Michael Eriksson's Blog

A Swede in Germany

Some problems with the German pension, health-insurance, etc. systems

with one comment

In Germany, a few leading politicians are currently (and again) suggesting that the self-employed* be forced to pay into regulated pension schemes, even when they feel that they are better off with other solutions—after already having been forced into extensive** health-insurance, some years back. Moreover, suggestions that private alternatives for various insurances be scrapped and everyone forced to participate in the public*** schemes are often recurring.

*“Selbständige”. Note that there might be differences in exact definition and treatment compared to e.g. the U.S. situation.

**The current German regulations require a, in my eyes, too extensive health-insurance. Cf. excursion.

***The “gesetzlich” (“legal”) this-and-that; as opposed to the “privat” (“private”) this-and-that. For instance, health-insurance is divided into two branches, where one is “gesetzlich” and everyone pays a fix proportion of income for a fix coverage, and the other “privat” with an income-independent fee and a more negotiable coverage.

This is highly misguided on at least two counts (some of which apply to other groups too):

  1. There are other means to provide than these official schemes. For instance, someone rich enough will not need a pension; for instance, someone who invests his money wisely might have a better return on investment than through a pension scheme;* for instance, a home-owner with modest requirements, a reasonable bank account, and the willingness to moon-light past retirement, might get by without a pension.

    *This especially in a system like the German, where money is not necessarily paid for one’s own pension, instead paying for the pensions of older generations; and where one’s own received pension will later depend on what future generations are paying at the time. Moreover, for those who have debts to pay, e.g. a mortgage, it is quite likely that paying off the debt would be a better use of the money than building a pension fund, seeing that the interest (or its rough equivalent) on assets is usually lower than on debt—often considerably so.

  2. For many, the money taken for these schemes is one of largest reasons why the schemes are needed… For instance, a typical reasoning around health-insurance is that it allows those hit by medical costs to pay those costs, because the insurance company (or the government) is there to cover the brunt. But: If someone had saved all the money paid in insurance fees (or extra taxes), chances are that additional money would not have been needed in the first place. In Germany, health-insurance for a “gesetzlich” insured mid-* to high-earner might be around 10,000* Euro a year—and with most years seeing less or significantly less actual health-insurance claims, there would have been plenty of time to build a buffer for the odd years when costs explode. A healthy ten years leaves a cool hundred grand for that major surgery and there is plenty of time to build reserves for less healthy “golden years”. I would go as far as to say that the German system misses the point of insurance, which is to replace the risk of a large damage (e.g. through robbery) with the certainty of a small damage (e.g. a monthly or yearly fee)—instead, all damages, large and small, are paid by the insurance, which implies unreasonably large fees, additional waste, and (on average) a pointless and wasteful transfer of money from the patient to the insurer to the patient to the hospital (or whatnot), where it would be much more sensible to just move money from the patient to the hospital…

    *There is a cap on the applicability of the (high) percentage fee at earnings of possibly 60,000 Euro/year (which is a good income, but not extraordinarily so, in today’s Germany). In a rough estimate, 18 % might be a typical percentage (including “Pflegeversicherung”), with 0.18 * 60,000 = 10,800. Beware that I have not researched the exact current numbers (and that the percentage will vary depending on circumstances). As a note to naive German readers: No, your employer only pays half of this on paper—in real life, you pay the employer half too, mostly through a lower salary, but also through e.g. higher prices.

    Similar issues are fairly common, e.g. in that the “Riesterrente”* has to be financed somehow. This financing amounts to taking money from everyone through taxes and giving said money to those who invest their money according to certain rules. It would be better and fairer to lower (or not raise, depending on the situation) taxes to begin with, and to let people handle their money as they see fit—including to make sure that they have prepared well enough that they do not need the additional Riesterrente. This especially since the biggest gainers through the Riesterrente are likely the providers of pension schemes, who see a massive artificial in-flow of customers. And, oh, what was the original motivation behind the Riesterrente? To cover the deficits of the regular pension system—implying that, had the politicians not already dropped the ball there, the Riesterrente would have been unnecessary…

    *A program by which certain voluntary pension-schemes payments are subsidized by the government, in order to make people spend their money like the government wants it to.

