SOCIAL SECURITY IN THE UNITED STATES AND THE FEDERAL REPUBLIC OF GERMANY: A COMPARISON OF PUBLIC AND PRIVATE BENEFIT SYSTEMS

492

SOCIAL SECURITY IN THE UNITED STATESAND THE FEDERAL REPUBUC OF GERMANY:

A COMPARISON OF PUBUC AND PRIVATE BENEFIT SYSTEMS

Hugh Mosley, University of Maryland

Comparative studies of national social welfare system focus almostexclusively on public social welfare institutions and neglect the continuingimportance of private social welfare programs. *̂ While this emphasis isunderstandable in light of the historical ascendancy of the welfare state, itmay distort analysis, particularly with respect to countries like the UnitedStates where public programs have developed more slowly. It also omits animportant comparative dimension in a period in which the public/privatemix and policy issues with respect to the appropriate relationship betweenthese two components of social welfare systems are of central importance.

Chart 1 illustrates schematically three basic types of social welfaresupport systems: private sector social welfare programs, and informalcommunity welfare activities. A further distinction is made betweensupport which is a right acquired through participation in coveredemployment and public and private support which is given selectively,usually means-tested, with the ideological connotations and discretionarypractices of public or private charity. Because of its informal andpersonalized nature, community welfare activity can only be selective aidand is distinguished from the state and private sector social welfareprograms by its non-institutional character.

These three types of social welfare support, with their sub-types, arenot alternative systems but layers of social welfare support which arepresent in a varying mixture in different societies and at different times.Our focus in this paper is on social welfare programs for wage and salaryworkers, which are typically organized as social insurance programs and inwhich entitlement to support is acquired through employment (Ia and Iia inChart 1). It is this type of social welfare program and not selective publicassistance which is the core of modern social welfare systems, although thelatter receives disproportionate attention in the United States.

This paper compares the distinction of public and private employeesocial benefits in United States (U.S.) and the Federal Republic of Germany(F.R.G.). Such a comparison is interesting from the standpoint ofpublic/private relations in social security systems because the countriesrepresent relatively extreme cases/policy choices. Private programs areonly of marginal importance in the strongly public German system but areparticularly important in the U.S.

The paper proceeds as follows:

(I) A comparison of the public/private benefit composition of the twosocial security systems;

(II) A discussion of possible distributional consequences of reliance onprivate programs;

Policy Toward Public-Private Relations 493

(III) A comparison of the distribution of public and private benefits in theU.S. and F.R.G.;

(IV) A comparison of the relevant private sector structures (laborrelations systems) which shape the distribution of private benefits;

(V) Some concluding observations.

I.In the Federal Republic statutory social security programs

(retirement and disability pensions, health and accident insurance, sick pay,unemployment insurance, and maternity leave) are heavily predominant.Its more fully developed public systems, with its generally high level ofbenefits, leaves relatively little unmet need for private occupationalschemes. By contrast the United States not only lacks a comprehensivepublic system of health insurance, sick pay and maternity leave, but benefitlevels are also generally lower even when corresponding programs do exist,as in the case of unemployment compensation insurance and workmen'scompensation (See Mosley, 1981).

The United States is a "welfare state laggard" (Ia in Chart 1) incomparison with advanced welfare states such as the Federal Republic ofGermany, but such a one-dimension comparison of social welfare programsis misleading. Private sector employee social benefits (Ila in Chart 1) havedeveloped especially strongly in the United States. Such private sectorsocial welfare programs, which are either negotiated by labor unions orvoluntarily instituted by management, provide supplementary old age anddisability pension, health and accident insurance, sick pay, maternity leave,unemployment insurance, and severance pay over and above that providedfor aU workers through comparable state social security programs. Thusworkers covered by the General Motors/United Auto Workers negotiatedprivate social welfare system, for example, enjoy a joint public-privatesocial welfare system which brings them benefits far above those ofAmerican workers dependent solely on the public system and gives them alevel of benefits comparable or superior to that in a welfare state like theFederal Republic of Germany."

