Study Reveals Germany’s Social Spending Driven by Rising Administrative Costs

Germany allocates 41% of its state budget to social spending, the highest share in Europe, according to a recent study by the Institute of the German Economy (IW). Nearly half of these expenditures are devoted to pension security, while healthcare accounts for 16% of the budget, on par with Scandinavian and Benelux countries. However, administrative costs in Germany have risen sharply over the past two decades, increasing from 7.2% in 2001 to 11% of total social expenditures in 2023. This growth in overhead is a key factor in Germany's overall high social spending levels.

The IW study also finds that Germany lags significantly in education spending, which constitutes only 9.3% of the total budget—substantially less than Austria and Switzerland, whose education outlays are nearly 50% higher. Amid ongoing pension reforms and budget negotiations in the Bundestag, the IW advises policymakers to halt further increases in social and healthcare spending to contain the "impending explosion of social costs."

Comparatively, Nordic countries and others like Austria and Switzerland spend around 40% on social security, slightly less than Germany’s share, and have increased their defense budgets since Russia's invasion of Ukraine to about 3.4%. Germany’s defense expenditure remains steady at 2.3%, though relative to NATO GDP targets, it stands at 1.1%, lower than Nordic figures.

The study underscores the need for German policymakers to address spending efficiency, especially in administration, to preserve fiscal sustainability without compromising critical service areas.