Financing of social protection

1. Financing of social protection Georg Fischer European Commission

2. Main Issues • Social protection trends • Expenditure • Financing • What do we know about impacts in a Lisbon context? • Employment • Financing and policy objectives

3. Level and structure of Social protection expenditures, %GDP (2004) Source: ESSPROS.

4. Structure and trends of social protection expenditures • Pensions followed by sickness and disability in all countries, • But wide differences between just over 12 in Baltics to 30 of GDP and more in Scandinavia, • Overall trend slowly declining with cyclical up 2000-2003

5. Social Protection expenditures since 1990 in EU Source: ESSPROS.

6. Impact and efficiency of social protection • Social protection effective tool against poverty, • Positive link to income level • No evidence for negative link to employment – positive? • Similar for external position

7. Poverty in Working Age Poverty of older people 18.0 40.0 IR MX 16.0 35.0 US JP 14.0 30.0 MX TU PT IR IT 12.0 US GR 25.0 GR SP AS NZ JP 10.0 CN UK 20.0 PL PT Poverty rate among elderly (%) Poverty rate among working-aged (%) AS 8.0 BE AT IT TU HU GE UK NO SP 15.0 BE FI NO FR 6.0 CH SW DK NL CH FR GE FI 10.0 LX 4.0 SW CZ AT DK LX PL 5.0 2.0 HU y = -0.43x + 17.26 y = -0.88x + 14.83 CN 2 CZ NZ R = 0.02 2 R = 0.67 0.0 0.0 NL 0 5 10 15 0 5 10 15 Non-health public social spending towards working-age Pension spending (%GDP) population (%GDP) Relative Poverty and Social Expenditures Source: OECD Social Expenditure database and data from the OECD income distribution questionnaire poverty 7

8. Social Protection Expenditure and GDP per capita (2001) * Luxembourg is not shown in the Chart given its status as an outlier. Data for Cyprus are not available. Source: Eurostat - New Cronos databank and ESSPROS.

9. Social Protection Expenditure and Employment

10. Structure of Social Protection Financing • Share of employers/employees contributions slowly declining, • Decline slightly more marked for employees, • Big differences between Member States leading to • convergence in financing structure

11. Evolution of structure of financing in EU (1990-2004) Source: ESSPROS.

12. Employee and employer contributions Source: ESSPROS.

13. Financing by general budget • Increasing trend – • Not in line with general belief about shift to contributions • How much scope for national tax policy? • Consumption taxes – likely to be regressive • Capital taxation – progressive

14. Changes in financing structure, shares of social contributions and general government contributions as pp of GDP Source: ESSPROS Note: data for 1990-2004, except EU25, EE, CY, LV, LT, HU, MT, PL and SI 2000-2004; CZ and SK 1995-2005.

15. Impact of financing methods • Employment Impacts – High expectations – how justified? • More likely to result from changes than from levels, • More likely to result from targetted reductions than from general cuts, • However – alternative financing has impacts as well.

16. Financing in a broader context • Incentives and financing methods: • Very high levels might be counterproductive notably if • systems lack credibility, • easy to work informally, • only a weak link between benefits and contributions.

17. Impact of reform – contribution benefit link Source: OECD –Pensions at a Glance 2007

18. Financing in a broader context • Careful design of contribution and benefit link: - Benefits must reflect more and longer working, • Contributions can be used to discourage/encourage behaviour • Health care, work accident, temporary lay-offs, Limit: solidarity function of social protection

19. Policy Conclusions • There are significant changes in social protection financing, • Financing matters – although one should not overestimate what can be achieved, • Careful system design can help needs to be seen in a broader social and economic context.