Committee on Economic Security (CES)
"Social Security In America"
APPENDIXES
APPENDIX X
FINANCIAL HISTORY OF THE WORKERS' INVALIDITY, OLD-AGE, AND SURVIVORS' INSURANCE OF GERMANY {1}
Since the United States is taking its first steps toward a Nation-wide
system of old-age benefits and since forecasts are made, actuarial and
otherwise, as to what will happen to such a system within the next half
century, it appears of value to investigate the experience of a country
which has had such a system in operation for the past 44 years. Germany
adopted contributory invalidity and old-age insurance covering its entire
working population in 1891 and has retained this system up to the present
time. The system was in existence for more than 20 years before the World
War, survived the war, which made an end to many another institution,
recovered from an inflation which ruined the financial structure of many
other enterprises, withstood the stress of the severe depression of the
last few years, and is now being continued under a national policy which
has altered some of the most fundamental establishments of German economic
life.
The German system has thus withstood nearly every conceivable hazard which a social insurance system might meet, but, of necessity, it has survived these hazards only by being modified and changed many times. This report presents a history of these changes, chiefly from the financial point of view. For this reason large sections of the history are omitted. For example, administrative procedure and enforcement provisions were studied only insofar as they exerted an influence on the finances of the insurance system. The political background is given only in passing. It might have been of value to study the forces which framed the original law and modified it in the course of its existence. However, it was felt that such an attempt would lead too far afield. Hence, the scope of the study is limited to a short survey of the distribution of costs, the financial condition of the fund, the investment of the reserve, the cost of administering the law, the rate of contribution, the benefits paid, and the number of persons in receipt of benefits throughout the years. In addition the history of the law itself is briefly summarized to provide a background.
A SHORT HISTORY OF THE LAW
The invalidity and old-age insurance law was part of the program which Bismarck offered to the German working population after having suppressed the labor movement by a stringent law. His hope was that by giving the workers a share of the Government's money in times of need and giving it to them as a matter of right, he could change the aims of the labor movement directed toward the overthrow of the Government, even though that share
{1}This report was prepared by Marianne Sakmann under the direction of
Edwin E. Witte.
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was a small one. The law was conceived from the point of view of conservative, enlightened benevolence rather than from the point of view of the workers.
The law was introduced in 1889 and was adopted by Parliament with a small majority of 20 votes against the opposition of the labor party and the left-wing groups. It was amended in 1899 and again in 1911, and both times the amendments were adopted by a vast majority of Parliament. These amendments carried with them a considerable expansion of the original provisions, the 1911 amendment adding survivors' insurance to the insurance against invalidity and old age incorporated in the original law.
Bismarck's hope for "buying out" the labor movement by giving them a stake in the existing government was fulfilled only in part. As a matter of fact, the establishment of social insurance gave considerable impetus to the labor movement. The Social Democratic Party opened offices all over the country in which organized and unorganized workers might obtain legal advice on how to make good their claims for pensions. The small amount of the pensions gave the party an opportunity to campaign against the "hunger pensions", to point to the large reserve which might well be used for increasing benefits, and to blame the employers for their opposition against such a procedure. In these campaigns they reached each worker, because they all had a stake in the system. The conservatives viewed this development with particular concern, since the membership of the Social Democratic Party and its proportion of votes increased from year to year.
However, looking back over this development and over the history of the Social Democratic Party since the war, one may well ask oneself whether Bismarck did not achieve his original aim. Gradually the German labor movement lost its revolutionary character, and the elements in it which advocated concentration on immediate aims won out over the radical elements which believed in an overthrow of the Government and of the entire capitalistic system.
The course followed by the Social Democratic Party under the republic bears out this statement. This party took an active share in the Government all through the twenties, but its efforts appear to have been bent rather toward receiving a greater share in wages and insurance benefits under the existing system than toward any fundamental revision of the system. This attitude is reflected in the many amendments to the invalidity insurance law adopted after the war. They were all directed toward liberalizing existing provisions. At no time was the suggestion made to abandon the system and substitute another.
Some writers have said that the present National-Socialist Government has abolished the German social insurance system or has modified it to such an extent that it can no longer be recognized. This is not true so far as invalidity insurance is concerned. Since the advent of the present party to power, the many decrees issued dealing with the subject all express the intention of retaining the system in its original form. The significant and perhaps the most important change--from the point of view of the workers at least--is that benefits have been drastically cut.
DISTRIBUTION OF COSTS
The Share of the Federal Government: When the plan for
invalidity and old-age insurance was first discussed, the possibility
of distributing the cost equally between employers, employees, and the
Federal Government was seriously taken into consideration. However, this
plan was abandoned for the reason that if the Federal Government assumed
one-third of the cost of each pen-
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sion, the higher-paid worker would be favored over the low-paid worker. In order to remove this injustice, it was decided that the Federal subsidy be a fixed supplement to each pension granted. This amount was set at 50 marks a year for invalidity, old-age, and widows' pensions and remained at that figure up to the time of the war. After the war it was changed several times, but has remained at 72 marks since 1925. The Federal subsidy to orphans' pensions is half that amount. (See table X-1.)
Table X-2 shows the actual amount which the Federal Government contributed toward the pension payments throughout the years and the proportion this amount bears to the total pension payments. It will be seen that, on the whole, the Federal Government has paid approximately one-third of the cost of the pensions. This share was as high as 40 percent in the beginning of the scheme, when the earned portion of the pensions was comparatively low.
