A secure income
Financial security was an important issue in the national dialogue. Along with good wages, this also includes having an adequate pension in retirement. People want to know that they can rely on state help in times of hardship. Many participants in the national dialogue were concerned about the gap between rich and poor.
Financial security was an important issue in the national dialogue. Along with good wages, this also includes having an adequate pension in retirement. People want to know that they can rely on state help in times of hardship. Many participants in the national dialogue were concerned about the gap between rich and poor.
“I don’t need great wealth, holidays abroad or shopping on Sundays. What I need is a good job that provides me with enough income to live a healthy and happy life with my family.”from an online response submitted on 30 June 2015
What is the financial situation of households in Germany?
Individual prosperity was an important issue for people who took part in the national dialogue. They mainly linked it to earning a steady income that provided them with financial security. They expect to be paid fairly for their work. Most people supported the minimum wage. A few people would like the introduction of an unconditional basic income. Only one or two explicitly stated that material prosperity was of less importance.
“For me, wellbeing means not having to worry about money.”from an online response submitted on 22 August 2015
The net household income indicator measures a household's disposable income, adjusted for inflation available to a median household1 in prices in Germany from 2010.
Net income describes what a household has left after the payment of taxes and social insurance contributions and the receipt of social transfers. It determines the spending for consumption of many families and single people and the amount they can save for their retirement.
Since reunification real household income in Germany has increased by 15.5 per cent, from around 18,100 euros to 20,900 euros. This increase is largely a result of a catching-up process in the states of eastern Germany, where net household income has increased by almost 20 per cent from around 15,150 euros to 18,150 euros.
In longitudinal studies such as the Socio-Economic Panel a representative sample of people2 are asked about their household income.
Every person living in the household provides information about their income.
The 100 dots are sorted from the lowest to the highest net household income. Each dot represents one per cent of the German population and shows the level of their household income.
As a household's needs do not grow in proportion to the number of people who live in it, the net income of each household is weighted in line with its size and composition, so that it is possible to compare the income of different households. This is based on the modified OECD equivalence scale.
In order to compare your own household income with the rest of the population, you need to enter your annual household income and the number of adults and children living in your household. The resulting equivalised net income makes the income of your household comparable to that of a single household.
When entering your details, be careful to include all disposable income of all household members.
Compare your income with that of other households in Germany. The black circle represents your income and compares it with the overall income distribution.
What Does the Government Do?
One of the key aims of the federal government is to ensure that people in Germany have an adequate disposable income and can enjoy a high material standard of living.
In order to achieve this goal, the German federal government invests in a good infrastructure, affordable housing, better education and innovative research. The federal government has reduced the tax burden and countered bracket creep through the so-called „cold-progression“. As of 2021, the so-called solidarity tax will be abolished for 33 million taxpayers and has been partially reduced for another 2.5 million.
Income distribution in Germany
With regard to the distribution of income and wealth in Germany, participants in the national dialogue often criticised the "gap between rich and poor". The discussions showed that people in Germany are very sensitive to this issue. Participants in the national dialogue specifically discussed tax rates, the need for a simpler tax declaration that everyone can understand and measures to prevent tax avoidance and evasion.
“In my opinion, it’s important to decrease the gap between rich and poor if the general level of wellbeing in society is to be increased.”from an online response submitted on 6 August 2015
The Gini coefficient of household income is an established, internationally comparable way of measuring income distribution. It is measured on a scale of zero to one. The higher the value, the greater the income inequality. A value of zero indicates that all citizens have an identical income. A value of one indicates that one person has all the disposable income.
The effectiveness of redistributive policies is measured by comparing the Gini coefficients before and after taxes and transfers.
Inequalities in household net income in Germany remained relatively steady during the 1990s. However, between 2000 and 2005 the Gini coefficient increased from 0.26 to 0.29. Over the last ten years, income distribution has remained largely stable and increased only marginally.
It is important to note that the Gini coefficient of household income after taxes and transfers (0.294 in 2016) is well below the Gini-coefficient of market income (0.487 in 2016). This shows that the German tax and social security system achieves a significant reduction in inequality. It particularly helps low-earners and families and leads to greater income equality.