A potential third count would be the way this forced prioritization and/or time-wise redistribution of money can provide obstacles to small businesses that might have earned well in the long run—but are prevented from reaching this long run due to a short-term lack of money partially caused by these schemes. This either in that the owner is forced to give up the business prematurely after a temporary setback or in that an expansion of the business has to be foregone (also see excursion). Similar arguments can apply more generally, e.g. in that a regular employee is forced to take on debt due to unforeseen circumstances, and that this debt would have been unnecessary without pension fees (and where, as above, the pension funds bring less returns than not having debt).

An advantage of e.g. a mandatory pension scheme is that everyone would be guaranteed a certain minimum pension, and thereby be less likely to require other social aid later in life. For instance, a successful entrepreneur might assume that he has no need for a pension scheme, see his business go broke in his sixties, and not have sufficient late-life income to cover his own needs—he would now turn to the government for “ALG II”* (or some other type of governmental) support. However, (a) chances are that he will not have this problem; (b) the actual pension payments for the current generations appear to be fairly bleak, making a bet on a pension potentially riskier;** (c) considering that he will likely have contributed well-above average to government income through taxes (and possibly the well-being of others through providing employment), I would not see it as unfair if he did receive e.g. ALG II. (Note that this line of reasoning need not hold when we look at long-term low earners. I do not, at this time, rule out that a mandatory system might make sense for them.)

*Literally, roughly, “unemployment benefits II”. In practice, this is a means for those with too little income (and who do not receive “regular” unemployment payments) to cover the difference between actual income and a government-stipulated tolerable minimum income. It is not restricted to those actually unemployed (but I do not rule out that some other scheme might apply).

**Note that this holds even for private pension-schemes: What if the scheme goes bankrupt or does not earn sufficient returns? (A governmental guarantee, similar to bank guarantees, might help, but would put the governments money at a larger risk than with the above entrepreneur.)

In reality, the true reason for the demands for making these schemes mandatory is likely (a)* giving lesser earners a leg up resp. giving the official schemes money that they do not deserve in order to allow them to give lesser earners said leg up, (b) preventing the “social injustice” of some people being better off than others. The same applies to health-insurance, where even now the “privat” insured have a portion of their payments diverted to the “gesetzlich” insured—with no recompense of any kind.

*Over a fairly large portion of the German political spectrum.

**Significant portions of the Left, which truly is (old) Left in Germany. (The Social-Democrats are the second largest party; a Communist or formerly Communist party is represented in parliament.)

Excursion on the scope of health-insurance:
In Germany, the scope of health-insurance is quite large, covering most of the medical bills and (physician ordered) medicines that apply, with usually only small deductibles. The result is astronomical fees, incentives for patients to “see the doctor” too often, and a medical industry that charges overly high prices and often recommends pointless procedures. A much better system would insure the big things*, of which most people will have none in their life-times, and only very few more than one or two. The rest would be up to the individual to cover (such cover could, obviously, be partially through a voluntary additional insurance). In return, he would see a considerably lower monthly fee, in part because he would have a lower coverage, in part because the overall costs in the system would drop.

*Exactly where to draw the line is a question that I leave open for now. I originally gave a few examples, including “major surgery”, but chances are that even a major surgery would be within what most people could pay with money to spare, if they had their insurance fees back (and did not waste them in advance), and that they might then be better off not having a single instance of major surgery covered. One possibility would be to simply have a very high deductible that applies either to the individual year or the individual problem (which can stretch over more than one year)—everything above covered; everything below not covered. The deductible would likely be dependent on personal choice, but might have a typical range from a few thousand to a few tens of thousand. A variable deductible would have the advantage of covering cases like a young family with marginal buffers—the family can reduce the risk of a debilitating blow by paying more per month, for a lower deductible, and continually go for a lower payment/higher deductible as the buffers grow. Alternatively, a fix deductible could be set by a public and mandatory scheme, while additional coverage could be purchased from private sources for a similar effect.

As an aside, this is where ObamaCare clearly went wrong, even objections concerning ethics and implementation aside: It did nothing to solve the true problem of U.S. health care, namely absurdly high prices. Worse, by putting more people into insurance schemes, the problem of high prices is worsened…

Excursion on financing:
Many seem to miss the simple truth that money is not an infinite resource—and that any additional benefits has to be paid for somehow. For instance, a “free” health-care system is not truly free. On the contrary, behavioral changes are likely to make it more expensive than a non-“free” one. The money has to come from somewhere, e.g. taxes, implying that the citizens still bear the full costs. On the outside, there is some redistribution of cost (e.g. from the unhealthy to healthy), but the costs do not disappear.

