Statutory contribution scheme for social care insurance fails to adequately factor in economic costs associated with raising children, other types of social insurance satisfy constitutional standards in that regard

Press Release No. 46/2022 of 25 May 2022

Order of 7 April 2022
1 BvL 3/18, 1 BvR 2824/17, 1 BvR 2257/16, 1 BvR 717/16

In an order published today, the First Senate of the Federal Constitutional Court rendered its decision on three constitutional complaints and a social court referral for judicial review concerning the constitutionality of provisions governing mandatory contributions to different public insurance schemes under Germany’s social security system (care insurance, health insurance, public pensions).

With respect to public long-term care insurance (hereinafter, public social care insurance), the relevant provisions are set out in § 55(1) first sentence, § 55(3) first and second sentence, and § 57(1) first sentence of the Eleventh Book of the Code of Social Law (Elftes Buch Sozialgesetzbuch – SGB XI). The Court held that these provisions violate the right to equality in Art. 3(1) of the Basic Law (Grundgesetz – GG) given that the contribution rate is the same for all parents, regardless of how many children they raise. Additional challenges claiming that childcare and child-rearing responsibilities were not sufficiently factored into the provisions governing mandatory contributions to public health insurance and pension schemes were rejected as unfounded by the Court.

The current legal framework governing public social care insurance results in a disadvantage to parents that have more than one child. This is because the costs associated with raising additional children are not reflected in the contribution rates. Applying the same contribution rate to all parents, regardless of how many children they have, is not justified under constitutional law. The legislator must amend the statutory framework by 31 July 2023 at the latest.

By contrast, the framework governing mandatory contributions to public health insurance and to public pension schemes is compatible with Art. 3(1) GG even though the contribution rates do not differentiate between contributors that have children and those that do not. The law as it stands does not result in a disadvantage to parents, given that the costs associated with raising children are otherwise adequately reflected in the design of public health insurance and pension schemes.

Facts of the case:

As of 1 January 2019, the contributions to public social care insurance are calculated at a base rate of 3.05% of the gross income earned by the person liable to contribute premium payments. When reaching the age of 23, insured persons that do not have children are liable for a premium supplement for ‘childless contributors’ (§ 55(3) first and second sentence SGB XI). In contrast to the basic contributions for which the cost burden is split between employees and employer, this supplement is solely borne by the employee. The supplement had been fixed at an additional 0.25% of gross income until 31 December 2021. It was subsequently increased to 0.35% effective 1 January 2022. By contrast, the law governing contributions to public pension schemes and public health insurance does not make any distinction between the contribution rates applicable to parents and childless contributors.

The supplement payable by contributors without children was first introduced in legislation that took effect on 1 January 2005, which had been passed in response to a judgment rendered by the Federal Constitutional Court on 3 April 2001. In that judgment, the Court held that it is incompatible with Art. 3(1) GG in conjunction with Art. 6(1) GG – the general equality clause and the fundamental right to protection of the family – if persons enrolled in public social care insurance that care for and raise children are liable for contributions at the same rate as those without children. This was based on the reasoning that parents already provide an additional (‘generational’) contribution towards a social security system in which current contributors finance the expenses for current benefit recipients (pay-as-you-go system, umlagefinanziertes System), since the current younger generation will likely be future contributors.

The referral from the social court received in proceedings 1 BvL 3/18 and the constitutional complaints lodged in proceedings 1 BvR 717/16 and 1 BvR 2257/16 raise the issue of whether the law on social care insurance ought to differentiate further not only by applying a lower rate to parents in comparison to contributors without children, but also by setting different rates depending on the number of children. The constitutional complaint lodged in proceedings 1 BvR 2257/16 additionally raises the issue whether the Basic Law requires that similar privileged rates benefitting parents be introduced in the law governing contributions to public health insurance and public pension schemes, which currently makes no specific distinction between persons with or without children. The constitutional complaint in proceedings 1 BvR 2824/17 also concerns (and is limited to) this last question.

