly more modest than Denmark (47 percent), France (28 percent) and Great Britain (28 percent), but demands more than the public sector in the USA (just under 19 percent).

However, social security contributions play an important role in this country. The Federal Republic of Germany uses them to finance the majority of the statutory pension as well as health and unemployment insurance. If you include these tariffs, Germany has a tax rate (share of taxes and duties in GDP) of over 40 percent. Too Much, Too Little? A matter of taste. There is no clear, scientifically deducible answer to this. Economically successful countries like Luxembourg and the USA manage with less. Economically successful countries such as Sweden, Austria, Finland and Denmark are demanding more. There is therefore no clear connection between economic success and the tax burden.

The good thing about it for politics: it has the freedom to shape it. In doing so, it must bear in mind that it is not just about securing income for the state and maintaining performance incentives for employees and entrepreneurs. Tax policy also has a decisive influence on the distribution in a society. It depends on it whether the chances are distributed fairly.

[...] The German welfare state finances itself unusually heavily through small and medium incomes and spares the top salaries. In some cases, high earners even deduct less taxes and social security contributions from their income than low earners. According to the OECD, an average wage earner in 2012 passes on every additional euro over 60 percent to the tax office and social security funds. Those who received one and a half times the mean value got off with just under 45 percent.

[...] By and large, the systems in all other nations are "progressive". For them, the overall burden increases with increasing income. Not so in the Federal Republic. Here the "tax wedge beyond a certain wage level becomes smaller again". Accordingly, the OECD describes the German system as "regressive": lower incomes are more heavily burdened than high incomes.
This is mainly explained by the great importance of social security contributions. While the tariff for income tax rises disproportionately with rising salaries, the social security systems place a heavy burden on low incomes in particular. [...] The actual wealth tax is not levied at all, the inheritance tax brings in relatively little. [...]

Markus Sievers, "Far Away From Ideal", in: Frankfurter Rundschau of October 22, 2014

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