The contribution of the Federal Government also includes a payment toward the pensions for the time which the insured spent in compulsory military service.
In addition, the Federal Government originally bore the cost of selling insurance stamps and the payment of pensions through the post offices as well as the cost of administration of the Federal insurance office. But as a result of the great financial difficulties resulting from the present depression, the regional offices were required to reimburse the post office for its services beginning with 1930.
Before the war the Federal Government did not share in the cost of medical treatment and of family allowances for the dependents of persons undergoing such treatment. However, after the war a certain proportion of the custom receipts was allocated to the regional insurance offices for medical purposes. This amounted to 40 million marks a year from 1925 to 1929, inclusive. In the following years it was gradually cut down.
When the wage tax was levied under the Bruning government in 1929, it was determined that if the income from that tax exceeded a certain amount, the excess would be given to the insurance system. Such an excess was collected only in 1 year, namely, 1929.
Since the insurance offices found themselves in financial straits during the last years of the depression, the Government replaced these uncertain receipts in 1932 by a fixed yearly amount of 163 million marks. This was raised to 200 million marks in 1933.
Several times in the history of the German insurance scheme the Federal Government granted it certain special subsidies in addition to the regular allowance. This occurred first during the inflation from 1920 to 1924, when the pensions were no longer sufficient to take care of the pensioners. A subsidy was given to the regional offices to be distributed by them on a relief basis.
Again, whenever the pensions were increased during the twenties, the Federal Government bore a part of the increase. Thus, when in 1927 survivors' pensions were extended to all widows over 65 years of age, regardless of whether or not they were invalids, and to survivors of insured persons who had died before 1912, the Government assumed the entire responsibility for this increase. When additional credit was given for the contributions paid before 1921 and since 1924, the Government again paid the increase in the pensions already in force.
Common Reserve Fund and Individual Funds.-When the law was adopted in 1891 it provided that each regional office should pay its share of the benefits out of the contributions it collected. The only provision for pooling any part of the contributions stipulated that each regional office transmit to a common reserve fund a certain proportion of the reserve it had accumulated. This common reserve fund was to be touched only in cases of extreme necessity and only with the sanction of the Federal insurance office.
(IMAGE OF TABLE X-1)
(IMAGE OF TABLE X-2)
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The experience of the first 10 years showed that certain regional offices, especially those in the agricultural sections of the country, had great difficulty in making the required remittances to the reserve fund. The finances of these regional offices were in a very poor condition compared with the highly industrialized sections of the country. The explanation for this difference was found in the fact that the cities attracted young and healthy people from the country and therefore had a much lower incidence of the risks of invalidity and old age. It became apparent that it would be desirable to pool some of the expenditures and a greater portion of the reserve in order to equalize the conditions between various sections of the country. For this reason the provision under which the regional offices had to transmit a certain amount to the reserve fund was abandoned in 1900. In its place a certain proportion of the contributions received was to be set aside by each regional office, and out of this common fund there was to be paid that part of the pensions which was independent of the length of the contributory period; i. e., three-fourths of the old-age pensions and the fixed basic amount of the invalidity pensions. In the beginning the regional offices had to set aside for the purposes of this common fund 40 percent of the contributions they received.
This transfer was a book transaction only, since the funds themselves remained the property of the regional offices, and were invested by them as they saw fit.
By a very intricate method of computation, it was determined at the end of each year what portions of the total pension payments had to be borne by the common fund, the individual funds, and the government. From 1900 to 1912 the distribution of the cost was as shown in table X-3. This redistribution of the cost of benefits had the desired effect of relieving the agricultural sections of the country at the expense of the industrialized regions.
Gradually the charges to be borne by the common reserve fund were increased,
and the fund received a larger and larger proportion of the contributions
collected. In 1926 the distinction between individual funds and common fund
was given up altogether, and all pension payments were charged to the regional
offices in proportion to their collections during the preceding year.
RESERVE SYSTEM VERSUS PAY-AS-YOU-GO SYSTEM
When the invalidity and old-age insurance law was first discussed, the question of whether to have a system of accumulation and to build up reserves or to adopt a pay-as-you-go system and to make the assessments only large enough to meet current expenditures was one of the most difficult to decide. The advocates of the accumulated reserve system pointed to the stability which it would give and the fact that each generation would pay for its own pensions, while the pay-as-you-go plan would put an unjust burden on future generations. The advocates
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of the system of assessment to meet current expenditures considered the building up of large reserves as dangerous from a political point of view. They also believed that this accumulation of capital would result in a lowering of the interest rate.
The final plan adopted in the original law was a compromise between these two extremes, and the system of assessment to meet the capital value of pensions was introduced. Under it the reserve accumulated is only large enough to meet the capital value of the pensions granted within each period of 5 years. The contributions of one generation are not accumulated until that generation becomes eligible for benefits; rather they are used for meeting the capital value of the pensions of a previous generation. Under this system the reserve is not as large as under an accumulated reserve system. The rate of contribution has to be increased gradually, but this increase is not as great as under a pay-as-you-go system, since the rate starts at a higher level. The period of stability is reached earlier than under a pay-as-you-go system. As under the latter, the initial generation is favored over against those that enter insurance at a later date, but the later generations are less heavily penalized.
