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individual earnings of the employee. In a pension scheme like in Germany, where the idea of
a close contribution-benefit link is important at least up to now, the shift from earnings-related
employer’s contributions to value added tax would dilute the contribution-benefit link and
make the social insurance scheme more interpersonally redistributive.
It is obvious that a decision about adequate financing of family policy implemented into social
insurance schemes depends also on the concept of social insurance that is seen as relevant in
a country. If social insurance schemes are highly redistributive, the above argument of
diluting the contribution-benefit link seems not to be relevant. Of course, the argument of a
lack of transparency, higher transaction costs and the problems in properly targeting all
elements of family policy which are distributed over several schemes and public budgets
remains relevant.
To base pension claims on raising children - the contribution in kind - in German pension
insurance, would require that the pension claim is not income-related but flat rate. This,
however, also would change the German pension scheme fundamentally, because up to now
the scheme and the formula for calculating pensions are explicitly earnings-related.
In the case of Germany and in particular regarding the social pension insurance instead of
differentiating contribution rates or contribution payments (by an allowance), the following
approach seems to be preferable if - as demanded by the Constitutional Court - a reduction
of contribution burden for families shall be realised: This can be done by direct transfer
payments financed by general public revenue (a) either to the pension insurance or (b) to the
household of the contributor.
In case (a) the contribution payments of families with children would be reduced and the
resulting deficit of the pension insurance would be compensated from general public revenue.
In case (b) families raising children would receive a direct transfer payment aiming at a
reduction of their contribution or - more generally - of their provision for old age in a pension
scheme belonging to the first tier of the pension arrangements (that means arrangements
being the base for old-age security of groups of people, whether funded or PAYGO
financed). The amount of this reduction could be equal per child.
It could, however, be argued that financing of family policy from general tax revenue may
burden families, especially if a high percentage of tax revenue is collected via indirect
taxation - like value added tax, purchase taxes or ecological tax. To avoid this, there could be
for example a surcharge in income tax (whether earmarked for family policy or not) designed
in such a way, that families with children are more or less exempted from paying this levy.
To go one step further in trying to make the effects of family policy more transparent and to
improve the possibility to realise the political objectives of family policy an institution could be