The international comparison of Gini coefficients for household income places Germany 15th out of 35 OECD countries. Countries such as Slovenia and Slovakia have some of the lowest levels of inequality (about 0.24). Disposable income in the United States of America (0.39), Turkey (0.4), Mexico (0.46) and Costa Rica (0.48) is distributed much less equally than in Germany. Among the major industrial and emerging economies (G20), Germany has the lowest level of inequality for net household incomes.
The German tax system has to ensure adequate revenues to finance the public sector and investments in education, research and infrastructure. At the same time, all population groups will only be successfully integrated into the labour market if the tax and welfare systems provide people with incentives to work.
According to the OECD, the tax ratio, i.e. the taxes and contributions collected compared to GDP, stood at 37.5 per cent in Germany in 2017. In the international comparison, Germany's tax and contribution ratio is mid-range. On the one hand, individuals and businesses are not financially overburdened. On the other, the level of tax and contributions provide an appropriate level of public services and an effective social welfare system for a highly developed industrial nation.
What Does the Government Do?
The German Federal Government is providing targeted support to low-income groups: through education and further training, increases in the minimum wage and improvements for so-called midi-jobs.
Distribution of Wealth
An individual's material prosperity is not only determined by their monthly income from employment or business activity but also by their wealth. Participants in the national dialogue were very concerned about the fair distribution of wealth. They clearly believe that adequate holdings of assets provide security when needed and make it possible to make long-term plans and reach personal goals. Wealth is the best provision for retirement.
“The more just and fair a society is, the most satisfied and stable it will be.”from the national dialogue event of the Lebenshilfe in Wetzlar on 18 June 2015
The indicator wealth distribution describes the distribution of wealth in Germany using the Gini coefficient based on a scale of zero to one, from equal to unequal. The assets analysed include monetary assets, real estate holdings, stocks and other investments – all minus personal debt.
Between 2002 and 2017 the Gini coefficient for the wealth distribution remained relatively stable at around 0.8, so wealth in Germany is less equally distributed than income. The 10 per cent of wealthiest households hold more than 50 per cent of total net wealth, with about one quarter of total net wealth in the hands of the top 1 per cent of households.3
In the international comparison Germany has relatively high wealth inequality. In 2010 the Gini coefficient in Germany was 0.78 (the same as Austria), whereas wealth in other countries such as France (0.68) and Italy (0.61) was more evenly distributed.
However, many country-specific differences have to be taken into account in the international comparison of wealth inequality. The relatively high Gini coefficient for Germany can be partly explained by the fact that entitlements to a public pension are not counted as assets in the calculation. The international comparison also shows that a large number of people in Germany rent rather than own their homes.
What Does the Government Do?
The federal government is particularly keen to ensure that all income, including investment income, is taxed fairly. It is therefore important to have an efficient tax collection system. The federal government also opposes tax havens, tax avoidance and tax evasion at international level.
People who earn less than 60 per cent of median income
In the national dialogue, many people were concerned about poverty, and particularly poverty among children and young people. In the lively debate about poverty, most participants knew that the welfare state protects people against the risk of poverty. However, some of them pointed to existing gaps and wanted to see improvements.
“We are a rich country and yet some children still have to go to bed hungry here.”from the national dialogue event of ver.di in Cologne on 19 June 2015
Poverty has many causes: lack of education, the loss of individual or family income. It can also be a consequence of unforeseen circumstances, such as long periods of severe illness or losing one's job.
The risk-of-poverty rate measures the proportion of the population that lives in relative income poverty. People are considered to be at risk of poverty if they have to live on less than 60 per cent of median net household income. It is important to distinguish between relative and absolute poverty. The social security safety net generally means there is no absolute poverty in Germany.
After reunification the risk-of-poverty rate increased from 11 per cent to 15 per cent. In 2016, the risk-of-poverty-rate was 16.6 per cent.
Poverty threatens certain at-risk groups: Women are at greater risk of poverty than men. Single parents and large families also have an increased risk of being poor. People who are immigrants are at greater risk of poverty than people from Germany.
The risk of poverty affects different age groups in different ways but young people are most affected. Children and teenagers are always affected by the poverty of their parents. The high risk of poverty among young adults is, however, often temporary. It falls dramatically after they have finished their education. This shows that education provides the basis for a sound future.
