Germany’s Hard Working Middle: Are You One Of Them?

 

It’s the same here in Germany as it is in most western democracies. The hard working middle classes feel squeezed, and increasingly see their politicians as being incapable or unwilling to fix the issue. The silent masses are becoming increasingly more vocal. It matters to us because a lot of us expats also fall into this group. Some of the factors may be important for those of us intending to make Germany our long-term home.

So who is this increasingly important demographic? Do you belong to them, and do you feel squeezed? Why is their situation becoming more precarious, and why does it matter in this election year?

The Economist ran a daily chart back in November last year entitled “What the world worries about”, showing the top-ranking problem as viewed by a country’s electorate. In Southern Europe, unemployment was perhaps unsurprisingly the key concern. The Germans, however, ranked poverty and rising inequality as their greatest worry, with a whopping 47% citing it. Something clearly is causing a worrying trend.

Politics is traditionally much less tribal in Germany as it is in the UK and the US, where the 2 party system tends to dominate. So for an issue to be such a consensual concern across the complete political spectrum, you have to start by asking “why”?

 

Isn’t Germany the land of milk and honey?

Up until the “Agenda 2010” reforms of the centre-left Schröder government back in 2004, the German labour market was very highly regulated. Around the turn of the millennium and into the early 2000s, Germany suffered from high unemployment and a stagnating economy, and was considered to be the “sick man of Europe”, through the lack of political will to force through necessary reforms.

The reforms which were ultimately passed made it easier to lay off workers, reduced the number of trades covered by collective bargaining, facilitated part-time “mini-job” creation by reducing the employer’s burden to pay their staff’s social insurance contributions, and limited to 1 year the amount of time that the long-term unemployed could claim unemployment benefit which was indexed to their previous job’s salary.

While these could hardly be considered a hard-right agenda (it was indeed a Social Democratic government in power at the time), one of the consequences was the increase in more precarious jobs, in a country which had been accustomed to a job-for-life mentality and cradle-to-grave welfare state since the Wirtschaftswunder of the 1950s through to reunification in 1990. Solidly middle-class families suddenly became at risk of slipping into poverty as a result of long-term unemployment.

Fast-forward on 10 or so years to today’s Germany. Unemployment may be the lowest it has been since 1991, but the cost of housing and social contributions has risen at a disproportionate level compared to general inflation and wage increases. Consider also that more often than not, nowadays both partners work, the retirement age is 67, and many younger working families in major urban areas will never be able to afford their own home because of the current property boom which shows no signs of abating. Consequently, they will continue to pay rent as retirees, rather than the mortgage on the roof over their head having been paid off during their working lives. It’s kind of easy then to see why there is plenty of Angst and anger among Germany’s squeezed hard working middle.

 

middle class

59% of Germans are classed as being in “the middle”

 

How do officials and academics define “the hard working middle”?

There are several yardsticks which can be used to benchmark where you sit:

 

Tax

Let’s start with our good old friends at the Finanzamt. The top 42% tax band kicks in at a gross annual salary of €53,666 (in 2017). That’s just under €4,500 gross per month or around €2,600 net, depending on a few factors. Let’s face it, you’re hardly Hugh Hefner on that salary, but for tax purposes you’re considered a high earner. Even though in Frankfurt or Munich you would be shelling out up to half your net salary for a decent apartment!

 

Health Insurance

Now let’s consider the threshold at which you can opt out of the public health insurance system. This comes in at €57,600 (in 2017), or around €2,750 per month net. Presumably above this amount, the state considers you financially capable of coping with private healthcare and the varying degrees of cover it offers.

 

Average (Mean) Salary

So if we take the average salary, surely this is more representative. Well, yes, up to a point. However, it is heavily weighted through the small proportion of top earners who earn disproportionately more than the vast majority of the working population. Or better said, it takes a lot of low earners to offset the weight given to the income of the super-wealthy 1%. Regardless, the mean, net monthly salary in Germany in 2014 was €3,218.

 

Median Salary

In 2014, according to Stern, this came in at a take-home salary of €1,758 monthly for singles and €3,690 for a couple with 2 children. That’s more like it. Median is the mid-point in the range of salaries across the whole spectrum. Meaning a few outlying, stellar top-end earners cannot skew the results as they do in the mean average. The median is the basis upon which the Cologne Institute for Economic Research (IW Köln) has conducted their analysis below.

 

And where do you sit?

Net monthly incomes. Adapted from Stern article “Die Mitte”, published 16.03.2017. Data source: Cologne Institute for Economic Research (IW Köln)

Why are the “hard working middle” important this election year?

