BPA_2010_Cover_A4_ :24 Uhr Seite 1 English edition 2004

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1 English edition 2004

2 English edition 2004 Unofficial translation Questions and Answers Published by Press and Information Office of the Federal Government Berlin Date February 2004 Concept and design Zum goldenen Hirschen Werbe- und Ideenagentur, Berlin This brochure is part of the Federal Government s public relations activities; it is distributed free of charge and not intended for sale. Ordering service By post: Postfach , Bonn Tel.: / ( 12 cents / min. from inside Germany ) bestellung@publikationsversand.bpa.bund.de Internet:

3 Dear fellow citizens, Important and far-reaching reform laws have been passed by large majorities in the Bundestag and the Bundesrat. Some of the changes agreed as part of agenda 2010 have been in force since the beginning of this year. Other laws will come into force over the coming weeks and months. The agenda 2010 reform programme will then take full effect in the course of this year, primarily by strengthening the forces of growth within our economy. The most important change, which took effect on 1 January 2004, was a further reduction in taxes for all citizens, corresponding to total cuts of EUR 15 billion. This will give fresh impetus to the economic recovery that is already clearly underway. And next year, taxes will be cut again, by a further EUR 6.5 billion. The resolutions passed within agenda 2010 are designed to ensure that Germany remains an economic force to be reckoned with. These measures are our response to the increasing influence of globalization on our economy. Fortunately, life expectancy is constantly rising; at the same time, the birth rate has been in steady decline. We have begun to adjust the social security systems accordingly. We all know that if our country is to continue providing a life in prosperity and social security for us all, then changes must be made. Our aim is clear: we want Germany to maintain or reclaim leading positions in all fields. The Innovation Initiative is an expression of this commitment. An ambitious goal, certainly, but by working together we can achieve it. And the basis for this effort is agenda This brochure provides comprehensive information about the reforms that have been passed, as well as details of the resulting changes. Gerhard Schröder

4 Contents Foreword Basic Questions and Answers on agenda 2010 Germany is taking action The Economy Vocational Training Taxation Education and Research Labour Market Health Pensions Support for Families Glossary

5 BASIC QUESTIONS AND ANSWERS ON AGENDA 2010 Why does Germany need agenda 2010? Agenda means what needs doing. agenda 2010 is a package of reforms that brings together what needs doing to secure Germany s future. Germany now faces increasingly tough international competition. The economy must bounce back. The unemployed need to find their way back into work and earn their own living. The labour market must be made more flexible, and obstacles to employment must be removed. Our social security systems must stay functional and economically viable in an ageing society, without placing impossible burdens on the next generation. Non-wage labour costs must remain at acceptable levels for both businesses and employees. The Federal Government is taking action. agenda 2010 was launched in 2003 ( in cooperation with the opposition CDU / CSU on some issues such as health reform ), as the basis for ensuring that our social security systems remain sustainable, for boosting the economy and for creating the potential to reduce unemployment. The aim is for Germany to improve its position in all future-critical fields in the mid term, i.e. by 2010, hence the name agenda Our vision of Germany in the year 2010 is of a country that has regained its leading position both as an economic power and in education and research. What are the core elements of agenda 2010? Last year, through a determined programme of structural reform, the Federal Government gave citizens and businesses new scope for action. Significant tax cuts came into force on 1 January Germany s citizens now have more money to spend to fulfil their needs and wishes. Businesses too, especially SMEs and skilled trades, have had their tax burdens reduced by billions of euro and bureaucratic obstacles have been removed. This opens up increased possibilities for investment. Furthermore, the reforms of the labour market are helping those looking for work to find employment faster. Based on a principle of incentives and demands, long-term unemployed must accept any reasonable offer of work. But they are also now allowed more supplementary income in addition to their state benefits. Miniand midi-jobs are proving a great success. There are also new incentives for self-employment. Are the reforms of agenda 2010 fair in social terms? Yes, because it is fair to give people faster access to work instead of making them permanently dependent on state benefits. It is fair to hand over a sustainable social security system to future generations. In an ageing society, it is fair to expect people to take more responsibility for themselves, especially concerning health care and pensions. It is fair not to cripple citizens willingness to work by excessive non-wage labour costs. It is fair to create equal opportunities for all and to recognize and further people s individual skills. This is the only way to safeguard social justice for the future. Social justice is and remains the foundation of any efficient, modern society based on the principle of solidarity. How can agenda 2010 create more jobs? Jobs cannot be created by politics alone. But politics can make it easier for companies and entrepreneurs to invest in new products and production facilities, thus creating new jobs. The reforms of agenda 2010 facilitate recruitment and make small-scale employment more attractive. Those out of work receive support if they wish to become self-employed. The Federal Employment Agency is concentrating on putting the unemployed back to work, offering swifter and better-targeted placement. This is practical politics for citizens and businesses alike. At the same time, improvements in local government finance enable local authorities to relaunch investments, in turn creating jobs in their communities. BASIC QUESTIONS AND ANSWERS ON AGENDA

