The nursing insurance scheme and the nursing care sector in Germany: Challenges and opportunities

Germany is going through what is known as the double-ageing process in which on the one hand the birth rate is falling and on the other hand people's life expectation is on the increase. The nursing care sector and nursing insurance scheme is especially affected by this ageing process as the risk of becoming in need of nursing care only starts rising sharply from the age of 70. Thus, as people grow older the more the number of people in need of care rises: from 2.1 million today to as many as 4.5 million in 2050.

This development harbors both opportunities as well as challenges. The opportunities lie in transforming the nursing care sector into a prospering economic sector: demand for nursing services and care products and, by extension, for employment in this sector will rise strongly: the number of nursing homes and persons employed in the provision of care services and working in nursing homes will at least double by 2050.

For the nursing insurance scheme, however, this also represents a major challenge. The nursing insurance scheme which is based on the pay-as-you-go system is already structurally underfinanced today. The growing number of people in need of care will cause the contribution rate to at least double to 3.5 % by 2050. This rise in the contribution rate will entail a growing inter-generational shift in the burden to future generations: over the course of time, young generations in the future will have to cough up more and more for the respective old insureds.

The propagated nursing care reform 2008 does nothing to alter this burden for future generations. Improvements will be seen on the benefit side, including above all the necessary dynamization of the lump-sum benefit payments, but the funding system remains unchanged. The announced rise in the contribution rate by 0.25 percentage points can cover spending until 2014 at the outmost. But how benefit dynamization is to be financed beyond 2015 remains unclear. The nursing care reform 2008 can therefore be viewed as a check that is sure to bounce.

As the nursing care reform 2008 does not solve the funding problems of the social nursing insurance scheme but merely pushes the problems into the future, the political agenda has yet to take on the reform of the funding side of the nursing insurance scheme. A key point in a reform of this kind should be the attainment of sustained funding and a reduction in the burden being shifted to future generations. This can only be achieved by strengthening capital cover. Reform concepts which encompass an income-related citizens' insurance and consequently an extension of the pay-as-you-go system lead in the wrong direction. Flat-rate contribution models are also inherently problematic if they do not incorporate fully-funded elements.

The best reform model is a gradual transition to a completely fully-funded system. A model of this kind excludes the younger generations from the social nursing insurance scheme who will have to take out fully-funded nursing insurance cover. Older generations remain in the pay-as-you-go scheme and continue receiving benefits. In the course of time, the number of insureds in the old scheme will decline and the pay-as-you-go system will gradually peter out. This transition phase will last some 50 years. During this period, costs will be incurred in the pay-as-you-go system totaling EUR 370bn. These costs can be termed change-over costs. However, it should be borne in mind that these costs would still have been incurred even without a changeover and, more importantly, would have to be shouldered by future generations.

The insureds remaining in the pay-as-you-go system will have to participate in the funding of the changeover costs by way of contribution payments. The remainder of a maximum EUR 250bn will have to be raised – spread over the transition phase of 50 years (i.e. some EUR 5bn p.a.) – by younger generations and by taxpayers. This culminates in a double burden on the change-over generations that is quite typical for a transition from a pay-as-you-go to a fully-funded system: they have to form capital for themselves while at the same time bearing part of the costs of the older insureds.

But after 50 years the pay-as-you-go system will have come to an end, freeing future generations from the demographic burden at least with regard to nursing care expenses. Anyone rejecting a fully-funded system on account of the high changeover costs for transferring to this system should bear in mind the relief derived for future generations. Once more: these costs will still have to borne even without a changeover, the decision for or against a changeover is determined solely by those bearing the costs!

Summing up, an opportunity therefore exists to create a prospering nursing care and insurance sector that is geared to competition and efficiency and that also ensures the best-possible provision of services to those in need of care and that at the same time eases the burden on future generations. Politicians and business should seize this opportunity.

You can find a detailed examination of this theme in our Working Paper No. 95 “The nursing insurance scheme and the nursing care sector in Germany: Challenges and Opportunities” at www.group-economics.allianz.com (Publications/Working Papers).

Only available in German.