Merz\u2019s own labour minister B\u00e4rbel Bas, who is also the co-chair of his junior coalition partners, the Social Democrats (SPD), called the chancellor\u2019s declaration \u201cbullshit\u201d.<\/p>\n
While Germany is no outlier in Europe, its social spending has crept up in recent years and its demographic time bomb threatens to undermine the welfare state\u2019s funding \u2014 just as its economy struggles to emerge from its longest postwar phase of stagnation.<\/p>\n
Sprawling and rising<\/p>\n
Germany\u2019s welfare state dates back to the days of Chancellor Otto von Bismarck, who first introduced statutory health and pension insurance from 1881 to counter socialism. <\/p>\n
Enshrined in the country\u2019s constitution since 1949, the welfare state has grown into one of the world\u2019s largest, accounting for 31.2 per cent of the country\u2019s GDP \u2014 the highest level on record when excluding the Covid-19 pandemic, when the data was distorted by emergency government spending. <\/p>\n
<\/p>\n Healthcare and old-age care costs have risen at faster rates than overall inflation. At the same time, the country has been stuck in economic stagnation for more than three years. <\/p>\n \u201cThe system is creaking,\u201d Germany\u2019s President Frank-Walter Steinmeier said in a landmark speech this week in which he argued that the country\u2019s welfare state was a \u201ctreasure\u201d but needed to be made \u201cfit for the future.\u201d<\/p>\n <\/p>\n Together with civil servants\u2019 pensions, the pay-as-you-go pension insurance and the health insurance account for three quarters of total welfare expenditures of \u20ac1.35tn, according to data from the German labour ministry.<\/p>\n <\/p>\n Germany<\/a>\u2019s pension system has survived two world wars, hyperinflation and several currency reforms. But the rapidly ageing workforce will pose a structural challenge as 16.5mn baby boomers \u2014 people born between 1954 and 1969 \u2014 will retire by 2036 while only 12.5mn young workers will join the workforce, according to the Cologne Institute for Economic Research.<\/p>\n <\/p>\n As retirees live longer, the financial pressure on the pension system will grow over time.<\/p>\n On top of \u20ac306bn of contributions from employers and workers, the government in 2024 paid another \u20ac118bn to fund<\/a> deficits in the system, or about a quarter of the total federal budget. <\/p>\n This share will double to about 50 per cent over the next two decades, according to Axel B\u00f6rsch-Supan, head of the Munich Center for the Economics of Ageing at the Max Planck Institute.<\/p>\n \u201cThe big elephant in the room is the pension system,\u201d said Jens S\u00fcdekum, an economist advising SPD finance minister Lars Klingbeil.<\/p>\n Merz\u2019s flagship measure so far on pensions is a plan to incentivise those willing to work beyond retirement age by exempting the first \u20ac2,000 they earn monthly \u2014 on top of their regular pensions \u2014 from income tax.<\/p>\n But he has refrained from being specific about how he intends to overhaul the overall pensions system, and has kept incentives for early retirement untouched. <\/p>\n Critics point out that Merz\u2019s own camp is simultaneously pushing for measures that would worsen the problem. The coalition has pledged to maintain the current pension level at 48 per cent until 2031. And the agreement includes a plan championed by the CDU\u2019s conservative Bavarian sister party CSU to lift pension perks for non-working mothers from 2027 \u2014 at an additional cost of \u20ac5bn per year.<\/p>\n It will be down to a commission, due to be set up early next year, to make reform proposals.<\/p>\n Persistent poverty<\/p>\n Germany\u2019s welfare system has had limited success in reducing the average poverty rate. <\/p>\n According to think-tank WSI<\/a>, which is funded by Germany\u2019s trade unions, this is mainly driven by below-inflation increases in minimum payments to the non-working poor and a falling level in state pensions. The average state pension, which in 2005 was equivalent to 52.6 per cent of the average wage, has fallen to 48 per cent.<\/p>\n <\/p>\n Merz has vowed to overhaul the so-called B\u00fcrgergeld, a basic income for those outside the labour force. While it accounts for just 3.5 per cent of Germany\u2019s total welfare payments, it has become a lightning rod for the far right. <\/p>\n Introduced by the previous coalition in 2023, it is claimed by 5.5mn people \u2014 three-quarters of them deemed able to work \u2014 and costs \u20ac47bn, according to government data.<\/p>\n Close to 50 per cent of the payments go to foreigners, including \u20ac6.3bn to Ukrainian refugees. Critics say the system is too generous and disincentivises work, especially after a 25 per cent increase in monthly allowances during the high-inflation years of 2023-24.<\/p>\n<\/a><\/p>\n
<\/a><\/p>\n
<\/a>The demographic time bomb<\/p>\n
<\/a><\/p>\n
<\/a>Reform of the B\u00fcrgergeld<\/p>\n