ifo Dresden: Expansion of Compulsory Contributions Unsuitable for Financing German Social Security Systems

Expanding the obligation to pay contributions will not be enough to finance the social security systems in Germany in the long term, according to calculations by the ifo Institute based on the Socio-Economic Panel. “Discussions are ongoing concerning an expansion of the obligation to pay contributions to all types of income, in other words to include interest, profit, and rental income. However, the additional revenue this would generate would be negligible,” says Joachim Ragnitz from the ifo Institute’s Dresden Branch.

In the case of statutory pension insurance, the additional revenue would amount to only EUR 5.6 billion, against total expenditure of EUR 341 billion. In the statutory health insurance system, too, the achievable additional revenue of EUR 5.3 billion is insignificant compared to the total expenditure of EUR 275 billion. The reason for this is that employees subject to social security contributions typically have only a little additional income.

“Higher revenues might be achieved if the income threshold were also abolished or if additional groups of people were included in the compulsory social insurance scheme. However, at least in pension insurance, this would also push up payment claims in the medium term, meaning this step wouldn’t help increase the sustainability of pension insurance,” says Ragnitz. Marcel Thum, head of the ifo Dresden branch, adds: “To make social security systems demographically resilient, there’s no getting around adjustments on the expenditure side. In pension insurance, this includes a longer working life.”