Introduction

Within the European Union , Germany is still the ‘social insurance state’ par excellence. In 2007, 46 percent of the general government 's outlays ran through the various social insurance schemes, and they disbursed roughly two-thirds of total social expenditure (according to national calculations). Social insurance spending amounted to almost one fifth of GDP which demonstrates the substantial impact of these social security institutions on the economy and on people's living conditions. The predominance of the institutionally segmented social insurance system stems from the still effective Bismarckian legacy that made Germany the prototype for a comparatively large and, at the same time, transfer-heavy welfare state.1 The strong reliance on earnings-related contributions – the combined rate paid by employers and employees standing at 40 percent in November 2008 – is widely regarded as the major weakness of the arrangement, impeding employment growth that, in turn, would ease the financial stress of social insurance and state budgets.

Since about the mid-1990s, we have observed intensified eff orts to transform welfare state institutions. Th ree directions of change are distinguishable. First, wage replacement schemes, traditionally aimed at status maintenance , are reoriented towards basic protection for pensioners and unemployed. Furthermore, the strategy of reducing the labor supply in view of increased open unemployment after 1974 was abandoned in favor of activating social policy. Instead of income support, the focus is now on a maximum integration of (long-term) unemployed, older workers and mothers into paid employment. Finally, in order to make welfare state financing more employment-friendly , there is a shift away from social insurance contributions towards a higher share of tax-funding , mainly out of the federal purse.

Although we have witnessed unprecedented structural reforms, mainly after the millennium, political attempts to arrive at an employment-and family-friendly ‘post-Bismarckian ‘ shape of the welfare state have been hampered by a combination of unfavorable and interrelated factors which constrain the room to maneuver: low economic growth rates in almost all the years after 1992, picking up not before 2005, resulted in an almost stagnant employment level and enlarged the ‘problem load’.