The original actuarial forecasts proved to be too conservative. The reserve accumulated during the first 10 years exceeded the estimates of the actuaries. It was considered unwise to lower the contribution rates, and so the system of assessment to meet capital value of pensions was abandoned in 1900 and that of collective accumulation substituted. Under this system the value of all present and future contributions had to be sufficient to cover the capital value not only of all current pensions, but of all future obligations as well. The reserve would, of course, be considerably greater than originally anticipated, but it would not be necessary to increase the contribution rate unless benefits were changed.
This system was retained up to the time of the war and inflation. It broke down when, as a result of the inflation from 1914 to 1923, the larger part of the reserve was wiped out. The insurance was then put on a pay-as-you-go basis, i, e., the contributions were only sufficient to meet the current expenditures and to build up a small reserve for emergencies. As a result of the present depression and its resultant unemployment, receipts declined so rapidly that a deficit occurred in 1931, 1932, and 1933. The present Government has expressed its intention to return to the system of collective accumulation. A cut in benefits is a first step in this direction, and an announced increase in contributions will be the second step. Whether or not it will be possible to return to this system will, no doubt, depend on the general economic development of the country.
Germany has had experience with almost all possible methods of financing a general workers' insurance scheme. This experience proves that no method can withstand a general collapse in the economic structure of a country. The system of assessment to meet capital value of pensions and that of collective accumulation worked well under the stable conditions before the war, but the war and its after effects wiped out the reserve on which the stability of the system was based. The pay-as-you-go scheme collapsed under the strain of the present depression. It appears very doubtful whether pre-war conditions can be restored by decree. All of which proves that a social insurance scheme is no more stable than the government or the financial condition of the country which administers it.
THE INVESTMENT OF THE RESERVE
General Investments.-The regional offices keep the funds which
they collect and invest them according to certain rules laid down by law-provisions
chiefly in the direction of protecting the safety of the investments.
A certain propor-
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tion of the funds is to be invested in Federal and State bonds. Beyond that, the regional offices are free to do as they please.
Table X-4 shows the size of the reserve and the various kinds of securities and loans in which it has been invested. The reserve amounted to slightly over 2 billion marks in 1913. The figures after that time are influenced by the inflation which began soon after 1914. In 1900 it had been estimated that the reserve would eventually reach a total of 2.5 billion marks, but in 1912 survivors' insurance was added to the system, and no doubt the reserve would eventually have reached a greater amount if the war had not interfered. However, the period of inflation from 1914 to 1923, during which the value of the German mark sank to almost zero, all but wiped out the capital on which the stability of the system was previously based. Only 15.5 percent, or slightly over 300 million marks, was left of the capital owned by the insurance offices before the war. The insurance system has never regained its former stability, and it has been in financial difficulties ever since that time. For even before the present depression, in 1927, an actuarial forecast was made which showed that the expenditures would exceed the receipts from 1928 on unless contributions were raised or benefits cut.
The decline in the reserve since 1931 resulted from the deficit of the insurance offices because of the drop in receipts. This situation was made worse by the fact that securities had to be sold at a loss of approximately 10 percent of the purchase price.
The question may be raised why the accumulated capital was not larger. Comparing it with estimates of the reserve that will be built up under the proposed United States wage and pay-roll taxes, it appears small indeed. There are several reasons for this. In the first place, wages are lower in Germany than in this country. In the second place, contributions before the war did not amount to much more than 2 percent of these wages, the benefits being correspondingly low. In the third place, the insured population is only about half the size it will be here. Then, stress has been laid in Germany on the curing of invalidity from the beginning, and this has meant that a large portion of the expenditures has been spent for rehabilitation of invalid workers rather than for the payment of pensions. Finally, and most important of all, full old-age benefits were given to workers who reached retirement age without requiring that they qualify for pensions by a long contributory period.
Table X-5 indicates the percentage distribution of the various kinds of investments of insurance reserve funds. This table shows what a large percentage of the capital has been invested in securities and loans to local governments. This was to be expected, since the law left the investment of the funds to the discretion of the regional offices, and each locality obviously wished to keep the funds which it raised. During the war the proportion of the reserve invested in Federal bonds increased greatly because of the fact that the insurance offices helped to finance the war by subscribing to war loans. The total invested by them in such loans in the course of the war amounted to almost one and one-half billion marks, or to more than half the total reserve. The investments in Federal Government bonds increased again from 1929 on, because the Government paid its share of the cost of pensions by bonds rather than in cash.
Investments Promoting the General Welfare.-A
very large proportion of the reserve has always been used for the purpose
of promoting the general welfare. Before the war about one-half of the accumulated
capital--or the share representing the workers' own contributions--was employed
fn many varied enterprises which would all eventually benefit the insured
class. Funds were lent to communities for the purpose of building workers'
dwellings, hospitals, convalescent homes, public-health centers, labor colonies,
public baths, homes for the blind, kindergartens, water works, and sewerage
systems. Insurance funds were also used to finance consumers' cooperatives
and to promote public instruction. The regional offices themselves built
hospitals and sanatoria in which invalid workers were treated. A smaller
portion of the funds was used for extending credit to agricultural sections
of the country. The funds served the
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purpose of financing mortgages, light railways to outlying districts, improvement of land and roads, stock breeding, alleviation of shortage of feed, drainage and irrigation, cultivation of moorland, reforestation, and similar enterprises. Table X-6 gives the history of these investments.
The public-service institutions established or financed by insurance funds were not distributed equally throughout the country, but the question as to which regional offices did most in this respect has not been studied. It is believed that the industrial regions, such as Berlin and the port cities which had a strong labor movement, had a greater share in these activities than did the rural and small-town sections.