Financial data on benefits paid by public and private programs areindicative of the public/private mix in the two social security systems. In arecent year for which roughly comparable data are available (1975), thepublic "social budget" in the F.R.G. for basic social security programsmanadated by law was 187.7 billion DM. Comparable company employeebenefits amounted to only 6.4 billion DM in the same year, or only 3.3% ofall social security expenditures (Federal Minister, 1978). In the UnitedStates, with its relatively underdeveloped state social welfare programs,the picture is quite different. In 1974, public social security programexpenditures were 82.3 billion dollars. Benefits paid under correspondingemployee-benefit plans in 1974 amounted to 41.5 billion dollars, or 33.5%of all public and private social security expenditures (Skolnik and Dales,1976).

The overall financial data reported here are certainly indicative ofthe relatively greater importance of company level employee benefits inthe United States in comparison with the Federal Republic, although public

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programs are the largest source of benefits in both systems. The largestsingle factor in this differential ratio of public to company social insuranceexpenditures is the absence of any national health insurance and sick payinsurance program in the United States. Health benefits are the largestcomponent of company social insurance expenditures in the United States.The second most important is the private occupational pension system.^

n.Private programs are not simply an alternative to public social

security programs. In the United States the heavy relianc on negotiated orvoluntary employee benefits in the social security system is not withoutimplications for the distribution of such benefits. Larger firms offer bettersocial benefits as well as higher pay and the large share of American socialsecurity benefits allocated in this way are highly unequally distributedamong American workers. The existence and level of benefits in suchprograms are a function of characteristics of the individual firm: itsprofitability, competitive pressures, the bargaining power of its employeesbased on labor market conditions and/or union strength, the personnelpolicies of the firm, etc. Public social welfare programs, by contrast,make by law certain social benefits a general condition of employmentindependent of the characteristics of the individual employer. The state isin this case a centralized allocative structure which mandates certainemployee social benefits independently of the economic firm (Skolnik andDales, 1976; Mosley, 1981).

It should be noted that the distribution between public and private inthis analysis of the distribution of employee social benefits is betweenthose programs mandated by law and those which are not. Programs whichare public in the sense of required by law may be privately administered,e.g. workmen's compensation insurance carriers in the U.S.

Analysis of the unequal distribution of private program benefits in theU.S. suggests the hypothesis that this result is inherent in the privatesector allocation of such benefits, under the structural conditions of theAmerican economy. It is conceivable that in very tight labor markets suchsocial benefits might become generalized conditions of employment, butthis is not the case in the United States. More centralized structures forthe allocation of private sector employee social benefit are also possible.In the United States, however, collective bargaining is relativelydecentralized and the level of unionization of the work force is low.

Comparison of the distribution of public and private social securitybenefits in the U.S. with the pattern in the F.R.G. makes possible a cross-national examination of this hypothesis. We would expect that thedistribution of the benefits of public programs would be generally spreadthroughout the workforce and that private progam benefits would, as in theU.S., be concentrated in the financially stronger and more highly unionizedfirms. Because of the heavily public character of the total F.R.G. systemin comparison with the U.S., we would expect an overall much more equaldistribution of such benefits among the workforce than is the case in theU.S., i.e. the centralized public allocative structure for social benefits inthe Federal Republic of Germany would not reproduce the inequalities ofthe economic structure in the distribution of employee benefits to the sameextent as in the U.S.


in.National surveys of employee compensation provide data in terms of

which we can examine the relationship between economic structure andallocative structure with respect to the distribution of public and privatesector employee social benefits. Such surveys are based on employers'detailed reports of their personnel costs, including not only pay but alsocosts for both the legally required and the voluntary and/or negotiatedprivate sector social security-type benefits. Such statements of employers'cost are not identical with benefits received by employees. Presentpayments may be made to cover future entitlements, for example,payments into retirement plans benefits are not only financed on the basisof employers' contributions; the public social security system also derivesfunds from employee contributions and, in the Federal Republic ofGermany, from general government revenues as well. With thesequalifications, the employee compensation data are indicative of theexistence and benefit level of such programs.