Compared to younger age groups, senior citizens have a relatively low risk of poverty in Germany. In other words, old-age poverty is currently not a widespread problem in Germany. This situation could change in future, however. The long-term unemployed, those with reduced earning capacity, the (single) self-employed and single parents tend to have an increased risk of poverty.
The government's redistribution mechanisms have also had an impact on the risk of poverty rate. Considering market income alone, i.e. ignoring tax and transfers, then the poverty risk rate in 2016 was 35.1 per cent. After deducting taxes and adding transfer payments, the rate was 16.6 per cent.
What Does the Government Do?
Fighting poverty is a key issue for the federal government. Investment in education and an effective labour market policy are some of the best ways of preventing poverty in the long run. Families benefit here from the new parental allowance (Elterngeld Plus) and the children’s allowance, as well as from the recent increase in the child tax credit. Furthermore, the government housing benefit was significantly increased for low-income households.Fighting poverty is a key issue for the federal government. About 18 million children and their parents benefit from increases in the child benefit and the child tax credit. Furthermore, the government housing benefit was significantly increased for low-income households and more households become eligible.
- More money for families
- Higher housing allowance for low-income households
Investment in education and an effective labour market policy are some of the best ways of preventing poverty in the long run.
Secure in old age
People want to be financially secure in old age. They also expect the pension system to be affordable and that future generations should not have to worry about having a secure pension. This was the unanimous tone of the national dialogue.
“Government policies should take the demographic transformation into account; otherwise future generations will have big problems.”from the national dialogue event at the Verbraucherzentrale Nordrhein-Westfalen in Schwerte on 9 September 2015
The personal pension provision should be built on more than one pillars in order to ensure financial security in old age. The statutory pension continues to be the main pillar of pension provision for the majority of the working population. It can be supplemented by voluntary company and private pensions. These are important in light of demographic change.
The increase in life expectancy means that people are drawing pensions for many more years. And, large numbers of "baby boomers", the generation born between 1955 and 1964, are approaching retirement age. This presents a huge challenge to the statutory pension insurance.
The population's age structure is shown by the old-age dependency ratio. It describes how many older people (67 and above) there are per 100 people of working age (20 to 66). Since 2010, the ratio has been relatively stable around 30. In 2019, the ratio is 100 people of working age to 31 pensioners. By 2050, this will have increased to 48 pensioners for every 100 people of working age.
For the statutory pension insurance, the ratio of contributors and recipients is deteriorating and in future fewer workers will be required to fund more pensioners.
The vast majority of retired people in Germany are currently able to do without government support. Some 560,000 elderly individuals received basic income support from the government in December 2018.
Various scientific studies show that future generations of retirees face an increasing risk of old-age poverty. There are various reasons why this risk is increasing. For one thing, employment histories and household structures have been changing and will continue to change.
In future, it will be necessary to better use the full potential of the labour force, because in economic terms it is not the number of people of working age that matters but whether these people are actually working with maximum productivity. The long-term viability of all the pillars of pension provision can be ensured if people are in a position to provide for their retirement through good employment opportunities (for everyone and every age group up to pension age) and adequate wage levels. In doing this, it is important to ensure that they are not burdened by high levels of taxes and contributions.
What Does the Government Do?
For the federal government the so-called "three-pillar model" comprising statutory, company and private pension plans provides the model for a responsible pension policy. In order to make old-age provision sustainable, the German federal government guarantees the pension levels not to drop below 48 per cent and contribution rates to not exceed 20 per cent. Due to the strong economy more than 25 million retirees benefited from significant increases in their pensions over the last years.
Footnotes
- 1
The median describes households in the mid-range of income distribution. 50 per cent of households in Germany have a lower disposable income than this household and 50% have a higher disposable income.
- 2
The statistics distinguish between the general population and the sample. When applied to Germany's resident population the general population includes everyone who lives in Germany on a particular reporting date. A sample is when certain people are selected from the general population, for example for the purposes of the survey. This selection process is random, so it is not determined in advance who will take part in the survey. A basic law of statistics states that conclusions about the general population can be drawn based on an adequately large sample.
- 3
Every four years, the German Socio-economic Panel collects data on wealth. For more information on the wealth distribution compare to Grabka, M. and Halbmeier, C. (2019): Vermögensungleichheit in Deutschland bleibt trotz deutlich steigender Nettovermögen anhaltend hoch. DIW Wochenbericht 40/2019, S. 735-745.