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Interest on Investments.-The prophesies that a large reserve would lead to a lowering of the interest rate proved fallacious. Before 1914 the average interest rate hardly ever fell below 3.5 percent, the rate which had been used in making the first actuarial forecasts. It was slightly above that in most of the years. When large investments were made in war loans at an interest rate of 5 percent, the average rate for all investments went up to over 4 percent. Since 1928 the rate has been about 5 percent.
It may be seen from table X-7, which shows the receipts and expenditures of the regional offices from 1891 to 1934, that the income from investments was sufficient to cover more than one-half of the cash benefit payments in the years immediately preceding the war.
ADMINISTRATION
Up to the time of the present National-Socialist regime, the administration of the insurance law was characterized by a large degree of local autonomy. Before the war there were 31 regional insurance institutes, plus 10 special funds for railroad workers, miners, and seamen, all responsible for making the collections, investing the funds, and fixing the benefits. These 41 funds were administered according to rules laid down by a statute adopted by the locality, the province, or the state, which to be valid had to be submitted to the Federal insurance institute for approval in order to make sure that it was in accordance with the provisions of the Federal law. The Versailles Treaty reduced the number of regions by 2 to a total of 29. In addition, some of the special funds were consolidated so that only 6 existed at the time when the present party came to power. These regional offices and special funds had a large degree of autonomy. They administered the law, kept the funds which they collected, and invested them. In these investments they were limited by certain rules contained in the Federal law, for example, that a certain proportion of the total had to be invested in Federal and state securities. But on the whole the funds remained in the section of the countiy in which they were raised and were used for whatever purpose the regional office thought fit. Only in the matter of appeal proceedings was the Federal insurance office supreme. The final court of appeal in all insurance matters has consisted of judges who are a part of the Federal insurance office.
The post office sells the contribution stamps to employers, and also makes the monthly benefit payments in accordance with instructions received from regional offices.
Under the present government, the local autonomy of the regional offices was curtailed by a law adopted July 15, 1934. This law contemplates a much greater centralization of the administration, and it also empowers the Minister of Labor to request the regional offices to invest a greater share of their funds in Federal securities than had been the case up to that time.
Another recent change consisted in the introduction of the "leadership" principle. Up to 1933 a board consisting of representatives of employers and employees performed supervisory functions over the officials administering the law. This board is replaced by a "leader" by the law of July 15, 1934.
The Federal Insurance Institute was an independent Government office up to 1922. In that year it was put under the Ministry of Labor and has remained there up to the present time.
It will be seen from table X-7, showing the receipts and expenditures from 1891 to 1934, that the cost of administering the insurance system rose steadily up to the time of the present depression. The functions of administration remained very much the same throughout the years, except that from 1930 on,
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as a result of the financial difficulties of the Federal Government, the regional offices had to reimburse the post offices for their services in selling stamps and paying cash benefits. Up to 1930 this service on the part of the post offices constituted a part of the Federal subsidy to the insurance scheme. The reimbursement to the post office now constitutes approximately 20 to 25 percent of the total cost of administration.
That the rise in the cost of administration results from the general expansion of the scheme, rather than inefficiency, may be seen from table X-8, which relates the cost of administration to the total expenditures and the total receipts.
The trend in the proportion of the cost of administration to the total expenditures
is downward except for the years immediately preceding the war. One of the
reasons for the increase in administrative cost in the years from 1906 to
1914 was that the distribution of the cost between the common pooled fund,
the individual regional funds, and the Government according to a very complicated
formula involved considerable work. Later on when costs were allocated to
the regional offices in direct proportion to their receipts, much of this
administrative detail work was eliminated. Another reason for the increase
in the administrative cost before the war may be found in the increasing
importance placed upon the curing of invalidity. The benefits paid for this
purpose increased at a more rapid rate in those years than did the payment
of pensions. Another possible reason may well be found in the work connected
with investing the considerable reserve which had been accumulated by that
time.
The proportion which the cost of administration bears to the total receipts shows no trend either upward or downward. These percentages reflect largely the employment conditions of the country, the percentage being high when employment is low, and low when employment is high.
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COVERAGE
From the very beginning the German social insurance law has covered by compulsory insurance almost all persons working for a wage. The reason for bringing under the law the entire working population from the start may be found in the fact that Germany had general sickness and accident insurance laws before insuring its workers against invalidity and old age. The original law of 1889 included workers in agriculture and forestry as well as domestic service. Salaried employees were covered if their salaries did not exceed 2,000 marks a year. In 1912 this group of employees was insured under a separate law. Only one group of workers was included later which had not been covered at first. They were the home workers. The home workers in the textile, tobacco, and cigar industries were included by the amendment of 1899, and the remainder of this group by an amendment passed in 1923. Casual workers still remain excluded, but must obtain a special permit if they want to be relieved from the obligation of paying contributions.
The number of persons covered is shown in the following tabulation. The decline after the war resulted from the fact that Germany lost some territory through the Treaty of Versailles; the decline in 1934 was the result of unemployment:
Number of persons covered by invalidity insurance 1893-1934
1893_______________________________________________ 10,700,000 1898__________________________ ____________________ 11,600,000 1903_______________________________________________ 13,600,000 1907_______________________________________________ 14,600,000 1913_______________________________________________ 18,100,000 1924_______________________________________________ 17,000,000 1928_______________________________________________ 18,000,000 1934_______________________________________________ 17,000,000
The law provides that persons leaving an insurable occupation may continue their insurance voluntarily if they desire to do so. In that case, they are required to pay the employer's share of the contribution as well as their own.
