Do demographics and defense spell the end of Germany's welfare state?

Germany's welfare model – the social bedrock that once ensured its postwar revival – is now showing real signs of stress. The country is grappling with three years of recession, a rapidly aging population, and an unprecedented wave of defense spending. 

The question on everyone's minds: can the welfare system endure?

Speaking on August 23, Chancellor and CDU leader Friedrich Merz delivered a sobering message: "The welfare state as we have it today can no longer be financed with what we achieve economically." 

His statement came against a backdrop of declining growth, as German GDP shrank by 0.3 percent in both 2023 and 2024, with further contraction in mid‑2025.

Germany spent nearly $55 billion in 2024 on core social services—pensions, healthcare, unemployment, and care insurance.

At the same time, German military investment has reached unprecedented heights. Defense spending rose 28 percent in 2024 to $88.5 billion, propelling Germany to Russia-sized rearmament levels. Projections indicate this could climb to $178 billion by 2029, equating to 3.5 percent of GDP, meeting NATO's new spending threshold.

Earlier this year in March Germany's famed "debt brake" was revised to fund this military expansion. Merz spearheaded the amendments exempting defense spending beyond 1 percent of GDP from borrowing restrictions and established a $580 billion infrastructure and green-energy fund.

Welfare spending: Not out of control, but pressured

Contrary to portrayals of a bloated welfare state, Germany's social expenditure has hovered around 26 percent of GDP since the early 1990s. 

The pandemic nudged it up to nearly 30 percent, but figures have since reverted, according to European Commission data. Comparatively, Germany's system remains modest – slightly below France, similar to Austria.

Critics point that a deeper issue lies in who pays – and who doesn't. For example, Germany's pension fund routinely shoulders costs for state-mandated programs, like child-rearing credits and special pensions for resettlers. 

In 2023, these bills hit $125 billion, yet reimbursements totaled only $100 billion – with contributors shouldering the bill for the remainder.