Key considerations of the Senate:

A. The challenged provisions governing public social care insurance contributions – § 55(1) first sentence, § 55(3) first and second sentence, and § 57(1) first sentence SGB XI – violate the right to equality in Art. 3(1) GG on the grounds that all parents are liable for contributions at the same rate, regardless of the number of children they have.

I. When imposing liability for public social insurance schemes, the legislator must observe the principle of equal burdening, which derives from the general guarantee of the right to equality and applies to all state-mandated charges and contributions. In some situations, this guarantee gives rise to a requirement of different treatment; however, this requirement is not necessarily violated simply because the legislator chooses not to make certain legislative distinctions when it would be permissible under constitutional law to do so. Rather, the legislator violates the fundamental right to equality when it fails to sufficiently account for existing factual differences, which arise in relation to a given subject matter addressed in legislation, where these differences carry such significance that they must be reflected in the law.

II. Based on the considerations put forward by the legislator, the legislative decision to require the same contribution rate from all contributors with children, regardless of the number of children, results – within the group of contributing parents – in equal treatment of matters that are inherently different, to the detriment of parents with more children.

1. According to the legislator, the supplement payable by contributors without children reflects the “financial and other costs associated with raising a child”, which justifies holding contributors without children liable at a higher rate. However, within the group of contributors with children, further relevant differences arise depending on how many children each contributor has. The economic costs of raising children are two-fold: First, the direct costs of raising children, including child-related consumer expenses, and second, the costs of diminished opportunity, i.e. the costs to persons taking on child-rearing responsibilities resulting from loss of opportunities in terms of lower income and social security benefits. Both sets of costs substantially increase the more children one has. It is true that since the Court rendered its 2001 judgment, the legislator has introduced numerous measures and strengthened existing policies to alleviate the burden on families by seeking to compensate the costs associated with raising children. Some of these measures are indeed contingent upon the number of children raised by a given person. Despite these efforts, the percentage of mothers in gainful employment, and their average income, is still substantially lower for women with more children as compared to women who have fewer children.

2. Within the system of public social care insurance put in place by the legislator, applying the same premium rates to all contributors with children, regardless of the number of children, specifically leaves those with more children at a disadvantage when compared with contributors who have fewer children. Persons with more children only benefit from lower contribution rates to the same extent as parents with fewer children, even though the economic costs associated with raising children increase the more children one has. This disadvantage is already noticeable when comparing parents raising two children with those raising a single child.

3. The current design of social care insurance does not sufficiently compensate this disadvantage. The disadvantage is somewhat mitigated by the fact that contributors with more children, who are subject to the same rate as contributors with fewer children, receive a comparative benefit from public social care insurance coverage being extended to a higher number of dependent family members (i.e., to their additional children). However, children are generally at a very low risk of needing long-term care, which means that the burden on public social care insurers arising from non-contributory co-insurance for additional family members is relatively small. The advantage of having more children co-insured therefore is not significant enough to offset the disadvantage resulting from the higher economic burden on contributors with more children than others. This disadvantage is also not compensated by ‘caregiver benefits’, i.e. insurance benefits extended to persons assuming the long-term care of family members under public pension and unemployment insurance schemes or rights and benefits granted persons taking ‘caregiver family leave’, such as caregiver subsidies. Such caregiver benefits serve to compensate the costs of providing long-term care and to encourage family members to take on caregiver roles. However, they are not aimed at compensating the costs associated with raising children.

III. Applying the same contribution rate to all parents enrolled in public social care insurance, regardless of how many children they have, is not justified under constitutional law.

1. When deciding on how to give effect to equality requirements in the contribution scheme for public social care insurance, the legislator is afforded a wide margin of appreciation and assessment as well as leeway in terms of design. The legislator not only has latitude in determining the extent to which the economic costs of raising children ought to be factored into the contribution system. It is also for the legislator to decide how exactly these costs are to be compensated, and to allocate the financial burden arising therefrom.

