"Modern societies cannot function without a welfare state"

"The economic rationality of solidarity"

By Malte Kornfeld

[This interview posted on February 21, 2024 is translated from the German on the Internet, https://makroskop.eu/06-2024/ohne-soziales-sicherungssystem-koennen-moderne-gesellschaften-nicht-funktionieren//]

State social policy is superior to market-based alternatives, writes health economist Hartmut Reiners. In his book "The Economic Reason for Solidarity", he argues that the public welfare system should be strengthened again. But the road is rocky.

The budget for social policy in Germany accounts for almost a third of GDP. It has long since ceased to be limited to redistribution, but also controls a growing sector of health and social services.

Accordingly, health economist Hartmut Reiners argues that, despite the need for reform, the social insurance system has a high degree of economic rationality in its basic features. The privatization of the social risks it covers is not only harmful to society from a social perspective, but also from an economic one. Converting pension insurance to a private, funded system would make old-age provision dependent on the whims of the financial market and would involve high expenditure that would benefit insurance companies and capital funds rather than the insured.

In his book "Die ökonomische Vernunft der Solidarität", published by Edition MAKROSKOP, Reiners therefore calls for an end to privatization in social policy and a democratization of the welfare state. Malte Kornfeld spoke to him.

Hartmut Reiners is an economist, health economist and freelance journalist. He held positions of responsibility in the public health system for many years - first in the North Rhine-Westphalian and then in the Brandenburg Ministry of Health. In these positions between 1988 and 2009, he was involved in significant reforms to the statutory health insurance system.

Mr. Reiners, what prompted you to write the book "Die ökonomische Vernunft der Solidarität"?

I keep finding that even politically educated people are very clueless about the structures, tasks and benefits of our welfare state. I would like to contribute to filling this knowledge gap. That is why I wrote a book years ago on "Myths of health policy", in which popular misconceptions are juxtaposed with facts. In my new book, I apply this approach to the social budget as a whole.

What do you criticize about the prevailing debate on social policy?

For over forty years, the welfare state has been viewed primarily through the lens of economics, both in public opinion and in economic theory. In this view, it is primarily a cost factor. Its tasks are reduced to providing for those in need of protection who cannot help themselves. But the modern welfare state goes far beyond this. It is a solidarity-based system of protection against general life risks such as unemployment, ageing, illness and the need for care.

Doesn't this weaken personal responsibility? Shouldn't everyone make their own provisions for these risks?

We constantly hear and read claims that discredit our welfare state. It is too expensive, promotes a hammock mentality, impairs the competitiveness of the German economy and puts future generations at a disadvantage. There is no reliable evidence for this. In my book, I show that the exact opposite is true. The privatization demanded by critics of the welfare state would not only further the division of society, but would also cost the entire economy dearly.

You write in your book that there are no private service providers offering unemployment insurance. But statutory unemployment insurance is standard. Why the discrepancy?

Unemployment is a privately uninsurable risk. Its factors cannot be calculated into premiums by insurance companies. Jobs and sectors that are considered absolutely secure today may no longer be in demand at some point due to new technologies or changes in demand. There are plenty of examples of this. These risks cannot be calculated in the medium to long term. This is why the insurance industry only offers occupational disability insurance that is tied to strict conditions and is more akin to disability insurance.

We hear everywhere that statutory pension insurance has no future because the burden of old age is becoming too great for contributors. What do you say to these pessimists?

What is the alternative? It's absolute nonsense to say that private insurance would already have financed future pensions today and that you would therefore not be a burden on the next generation. Every pension insurance policy, regardless of whether it is financed via a pay-as-you-go system or from the earnings of a capital stock, offers entitlements to a pension that will be earned in the future. A money store only exists in Duckburg. The crucial question is: who is better able to guarantee a pension insurance for all citizens that avoids poverty in old age - statutory pension insurance or private capital funds? Or to put it another way: should we make pensions dependent on domestic economic strength or on the whims and interests of the international financial sector?

Social insurance schemes have a large administrative apparatus. Don't private insurance companies have greater incentives to cut costs there?