6 What are the next steps for agenda 2010? The first steps on the path to Germany s renewal have been taken. With agenda 2010, Germany has proved that it is capable of reform. The Federal Government will rigorously pursue the reform programme it has embarked on. It will make additional efforts in particular to regain a leading role in future technologies. This Innovation Initiative complements the structural reforms of agenda 2010 in a meaningful way. This year and in the years to come, the Federal Government will be concentrating on education, research and development. These are to be years of innovation, a vital prerequisite for growth and prosperity. Innovation does not mean just renewal in terms of technical progress. Innovation also means the openness of society as a whole to new things: an innovation-friendly, social culture that promotes independence and courage, mobilizes creativity, and emphasizes the importance of curiosity and human knowledge. With this Innovation Initiative, the Federal Government wishes to promote such a society. Achieving this will require close cooperation between politics, business and science. The aim is for Germany to be successful as a strong business location, a modern country that stands for innovative products and services, leading the world in research and technology. BASIC QUESTIONS AND ANSWERS ON AGENDA

7 The Economy Promoting SMEs. Strengthening investments. Stimulating economic activity. Page 7 Labour market Putting more people to work faster. Incentives and demands for the unemployed. Pages Vocational Training A universal right. Only well-trained young people can safeguard our future. Page 8 Pensions Creating security for senior citizens. Making pensions secure and affordable in the long term. Pages Taxation More money in people s pockets. Making taxes fair, transparent and simpler. Page 9 Health Maintaining a functioning health system. Raising medical standards and keeping quality healthcare affordable. Pages Education and research For an intelligent future. Modernizing research and higher education. Pages Support for families Opportunities for all. Creating a balance between work and family. Page 18 GERMANY IS TAKING ACTION 6

8 THE ECONOMY The Challenge Anyone who is or has been out of work knows that unemployment is a distressing experience. The longer it lasts, the harder it gets to return to permanent employment. But ongoing high unemployment levels are also a burden on public funds and social welfare systems, since those who are not working cannot pay taxes or other contributions. The Federal Government therefore considers the fight against unemployment in particular the reintegration of young and long-term unemployed into the labour market, to be its most urgent task. The Answer Politics cannot create jobs. But it can help Germany s economic motor get back up to speed. This is the prerequisite for new jobs. agenda 2010 provides reductions in non-wage labour costs, significant tax cuts, incentives for investment and the removal of unnecessary bureaucracy. The reform of local government finance gives local authorities more scope for investment. Another key issue is strengthening the power to innovate. New credit programmes from the Reconstruction Loan Corporation ( KfW ) one for the modernization of private housing and one for local authorities offer more jobs and increased quality of life locally. New forms of employment and self-employment, as well as innovative back to work programmes from Employment Agencies, are stimulating the labour market. As well as receiving better support, job-seekers are also subject to increased demands. The work placement process is being accelerated. What is the Federal Government doing to help unemployed people find work faster? The Federal Employment Service in Nuremberg has been renamed Federal Employment Agency and is being restructured as a modern service provider. At present, placement officers are responsible for approximately 400 job-seekers each. After the restructuring, they will be able to focus their attention on just 75 candidates. This should considerably reduce periods of unemployment. Job seekers will begin earning again sooner, easing the burden on the social security systems. What has changed concerning protection against unfair dismissal? For craft trades and small businesses, it is now easier to recruit new staff to cope with increased orders. They can now employ ten ( instead of five ) people without having to offer legal protection against unfair dismissal. For employees who already enjoy protection from dismissal, nothing has changed. Why were the regulations governing skilled trades changed? Establishing and taking over businesses in skilled trades has been made easier. This creates new jobs. Experienced journeymen in nearly all trades can now set up their own business without a master craftsman s diploma. Unlike in the past, they now have essentially the same career opportunities as journeymen from other European Union countries. This makes training in skilled trades more attractive. As a result of this reform, skilled labour can become cheaper, thus also combating moonlighting. Who benefits from the two Reconstruction Loan Corporation ( KfW ) programmes? The programme for modernizing accommodation can be used by all homeowners, private landlords and housing associations. Interested parties should submit an application through their bank as soon as possible, since the low-interest loans are only available for as long as the funds last. And the growth stimulation programme helps local authorities to finance investments in their infrastructure. The Federal Government is making available over EUR 1 billion for these two programmes. Germany is the world s leading exporter Billion US $ ,919 47,543 58,733 60, * Exports in billions of US $ Monthly averages 57,771 51,050 USA Germany * For 2003: Average up to and including July 2003 (own calculations) Source: OECD monthly statistic, Statistique mensuelle du commerce internationale, December 2003 THE ECONOMY 7