Middle class voters are a key election battleground this time round because they have started to become more vocal. Little has been done in the last 5 years in the way of domestic politics, in contrast to Merkel’s presence on the international stage. The “grand coalition” has in effect been a “grand compromise”. Government by the lowest common denominator; difficult decisions have not been taken.

59% of Germans are considered middle class and 60% of them feel that political parties of all stripes do not do enough for them.

“Whether it’s the anti-TTIP alliance or Pegida, the political extremes in this country bang their drum the loudest. However, the in-between folks significantly outnumber them: The Cologne Institute for Economic Research estimates they number up to 40 million.” Stern, article “Die Mitte”, published on 16.03.2017

Many of the concerns are echoed across western democracies: Statements such as “our parents had it easier than we do” and “we’ve worked all our lives but we are concerned about paying for our retirement” could have been picked from any newspaper or periodical from numerous European or Anglo-Saxon countries. They were in fact snippets from interviews by German weekly Sternin an article on the importance of the middle class on this year’s election.

According to a recent report by the OECD, Germany has the second highest tax burden of all developed economies. So in a discussion on fairness and the squeezed middle, this comes into play. Welfare dependants those otherwise close to the bottom pay little or no income tax. The very wealthy and business owners have the means and the vehicles to legally avoid or minimise their taxes. By contrast, regular, middle-class employees who have tax deducted on a pay-as-you-earn system are the ones who contribute disproportionately to the system. They’re unhappy, and politicians realise they can’t continue to take them for granted.

 

Is Germany any different from other countries?

First of all, Germans tend to take longer to complete their degrees. It is not unusual in Germany for somebody to still be a student at 30. Even for those who complete their studies sooner, most don’t enter the labour market for their chosen career path until their mid-to-late 20s. It is almost unknown for Germans to finish their Bachelors at 21 or 22. This tends to mean less money saved for buying a home and starting a family, which often then gets deferred. You don’t meet many university educated couples under 30 with children in major German cities.

Germany has a rapidly ageing population and one of the lowest birth rates in Europe. This is putting pressure on healthcare contributions, as the cost of medical care is going up as a result of a skewed population pyramid. Coupled with this, younger people in Germany face uncertainties on their state pension contributions. The state pension system in Germany is not based on an individual contributing to his or her retirement pot. Rather, everyone who is eligible to pay social security contributions pays this into a big pot and it just gets distributed to today’s retirees. In other words, today’s workforce is paying for today’s pensioners. Great in theory but in practice, it is unsustainable with a low birthrate and rapidly ageing population.

Many Germans have never owned a home. Property ownership in Germany, though rising due to low interest rates, is the second-lowest in Europe at just under 52%. Renting rather than buying is of course a personal choice, but it puts renters at a disadvantage to homeowners as they approach retirement. Rent (or mortgage payments) are typically any household’s largest monthly expense. Once the mortgage is paid, homeowners do not have to worry about this as old age pensioners. Renters, on the other hand, continue having this overhead throughout retirement.

As a nation, in general, Germans tend to be more risk-averse with investments. If their savings are not working as hard for them as they could, they are not seeing the benefits of compounding interest and their nest egg for retirement, or wealth-building in general, grows much more slowly. This again impacts later on in life, if somebody has never owned a home or invested savings into the stock market, then their net worth is almost certainly substantially lower than an individual who has made their money work harder for them.

 

hard working middle

 

Where next for those in the middle?

There is consensus that for the first time in a long time, Germany’s politicians are finally acknowledging that the squeezed middle has been neglected, and are being sounded out as a good political battleground. All the major parties away from the extremes of the political spectrum are fighting for their votes and claiming to be the voice of the hard-working average person / family.

Utlimately, the question boils down to this: Will more voters be convinced that the solution to helping Germany’s middle class lies in more traditional, leftist policies of increasing taxes on the wealthy to redistribute to those at the lower end of the spectrum? Or will liberal, market-orientated policies win through, such as cutting bureaucracy to encourage more entrepreneurship and start-ups, or increasing the income tax thresholds to reduce fiscal drag of middle earners being pulled into the highest bands of taxation.

Economic think-tanks such as the DIW and IW agree that on the one hand, just short of €55,000 per year does not make you wealthy in Germany by any stretch of the imagination, despite the Finanzamt’s tax banding. While on the other hand, they accept that inequality has increased sharply despite record employment. Only time, along with the results of the next election and the policies which ensue, shall determine the course the country takes. And ultimately, whether or not it proves to be successful in silencing the growing disquiet from usually placid middle class voters.

 

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