2. However, imposing the same contribution rate on all contributors with children, regardless of the number of children they have, is not appropriate and thus violates the principle of proportionality in its strict sense.

a) In the present case, the review conducted by this Court concerns legislation that relies on typification. In such cases, constitutional review must in particular consider that the use of typification for the purpose of simplifying administration may serve as a factual justification for why matters are treated equally despite inherent differences. Relying on typification is only permissible if the legislator does not use an atypical case as the main reference point, but instead ensures that the law is realistically based on the typical case. Hardships and injustices arising in individual cases due to the use of typification in legislation must be limited to a relatively small number of cases. Moreover, the typification must not result in severe interference with equality standards. Furthermore, constitutional review must take into account whether the hardships resulting from typification could only be avoided with great difficulty. Relevant concerns in this regard include the practical demands of public administration. Where typifying legislation aims to resolve matters that affect a multitude of heterogeneous interests, further examination is required. In this case, the reasons supporting a typifying approach must be balanced against the disadvantages and burdens that would be imposed on third parties or the general public if a more differentiating approach were to be taken.

b) In determining the contribution structure of public social care insurance, the legislator exceeded its permissible margin of typification by imposing the same contribution rate on all parents regardless of the number of children they have.

aa) Based on the representative sample survey (Microcensus) conducted in 2019, there are roughly as many one-child families in the general population as there are families with two or more children. It can be assumed that the demographics of persons enrolled in public social care insurance are largely similar. Among contributors to public social care insurance, the percentage of persons that bear higher economic costs associated with raising children therefore is by no means negligible, but instead, quite significant.

bb) By applying the same contribution rate to all contributors with children, the law creates a disadvantage of considerable weight for contributors with more than one child. The more children contributors raise, the less they benefit from the privileged rate applicable to parents when compared to contributors with fewer children, who enjoy the same privilege but do not incur increased child-rearing costs to the same extent. The additional cost burden on contributors with more children is not fully compensated by the benefit of having the additional children insured without further contributions.

cc) The fact that, in absolute terms, the amounts of social care contributions are comparatively low does not justify the extent of typification used here. The argument that the resulting burden is negligible cannot justify a substantial and extensive disadvantaging effect that directly concerns the essential elements of the legislation. It also cannot be assumed that a contribution structure that differentiates depending on the number of children would make only a marginal difference in the amounts owed by contributors.

dd) Nor can the typification undertaken by the legislator be justified by the argument that it makes implementation by administrative authorities easier and more practical. From the outset, it is not ascertainable that applying different rates based on the number of children would disproportionally increase the burden on public administration.

ee) Lastly, it cannot be argued that expanding the privileged treatment of contributors with children, in the form of lower rates depending on the number of children, would necessarily burden contributors without children and those with fewer children to an extent that exceeds constitutional limits. A risk of excessive burdens on others can be ruled out, not least because the actual contribution owed depends on the individual income of the contributor and because the applicable rates for social care insurance contributions are generally set at a low level. The legislator also has latitude in determining how to account for the differences in child-rearing costs incurred by contributors. In exercising this latitude, the legislator may decide against fully or partially “shifting the extra burden” from parents with more children to parents with fewer children or to contributors without children. Instead, the legislator may choose other options to finance these costs, such as by granting federal subsidies from tax revenue or by making use of other means available for the design of public contribution and benefit schemes.

B. By contrast, the framework governing contributions to public pension schemes is compatible with Art. 3(1) of the Basic Law even though the law makes no distinction, in terms of contribution rates, between contributors that have children and those that do not.

I. By applying the same contribution rates to contributors with and without children, the law governing public pension schemes accords equal treatment to matters that are inherently different. Nevertheless, the legislative design as such is aimed at recognising the economic costs associated with raising children, and effectively factors these additional costs into the contribution system.