9 VOCATIONAL TRAINING The Challenge Every year, hundreds of thousands of young people in Germany seek vocational training, and not all of them are successful. It is crucial, however, for each individual to develop his / her own skills and get the best possible start in working life. In Germany as in other countries, a sound training opens up good career opportunities. Skills and creativity are essential prerequisites if Germany is to defend its position among the world s leading economies. Eighty percent of traineeships and apprenticeships are offered by small and medium-sized businesses and within the skilled trades. Companies that do not train young people share the responsibility for shortages of skilled labour in the future. The Answer The Federal Government s goal is that all those who want and are qualified for a traineeship or apprenticeship should obtain such a position. Together with trade associations and unions, the Federal Government has launched a Training Offensive. In 2003, this considerably reduced the lack of training places. The Training Offensive continues this year. The Federal Government expects the business community to fulfil its duty to train young people, as a matter of self-interest and out of a sense of responsibility. Companies that train new staff today secure themselves a competitive advantage for the future. created trades with limited theoretical content, even young people with learning difficulties can obtain a qualification within just two years. These include trained staff for the postal and freight sector, the hotel and restaurant sector, and skilled interior fitters. This makes it more attractive for businesses to train the full range of young people. Can training only be offered by master craftsmen? No. Besides master craftsmen, experienced freelance journeymen are now also permitted to offer training in skilled trades. In addition, all those no longer requiring a master craftsman s diploma to practice their trade may offer training, provided they have the necessary skills. How is the Federal Government helping young people who try but fail to find training? The Federal Government is helping young recipients of social welfare and unemployment benefits between the ages of 15 and 25 with the JUMP Plus programme that offers opportunities for qualification and employment. Young jobless people receive special help from the Federal Employment Agency, where special placement officers help them enter working life. The programme was launched on 1 July 2003, and runs until the end of Companies reasons for offering training Young staff geared to company s requirements 94 % Skilled workers not available on the job market 90 % Pick of the crop when offering trainees jobs 74 % Can the Federal Government increase the business community s willingness to provide training? Enhances company s image 57 % Cost-effective way to find staff 35 % Source: Federal Ministry for Education and Research Yes. To achieve an overall increase in the willingness to provide training, the Federal Government has created corresponding incentives. Bureaucratic obstacles have been removed. Companies no longer require a formal diploma to offer training, and presenting proof of the required specialist and training skills to the chamber or relevant authorities is sufficient. The range of trades in new fields of activity has also been developed to take new requirements in the business world into account. In certain newly VOCATIONAL TRAINING 8

10 TAXATION The Challenge After years of stagnation, Germany s economy is now bouncing back. It is vital to make use of and reinforce this recovery. Although we are the world s leading exporter, we still need to stimulate demand at home. The Answer From 1 January 2004, the tax burden on both citizens and businesses will be massively reduced. This puts more money in taxpayers pockets, with income tax cut by a total of EUR 15 billion. In 2004, the basic income tax rate is being reduced to 16 percent, the top rate to 45 percent. The basic tax allowance is being raised to EUR 7,664 earnings below this amount are not subject to taxation. allowance and the general allowance for income-related expenses ( that also came into force on 1 January 2004 ), an employee who travels 20 km to work will have EUR 447 more in his / her pocket. Are the tax reforms balanced in social terms? Yes. Those earning low wages and salaries benefit more: the tax-free part of their income, the basic tax allowance, rose on 1 January 2004 from EUR 7,235 to EUR 7,664. This increase was originally scheduled for 1 January At the same time, the basic income tax rate was lowered from 19.9 to 16 percent These tax cuts will stimulate consumption and encourage companies to invest, leading to increased growth and employment. From 1 January 2005, citizens will benefit from further tax cuts worth around EUR 6.5 billion. This measure has already been approved. The basic income tax rate will then fall to 15 percent, the top rate to 42 percent. Five years ago, the basic rate of income tax was just under 26 percent, the top rate 53 percent. These tax cuts will benefit all those who pay income tax. But the main beneficiaries are employees, families with low and average incomes, and small and medium-sized businesses (SMEs). These groups enjoy an above-average reduction in their tax burden. How much more money will I have in my pocket in 2004? In comparison to 2003, citizens will pay an average 7 percent less income tax in For low wage and salary earners, the effect is even greater. One example: in 2004, a single person with no children and annual gross income of EUR 40,000 will pay EUR 553 less tax than in In spite of reductions in the mileage TAXATION 9

11 EDUCATION AND RESEARCH The Challenge Germany s wealth is based on the knowledge and skills of its citizens. Only high standards of knowledge and education can ensure Germany a place among the world s leading technological powers. The PISA Report and other international studies have revealed shortcomings in our education system. Our schools are not sufficiently able to provide all children and young people with the support they need to develop their individual skills. Deficits were found in the support given both to those with learning difficulties and to the highly gifted. In Germany, more than in almost any other comparably developed country, social origins are a determining factor in success at school and subsequent academic careers. In international comparisons, German universities have become less attractive. The number of school leavers per year going on to higher education is also lower than in other industrialized nations in Europe. While the current OECD average is 47 percent in any given year, the figure in Germany is 35 percent. Why is the Federal Government investing so much in education and research? We live in a knowledge society. Education and research are crucial in ensuring that Germany is capable of maintaining its current level of prosperity. Education is the key to a successful career which in turn benefits the economy. Research is essential to generate ideas and concepts that lead to new products and techniques, in turn stimulating growth. In a climate of global competition, this is the only way to safeguard existing jobs and create new ones. As a result of the Federal Government s reform of the student grant programme ( BAföG ), 162,000 more students now receive funding. This has led to a run on the universities, with the consequence that the number of young people in higher education in Germany has risen above two million for the first time. The Federal Government s Innovation Initiative will focus increased attention on the promotion of excellence. The federal states also have a contribution to make here. The Answer Over the last five years, the Federal Government has raised spending on education and research by more than 25 percent to over EUR 9 billion in For 2004, a further increase to over EUR 9.7 billion is planned. But the weaknesses of our education system can only be remedied by comprehensive educational reform. The Federal Government considers nationally binding standards, improved teacher training and the creation of an independent education agency to be essential. These measures should enhance the performance levels of all school pupils. In addition, the Federal Government is concentrating its research funding on fields with particularly long-term potential, with the main focus on IT and biotechnology. The key criteria for funding should be whether projects have an impact on growth and employment. The aim is to make 2004 a year of innovation in education, research and development. How can Germany achieve better PISA results? Although the Federal Government has no direct influence on the schooling policies of the federal states, it is aware of its overall responsibility for education policy. The government programme entitled Future Education and Supervision makes a decisive contribution to improving educational opportunities in Germany. Between 2003 and 2007, EUR 4 billion will be spent on establishing and maintaining all-day schools. This form of schooling offers pupils longer and more intensive supervision and encouragement, as shown by experience in countries that out-performed Germany in the PISA Report. How is the Federal Government fitting higher education for the future? With the creation of junior professorships, the Federal Government has opened up new perspectives for young scientists at German universities. The introduction of Bachelor and Masters degree courses allows students to obtain a qualification in just three years, as well EDUCATION AND RESEARCH 10