The needs of independent craftsmen, small employers, and farmers are taken into consideration by providing that they may come under the scheme by paying the full contribution rate and a share of the administrative cost, provided they are not over 40 years of age at the time they become insured. This privilege is limited to people who do not employ more than two persons at any time of the year.
CONTRIBUTIONS
Contributions have been shared equally by employers and workers from the beginning of the scheme. Workers have always received credit for periods of illness, and for periods of compulsory military service and more recently also for periods of unemployment.
For the purpose of making the collections as simple as possible and still graduating the contribution in accordance with the wage of the worker, wage classes were initially established, the same contribution being required of all workers belonging to the same wage class.
The rates of contribution as well as the wage classes themselves have been changed frequently, as may be seen from table X-9. In order to be able to make some comparison with the proposed American law, these rates are expressed as percentages of the lower and upper limit of each wage class in table X-10. The period of inflation is omitted from the latter table for the reason that wage classes and contribution rates had to be changed frequently to keep step with the rapid decline in the value of the money.
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(IMAGE OF TABLE X-9)
(IMAGE OF TABLE X-10)
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The contribution rate increased from approximately 2 percent of the wages in 1891 to 5-6 percent in 1934. The present government has announced that it is to be raised further by about 1.5 percent as soon as general business conditions have improved, and by a further 1.5 percent in 1950. When the law was first introduced it was predicted that the original rates would have to be doubled within 80 years. Subsequently the law was liberalized in a number of important respects, so that the original forecasts would not have held good under any circumstances.
On the whole, the low-paid worker pays the higher percentage of the wage. This apparent discrimination against persons belonging to a low-wage class was justified by the drafters of the original law by the statement that the administrative expenses for all workers were the same and that the low-paid workers should pay their share. From 1927 on, this injustice was rectified to some extent by having a uniform rate of 5 percent for the upper wage limit of each class.
BENEFITS
The original law covered the risks of invalidity and old age. Of these two risks that of invalidity was considered the more important from a social point of view. Not only was much stress laid on medical attention and treatment, but very soon after the law was put into effect, the expenditures for invalidity pensions exceeded many times those for old-age pensions. This was the case in spite of the fact that the old-age insurance was fully retroactive: the contribution period was shortened for the persons who were over 40 years old at the time they entered insurance by the number of years that they exceeded that age. For this reason the maximum old-age pension load was reached very soon after the law was adopted. Survivors' pensions were added in 1912 and took the place of the cash refunds which up to that time had been granted in cases of marriage, accident, and death.
Old-Age Pensions: The original law provided that old-age pensions be paid from age 70 on after a contributory period of 1,200 weeks. This contributory period was shortened by 47 weeks for each year the worker was beyond 40 years of age, if the insured could prove that for 3 years preceding the effective date of the law he had been employed in an insurable occupation. If he could prove that, he was entitled to the full old-age pension after 1 week's contribution only. This is no doubt one of the main reasons why the reserve did not reach the proportionate size which is forecast for the proposed United States old-age benefit system. The conditions for receiving an old-age pension were liberalized in the law of 1900, and the provision for shortening the qualifying period was retained not only for the initial generation but for all persons who entered compulsory insurance after they were 40 years of age. Later this was changed to 35 years of age. From the beginning there had been a considerable movement toward lowering the age limit for the receipt of pensions, but it remained 70 until 1916. In that year it was lowered to 65.
The framers of the original law considered the old-age annuity merely a supplement to the earnings of the worker. It was not conceived as a retirement allowance. When the old person became incapable of working he could ask to have his old-age pension changed to an invalidity pension. The latter was higher, and under it the insured was given full credit for all contributions made. One of the changes made in 1922 under the Republic was to grant the person who had reached retirement age the full amount of the invalidity pension whether or not he was an invalid. This same law lowered the qualifying
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period from 1,200 to 200 weeks. Under the pressure of the depression the qualifying period for an old-age pension was increased to 750 weeks in 1929.
Table X-1 gives a summary of the legal provisions according to which the amount of the old-age pensions has been computed at various times in the history of the law. It will be seen from this table that until 1922 the old-age pension consisted of the fixed Federal subsidy of 50 marks a year plus an increment varying with the wage class to which the insured belonged. After 1922 the old-age pension was computed in the same manner as the invalidity pension. It consisted of the fixed Federal subsidy, a fixed basic amount, plus an increment varying with the number and amount of contributions paid by the insured for the entire period during which he was covered.
The amount payable in the several wage classes after a contributory period of 2,000 weeks from the date of each change in the law may be seen from table X-11.
