POLITICS
Germany: The Politics of Socialism
The socialist policies that affect the middle class
Note: This is an opinion piece that might reek of sampling bias and subjective experience living in Germany. Please take it with a grain of salt.
“Europe doesn’t want you to have money!”
My friend exclaimed while we marveled at the Alcazar of Segovia. It’s a medieval castle from the 12th century, an hour’s drive away from Madrid. The irony wasn’t lost on me that we were looking at all the things that were made possible with money, while we lamented at not being able to keep our money.
We are both expats from humble backgrounds, my friend and I. I zigzagged from India to the US to Germany as he did from Mexico to the US to Spain. Often I find us being part of a new tribe of global citizens who are in the world but not of the world, with no particular loyalty to any country. We peer inside through the windows, often perpetually standing outside.
Perhaps we’re looking for our Ithaka, slowly realizing that there’s no place we can truly call home, a place that welcomes us and lets us thrive.
We all left the US due to its demons; the guns, the healthcare, the absence of labor protection, the immigration, and finally the physical embodiment of all that in Trump’s crazies. What I found unpardonable was the way the US treated its own people.
Having lived in Seattle for eight years, I slowly witnessed its degradation. By the time I left in 2021, the downtown overflowed with the homeless and their tents. With all the wealth around us, I couldn’t understand why there was none to help them. Was it impossible to be a community that lets the strong thrive while taking care of the weak and needy?
Even when I could see some value in the libertarian ethos of the US, which limited government intervention in people’s economic choices, the 2008 financial crisis had shown us how cruel that could be.
A community has to help each other. Otherwise, it’s just a set of loosely connected individuals barely tolerating one another. So, the ideals of a socialist democracy made sense. The young pay higher taxes to assist the old and the disabled.
So, I found in the social democracies a more humane system.
I came to Europe with my eyes and arms wide open.
Reduced pay and higher taxes were the price I was willing to pay for a better quality of life. A life where I didn’t have to worry about one crazy shooting us, or another crazy firing us. A society that had less than a third of the homelessness rate as that in the US. I moved to a country that welcomed half a million Syrian refugees at the height of its civil war, famously proclaiming —Wir Schaffen Das (We can do it).
Truthfully, it’s a great system for low-earners. The country has a minimum wage of €12.41. But it comes with several other welfare supports.
New parents who make less than €150k per year are eligible for Elterngeld or parental allowance for up to a year. Parents also receive Kindergeld or monthly allowance per child to support their food, clothing, and education. The parent is paid €250 per month per child until they turn 18. Since the schools and colleges in Germany are free, education cost is nil.
If the child falls ill, the parent is legally entitled to take time off work to take care of them. If one is unable to work due to illness, they will be covered for up to 78 weeks, by either the employer or their health insurance provider.
If someone makes less than €1000 is eligible for Wohnberechtigungsschein or social housing in Germany. There’s also the Agentur für Arbeit that helps the unemployed with job options, unemployment benefits and pays for healthcare.
So, in spirit, it is a humane system that tends to the young, old, and the weak. A herd is only as fast as its slowest member. However, what was jarring to me was the politics of socialism; one which caters to the poor, ignores the rich, and squeezes those in the middle.
Our upbringing is like the angels and demons of our psyche. All those years of pinching pennies don’t go away without a fight. So, I save profusely watching the empty jar slowly clink. I often save more than I spend, being acutely aware that every penny in that jar is collected one at a time.
I’m rarely interested in multiplying those pennies, only holding on to it. With a very low appetite for risk, I gravitate towards stable, relatively risk-immune modes of investments. Although with the inflationary trends, I often question the prudence of my attitude.
With such an attitude, what do you do with money? There are only five things one can do with money — Save it. Spend it. Give it away. Pay taxes. Pay down debt.
We see permutations and combinations of the five. Saving might also become an investment. One might incur debt in the short term to save for the long term. One might give money away and save money on taxes. And on and on. However, like a good tomato soup, the ingredients are simple.
So, what do you do with money in Germany?
Spending is always the easiest suspect on the list. It comes naturally to all of us and it’s easy to spend money in Europe. Aside from the regular household expenses of rent, groceries, and utilities, there are a million easy ways to lose those pennies.
Paying taxes is the runner-up.
When we moved to Europe, we were aware of the changes awaiting us. We took a 50% pay cut to cross the Atlantic. We agreed to pay an average of 45% taxes on the reduced pay.