12 as making German universities more competitive internationally. This will make studying in Germany more attractive and facilitate international exchanges. We are investing more in education and research Millions of euro 9,500 9,000 8,521 8,834 9,099 9,706* 8,500 8,000 7,500 7,550 7,629 7,438 7,470 7,472 7,200 7, ,263 7,513 7,701 Expenditure for education and research in millions of euro * Draft budget (as of November 14th, 2003) Source: Federal Ministry for Education and Research EDUCATION AND RESEARCH 11

13 LABOUR MARKET The Challenge On average, unemployed people in Germany remain out of work for longer than in other countries. The German labour market is not sufficiently dynamic. The process for placement of job seekers is too lengthy and complicated. The parallel systems of unemployment and social security benefits represent an expensive solution. The Answer The Federal Government has introduced a number of laws aimed at modernizing the labour market. The Hartz Laws open the door to new employment opportunities. Personnel Service Agencies and Job Centres accelerate and improve the placement of job seekers. With the help of special aid for the creation of new businesses transitional grants and support for one-person start-ups ( Ich-AG, or Me plc ) thousands of formerly unemployed people have become self-employed. The mini-job model is a success. The Capital for Work programme offers a financial package of up to EUR 100,000 to make it easier for small and medium-sized businesses to employ job seekers on a permanent basis. From 1 March 2004, an extension of this programme entitled Capital for Work and Investment will fund investments that create new jobs or safeguard existing ones. The Federal Employment Service in Nuremberg is being restructured as a modern service provider and has been renamed Federal Labour Agency. From 1 January 2005, unemployment and social welfare benefits for employable job seekers in need of assistance will be combined as the new basic income for job seekers ( Unemployment Benefit II ), with more effective attention being paid to the family situation of recipients than in the past. Increased supplementary income will also be permitted. For example, for a family of three, the maximum monthly allowance is EUR 207 in Germany s western states and EUR 199 in the eastern states. This provides an added incentive to work. What do the Personnel Service Agencies do? Personnel Service Agencies ( PSAs ) employ people who are out of work. They receive a work contract, are paid at rates defined by the tariffs for supply workers, and enjoy social insurance cover. They are hired out to companies on a temporary basis. For employees, this creates a chance of being recruited by the company on a permanent basis. During periods where no supply work is available, the PSA provides support for vocational training. What help is being offered to the long-term unemployed? The long-term unemployed are people who have been out of work for one year or more. Especially in economically underdeveloped regions, there are large numbers of long-term unemployed, for whom the Federal Government has set up a special programme entitled Work for the Long-term Unemployed. For a limited period of two years, 100,000 long-term unemployed over the age of 25 will receive financial support. In addition, the long-term unemployed are participating in above-average numbers in the Federal Employment Agency s active work promotion measures. How do I set up a Me plc? Unemployed individuals wishing to become selfemployed as a Me plc receive support from their Employment Agency through a system of graded monthly subsidies: EUR 600 for the first year, EUR 360 for the second and EUR 240 for the third. This subsidy is not subject to tax and must not be repaid. If the new enterprise succeeds during this start-up phase and makes an annual profit of over EUR 25,000, the funding ends the following year. What are mini-jobs and midi-jobs? Mini-jobs involve small-scale employment with maximum monthly income of EUR 400. For the employee, these earnings are not subject to taxes or other deductions. The ( fixed level ) contributions due are paid by the employer. This also LABOUR MARKET 12

14 applies for mini-jobs in private households. Since the mini-job model was introduced on 1 April 2003, over one million new mini-jobs have been created. Midi-jobs involve small-scale employment with monthly income of between EUR 400 and EUR 800. Here, the social insurance contributions payable by the employer increase incrementally up to the full rate. Mini-jobs on the rise 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, ,900,000* 6,127,605 4,183, Numbers in small-scale employment (including short-term jobs and work in private households) * estimated figure Source: Federal Miner s Insurance Company Mini-Job Centre LABOUR MARKET 13

