Many Germans are slowly reaching their financial limits. Inflation sucks money out of their pockets. In the end there is nothing left to save. In addition, many have hardly any savings today and are defenseless against inflation. This is how Germany saves.
Fulfill the dream of a house, a new car or the next vacation with the children? For many Germans, that seems pretty unrealistic at the moment. Because you have to set aside money for that. However, inflation and price increases are causing people to run out of money to save. According to the estimates of several banks, the majority of one’s own income is required for subsistence.
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Helmut Schleweis, President of the German Savings Banks and Giro Association (DSGV), told the “Welt am Sonntag”: “We expect that due to the significant price increase, up to 60 percent of German households will lose their entire disposable income – or more – monthly for the pure standard of living will have to start.” The population’s ability to save: gone.
According to Marcel Fratzscher, Professor of Macroeconomics at Humboldt University and President of the German Institute for Economic Research (DIW) in Berlin, the central problem lies elsewhere. On Twitter he writes: “40 percent of people have almost no savings today, so nothing to protect themselves against high inflation.” The masses are therefore defenseless at the mercy of inflation and price increases and have nothing on the high edge for hard times. Income is eaten up just as quickly as it comes in.
And that, although the Germans traditionally belong to the high savers. Only in Switzerland is the savings rate even higher. This is shown by data collected by the Organization for Economic Co-operation and Development (OECD). The household savings of the British and Italians, for example, have been declining for years, while Germans have consistently set aside much of their household income. And yet, Fratzscher notes, “many people in Germany have little or no savings.” Why is that?
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The economist explains: “The savings rate in Germany today is not low, neither in historical comparison nor in comparison with other industrialized countries. The savings rate has only become (even) more unequal, since even more people are now unable to save.”
In detail, this means that the inequality in the savings rate in Germany is among the highest in Europe. “The bottom 40 percent actually save nothing. The richest one percent saves 35 percent,” writes Fratzscher.
The higher earners in Germany are therefore making high savings and this means that inequality in the country is increasing. The analysis sponsored by the Hans Böckler Foundation, to which Fratzscher refers, shows that in 2013, on average, people in the lower half of the income distribution went into debt by around 300 euros. The top one percent of households, on the other hand, was able to save around 58,000 euros. That means: According to the calculations, the bottom half of Germans go into debt by 1.6 percent of their income and the top one percent can save 35 percent. According to the analysis, the bottom half of the income distribution does not form any reserves. And the top tenth accounts for almost 60 percent of all savings in a year.
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The same picture can be seen in the absolute savings amounts. Fratzscher on this: “While the bottom third of the income group does not save anything but goes into debt, the top 10 percent can put larger sums of money aside.”
“Over time, it has become apparent that the concentration of savings continues to increase,” say Jochen Späth and Kai Daniel Schmid from the Institute for Applied Economic Research in Tübingen, who carried out the analysis. The scientists’ summary: The large differences in savings rates and amounts can lead to social inequalities, become entrenched or intensify.
Fratzscher identifies four reasons that explain “why in a country as rich as Germany so unusually many people can save little or no savings at all.”
1. Unusually high inflation
Germany currently has an inflation rate of 7.5 percent. The highest level was recorded in May at just under 8 percent. These values, which are also high in historical comparison, mean that people with low incomes are currently experiencing inflation that is 3 to 4 times higher, writes the DIW President. That’s because they “have to spend a much higher proportion of their income on things that have gone up in price particularly sharply.”
One of the things that has become particularly expensive is energy. A current study by the DIW shows that price increases for electricity, heating and fuel have a much greater impact on poorer households. On the other hand, the relief packages from the federal government are currently not helping either.
“In the medium term, the relief packages will only absorb part of the costs,” comments study author Stefan Bach. There is further need for political action if the high energy prices continue as expected. “Future relief packages should be more focused on the low paid, particularly through higher social benefits,” he says.
Because in the medium term, the high energy prices mean a real income loss of 3.4 percent in relation to the average of all households and in relation to the annual income in 2022. The study also reveals:
2. Income inequality
Fratzscher identifies the unusually large low-wage sector in Germany as the reason for the increase in income inequality. Added to this are the many low-income households that only work part-time for a few hours.
According to a DIW study, the inequality of earned income was significantly higher in 2018 than in 1993. The reason for this is the development of working hours and less that of hourly wages. In the 1990s, for example, employees with low hourly wages worked a relatively long time. As a result, inequality in earned income fell by around 7 percent. In 2018, on the other hand, employees with high hourly wages tended to work more hours than those with low hourly wages. This led to an increase in inequality – by about 12 percent.
3. The German tax system
In addition, wealthy people are hardly ever taxed in Germany. As can be seen from OECD data, there is almost no industrialized country that taxes “wealth so low and income from work so high” like Germany. Therefore, building up savings through work is unusually difficult, especially in Germany, says Fratzscher.
The revenue from wealth-related taxes in the gross domestic product (GDP) of the OECD countries is between 1.7 and 2.3 percent (1998 to 2018). According to OECD data, Germany achieved around 1.1 percent in the years 2017 to 2019. In comparison: In our French neighbors, wealth-related taxes account for around 4 percent of GDP. The property tax in particular has an impact here.
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Fratzscher also emphasizes that many would not realize that people with low incomes “do pay taxes” in this country. These are also quite high if you put them in relation to their income. “These are mainly indirect taxes.”
4. The inheritances
And the Germans inherit more wealth than they earn. Fratzscher states that more than half of all private assets are inherited today. “In most cases, people with a low income from work inherit little or nothing.”
The graphic from Marcel Fratzscher’s tweet comes from a study on inheritance flows in Switzerland, published in the Swiss Journal of Economics and Statistics. This shows the stock of inheritances as a proportion of private assets for Germany, Switzerland, France and Great Britain. What is striking: the number of inherited assets in relation to total assets has risen steadily in Germany since the 1980s.
Read more about the topic here:
The bottom line for the economist is: “Although hardly any other country saves so much of its economic output, there is hardly a western country where the inequality in saving is so high.” For the expert, the main problem is that in Germany an unusually large number of people cannot save at all. Not because they lack the ability to do so, but “because they need every euro of their income for daily living”.
