Reputable State?

One year of black and yellow: sustainability negative

An analysis founded in long-term accounting

The Market Economy Foundation presents its fiscal sustainability report for the first years of the black-yellow governing coalition. The result is alarming. In comparison to the long-term unfunded shortfall of 291% of gross domestic product (GDP) inherited from the Grand Coalition in 2009, the gap has climbed to 308% of GDP today. This figure measures large: three times the size of Germany’s annual economic output, or €7.4 trillion. Nevertheless, a systematic restructuring of the components of this future liability, as well as comprehensive health reform, could begin to improve this situation. In order for this to happen, the ruling coalition has to engage in more courageous reform of public spending.

Even if such an effort is successful, further reform, particularly to the health care system, must follow. “So far, the black-yellow federal government has simply continued the idleness of the last decade when it comes to health care policy,” opined Prof. Dr. Bernd Raffelhüschen, board member of the Market Economy Foundation and director of the Intergenerational Contract Research Center at Freiburg University (Forschungszentrum Generationenverträge an der Universität Freiburg), at our press conference on October 19, 2010.

Reputable State? Long-Term Balance Sheet Update 2010

The Market Economy Foundation presents an update of the long-term balance sheet and analyzes different models for health care reform to test their viability and to estimate the tax increases necessary to fund the system.

The long-term unfunded imbalance between expected revenues and explicit and implicit state expenditures amounts to nearly €8 billion, or roughly 315% of gross domestic product, according to the latest calculation by the Market Economy Foundation and the Intergenerational Contract Research Center )(Forschungszentrum Generationenverträge). The bulk of this is driven by implicit (not yet visible) state spending that constitutes 250% of GDP and hides the costs of state liabilities, particularly the social security system, which cannot be paid for by current levels of taxation. The remaining part comprises those state liabilities that are explicit and already visible.

In order to service this debt load, every German citizen, independent of taxes and contributions to social schemes, would have to hand an additional €355 per month (€279 at 2007 debt levels) over to the state.

Prof. Dr. Bernd Raffelhüschen, board member of the Market Economy Foundation and director of the Intergenerational Contract Research Center at Freiburg University (Forschungszentrum Generationenverträge an der Unviersität Freiburg), outlined the progression of this phenomenon at a press conference on May 18, 2010 and made the following points:

• The debt problem in Germany is much more structural than cyclical

• The social security system has demonstrated a nearly unchanged budgetary shortfall year-over-year; in this area, there has at least been no worsening

• There is a growing need for action in the statutory health insurance system as well as in the social nursing care insurance system.

Are flat rate health care premiums a solution?

Reform of the way in which statutory health care is financed, through the introduction of flat rate health care premiums, could lower the long term budgetary shortfall of the system by up to 30 percentage points. This would at least be a first step towards the realization of a sustainable health care system. The tax rise needed to fund the social system would, depending on the configuration of the premium system, amount to between €3.4 billion and €18.4 billion. The opaque system of redistribution that defines the current statutory health insurance system would be done away with, so as not to add to the total burden borne by private households.

A truly sustainable health reform requires more elements, for example a pro rata personal contribution for outpatient services and medication.

Reputable States? International Sustainability Ranking on the Basis of Long-Term Balance Sheets – Focus on Pension Reform

The Market Economy Foundation presents an updated international sustainability ranking and considers pension reform in light of this international comparison.

How big is Germany’s long-term budget shortfall in comparison to the situation in other countries? And how do the recent German pension reforms size up internationally? The fact is that not only in Germany does demographic change pose large problems for the financing of statutory old-age security, as all countries studied have in principle trusted in the pay as you go system. And with the exception of the United Kingdom, all other countries have initiated some severe reforms to the way in which they fund old age benefits.

More information on this theme, as well on the indexation of retirement benefits, is available in the following study:

Authors: Bernd Raffelhüschen, Stefan Moog, Christoph Müller

In “Incorrect Facts,” we have posed the following question:

How high would the level of state debt or, more precisely, the long-term budgetary shortfall, be today, if the Baby-boomer generation had had a similar amount of children as the previous generation?

Would the debt problem have been solved?

The answer is: no, quite the opposite. The sustainability issue would in fact be exacerbated.

Read our paper on the topic:

The Baby-boomers' purported demographic mortgage (German)

The Market Economy Foundation presents the 2009 generational balance sheet update: “Cyclical political mismanagement exacerbates sustainability issue”

How do the economic crisis and the stimulus package affect the long term sustainability of public finances? You can find the answers in our third update to our “Generational Balance Sheet,” begun in 2006. At our press conference at the beginning of July, Prof. Dr. Bernd Raffelhüschen and economist Stefan Moog quantified the burden on the public budget in detail:

Reputable State? The 2009 Long-Term Balance Sheet Update: Economic Crisis Affects Sustainability

More information is available in the following study:

Authors: Bernd Raffelhüschen, Stefan Moog

The German long-term balance sheet in international comparison

“Switzerland exemplary, Germany just mediocre.” Such were the results of an international comparison study by the Market Economy Foundation aimed at restoring sustainability to public balance sheets. Prof. Dr. Bernd Raffelhüschen, board member of the Market Economy Foundation and director of the Intergenerational Contract Research Center at the Albert Ludwigs University (Forschungszentrum Generationenverträge an der Albert-Ludwigs-Universität), presented the study at a press conference in Berlin’s Mitte district in November 2008.

Using long-term accounting methods that also account for future demographic development, Professor Raffelhüschen studied the sustainability of public finances in seven industrialized European countries (Germany, France, Austria, Spain, the United Kingdom, Norway, and Switzerland), as well as the United States as a non-European standard of comparison. The results of the study appear in the following ranking:

Authors: Bernd Raffelhüschen, Christian Hagist, Stefan Moog, Johannes Vatter

Further Publications

Authors: Bernd Raffelhüschen, Christian Hagist, Stefan Moog

Authors: Bernd Raffelhüschen, Christian Hagist, Matthias Heidler, Jörg Schoder

Authors: Bernd Raffelhüschen, Christian Hagist, Olaf Weddige

On 15.10.2008 Prof. Dr. Bernd Raffelhüschen, member of the board of the Market Economy Foundation, delivered a policy brief to the parliamentary advisory council for sustainable development:

Generational justice in the Constitution? (German)

Methodology of the Long-Term Balance Sheet

The long-term “generational” balance sheet was developed at the beginning of the 1990s in the United States of America in order to better analyze long-term fiscal and social policies. With these methods, long-run public income and expenditure, such as retirement payments and tax receipts, are calculated with consideration of demographic development and underlying economic and fiscal conditions. The resulting indicators, such as the sustainability gap, enable a thorough analysis of the sustainability and generational consequences of current fiscal and social policies. The long-term sustainability gap comprises of explicit debt as well as implicit “hidden” debt. Implicit liabilities describe the future imbalance between receipts and expenditures and thereby reveal the extent to which, under the current law, the state will be indebted. In other words, the sustainability gap shows just how large financial reserves must be in order to maintain current levels of service into the future.