The amount of the old-age pension remained fairly stationary in the 24 years before the war. During the inflation period the pensioners found themselves in very great financial difficulties, as did everyone else who depended on a fixed income. From 1918 on it was necessary to grant the pensioners additional allowances, which soon were many times the amount of the pension itself. These supplementary allowances amounted to 8 marks a month in 1918 for all old-age and invalidity pensions, 20 marks in 1919, 30 marks in 1920, 70 marks in 1921, and from 1922 on, the pensioners were put on a needs test and received payments on a relief basis. The Federal Government shared with the states and localities the expense of the relief of the pensioners during this period. When the currency was stabilized in 1924, flat pensions were first paid to all persons entitled to them, and no credit was given for any contributions paid before the war. Soon, however, this system was abandoned, and from April 1925 on, pensions were increased in proportion to the number and the amount of the contributions paid before as well as after the war. (See table X-1. ) From that time on the labor movement exerted political pressure, as a result of which the amount of the pension was more than trebled in all wage classes compared with pre-war benefits. The financial difficulties caused by the present depression made it necessary not only to compute the new pensions on a different basis but to cut all current pensions by 72 marks a year. In 1932 the Von Papen government cut the fixed basic amount by 50 percent, and the present government canceled this portion of the pension altogether. (See table X-1.) According to the law now in effect, the pensions in the lowest
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wage class amount to only slightly over 50 percent of the pensions paid under the republic. The higher-paid workers fare somewhat better.
As has been shown in the section on the rate of contribution, contributions were increased in the period after the war in approximately the same proportion as benefits. The present government, moreover, does not propose to lower contribution rates. On the contrary, it is hoped that rates may be increased when employment has picked up sufficiently to lower the unemployment insurance contributions.
The actual average amount of the new pensions granted each year since 1891 is shown in table X-12. This table indicates the very gradual increase in the amount of the pensions before the war, the jump to two and then to three times the pre-war amount under the Republic, and the drastic cut under the Von Papen and present governments.
These figures do not mean very much unless they be related to the wages
which the individual received before drawing a pension. Unfortunately it
is as difficult to procure information on the average wage in Germany as
it is in the United States. An attempt has been made to arrive at an estimate
of the average yearly wage from the amount of contributions paid in each
wage class. This is not a very satisfactory method of making an estimate,
because it does not take into account the degree of unemployment. The official
publication of the Federal insurance office refuses to draw any conclusions
as to a general average wage of the insured population from the available
figures. Seeping in mind these limitations, one may make the statement that
the average old-age pension was approximately 28 percent of the average
wage in the first 10 years of the insurance scheme. This percentage declined
slightly in the years from 1900 to 1914 for the reason that wages increased
considerably during this period. After the war the percentage increased,
but no figures are available until 1930, when the proportion was about 35
percent. Because of the severe unemployment and the wage cuts after that
time, the estimates are too uncertain to be of value.
Invalidity Pensions.-Invalidity was defined as loss of two-thirds of the normal earning capacity under the law of 1889, and this definition has been retained up to the present time. Since sickness insurance takes care of periods of illness of less than 26 weeks' duration, it was found desirable to have the invalidity benefit begin as soon as the sickness benefit ceased. No such provision was included in the original law, but the change was made in 1900. For
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a number of years special sickness pensions were granted, but as time went on, these were combined with the invalidity pensions. At the present time a person who has exhausted his sickness benefits becomes eligible for the invalidity pension automatically and is entitled to it until his earning capacity is restored.
The qualifying period for the invalidity pensions was fined at 235 weekly contributions in the original law. It was lowered to 200 weeks in 1900 and raised to 250 weeks in October 1929.
Table X-1 lists the provisions according to which the amount of the invalidity pension has been computed throughout the years. The invalidity pension consists of three parts:
(1) A fixed Federal subsidy, amounting to 50 marks a year before the war. After the war it was 36 marks for the first half of 1924, was raised to 48 marks in August of 1924, and finally to 72 marks in 1925. It has remained at that figure since then.
(2) A fixed basic amount. This was a flat 60 marks for each pension paid from 1891 to 1900. It was raised for wage classes II to V in 1900 by 10, 20, 30, and 40 marks, respectively. No further change was made until after the war. In 1924 it was raised to 120 marks for all wage classes, then to 168 marks in 1925, cut to 84 marks in 1932, and canceled altogether in 1934.
(3) An increment varying with the number and amount of contributions paid on behalf of each individual worker. Numerous changes were made in the computation of this increment. The details may be found in table X-1.
When survivors' insurance was added to the system of invalidity and old-age insurance in 1912, provision was made for children's bonuses for pensioners who had children under 15 years of age. In the beginning the children's bonus for each child was fixed at one-tenth of the invalidity pension. In 1924 it became a fixed amount of 36 marks for each child. In 1925 this was raised to 90 marks and in 1928 to 120 marks. In 1932 it was again reduced to 90 marks. From 1924 to 1926 the age limit was 18 instead of 15. However, this proved too expensive, and the age limit was again lowered to 15. Children who went to school remained entitled to a bonus up to the age of 21, and those who were incapable of earning a living because of infirmity received a bonus without an age limit. In 1931 these latter provisions were canceled by executive order, and now no bonus is paid for children who are over 15 years of age.
Table X-13 shows the amount of the invalidity pension in the various wage classes after a contributory period of 250, 500, 1,000, and 2,000 weeks from the time of each change in the law. The actual average invalidity pension granted in each year is shown in table X-14. These two tables show that, as in the case of the old-age pension, invalidity benefits rose only slightly before the war, were increased in the twenties to approximately two to three times their prewar amount, and were cut drastically, especially in the lower wage classes, under the Von Papen and present governments. Not only were the new pensions computed on a lower basis from 1932 on, but all current pensions were cut by 72 marks a year. This drop is likely to continue if the policies of the present government are not modified.