15 HEALTH The Challenge In Germany, all those with statutory health insurance cover, regardless of their age, income and sex, are entitled to the necessary medical care. This costs a great deal of money. But the revenue of health insurance companies has fallen. One reason for this is the high rate of unemployment caused by insufficient economic growth. Another problem faced by health insurers is that the average age of the population is constantly rising, with not enough young people. At the same time, the cost of health care is constantly rising, as medical progress makes possible new therapies which are often very expensive. But our health system also suffers from inefficient structures, resulting in insufficient, excessive or misdirected care. The available funds are not always used in an economical and targeted manner. safeguard and improve the quality of medical treatment for all patients? All those with statutory health insurance cover continue to be entitled to any medical treatment that should be necessary, regardless of their income and age. The health reform strengthens the rights of patients. Insurance cover now entitles people to demand a patient s receipt from their doctors. From 2006, every insured person will have an health smart card. The information stored on these cards will help avoid expensive multiple examinations. Doctors are now obliged to undergo continual training. They are now allowed to found medical care centres for the treatment of outpatients. An independent institute for quality and cost-efficiency in the health care sector will assess the effectiveness of drugs and issue recommendations for the treatment of specific illnesses. The Answer The health reform package that was approved by both government and opposition in the autumn of 2003, coming into force on 1 January 2004, safeguards the high standards of health care in Germany in comparison with other countries. The reform will help to reduce costs. Increased competition in the health care sector and more self-responsibility on the part of individuals will ease the burden on health insurance companies. This will have a positive effect on statutory health insurance contributions. In 2004, the health reform will ease the burden on statutory health insurers by EUR 10 billion. By 2006, the annual reduction in costs will rise to EUR 23 billion. As a result, the average rate of contributions should fall to well below 14 percent of gross income, falling below 13 percent from The measures will help ensure that Germany s health care system remains financially viable in the future. All parties have a contribution to make the health services, the insurance companies, those paying their insurance contributions, and patients. The necessary burdens are distributed fairly. What is the Federal Government doing to How is the burden on statutory health insurance being eased? The Federal Government is reducing the burden on statutory health insurance companies in the field of non-insurance benefits. As a result, as an example of meaningful health policy, maternity benefits are being financed by increased taxation of tobacco. Other non-insurance benefits, such as funeral allowances and one-off childbirth benefits, have been abolished. From 2005, a separate premium will be payable to cover dentures and from 2006 the same will apply for sick pay. As a result, individuals statutory health insurance contributions will decrease. What changes came into effect on 1 January 2004? New regulations now apply concerning surcharges, e.g. for medicines. Maximum limits for additional payments ( 2 percent of gross annual income, 1 percent for the chronically ill ) protect individuals from being charged more than they can afford. For visits to general practitioners and dentists, a quarterly fee of EUR 10 will be charged. This fee is not charged for preventive check-ups, for referrals within the same quarter, or for children and young people under the age of 18. HEALTH 14

16 What does health cost? Net administrative costs Home health care Spa treatments Other expenditure Treatment by doctors Dental treatment Dentures Transport costs Sick pay Hospital treatment Total expenditure Euro 142,614 billion Medicines from pharmacies Medical supplies Cures and remedies Breakdown of costs for statutory health insurance companies in 2002 in billions of euro Source: Federal Ministry of Health and Social Security HEALTH 15

17 PENSIONS The Challenge People are living longer. This is the happy consequence of more humane working conditions and ever-improving health care. As a result, pensions are being drawn on for to thirds as long again as they were in 1960, with the average length of time a person claims on his / her pension rising in that period from 9.9 years to the current figure of 16.6 years. Whereas today there are four people of working age for every pensioner, by 2030 there will be just two. Germany is currently home to approximately 13.5 million senior citizens. By 2030, the working age population ( 15 to 64 years old ) will have shrunk by over 7 million. In contrast, the number of people eligible to receive pensions will have risen by over 8.5 million to over 22 million. High unemployment means that fewer and fewer people are paying pension contributions. Many people no longer spend their whole lives in full-time employment in the same profession. Hundreds of thousands have taken the opportunity of early retirement offered by businesses and policy-makers. Taken together, these factors create problems for pension insurance cover. Reforms are inevitable. The Answer People can continue to count on their living costs being covered in their old age. Statutory pension insurance is and remains the main pillar of this security. But it must be supplemented by a further pillar, private pension schemes. In a first important reform step in 2002, the Federal Government introduced a capital-funded state supplement to statutory pension cover, the Riester Pension. To make this option more attractive, the application process is being considerably simplified. In addition, pension scheme contributions are being gradually freed from tax. This gives those in work increased financial scope, allowing them to afford supplementary Riester Pension cover. To make up the pensions shortfall of billions of euro, the Federal Government has passed some measures for immediate effect and others whose effect will be felt in the medium to long term. They are designed to safeguard the financial basis of the pension system. These measures allow the rate of pension contributions to be held steady at 19.5 percent of gross income. This stabilizes non-wage labour costs and supports policies focusing on growth and employment. What does the freezing of pensions mean? On 1 July 2004, there will be no increase in pensions. From 2005, the yearly increase will be calculated on the basis of a new pensions formula. The new formula will include a sustainability factor that takes into account changing ratios of those paying instalments to those drawing pensions. From 1 April 2004, new pensioners will receive their payments at the end of the month. How will the pension payment rate develop in the long term? In the period to 2020, the rate should not rise above 20 percent, remaining below 22 percent thereafter until This will be made possible above all by the sustainability factor. Will the retirement age be raised? The Federal Government does not plan to raise the legal retirement age of 65 years. Between 2006 and 2008, it in fact plans to raise the de facto retirement age step by step from 60 to 63, while upholding confidence in the system. For this reason, incentives for early retirement are being removed, as are regulations in labour and wage law that discourage the recruitment of older employees. Training schemes and adequate working conditions should make it easier for older citizens to return to work. What changes will there be for pensioners concerning nursing care insurance? In the past, nursing care insurance was funded in equal parts by state pension funds and by pensioners themselves. However, the pensioners who enjoy this cover today often only paid nursing care insurance contributions for a few years, if at all, during their working lives. From 1 April 2004, pensioners will be asked to cover PENSIONS 16