Excursion on business expansion:
Expanding a small business beyond the one-man stage is unduly hard in many countries, including Germany. Above, I mentioned the need to pay e.g. health-insurance for one-self as a component—but that is just a small part of it. The major problem is the disproportionate cost and risk involved with getting employees—even a single one. For instance, take a one-man business with a revenue of a 10,000 Euro/month. Hire someone for a nominal salary of 5,000 Euro/month, and what is left of the old net is not another 5,000 (to cover other costs and the employer’s own living expenses): As a German rule of thumb, various additional fees increase the price-tag by thirty percent, leaving roughly 3.5 thousand. This without counting existing costs and additional costs not related to the government, e.g. additional office space, training, legal advice in preparation, the potential need to create a GmbH*, and what else might apply. And: This before various taxes, insurance fees, and whatnots that might apply for the business and/or the owner.** In other words, the owner will earn next to nothing (instead of the presumable 5,000 – expenses) until the new employee is up-and-running—in a low-margin business, he might even take a loss.

*A type of limited-liability corporation suitable for small businesses, which might be a good idea with the additional risk that the new employee brings. Of course, then stricter regulations on e.g. accounting apply, the taxation rules change even further to the disadvantage of the business owner, etc.

**In all fairness, taxes might initially be lower than before due to the extra cost, but, obviously, nowhere near enough to offset said cost.

But: Getting a new employee to the point of adding serious revenue can take several months (depending on competence, type of business, businesses climate, …)—and doing so might cut into the employer’s own revenue generation (or force him to work additional hours).* Worse: It might turn out that the employee is not up to the job and needs to be replaced. Then is the question: How soon can he be removed? The legal minimum might be four (?) weeks**, which then amounts to another month down the drain—and chances are that he will not earn anything significant for the company during that month anyway.*** If he is fired, he might choose to go to court, which brings additional risks, costs, and personal effort to the employer.**** Or, possibly, he chooses to leave, leaving the employer with a few wasted months and the need to start over…

*For instance, in my line of business (IT consulting and on-site software development for customers), I would need to convince one customer or other that this particular employee is worthy of being hired-out to them—a process that involves searches and application processes quite similar to a regular job search. This would not only bring me unbillable work for myself, but could leave the employee with nothing billable to do for weeks on end. The last few years, demand has exceeded supply, but customers often have specific requirements, and will strongly prefer e.g. someone with ten years of relevant experience over the newly graduated who has still to complete his first project. (And just to hire someone both highly competent and more experienced is easier said than done, because these tend to want more money, already be in employment, or run their own businesses.)

**IIRC, for a small business and a newish employee. For larger businesses or longer periods of employment, the delay might be considerably larger.

***For instance, in my case, putting him in a customer project for that month would be next to impossible (and arguably negligent towards the customer). Of course, he might already be in a project, but then the proof of his unsuitability is likely to coincide with a rejection from the customer, which would terminate that project…

****In all fairness, the strong German restrictions on termination of employment are largely suspended for such small businesses. However, this can be a real concern when additional growth has taken place, together with many other regulatory obstacles.

Now, consider a world with everything else as it was—just with considerably less taxation, health-insurance fees, unemployment fees, … Run through the same scenario with a monthly own income of even just 3,000, instead of the “next to nothing”. Now our entrepreneur can lead a good life, possibly even increase his personal buffers, and if the employment attempt flops, he is back where he started. If things with the first employee seem to turn out well, he can add a second that much faster. Etc. In today’s Germany or, worse, if even stricter rules for e.g. pensions are instituted? Well, then it is the question of how large buffers are present and how much risk the wannabe employer is willing to take.


Written by michaeleriksson

April 6, 2019 at 7:05 pm

One Response

Subscribe to comments with RSS.

  1. […] skimming in lieu of proper proof-reading. Sometimes these errors can distort the text, as with a recent use of “net”**: I originally wrote an example in terms of net income/profit, but decided that it made more sense […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s