Marcel Fratzscher - The real reason for the deep social inequality in Germany

The great German economist Marcel Fratzscher, director of the prestigious DIW in Berlin, on Die Zeit explains why social inequality in Germany is so extreme. From Die Zeit

The distribution of private assets in Germany is much more uneven than in other countries. In the previous commentary I spoke about some recent data which show us that in Germany the real wealth of millionaires is much higher than previously thought and that consequently the overall inequality in the distribution of assets is also much higher than previously assumed. What makes the distribution of wealth so unusual in Germany is the fact that very many people have little or no savings, or even find themselves in a situation of net debt. And for this reason they must necessarily rely on the welfare state. They have relatively little personal responsibility and little room for manoeuvre for themselves and their families - especially now, in the crisis caused by the coronavirus. But is this high inequality in terms of assets a problem? And for whom? To answer, we need to know more about the distribution and nature of this wealth.

There are just under a million millionaires in Germany, which is about 1.5% of all adults in the country. At the other end, there are around 16 million citizens who have no net savings or are even in debt. Is that fair? Many studies show that we Germans associate social justice primarily with achievements and adequate satisfaction of needs. By contrast, the vast majority of Germans would not consider a uniform distribution of assets or income to be fair. This means that many would consider a high level of wealth to be fair, if this is essentially due to the performance and merit of the individual.

A new study by the Berlin DIW shows that millionaires in Germany have six common basic characteristics: they are unusually often male, middle-aged or older, have no migration background, come from West Germany, are well educated and often work on their own. Three of these characteristics are very compatible with the principle of merit: if people strive to achieve a good level of education and training and run the risk of starting their own business (most of those who try then fail, often more than once), then the assets will be the result of individual performance. Moreover, the fact that people can only accumulate a fortune in middle age or old age would seem logical and in itself not unfair.

There are 3 other characteristics that are problematic. Because there is absolutely no good reason why gender, geographical origin or migration background per se - if you leave out all other relevant influencing factors such as education - should influence wealth or income. There are many scientific studies showing that these three characteristics also play a decisive role in the labour market. But the most important reason for the great wealth differences in Germany is another: inherited wealth.

Inheritances in contradiction to the principle of merit

More than half of all private wealth in Germany today has not been earned or created with one's own hands, but is the result of inheritance and donations. And this contradicts the principle of merit (and of course the principle of necessity). In fact, only a little more than one person in three inherits a fortune.

It is mainly millionaires who have inherited a large part of their assets, usually in the form of corporate and real estate. Two-thirds of inheritances from companies transferred tax-free go to male heirs, only one-third to female heirs. 41 % of the millionaires' assets are real estate, 43 % are business assets. On the contrary, people with few assets usually do not own a house, have few savings on their account and perhaps not even a car. Adults in the lower half of the wealth distribution in Germany have on average a net wealth of around 3,600 euros.

For many, an inheritance is a great fortune. It means security, it opens up new professional opportunities or the possibility of continuing old family traditions. Especially for younger families in big cities, an inheritance is sometimes the only chance to afford a good apartment in a good location. It is therefore not surprising that surveys clearly show that many Germans are against an increase in inheritance tax.

However, two fundamental problems arise here. On the one hand, large inheritances pay significantly less inheritance tax than relatively smaller ones. In the case of inheritance, moreover, business assets are mostly not taxed. This also explains why, before the inheritance tax reform, Germans with more than €20 million in inheritance paid less than 2% inheritance tax, while people with an inheritance of up to €500,000 paid more than 10%.

Inheritance tax reform may have reduced this problem somewhat, but it is far from being solved. Sooner or later the issue of inheritance tax will become the bone of contention in the German political debate. A radical simplification of inheritance tax, for example a 10% tax on all assets, after the necessary exemptions, and without exception, would be a wise solution that would probably be perceived by society as fair.

The second fundamental problem is that many people with low incomes, little education and few opportunities are not fortunate enough to be able to collect an inheritance, but are completely dependent on the social security system of the state. The welfare state, however, is an insurance policy that protects people from risks such as illness or unemployment, not a tool for people's development.

The central problem: the lack of equal opportunities

If inheritances are so important, then why shouldn't all people be lucky enough to receive an inheritance? The idea of an inheritance as an opportunity for life, which I picked up on some time ago in this column, would give every young person an inheritance of EUR 30,000 on completion of their education. This money could then be used freely by anyone, for example for a career change, a period of leave from work to take care of relatives or other socially important tasks.

The lack of social justice perceived by many people in Germany is not so much about the fact that so few people own so many assets, but that many have so little. The central problem is and remains that there are no equal opportunities: during their working life, many people do not even have the opportunity to build up a small fortune and to plan their lives beyond the help of the welfare state. Yet money and independence, as I will show in my next commentary, undoubtedly make people happier.