18 the full cost of nursing care insurance. In 2004, the rate will remain stable at 1.7 percent. This means, for example, that someone receiving a pension of EUR 1,000, who previously paid EUR 8.50 for nursing care insurance, will be charged EUR 17 in future. Demographic change : : : : : 1 Numbers paying pension contributions per pensioner Source: Rürup Report PENSIONS 17

19 SUPPORTING FAMILIES The Challenge Children are the future of our country. This is why they need our special attention, regardless of the family situation in which they grow up. Whatever the social status of their parents, children need the best possible educational opportunities from the outset. This calls for high-quality pre-school education geared to individual needs. This also enhances the compatibility of family and working life. Parents require good, reliable childcare in nurseries and kindergartens and sufficient numbers of places in all-day schools. It should be perfectly possible to combine having a family and a career. The Answer agenda 2010 has positive consequences for families. They are receiving support and targeted assistance, with the focus on increased options for childcare. Children should be supported more effectively and from an earlier age to give them better opportunities for the future. The Federal Government is relieving the burden on local authorities as part of its reform of local government finance, and from 2005, local authorities will be expected to spend up to EUR 1.5 billion each year to provide care for children under three years. The Federal Government will give the federal states a further EUR 4 billion in the period to 2007 to develop all-day schools. This financial aid will help to make family and working life more compatible in the future. Families also benefit from the tax reform. From 1 January 2004, single parents will be granted a tax allowance of EUR 1,308. From January 2005, parents with low incomes that cover their own requirements but are not sufficient to support their children will receive an additional monthly child subsidy of up to EUR 140. What else is being done to make family and working life more compatible? Besides childcare, it is also important to create a family-friendly working culture. Together with leading business associations and the trade unions, the Federal Government is supporting projects that develop employment models geared to the needs of families, helping to bridge the gap between family and working life. Such models include flexible working hours, modern organization of labour, and childcare at the workplace. They also include programmes for returning to work after parental leave. Anyone committed to making Germany a better place for children should not look to politics alone. Positive attitudes to children begin in the workplace and in each person s own neighbourhood. We support families What financial support are families receiving? In 1998, the Federal Government provided support for families worth EUR 40 billion; the figure for 2003 is almost EUR 59 billion. In 1998, monthly child benefit was EUR 112 for first and second children and EUR 154 for each further child. Today, it is EUR 154 for every child and EUR 179 from the fourth child. For a family of four entitled to housing benefit, housing benefit payments have risen from an average of EUR 110 in 1998 to an average of around EUR 160 in Funding for students has been improved, with a new increase in numbers of students receiving student grants ( BAföG ). Increase in child allowance in euro for the first and second child Source: Federal Ministry of Finance SUPPORTING FAMILIES 18