The great advantage of such data is that they are available accordingto the size of the employing unit, thus permitting an examination of therelationship between characteristics of the employing firm and thedistribution of employee social benefits. Size of the employer serves as anindex of firm characteristics associated with private employee benefits.Moreover, the data on compensation are given in sufficient detail todistinguish between public (legally required) employee social benefits andprivate sector (voluntary or negotiated) benefits, thus enabling us toinvestigate the differential implications of public and private allocativestructures on the distribution of such benefits.

The following two tables show, for the United States and the FederalRepublic of Germany, the relationship between size of employing unit andemployer expenditures for public and private social security benefits as apercentage of pay (Tables 1 and 2). The data are derived from surveys ofemployee compensation in manufacturing in the United States and theFederal Republic of Germany. The two sets of data are similar but notstrictly comparable. The American data are less differentiated by size ofemploying unit and, more importantly, based on data for establishmentsrather than for firms. Thus a smaller plant owned by a large firm would bemisplaced in so far as private employee benefits are more determined bycompany policy and labor relations rather than at the plant level. Thismeans that the chart probably understates differences by size of employingfirm. By contrast, the German data are based on the size of the employingfirm rather than on the size of the particular establishment in which theindividual works. Despite these differences, the best available data dopermit some comparison of the relationship between economic structureand aUocative structure within the two countries.

The American data show clearly the major importance of privatesector employee social benefits which are voluntary or negotiated. ForAmerican manufacturing as a whole they actually represent a greater costto management than do public social security contributions required bylaw. Although Table 1 is based on establishment rather than firm data andnot sufficiently detailed, the pattern is clear and corresponds to otheravailable distributional data on employee social benefits in the UnitedStates (Skolnik and Dales, 1976; Mosley, 1981). While state social welfare


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Policy Toward Public-Private Relati(»is 499

programs become a general condition of employment, private sectoremployee social benefits are most associated with larger firms. In the datareported here, for example, such benefits constitute only 6.5% of pay fortime worked for non-office employees in establishments with less than onehundred employees, whereas for non-office employees in establishmentswith more than five hundred employees they constitute 15.1% of pay fortime worked. The pattern is only slightly less pronounced in the case ofsuch benefits for office employees. The index of pay for time worked alsoshows a similar pattern for non-office employees, rising from 88.7 to 112.6of average pay for all non-office employees in manufacturing, indicatingthat not only social benefits but also pay is higher in larger firms of thecorporate economy. Since employee compensation in the form of socialbenefits is given here as a percentage of pay for time worked, actualinequalities in benefits are understated. The relationship between payindex and size of establishment is, for reasons that are not clear, less in thecase of office employees in manufacturing. Office workers are a moreheterogeneous category than non-office workers and average pay data mayobscure important differences in the composition of the office work force.

The data on employee compensation in manufacturing in WestGermany reflect the overwhelming predominance of the public system ofemployee benefits, even in the very largest firms with the highestpercentage or private employee social benefits. While legally requiredsocial benefits show a slight tendency to rise with increasing size ofemploying firm,^ private social benefits increase dramatically, even moreso than in the United States, tripling for non-office employees andincreasing more than five-fold for office employees. Thus in WestGermany, as much as in the United States, private social benefits reflectthe inequalities of the economic structure and are concentrateddisproportionately in the larger firms of the corporate economy. However,the overall level of such benefits as a percentage of pay for work is quitelow (less in the largest German firms (1000+) than in the smallest (1-99)American establishments reported) and the overwhelming predominance ofthe generalized public system of employee social benefits (public plusprivate system) taken together increase only from 27.4% to 32.7% from thesmallest to the largest firms for non-office employees in manufacturing. Ifthe German data are adjusted to obtain two categories of firms with 10-99employees and 500+ employees respectively, then the extreme categoriescorrespond roughly to those in the American data (disregarding the fact theU.S. data probably understate the relationship of social benefits to firmsize by reporting data in terms of establishment size). With theseadjustments the German total system (public and private) increases foroffice and non-office employees together from 26.1% to 29.6% of pay fortime worked from the smallest to the largest units in the economicstructure, while the United States total system (public and private)increases from 15.9% to 22.9% of pay for time worked.

