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Distribution and Public Finances

The national budgets of the federal government, the states, the municipalities and the social security funds have a volume of just under half of Germany's gross domestic product. After running deficits for decades, the state as a whole recently achieved surpluses before the Corona crisis. Thanks to low interest rates and rising revenues from taxes and social security contributions, Germany did not have to incur any new debt. However, the Corona crisis has again led to rising government spending, lower tax revenues and thus higher government debt overall, although the scope for government investment is limited by the debt brake. Germany currently has a debt level of more than two trillion euros.

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In addition to the openly disclosed debt, implicit debt lies dormant in the social system in the form of unfunded benefit commitments for pension, health and long-term care insurance. Germany currently spends around one-third of its economic output on social benefits, which already puts it in the lead among industrialized nations. Demographic change will place even greater demands on the social systems in the future.

The development of income and wealth inequality is the subject of much controversial debate in Germany. Although the inequality of disposable household incomes in Germany is higher today than it was at the beginning of the 1990s, it has not changed significantly since 2005. In an international comparison, it is low. For example, the top ten percent receive just over 30 percent of incomes. The wealthiest ten percent own around 60 percent of total assets. Consequently, wealth is distributed more unequally than disposable income. However, the upper class is not quite as aloof as these figures suggest: A large proportion of wealth is tied up in businesses that provide the livelihood for many millions of people in the form of jobs.

Due to technological progress, companies are increasingly looking for more highly qualified employees - with correspondingly higher salaries. At the same time, low-skilled workers face greater competition from workers from abroad. Because of these and other trends, income distribution in Germany - as in all industrialized countries - widened in the 1990s and up to the mid-2000s. Unlike most other countries, however, Germany was recently able to slow the income drift and fix it at the 2005 level. The good economic development and the unprecedented reduction in unemployment have improved the living situation of millions of people and stabilized income levels.

The state intervenes more strongly in income distribution in Germany than in many other countries, so inequality in Germany is low. As convoluted as the effects on redistribution are in detail, the result is clear: Those who earn more receive less state pay and pay higher taxes. Conversely, the less citizens earn, the more they receive from the state. The strong shoulders thus bear a heavier burden.

German Economic Institute (IW) German Economic Institute (IW)

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Factors Influencing the Decentralised Energy Transition in North Rhine-Westphalia
Martin Beznoska / Björn Kauder / Finn Arnd Wendland IW-Trends No. 4 25. January 2023

Factors Influencing the Decentralised Energy Transition in North Rhine-Westphalia

North Rhine-Westphalia (NRW), the most populous of Germany’s sixteen states and an industrial heartland, is a particular focus of the energy transition. Despite considerable progress in expanding the use of renewable energy, NRW still lags far behind other German states.

IW

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A Systematic Study of Neutrality in Pension Financing and in the Burdens and Incentives for Members of the Statutory Pension Scheme
Jochen Pimpertz IW-Trends No. 4 2. January 2023

„Actuarially Fair” Reductions in Early Retirees’ Pension Benefits

Calls for the reduction in state pension benefits for early retirees to reflect real insurance risks imply that early retirement need not involve any additional costs.

IW

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Influence of structural changes on income distribution
Maximilian Stockhausen IW-Report No. 63 26. November 2022

IW Distribution Report 2022: Influence of structural changes on income distribution

Academization, immigration and demographic change are defining issues of our time and influence the distribution of income. This year's report therefore focuses on the question of which long-term structural changes in the net income distribution are associated ...

IW

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Asset accumulation for retirement provision
Michael Hüther / Jochen Pimpertz IW-Policy Paper No. 6 6. October 2022

Asset accumulation for retirement provision

The pay-as-you-go statutory pension insurance is intended to protect workers in Germany from having to rely on tax-financed assistance in old age. However, due to the ageing of society the security level of the statutory pension insurance must decrease.

IW

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Read study
Factors Influencing the Decentralised Energy Transition in North Rhine-Westphalia
IW-Trends No. 4 25. January 2023

Factors Influencing the Decentralised Energy Transition in North Rhine-Westphalia

Martin Beznoska / Björn Kauder / Finn Arnd Wendland

North Rhine-Westphalia (NRW), the most populous of Germany’s sixteen states and an industrial heartland, is a particular focus of the energy transition. Despite considerable progress in expanding the use of renewable energy, NRW still lags far behind other German states.

IW

Read study
A Systematic Study of Neutrality in Pension Financing and in the Burdens and Incentives for Members of the Statutory Pension Scheme
IW-Trends No. 4 2. January 2023

„Actuarially Fair” Reductions in Early Retirees’ Pension Benefits

Jochen Pimpertz

Calls for the reduction in state pension benefits for early retirees to reflect real insurance risks imply that early retirement need not involve any additional costs.

IW

Read study
Influence of structural changes on income distribution
IW-Report No. 63 26. November 2022

IW Distribution Report 2022: Influence of structural changes on income distribution

Maximilian Stockhausen

Academization, immigration and demographic change are defining issues of our time and influence the distribution of income. This year's report therefore focuses on the question of which long-term structural changes in the net income distribution are associated with a higher average level of education, increased net immigration and a higher share of older fellow citizens in the total population.

IW

Read study
Asset accumulation for retirement provision
IW-Policy Paper No. 6 6. October 2022

Asset accumulation for retirement provision

Michael Hüther / Jochen Pimpertz

The pay-as-you-go statutory pension insurance is intended to protect workers in Germany from having to rely on tax-financed assistance in old age. However, due to the ageing of society the security level of the statutory pension insurance must decrease.

IW

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Proposals for more liquidity in private households and companies
IW-Policy Paper No. 5 24. September 2022

Effective aid programs in the energy price crisis

Tobias Hentze / Michael Hüther

The energy price crisis is a huge challenge for economic policy. With the three relief packages, the government has given some important support, but the economic policy lacks a stringent line. All measures should currently have the top priority to secure liquidity for private households and companies over the winter.

IW

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