20 THE MOST IMPORTANT KEYWORDS RELATING TO AGENDA 2010 All-day school All-day schools facilitate increased quality of teaching, individual coaching and family-oriented care. They should break down the educational divide, prevent social marginalization and help improve ƒpisaratings. Between 2003 and 2007, the Federal Government will provide financial support for all-day schools totalling EUR 4 billion. Assessable income ceiling The assessable income ceiling determines the portion of an individual s pay that is subject to deductions for pension, health, nursing care and unemployment insurance. Income in excess of this limit is not subject to deductions. In 2004, the income ceiling is EUR 5,150 ( western states ) and EUR 4,350 ( eastern states ) for pension and unemployment insurance, and EUR 3, ( east and west ) for health and nursing care insurance. Average pension The average pension is a figure calculated on the basis of all pensions currently being paid in Germany. According to the Federation of German Pension Insurers ( VDR ), the average pension for male former salary earners in 2002 was EUR 1,172 in Germany s western states and EUR 1,209 in the eastern states. Women received average pensions of EUR 582 ( west ) and EUR 710 ( east ). Basic income for job seekers From 1 January 2005, ƒ Reducedrate unemployment benefit and ƒ Social welfare benefits will be combined for all for employable job seekers and their non-working spouses and children ( family group requiring welfare ). This basic income for job seekers (ƒunemployment Benefit II) will be coupled in particular with intensified counselling and supervision of those entitled to benefits. Those receiving ƒ Unemployment Benefit II enjoy statutory health, pension and nursing care insurance cover. They will also be permitted to earn higher levels of supplementary income besides Unemployment Benefit II. In addition, penalties for unjustified refusal to accept a reasonable job offer will create greater incentives to work. Capital for Work/Capital for Work and Investment If a small or medium-sized business is willing to take on an unemployed person ( or a trainee ) but requires financial assistance to do so, a loan of up to EUR 100,000 per job is available from the Federal Government s funding bank, KfW SME Bank. The Capital for Work programme is undergoing further development and from 1 March 2004, under the new name of Capital for Work and Investment, it will finance investments that create new jobs or safeguard existing jobs. Child-rearing allowance For children born in or after 2001, mothers or fathers who look after and raise their children themselves while working less than 30 hours a week receive a means-tested monthly child-rearing allowance: either a maximum of EUR 300 until the child s second birthday or a maximum of EUR 450 until the child s first birthday. Child subsidy From January 2005, low-income parents who earn enough to cover their own living costs but not those of their children will receive a monthly child subsidy of up to EUR 140. Citizen s Insurance Citizen s Insurance is a model discussed outside of agenda 2010 according to which all citizens would join the Citizen s Insurance scheme, with contributions independent of income levels but extended to all forms of income. The aim of this model is to place the financing of items previously covered by health insurance on a new basis. Additional items could be covered on a voluntary basis by private health insurance policies. This model was proposed by some members of the ƒ Rürup Commission as an alternative to the idea of a ƒper-capita lump sum. Commission on Federalism In October 2003, Germany s parliament, the Bundestag, and the legislative body that represents the interests of Germany s states at the national level, the Bundesrat, appointed a commission to make recommendations concerning a restructuring of the legislative powers and financial relations between federal and state governments. This Commission on the Modernization of the Federal Structure of the State is due to submit its proposals on an amendment to Germany s constitution, the Basic Law, in the course of Among other things, the commission will examine the competence and participatory rights of the federal states in legislative procedures at national level, to avoid the kind of drawn-out conciliation proceedings required for agenda Craft Trades Law Among other things, the Craft Trades Law regulates the practice of skilled trades, vocational training in skilled trades, master craftsman diplomas and titles, and the organization of trades. The Craft Trades Law and other legislation on trades was amended with effect from 1 January A master craftsman s diploma is now required for fewer trades. Demographic development Demographics describes the age distribution within a society. In Germany, the population is ageing: the birth rate is low, while life GLOSSARY 19

21 expectancy is on the rise. By 2050, the number of people under 20 will sink from today s figure of 21 percent to just 16 percent of the population, while the number of over-60s is set to rise over the same period from 24 to 37 percent. Today, there are 100 working-age men and women (15 65 years old ) for every 44 people over 65 in 2050, the ratio will be 100:78. This rise in the number of older citizens represents a major challenge for the ƒ Social security systems. Downstream taxation of pensions The Federal Government intends to reorganize the taxation of pensions and switch to the downstream taxation model. The corresponding senior citizens income bill is already on its way. This new legislation is in accordance with a ruling by the Federal Constitutional Court from Downstream taxation means that from 1 January 2005, contributions to pension insurance, currently deducted from taxable income, will gradually be exempted from tax. Conversely, pensions will gradually become subject to taxation. As a result, the burden on taxpayers will be considerably eased, and in the years to come, the majority of pensioners will not be subjected to an increased tax burden. Federal Employment Agency ( formerly Federal Employment Service) On 1 January 2004, the central administrative body changed its name from the Federal Employment Service to the Federal Employment Agency, and all local Employment Offices became Employment Agencies. This authority is currently being restructured to focus increased attention on its core task, placing people in training and employment (ƒhartz III). Growth forecasts Growth forecasts make predications about the development of a given economy. In Germany, the most important forecasts are drawn up by the Five Wise Men ( Council of Experts for the Assessment of Overall Economic Development ), who usually present their findings in November. Twice a year, in spring and autumn, Germany s six leading institutes of economic studies draw up a joint forecast of the country s economic development. For the first time in three years, all institutes have predicted a marked upturn in the economy in Hartz Commission An expert commission on modern labour market services appointed by the Federal Government and headed by the Director of Human Resources at Volkswagen AG, Dr. Peter Hartz. The commission submitted its report in August Its proposals for cutting unemployment and for restructuring the Federal Employment Service formed the basis for the Federal Government s reforms of the labour market (ƒhartz I to ƒ Hartz IV). Hartz I The first law on modern services in the labour market is designed to open up new opportunities for employment and create new jobs. ƒpersonnel Service Agencies place unemployed people in temporary work, providing a bridge to the primary labour market. Hiring out of staff ( temporary work, loan employment ) is being liberalized; at the same time, fair pay for temporary work is guaranteed. Quality and speed of placement are to be improved, in particular by means of an early start to looking for work ( obligation to visit the Employment Agency as soon as notice of termination of employment is received ). Recruitment of older workers is being promoted. Hartz II The second law on modern services in the labour market covers social insurance payments and taxation for ƒ Mini-jobs, financial support for setting up a ƒ Me plc, and the establishment of ƒ Job Centres. Hartz III The third law on modern services in the labour market came into effect on 1 January 2004, providing the legal framework for restructuring the Federal Employment Service as the Federal Employment Agency a modern, customer-oriented service provider. This organizational reform will be supplemented by simplification of legislation concerning payments and funding through unemployment insurance. This will free more staff to concentrate on work placement. Hartz IV The fourth law on modern services in the labour market covers the merging of ƒ Reduced-rate unemployment benefit and ƒ Social welfare benefits for employable persons in need of assistance to create the ƒ Basic income for job seekers (ƒunemployment Benefit II) from 1 January This new benefits system will be the shared responsibility of the ƒfederal Employment Agency and of municipal and local authorities, cooperating closely with the ƒ Job Centres on the integration of job seekers and on payment of benefits. Herzog Commission Named after the former Federal President Prof. Roman Herzog who headed this commission. It was appointed by the national executive of the Christian Democratic Union (CDU ) with a view to safeguarding the future viability of health, nursing care, pension and unemployment insurance. The commission submitted its final report on 30 September GLOSSARY 20