The data confirm in general our expectations about the two types ofaUocative structures. The German social security system is characterizedby a predominance of expenditures determined by law. In both countriesthe privately determined company social security expenditures varysignificantly with the size of the firm/establishment and the legallyrequired program expenditures vary little. Allocation of the latter by


public law constitutes them as general conditions of employmentindependent of the characteristics of the employing firm. However, due tothe very different public/private composition of the two systems, thevariation by size of employing unit in the total system is very great in theUnited States in comparison to that in Germany.

IVThis analysis of the relationship between public and private allocative

structures and distribution of benefits can be developed further byexamining a different employment benefit, paid vacations. Thiscomparison makes clear that the public/private distinction elaboratedabove must be supplemented by consideration of the degree ofcentralization of private aUocative structures, i.e. in this case the systemof labor relations.

Paid vacations are a significant employment cost in the UnitedStates, amounting to 3.3% of total compensation for private non-agricultural wage and salary workers in recent years (U.S. Department ofLabor, 1975). In the United States there is no general legal regulation ofvacation time. It is determined by the personnel policies of individualfirms or by the coUective bargaining agreement between the union and theindividual firm — the usual level at which such negotiations take place inthe United States. Here is clearly another example of a highlydecentralized allocative structure.

West Germany, by contrast, has a much more centralized allocativestructure. First of all, the Federal Vacation Law (Bundersurlaubsgesetz)establishes a general minimum vacation time of eighteen working days percalendar year as a matter of legal right after six months of employment.The law further provides, for example, for proportionately reduced paidvacation, or compensation, if the employment relationship ends sooner.Above and beyond the legal minimum, most workers are entitled toadditional paid vacation at their place of work. According to a LaborMinistry report the average minimum vacation was 23.6 work days. As inthe United States, private aUocative structure reproduces inequalitiesrooted in characteristics of the economic structure. Thus at one extreme4.9% of employees get only the legal minimum, while at the other extreme,3.7% receive thirty-one or more days minimum vacation (see Clasen,1979). Thus, for 95% of employees vacation time is set by the privateaUocative mechanism of the labor relations system. However, in the caseof the Federal Republic of Germany, such inequalities which arise arevariations above a high legal minimum.

Moreover, the private (non-state) aUocative structure of the laborrelations system in the Federal Republic is itself much more centralized.The labor unions are highly structured in sixteen national industrial unionswhich comprise the German Labor Federation (DGB). The usual level ofcollective bargaining is industry bargaining in a "Land" or othergeographical district between the employers' association for the industryand the union, rather than the decentralized, typically company-levelbargaining in the United States. In law the union contract applies only tounion members who work in firms that belong to the employers' associationfor the industry and district that negotiated the contract with the union.But in practice the terms of union contracts are extended to all employees


in the contract district (Tarifbereich). Thus official statistics are based ona projection of union contract terms for all workers in a given contractdistricts. This is a consequence of both the relatively high level ofunionization in the Federal Republic of Germany and the higher levels ofemployment in contrast to the United States. There is, however, asignificant provision in German Labor Law which empowers the LaborMinistry, under certain conditions, to make the terms of an industry laborcontract binding on aU employers and for all employees (see Bergmann,1975). This provision has been infrequently used in the past but is availableif changing labor market conditions and employer practices make itnecessary.

As a consequence of the more centralized and distanced allocativestructure in West Germany, both in terms of general state regulation andthe much more centralized structure of collective bargaining, thedistribution of vacation benefits does not vary as much as in the U.S. andnot to the same extent according to firm size. In West Germany all areentitled to an eighteen day minimum and 83.5% receive from twenty-one totwenty-six days paid vacation (Clasen, 1979). U.S. data are available onlyfor larger firms (50 or more employees) in metropolitan areas (U.S.Department of Labor, 1975). The pattern is one of generally much loweraverage paid vacation time with greater variation in terms of this lowaverage.

