Bismarck, Urban Insiders and the Global Rise of Social Security Contributions

Together with a great team of research assistants, Philipp Genschel and Laura Seelkopf compiled an impressive data set (TID) that gives information about the first introductions of all major modern forms of taxation from personal income taxes to VAT. You can find this data here: On basis of this data, the two have edited an equally impressive edited volume introducing the data and then looking at the correlates of early introductions. For details see here:

I was lucky enough to be involved in the book project. My chapter deals with early introductions of Social Security Contributions (SSC). As you might know, SSC are typically very closely linked to social security. They tend to be ear-marked and represent rather a type of forced or contingent savings than a real tax. Because of this strong nexus, a crucial question is not (only) when to introduce SSC, but rather whether to use SSC or taxes to finance early soc security.

This crucial question was also a quetion which vexed German imperial chancellor Bismarck in the 19th century. Bismarck is often credited as founder of the welfare state and public social insurance. One impressive finding of TID is that many non-European countries have done similar things, at times much earlier. Nonetheless, Bismarck’s decision was important because it inspired a lot of other countries to do similar reforms. So his problem becomes relevant: How to finance social insurance? Surprisingly enough, he preferred taxation! And he lost against the parliament. This is why the German welfare state became associated with SSC.

Now the question is whether this was an exclusively German story or whether there are some general structural problems. In other words, when do governments use SSC rather than taxes to finance early social policy? Of course, there are many different potential explanations why governments might choose one form of financing the welfare state over another. Colonial introductions played a huge role. French colonies, for instance, introduced SSC in the year 1952 as response to a bill on maternity benefits passed in the French parliament.

For me, one potential explanation is particularly intriguing: as argued above, compared to general taxes, SSC are (usually) tied to benefits. This makes them particularly interesting for qualified workers, usually found in the (male) urban industrial sector, who want to insure themselves against issues such as invalidity, but who do not really seek universal insurance for everyone. Some people have called this segment ‘insiders’, because these workers are the ones usually having access to social security benefits whereas a lot of self-employed, non-employed or informally employed people do not. Whether or not you agree with this notion, it is clear that SSC impart a different logic compared to taxation. In particular, SSC do not really follow a redistributive logic.

If it is true that SSC are advocated by urban (industrial) workers and their interest groups this suggests that they arise in urban settings. Rural societies do not have the logistic and political capacity to promote SSC. However, there is a counter argument, which might impose an upper limit on this logic of urban industrialism. Very urban societies make special interests very large and dissipate the benefits of insidership. Larger urban societies will contain workers of all types not only specially qualified workers. They will include service sector workers and many other people in the need of social security. They will also include informal workers. In such settings, SSC loses some of its charm and it would make more sense to expect tax-financed social security.

When you put both arguments together, we could expect that SSC need some degree of urbanization but only up to a limit. This is also what we see in the data. The figure shows predicted probabilities for having an SSC rather than a tax financed system. I do not want to bore you with the details. Econometrics is one of those things you do not want to look into too closely, because you would realize how ugly the truth often is. For those interested in the details, I refer to the chapter. Let us focus on the somewhat naïve and stylized descriptive (bivariate) relationship between the probability of having a SSC-financed rather than a tax-financed social security system. The curvilinear relationship indeed illustrates that the probability is highest for medium levels of urban density. Very rural countries don’t really have the capacity and the political will to collect SSC, very urban societies do no longer find it attractive compared to taxed-financed.

For details see the book chapter.

There is some anecdotal evidence that this logic applies to many countries in the global south and the global north. But of course there are varieties and several other reasons informing this choice. The chapter concludes with Bismarck’s other defeat. As many people might know, Bismarck famously introduced social security (also) to fight Socialism and the rise of Social Democracy. As history showed, this did not really work. To the contrary, early decisions for or against SSC might have had path dependencies because, once you introduce SSC, (qualified) workers will fight for their expansion and continuation.


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