So, if I earned $100k per year in the US, the money I had available after taxes was $65k. But in Europe, the pay cut would leave me with a €50k salary per year, of which only €27.5k would be available after taxes.
However, coming in with eyes wide open, this wasn’t shocking. Public transportation, labor protection, reduced stress, the universal health care made it a worthwhile deal. My husband and I were at a point in life when we no longer agreed to tolerate insane stress and ruin our lives for the sake of work. We weren’t Calvinists. We were good old atheists.
Besides, the reduced pay and increased taxes leveled the society, reducing the gap between the rich and the poor. It improved the fabric of the society, weaving in people from every walk of life. It was a worthy enough cause for the price.
However, the kicker came in the form of the complexity of tax laws.
Like many couples around the world, my husband earns slightly more than me. Almost all our financial portfolios and bank accounts are jointly held. After filing taxes for two years, we recently learned about Steuerfalle Gemeinschaftskonto, or ‘Tax Trap Joint Account’.
If a husband and wife, both employed, hold a joint account for their income, then 50% of one’s salary is counted as a gift to the partner. The limit for gifting within marriage is €500k/10 years. So, any contribution beyond that could be subject to inquiry. I’m clueless about what would happen if one goes on parental or disability leave or if it’s a single-earner household.
German tax also stipulates that one report every transaction involving capital gains. If someone employed an automated investment service that performs several short & long-term trading, reporting every transaction that had some gain would require the assistance of a chartered accountant or some paid service.
Even without any additional investments, there is complexity involved if one works in a foreign company. I work in an American company, which issues half my salary in stocks or RSUs. Perhaps the tax system might be a walk in the park if one earns their entire salary in cash in Germany.
To navigate the weeds of tax laws like the Steuerfalle Gemeinschaftskonto, one would also need assistance from a tax consultant or lawyer. So, the tax systems are built such that only the rich, who can employ a lawyer or an accountant, can indulge in investments.
These taxes only apply to the salaried personnel. On the other hand, the millionaires or the super-rich who aren’t salaried, but earn from capital gains of their investments, need to pay only 21.88% tax, or 24% including social security contributions.
So, the system taxes the ones without the means as well as the ones with ample means similarly, while squeezing the ones in the middle. With all the bureaucracy around investments, it also limits one’s ability to rise above their middle-class stature.
After paying taxes and spending the money, one might attempt to save what remains.
Growing up in frugal India, the common-sense advice was to save more than half of your income. So, imagine my horror when Commerzbank charged us 0.5% per year on savings deposits that exceeded their threshold of €50k.
Customers not only don’t receive any interest on the savings, instead, they pay the bank the custody fees to store the cash, like renting a storage unit. This might be a peculiar shortcoming in Commerzbank. However, in a country that regulates every financial institution, I’m shocked that this is allowed.
Instead of storing the money in a bank, and paying the bank to store it, one might consider buying a property. A vacation or rental property might appear a great idea. However, most cities stopped issuing Airbnb licenses to clamp down on housing shortages. Hence, short-term rentals are impractical investments prompting one to invest in a long-term rental.
Germany is a renter’s paradise. Less than 47% of the population live in their own home. Most people spend their entire lives renting someone’s apartment. There are strong tenant protection laws that prevent eviction and rental increases. In Berlin, apartments that were built before 2014 are all subject to a rental cap. Even if the owner spent a lot of money renovating the apartment, the rent can’t increase proportionately.
However, when someone purchases a rented apartment as an investment, the purchase price will reflect the inflated market. For example, a 70m2 apartment in the city will cost between €400k to €500k.
It isn’t low enough to reconcile with such a low monthly rental income. As a result, the new owner can neither evict the tenant to occupy the property themselves, nor increase the rent.
Specific to Berlin, there are also areas marked as Milieuschutz or Social Preservation Area. According to it, demolition, alteration, or change of use of built structures require approvals from the city administration.
If a rented apartment needs to be occupied by the owner, or if they would like to change the floor plan, the likelihood of approval is next to nil. Any ‘luxury’ improvements such as the installation of a guest toilet or underfloor heating or building a balcony, would all be restricted.
So, even if the owner paid dearly to buy the apartment, they can neither live in it nor improve it.
However, the only people who buy apartments for investments are the millionaires who can afford to park their cash in properties without short-term benefits.
These regulations were introduced to control gentrification and retain the existing social structure in a locality.