The data reported on employee compensation in Tables 1 and 2 alsoprovide information on variation in employee compensation for vacationpay by size of employing unit. The data confirm the pattern of other socialbenefits compared. The West German system show a much higher level ofbenefits as a percentage of pay for time worked and significantly lessvariation in terms of size of employing unit. Whereas the American datashow expenditures for vacation pay increasing by over 100% from thesmallest (1-99) to the largest (500+) firms for non-office employees and50% for office employees, the West German data indicate only increases of31% and 16%, respectively, for non-office and office employees.

V.A striking aspect of the West German data on employee compensation

in manufacturing is that the index of pay for time worked is, if adjusted toconform to the groupings in the American data, essentially independent offirm size for non-office employees. This relationship is somewhat strongerfor office employees. By contrast, the index for pay for time workedincreases from 88.7% to 112.6% for non-office employees in manufacturingin the U.S., and a separate category of the largest firms would undoubtedlyshow even greater differences in pay. Comparison of variations in pay inthe two countries according to location in the economic structure requiresmore detailed analysis. GeneraUy the data reported here seem to indicatemarkedly less stratification, particularly among the German blue collar(non-office) work force in contrast to that in the United States. This holdstrue for both pay and available social benefits. Whereas correspondingworkers in the U.S. are much more hierarchically stratified in terms of payand social benefits according to characteristics of the employing firm.

This preliminary research suggests a broader hypothesis with respectto the distribution of pay and benefits in the United States and the Federal


Republic of Germany, the indications for which are strongest in the case ofwage workers. These two developed market economies evince employmentsystems for such workers with quite different structural features. In WestGermany the employment system is characterized by more centralized,political determination of conditions of employment with respect to pay,benefits and job rights by national social policy. The central institutionalcomponents of this type of employment system are a highly developedsystem of state social legislation and a relatively centralized system ofindustrial relations. Relatively high minima in pay, benefits and job rightsbecome mandated as general conditions of employment. In the U.S.,location of the firm in the economic structure and the discretion of thefirm in determining conditions of employment lead to a quite differentpattern of cumulative inequalities in pay, benefits and job rights.

NOTES

1. Thus, Harold Wilensky in his The Welfare State and Equality (Berkeley,1975), for example, does not consider the influence of private socialwelfare systems. He is, of course, well aware of them; see his earlierIndustrial Society and Social Welfare (New York, 1965).

2. Mosley, 1981:144-48. See especially Table III, which summarizes thetotal benefits for General Motors/UAW employees under theirpublic/private social benefits package.

3. Calculated in terms of the data given above on public and privatebenefits as a percentage of GNP in the respective years.

4. The U.S. data are based on a large BLS sample of all establishments inU.S. industry. See "Appendix B, Scope and Method of Survey" in thesource given for details. The German data are based on an even largersample (30%) of firms with fifty or more employees. See the sourceindicated for technical details. Both surveys are continuing series.

5. Examination of the data shows this to be due almost entirely to greatersick pay costs per worker in larger firms, i.e., they are more oftenabsent from work due to sickness.

6. See the Bundesurlaubsgesetz, BGBl. Ill 800-4, in any compilation ofGerman labor law.

REFERENCES

Bergmann, J. et. al., 1975. Gewerkschaften in der Bundesrepublik(Frankfurt).

Clasen, Lothar. 1979. "Arbeitsbedingungen 1978," Bundesarbeitsblatt(March).


Federal Minister for Labor and Social Order. 1978. Sozial bericht 1978(Bonn).

Mosley, Hugh. 1981. "Corporate Social Benefits and the Underdevelopmentof the American Welfare State," Contemporary Crises 5.

Skolnik, Alfred and Sophie Dales. 1976. "Social Welfare Expenditures,1950-1975," Social Security Bullentin (January).

U.S. Department of Labor, Bureau of Labor Statistics. 1975. Handbook ofLabor Statistics 1975; Reference Edition (Washington).

Documents

SOCIAL SECURITY IN THE UNITED STATES AND THE FEDERAL REPUBLIC OF GERMANY: A COMPARISON OF PUBLIC AND PRIVATE BENEFIT SYSTEMS