That is a fact-free myth. The pay-as-you-go social pension has a significantly lower administrative burden than private funds. A practical example: the German pension insurance system takes up 1.6 percent of the pension budget. In the Netherlands, funded occupational pensions account for more than half of most pensioners' income. These funds pay out over 30 billion euros in pensions every year, but at the same time pay commissions of over eight billion euros to financial giants such as Blackrock and Vanguard. What's more, these asset managers are barely monitored. This means that over 20 percent of the money paid into the funds does not end up with pensioners, but in the accounts of the financial industry. What is economically sensible about this?

The economic rationality of solidarity

Benefit expenditure for statutory health insurance has risen in real terms in recent years. Nevertheless, you consider statutory health insurance to be superior to private health insurance. Why is that?

The rising costs in the healthcare system affect private health insurance just as much as statutory health insurance. Both pay the same flat rates per case for hospital treatment. There is also hardly any difference in pharmaceutical expenditure. But in outpatient medical care, private health insurance expenditure is twice as high as that of statutory health insurance, even though the same services are provided. As a private patient, you can usually get an appointment more quickly, especially in specialist medical care, but the treatment as such is no better. As a retired civil servant who has no access to statutory health insurance and is forced to take out private insurance, I know what I'm talking about here. Even the "wise men of economics" have stated in one of their annual reports that our dual system of private and statutory health insurance cannot be justified economically.

Private long-term care insurance has accumulated large reserves due to a lack of solidarity equalization. Why is the accumulation of these savings bad for the economy?

It is true that these are savings. But at the same time, these are unused resources that are being withheld from the care of people in need of long-term care. Private long-term care insurance must not be allowed to develop into a capital fund with associated long-term care. The contributions paid by the insured must end up where they belong: in the care services and nursing homes.

You believe that social policy is more than just policy for those in need of protection and the disadvantaged, but affects the whole population. Why is that the case?

In the past, old and sick people were looked after by their families, local authorities or self-help associations. However, this local idyll is increasingly being eroded. This is due to the enormous economic growth of recent decades, which has also led to an increase in mobility. Modern societies are dependent on general security systems for the entire working population. Since the 1950s, the share of the social budget in gross domestic product, i.e. in our economic power, has almost doubled from 16 to over 30 percent. The welfare state does not become superfluous with increasing prosperity, but rather grows.

What need for reform do you see in public social policy?

This cannot really be answered in the brevity required here. There are two major levels of reform, which again have numerous construction sites with complex problems. Firstly, the financing of the individual branches of social insurance must be ensured. All working people must contribute to this according to their ability to pay. Our neighbor Austria, where civil servants and the self-employed are also covered by social insurance, shows how this can be done. The second level is the development of integrated health and care provision. Improvements can only be implemented step by step.

Why are social policy reforms so complicated?

Anyone who claims that social policy problems can be solved with a major reform has no idea of the complicated structures of our health and social care system. It has developed into a huge industry in which defensive coalitions form very quickly. These interest groups have one main goal: to prevent reforms. That is why we need to proceed step by step and form effective political reform coalitions. This requires staying power. Public announcements of reforms are one thing, their implementation is another. We must not jump as a tiger and land as a bedside rug.

In a carnival song from 1949, Jupp Schmitz and Kurt Feltz ask themselves the question "Who's going to pay for it? [...] Who has so much money?" The background was price increases as a result of the currency reform. Do you have any ideas on how to keep public social policy affordable?

I have just outlined it, albeit only very roughly. Modern societies cannot really function well without a general social security system. That's why we need a security system for the whole of society that everyone pays into. In addition, growing social inequality is also a major economic risk. This is confirmed by data from the international economic organization OECD, which confirms that countries with a comprehensive welfare state have a particularly high level of life satisfaction and economic crisis resilience.

Reiners, Hartmut: The economic rationality of solidarity. Perspectives for a democratic social policy. Promedia 2023. 272 pages.

Malte Kornfeld is a political economist and editor at MAKROSKOP. He writes and researches macroeconomic developments from a heterodox perspective.