Committee on Economic Security (CES)

Volume II. Old Age Security

Other Staff Reports
Foreign Systems


FINANCIAL HISTORY OF THE WORKERS' INVALIDITY, OLD AGE AND SURVIVORS' INSURANCE OF GERMANY

by
Marianne Sakmann

Now that this country is considering the introduction of a general contributory old age insurance system and that forecasts are made, actuarial and otherwise, as to what will happen to such a system within the next half century, it appears worthwhile to investigate what has happened in a country which had has 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. It 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 a good many other enterprises, withstood the stress of the severe depression of the last few years, and is now being continued under a dictatorship which has destroyed some of the most fundamental establishments of German economic life.

The German law has lived through every conceivable hazard which a social insurance system might meet. It goes without saying that it has not met these hazards without being modified and changed many times. This effort 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 worthwhile 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 to far afield.

The following pages are limited to a short survey of the distributionof cost, 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 the share offered 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 adopted by parliament by a small majority of 20 votes against the opposition 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. They 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 of "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 secure legal advice on how to make good their claims for pensions. The small amount of the pension 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 every single worker, because they all had a stake in the system. The conservatives viewed this development with concern all the more since the membership of the Social Democratic Party and the votes for it 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 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 toward receiving a greater share in wages and insurance benefits under the existing system rather than making any fundamental change in it. 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 introduce another one for it.

It has been said that Hitler has given up this system or has modified it to such an extent that it can no longer be recognized. This is not true as far as invalidity insurance is concerned. Since his advent to power, the many decrees issued dealing with the subject all express his intention of retaining it in its original form. What he has done, however--and perhaps that is the only thing which matters, from the point of view of the workers at least--is to cut the benefits drastically. Since labor can no longer express its dissatisfaction with this procedure, it appears probable that he will be able to do so as long as he remains in power.

Distribution of Cost

The share of the federal government
When the plan for invalidity 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 person, 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' pension 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 Appendixes F, G, and H).

Appendix B shows the actual amount which the federal government contributed toward the pension payments throughout the years and the proportion of this amount to the total pension payments. It will be seen that, as the whole, the federal government paid approximately one-third of the cost of the pensions. This share was as high as 40 per cent in the beginning of the scheme, when the earned portion of the pensions was comparatively law.

The contribution of the federal government also includes a payment in the pension for the time which the insured spent in compulsory military service.

In addition, the federal government bore the cost of selling stamps and the payment of pensions through the post offices as well as the cost of administration of the federal insurance office. 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 one 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 government gave certain special subsidies to it in addition to its 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 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 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 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 con reserve fund was to be touched only in cases of extreme necessity and only with the sanction of the federal insurance office.

The experience of the first ten 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 place of it a certain proportion of the contribution 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, that is, 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 per cent of the contributions received by them.

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 follows:

Table 1 Distribution of Cost of Pensions between the Individual Funds, the Common Fund and the Federal Government
	Per Cent Borne By
Year	Individual Funds	Common Funds	Federal Government
1900	20.4	44.3	35.3
1901	20.8	44.7	34.5
1902	20.9	45.0	34.1
1903	21.4	45.1	33.5
1904	21.8	45.1	33.1
1905	22.4	45.0	32.6
1906	22.9	44.9	32.2
1907	23.6	44.7	31.7
1908	24.4	44.4	31.2
1909	25.1	44.2	30.7
1910	25.7	44.0	30.3
1911	26.7	43.6	29.7
1912	22.2	47.0	30.8

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 changes to be borne by the common 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 funds was given up altogether, and all pension payments were charged to the regional offices in proportion to their collections during the preceding year.

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