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5.2 Reducing the contribution burden of families - instruments and
effects
It has to be discussed and politically decided in Germany how to react to the request of the
Constitutional Court to reduce the contribution burden of families within social insurance
schemes. If this is regarded to be necessary (not only in long-term care insurance but in other
schemes as well), then it has to be decided who has to finance the deficit resulting from a
reduction of contribution payments of families and what is the adequate assessment base for
these payments.
One possibility often mentioned in the German discussion is to implement different
contribution rates according to the number of children. This could only be realised for the
employee’s part of contribution payments only and not for the employer’s contributions
because of otherwise distorting effects regarding labour costs on the labour market.
Contributors without children would have to pay higher contribution rates compared to those
contributors with children. The reduction of contribution rates for contributors with children
affects these contributors differently according to their earnings: Contributors with higher
earnings would gain more per child in absolute terms compared to those with low earnings.
Therefore, it was proposed to use a fixed absolute (flat rate) amount of an allowance per
child. Here, the absolute reduction of the contribution payment would be identical for all
contributors but relatively higher (compared to the individual earnings) for those in the lower
income brackets.
Introducing an allowance into the contribution formula would have several additional effects:
Up to the ceiling the contribution scale would become (indirectly) progressive. The effective
contribution rate (defined as individual contribution payment as ratio of individual gross
earnings) would remain below the contribution rate12 and is regressive for earnings above the
(upper) ceiling. Overview 5 illustrates the effect of introducing an allowance into the formula
for calculating the contribution payment.
The introduction of an allowance would not affect the individual pension claim, because in
German social pension insurance the pension claim is based on the amount of individual
earnings and not (as in a defined contribution scheme) on the amount of the contribution
payment. However, the contribution revenue would be reduced by introducing an allowance
as well as in reducing the contribution rate for families with children.
12 Only if the upper ceiling is increased by the amount of the allowance, contributors with earnings
at the new ceiling would have an effective contribution rate just as high as the (formal)
contribution rate. For a detailed discussion of effects of allowances in calculating the
contribution payment see Schmahl (1977: 165-190).