22 High-Tech Masterplan The High-Tech Masterplan is part of the Federal Government s ƒ Innovation Initiative. The primary aim here is to improve access to venture capital. As well as promoting the necessary links between science and industry, legal and commercial conditions are being oriented more strongly still towards innovation. Incentives and demands This is the guiding principle of the proposals made by the ƒ Hartz Commission, whose report submitted in August 2002 supplied the basis for the laws concerning reform of the labour market. New instruments and support packages (ƒme plc, ƒpersonnel Service Agency) and more intensive counselling aim to give the largest possible number of unemployed people the chance to re-enter the labour market as soon as possible. At the same time, however, those concerned will be expected to make increased efforts of their own in the search for new employment. The principle of incentives and demands also shapes the new ƒ Basic income for job seekers. Innovation Initiative Besides structural reforms, innovation is a further key component of agenda A country like Germany, with few raw materials and high wages, can only safeguard and raise its standard of living through innovative products, and through knowledge and skills. The aim is to ensure that Germany remains a strong business location where innovative products are developed and sold and which is characterized by worldwide technological leadership. To this end, the Federal Government launched a wide-ranging Innovation Offensive for Job Centres The Job Centres in the Employment Agencies are the new first points of contact for job seekers, offering comprehensive support in all matters of placement and benefits service from a single source. This puts an end to the previous division of tasks between Employment and Social Welfare Offices. Long-term unemployed Unemployed persons who have been out of work for one year or longer. Me plc ( Ich-AG ) A new form of self-employment for the formerly unemployed, funded by a start-up grant from the Employment Agency. This subsidy will be available for an initial phase of three years after the business is established. The monthly payments are graded: EUR 600 in the first year, EUR 360 the second, and EUR 240 the third. The entrepreneurs also receive statutory pension insurance cover. In health and nursing care insurance, they have access to cover at reduced rates. Since this package was introduced on 1 January 2003, around 93,000 Me PLCs have been founded ( as of December 2003 ). Mini-jobs/Midi-jobs Since 1 April 2003, new regulations have been in force concerning smallscale employment, allowing tax-free monthly earnings of up to EUR 400 ( mini-jobs ), with the employer paying a lump sum of 25 percent via a simplified registration procedure to cover taxes and social security contributions. For mini-jobs in private households, employers must only pay around half of this lump sum. One mini-job also remains tax-free if it is carried out alongside a main occupation. Any further mini-job is then subject to tax. For jobs with monthly income between EUR 400 and EUR 800 ( midi-jobs ), the level of social security contributions payable by employees increases step-by-step to the full amount; the employer must pay the social security contributions in full. Non-wage labour costs Non-wage labour costs are the contributions to pension, health, nursing care and unemployment insurance. They are split equally between employer and employee. In 2003, non-wage labour costs made up around 42 percent of gross pay ( pension insurance: 19.5 percent; health insurance: on average 14.3 percent; nursing care insurance: 1.7 percent; unemployment insurance: 6.5 percent ) up to the ƒ Assessable income ceiling. The Federal Government aims to reduce non-wage labour costs as a way of stimulating economic growth and employment. Pension adjustment Pension adjustment is the name given to the annual increases in pension payments. Pensions are usually adjusted on 1 July each year. The increase is always in line with the development in wages. Due to the current difficulties of pension insurers, and in order to stabilize pension contributions, pensions will not be adjusted in Pension rate In 2002, the net pension rate was 68.9 percent of the average net income for the same year. The gross pension rate was 48 percent of the average gross income. Both these figures refer to a standard pensioner having paid instalments on an average income for 45 years. Per-capita lump sum This is a model discussed outside the context of agenda 2010 for financing health insurance. The aim of the per-capita lump sum ( also called health premium ) is to cut the link between health insurance contributions and labour costs. The insured would all pay the same amount for health insurance, with low-wage earners receiving a tax-funded subsidy. The contributions payable by employers would be fixed and paid GLOSSARY 21