Some of these rental regulations are also knee-jerk reactions to the city’s and its politicians’ past actions. After the fall of the Berlin Wall, there were plenty of apartments that were decrepit and empty. Supply was higher than the demand, and rents were dirt cheap. To revive the situation, politicians sold off more than 110,000 flats from the publicly owned apartments for less than €6k each.
With barely any regulation on rental increases, this influx of capital and privatization of public housing severely affected the existing population. The government invited further investments after the 2008 crisis hoping to revive the job market. So, the rent control, the tenant protection, and the Milieushutz were all just atonement for the Government’s sins from the 2000s.
But they seem to be correcting one poor short-term decision with another similarly poor one.
Among the developed nations, at 46%, Germany has one of the lowest homeownership rates. Unlike several other countries, Germany also doesn’t offer any incentives for home ownership such as tax rebates on mortgage interests.
Instead, the tax rebates are offered for mortgage interests if the purchased property is let out for rent. So, the government actively encourages people to be landlords instead of homeowners.
Each property purchase also comes with a hefty transfer tax, which is 8% in Berlin, demanding careful consideration before a property transaction.
However, as economic studies indicate, increased home ownership reduces wealth inequality in a society. A society where investments are the sole source of assets tends to be unequal.
We had once attempted to buy an apartment in Berlin, which we lost at the last minute to an insanely high counteroffer. Knowing the payscales in Germany, I wondered who has enough money for such exorbitant purchases.
Even with a biased sample set of just my colleagues, I know of no German who has purchased a home. The only homeowners I know are expats, who made money elsewhere and saved enough for the downpayment.
The small group of lower- and middle-class households that can enter homeownership is likely to rely on other resources than the household income (e.g. family transfers, savings) since labor market earnings are often not sufficient to obtain homeownership.
When we were working on the mortgage application, we had to prove to the bank that the downpayment was indeed our money, and not laundered from illegitimate sources.
With an increased push for fiscal digitization in Europe, I’d expect the governments to have better visibility and monitoring of the flow of money across the continent. Even with the data protection laws in the EU (GDPR), reading between the bank’s custody fees and Milieuschutz, I wonder if the governments will allow autonomy in managing one’s own money.
It almost feels like the government wants us to be on a joyride, spending endlessly, and pumping the money back into the system. When the government offers social security net without pairing them with options to be self-sufficient, they are in turn encouraging people to exploit the welfare system.
The system also tends to the super-rich. None of this economic leveling impacts them. The top 10% of the rich hold 63% of the total wealth here. In the absence of a wealth tax, neither the current tax system nor these Kafkaesque regulations matter to them. They can employ the personnel to deal with the taxes and park their empty apartments.
It’s only those in the middle, the lesser mortals who are affected by the system. They are the ones who pay higher taxes and strive to save for their rainy day. They try to be self-reliant, while also paying the taxes that aid the society. However, with its unfavorable policies around investment and taxes, the government seems to discourage self-reliance.
I wouldn’t complain so much about the system if it’s assured that it would take care of us when we are old or disabled. However, the experiment of social democracy is less than a century old. Having seen just a few generations of pensioners, the system is yet to undergo an endurance test. Even with that, the push to increase the retirement age in France is a clear indicator that social security benefits for the old aren’t something we must take for granted.
Instead, wouldn’t it be prudent for each of us to save and plan for our future when possible?
Since the medieval times, Europe has had very few self-made millionaires. There are the ultra-rich and the oligarchs with generational wealth. Often, they were plundered wealth; the wages sold, the taxes evaded, the laws ignored. So, people’s attitudes to wealth and riches seem to be shaped by that history.
Being predominantly Christian (72.8% of the total population), it isn’t surprising to see these European countries embrace the biblical notions of saving the poor.
“Because the poor are plundered, because the needy groan,I will now arise, says the LORD; I will place him in the safety for which he longs”, Psalm 12:5
The US, on the other hand, had its Calvinist notions that God blesses you with money. Only good people became rich, and if one was rich, they were good. Conversely, one was bad and unloved by God if they were poor.
So, comparing the two, even with all of Europe’s shortcomings, I prefer it this way to the US’s pseudo-libertarian way of letting the poor rot. But the socialist policies in Germany, as they are today, keep the social classes rigidly in their own lane. The poor remain poor, the rich remain rich, and the middle ones remain stuck between the two. There are very few ways in which a poor or middle-class person can advance in life.
Doesn’t today’s messed-up world demand something more inclusive? Support the needy. Empower the strong. Facilitate an environment where everyone can thrive. Or are we incapable of building a political system that carries everyone along?