If these average pension grants are related to the estimated average wage of the insured population, it appears that the pensions constituted approximately 25 percent of the wage before the war and that this proportion had risen to 35 percent by 1930. What the proportion has been since 1930 is difficult to estimate because of severe unemployment and the decline in wages. These percentages are estimated only, because no figures on the average wage of the insured population are available.
Survivors' Pensions.-Survivors' insurance was not a part of the original law, but was added in 1912 and extended later on. Before it was included in the law, refunds amounting to one-half of the contributions paid were given to
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the dependents of insured persons who died or suffered an accident, and to women who married, provided they had been insured for not less than 200 weeks. These refunds had always been comparatively small. By 1912 they averaged slightly over 100 marks ($25) in cases of death and accident, while they were only about 40 marks ($10) in cases of marriage. After the introduction of survivors' insurance, the provision for refunds was canceled.
(IMAGE OF TABLE X-13)
(IMAGE OF TABLE X-14)
However, the idea of a cash lump-sum payment was retained for some time
for widows who had acquired the right to an invalidity pension by contributions
of their own. The children of such women also received a lump-sum payment
on reaching age 15. These provisions were given up in 1921. At the present
time all cash payments are in the form of pensions.
It had always been thought desirable to limit the amount which might be drawn by any one family. In 1912 this maximum for all survivors was put at one and one-half times the amount of the invalidity pension; the allowance for the orphans in one family was not to exceed the amount of the invalidity pension. In 1916 it was decided that there be no maximum to the amount a family of a deceased insured person might receive. This was no doubt because of the great distress in families which had lost their chief breadwinner in the war. In the section dealing with the number of pensioners (p. 494), it will be shown how rapidly the widows' and orphans' pensions increased from 1914 to 1918. The war placed a heavy burden on the social-insurance scheme of Germany, and it may well be asked whether this burden should not rather have been borne by funds derived from general taxation. After the effect of the war had worn off somewhat and the war orphans had reached the age where they could earn their own living, a maximum was again set to the benefits to be drawn by any one family. In 1927 it was decided the total amount was not to exceed 80 percent of the yearly wage of the insured; in 1934 it was further limited to the amount of the invalidity pension plus the children's bonus.
Widows' Pensions.-In the beginning only invalid widows, i. e., widows who had lost two-thirds of their normal earning capacity, were eligible to receive a widow's pension. Widowers of insured women received a pension under the same conditions provided they were needy. Widows who had exhausted their sickness benefits without regaining their earning capacity became eligible to pensions in 1923. From 1927 on, all widows over 65 years of age became eligible to the widows' pension.
The widows' pension is made up of the same components as the invalidity pension. It consists of a Federal subsidy, which is the same for each pension, a fixed basic amount, which is a certain proportion of the fixed basic amount of the invalidity pension, and an increment, which is a fraction of the increment of the invalidity pension. ( See table X-1. ) The increase and decrease in the amount of this pension follow the same pattern as do the old-age and invalidity pensions: a considerable liberalization of benefits in the twenties and a subse-
493
quent cut as a result of the depression and the change in government. This movement may be seen from table X-15, which indicates the average yearly grants for widows' pensions since 1912. The average pension was trebled in the twenties, and the cut in recent years does not seem to have been as drastic as that for invalidity and old-age pensions.
If these amounts are related to the estimated average wage of the insured population, it appears that widows' pensions constituted approximately 10 percent of the wage before the war, and that this percentage had risen to 18 percent by 1930. The figures after that date are too much influenced by the extent of unemployment and the decrease in the wage level to be reliable.
Orphans' Pensions.-By an amendment to the law of 1912, legitimate children of insured men and fatherless and illegitimate children of insured women became eligible to an orphans' pension up to the age of 15. Children of an insured woman were likewise eligible to a pension after her death if the father was incapable of earning a living and if they were in need. Grandchildren of the deceased insured were also eligible if the parents had died, if the insured had provided for them during his lifetime, and if they were in need. In 1923 adopted children and stepchildren and grandchildren for whom the insured had provided before his death were put on the same basis as legitimate children. At the same time the age limit was raised to 18 years. As a result of these provisions the expenditures for orphans' pensions increased rapidly, and it was thought necessary to change some of them. In 1926 the age limit was lowered again to 15 years. However, children who went to school received a pension up to age 21, and invalid children were pensioned until they were capable of earning a living. In 1931 the law was further limited so that no child over 15 years old was entitled to a pension. At the same time the pensions of stepchildren were canceled. Those of grandchildren had been given up a few years earlier.
Table X-1 shows the legal provisions for computing orphans' pensions. It will be seen that they are made up in the same manner as the widows' pensions--they consist of a fixed Federal subsidy for each child plus a fixed basic amount and an increment, which are a fraction of the basic amount and the increment of the invalidity pension. The trend in the size of the pension follows that of the widows' pension, as may be seen from table X-16, which indicates the average yearly amount of new pensions granted in each year. The figures of the table represent the amount given per child, and not per family.
The increase in the orphans' pensions during the twenties is greater than for any other type of pension. Before the war the average orphans' pension was only about 4 percent of the estimated average wage. By 1930 this percentage had increased to approximately 15 percent.
494
THE NUMBER OF PENSIONERS
Perhaps the most impressive picture of the increasing importance of a social insurance scheme in Germany is that of the pension load. Table X-17 gives the number of pensioners from 1891 to 1934. Starting with slightly over 100,000, the number increased quite rapidly until the beginning of the war, when it was a little over 1,000,000. Since then the increase has been very rapid. The number of persons in receipt of pensions at this time is almost 3 1/2 million. It is estimated that the maximum load will not be reached until some time between 1960 and 1970, though it is expected that the rate of increase will gradually decline until then.