Most notably, the period spent by a parent in raising a child during the first three years of life (§ 56(1) first sentence of the Sixth Book of the Code of Social Law, Sechstes Buch Sozialgesetzbuch – SGB VI) is credited as a contribution period for public pension schemes. The credit afforded to child-raising periods serves to prevent insured persons from diminished old age pension benefits due to time spent caring for a child in lieu of outside employment. In the current system of contribution-based (pay-as-you-go) financing of public pension schemes, it also serves to honour the value of child-rearing, which ultimately benefits the system. Under § 70(2) SGB VI, eligible child-carers are credited pension points that translate into normal pension expectancies. The pension points accrued for child-raising periods are added to the pension points accrued during regular contribution periods, up to the maximum income limit for contribution assessments (Beitragsbemessungsgrenze). By treating child-raising periods as equivalent to regular contribution periods, the law effectively alleviates the contribution burden on parents. Without such privileged treatment, contributors raising children would have to make greater direct contributions to earn the same level of expected pension benefits.

II. This legislative design of the public pension schemes does not entail a disadvantaging effect for parents. It cannot be argued that crediting child-raising periods towards contribution periods are insufficient to ensure that the economic costs of raising children are sufficiently factored into public pension schemes as such.

If a parent takes leave or works part-time in order to raise children, they would normally earn less pension points due to the reduction in income-based pension contributions. However, during the first three years of the child’s life, the potential loss in expected pension benefits that would otherwise result is fully compensated for contributors with low and average incomes. The privileged treatment of child-raising periods in the law governing public pension schemes already creates an appreciable economic advantage during the years of employment.

The law therefore ensures that the economic costs associated with raising children are sufficiently compensated. The fact that the privileged treatment of child-raising periods is subject to the maximum limit for contribution assessments does not merit a different conclusion. By capping the credit for child-raising periods in this manner, the law simply gives effect to the general principle that contribution-based social security benefits are only awarded up to a maximum limit. Imposing such a limit strikes a balance between maintaining the existential social security function of public pensions and protecting the general public against excessive burdens arising from the financing of such a system. Limiting privileged child-raising periods to a maximum of three years takes account of the fact that the costs of diminished opportunities associated with child-rearing in terms of income and employment are particularly high in the first years of the child’s life. The legislator did not exceed its latitude by assuming that other measures, taken beyond the law on public pensions as part of the state’s mandate to promote gender equality under Art. 3(2) second sentence GG that serve to further the reconciliation of career and family life, contribute to increasing the percentage of working mothers and the share of income earned by women with children.

C. Similarly, the law governing contributions to public health insurance is not in conflict with Art. 3(1) GG on the grounds that parents pay contributions based on the same rate as persons that have no children.

I. In light of the structural principles of the public health insurance system, there are relevant differences between parents and persons that do not have children. In families with children, there is a higher number of persons needing health insurance, which – in the absence of non-contributory family health insurance coverage – would place a higher cost burden on the family, requiring parents to increase their own contributions to secure such coverage. Recognising this additional cost burden, the legislator incorporated family insurance coverage without additional contributions into the system of public health insurance in order to alleviate the contribution burden placed on parents.

II. This public health insurance system does not result in a disadvantage for parents. By providing for family insurance coverage together with other child-related benefits, the legislator not only recognised, but also sufficiently compensated, the economic costs associated with raising children and the resulting additional burden borne by families.

In contrast to the services covered by public social care insurance, children and young people benefit to a considerable extent from the treatments and services covered by public health insurance, including preventive healthcare. Both the actual benefits claimed and the underlying insurance cover constitute an appreciable economic advantage for families that already materialises during the phase of child-rearing and childcare.

The significance of this advantage cannot be called into question by arguing that parents would contribute to a greater extent to the pay-as-you-go system financing public health insurance than they receive in terms of insurance-paid services for themselves and for co-insured family members. In that regard, parents are in no different position than persons without children that make income-based contributions to public health insurance schemes. For the latter group, the difference between the amounts paid into the system and the insurance benefits claimed is typically even greater, meaning that their contributions effectively help finance family insurance coverage. If – based on the aforementioned argument – contributors that have no children and therefore claim less benefits were to be given privileged rates, this would ultimately increase the cost burden on parents.