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The outstanding facts in table X-17 are as follows:
(1) The highest number of old-age pensioners was reached soon after the introduction of the scheme, because the qualifying period was shortened for the older worker in direct proportion to the number of years he was over 40. The number jumped considerably in 1916, when the age requirement was lowered from 70 to 65. From 1922 on it has declined gradually, because after that time old persons were given invalidity pensions.
(2) The greatest increase in the number of persons receiving survivors' pensions is found in the time of the war. As stated before, the invalidity insurance system carried a part of the burden of the war by providing for the widows and orphans of the insured workers who were killed in the war. The number of widows' pensions paid increased again considerably in 1927, when all widows over 65 became eligible for a pension. During recent years there has been a decline in the number of persons receiving survivors' pensions, and especially in the number of pensioned orphans. On the one hand, this results from the general policy of retrenchment. On the other hand, most of the war orphans have passed the age limit for pensions and in addition the average size of family has gradually declined.
Unfortunately no figures are available regarding the age of the pensioners before 1924. Table X-18 lists the number of pensioners in each category who have reached the age of 65. By comparing these figures with those giving the total number of pensioners, it would appear that an increasing proportion of old people is being provided for under the workers' insurance scheme.
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SUMMARY
In the following paragraphs an attempt is made to summarize the most important conclusions that may be drawn from the history of the German social insurance system.
The first outstanding fact is the ever-increasing size of the business itself, which neither war nor inflation nor a severe depression could check. One of the causes of this tremendous growth is to be found in the increase of the population itself and the expansion of industry during the last half century. Another cause lies in the extension of the insurance to cover new groups of beneficiaries. Since almost all insurable workers were covered by the insurance system from the beginning, the expansion has not resulted from extending the coverage to any large, new occupational group.
The second most outstanding fact in this history is the inadequacy of the forecasts which were made for it in the beginning. This was not the fault of those who made the forecasts, but rather their inability to prophesy the general future development of a country. They had to assume that the general economic trend would continue in more or less the same manner as they had known it, and they could not possibly foresee the war, the inflation, and the subsequent changes in government and governmental policy: The forecasts were very good, if somewhat too conservative, for the period from 1891 to 1914, but they broke down completely from that time on.
This leads to the third point which needs to be brought out. A social insurance scheme is not a separate entity; it is an integral part of the economic life of a nation, and the forces which influence other enterprises shape its course as well. It changes its character with a change in government, becomes more liberal when labor has political power, and is limited in scope when labor is suppressed. It is not a scheme that is adopted once and for all; rather it is in a constant state of flux reflecting all changes in the economic life of a country. It was "under control" under the monarchy of pre-war Germany, and benefits were increased only if a careful investigation of the finances seemed to justify such a change. Never was labor allowed to exert political pressure for higher benefits. This situation was changed entirely under the Republic. There we find frequent increases in benefits, extension of benefits to new groups of workers, and this in spite of the doleful prophesies of the actuaries that a deficit was impending.
It became evident very soon after reserves began to be accumulated that ordinary investment opportunities would soon be exhausted. For this reason the insurance offices had to look around for new types of investments. They found that the employers and the workers, who financed the insurance scheme, would derive the greatest benefit by investments which would promote the general welfare of the workers. Hence they embarked on an extended program of construction of workers' apartments, hospitals, sanatoria, and similar institutions. The insurance offices themselves profited by these activities, since these institutions all helped to prevent and to cure invalidity and tended to lower the expenditures for invalidity benefits.
The period of inflation wiped out the accumulated capital and destroyed the financial basis on which the insurance scheme was built. In spite of the fact that inflation in Germany assumed unprecedented proportions, it did not make an end to the insurance system as such. The system has been put on a different basis and has had great financial difficulties since that time, but the expansion of the insurance was not checked thereby.
Germany started on its social insurance scheme giving the localities and special groups of workers a large degree of autonomy. The trend in its history
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has been toward a greater and greater centralization, pooling of risks, and depriving the regional offices of more and more of their powers. This trend has been the same under all successive systems of government, and it has been accelerated under the present regime.
The question of whether or not the Federal Government should share in the cost of the insurance scheme was answered in the affirmative by the sponsors of the original law. However, in times of financial difficulties the share of the Federal Government has been increased greatly beyond that originally proposed. During the inflation period the Government helped the regional offices in relieving the distress of the pensioners. After that time many special appropriations were made so as to enable the insurance offices to fulfill their obligations. This policy is still carried on under the present Government.
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Gebhard, Herman and Geibel, Paul, Fuhrer durch das Gesetz, betreffend die Invaliditats und Altersversicherung vom 22. Juni, 1889, Zweite, um ein ausfuhrliches Sachregister vermehrte und verbesserte Auflage (Stephan Geibel, Altenburg, 1890).
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Young, T. E., The German Law of Insurance Against Invalidity and Old Age, "Journal of the Institute of Actuaries", vol. XXIX, part IV (no. CLXII, July 1891), p. 269.
Zacher, Dr. G., Die Deutsche Arbeiterversicherung 1905-1908, "Actes du VIII Congres International des Assurances Sociales, Rome, 12-16 octobre 1908" (Imprimerie Nationale de J. Bertero & Cie., Rome, 1909), p. 113.