COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 31.10.1995 
COM(95)457 final 
REPORT FROM THE COMMISSION 
SOCIAL PROTECTION IN 
EUROPE 
1995 

Table of contents 
Table of contents 
Foreword 
Summary and conclusions 
Chapter 1 Systems of social protection in the Union 
Chapter 2 Adapting to change: recent reforms 
and key developments 
Chapter 3 Trends in social protection and its financing 
Chapter 4 Unemployment compensation and incentives 
to look for work 
Chapter 5 Reforms in health care 
Chapter 6 Social protection and the self-employed 
Chapter 7 Social protection and caring responsibilities 
Sources and methodology 
/- -5 
Summary and conclusions 
Summary and conclusions 
The development of extensive 
systems of social protection to 
support and assist people in need 
has been a prominent feature of 
European societies over the post-war 
years. The systems which have been 
established differ in detail in terms of 
their organisation and methods of 
funding, reflecting the cultural, his­
torical and institutional differences 
which exist between Member States. 
Nevertheless, they share a common 
characteristic of protecting all those 
who require support, whether tempo­
rarily, because they fall ill or lose 
their job or have a baby, or on a 
longer term basis, because they retire 
from paid employment, become per­
manently disabled or have children to 
bring up, irrespective of their ability 
to pay. 
It is the universal nature and extent of 
this support, and the scale of redistribu­
tion of income entailed, which distin­
guish systems of social protection in 
Europe from those in most other parts 
of the world or, indeed, from private 
insurance schemes. While systems are 
based on insurance principles in va­
rying degrees throughout the Union, so 
that in many cases the amount received 
in benefit is related to the contributions 
which have been made, there is no 
direct link between what each person 
pays as their contribution to financing 
the system and their vulnerability to 
illness, disability, unemployment or any of the other risks covered. At the 
same time, in most Member States, a 
minimum level of income and basic 
support is guaranteed to everyone irre­
spective of whether they can afford to 
pay anything or not. 
As such, systems of social protection 
contribute significantly to maintain­
ing social cohesion and strengthen­
ing solidarity within the Union. They 
have arguably played a major role in 
helping societies cope with the in­
creasing strains imposed on them by 
the significant economic and social 
changes which have occurred over 
the past two decades in particular, 
which have been accompanied by 
high and rising unemployment, in­
creased uncertainty and instability of 
employment and income, the influx 
of large and growing numbers of 
women onto the job market, an 
ageing population as life expectancy 
has risen and substantial changes in 
the structure of households, with a 
marked growth in the number of 
people living alone and in lone-
parent families. 
All of these developments, however, 
have equally imposed strains on 
social protection systems themselves 
as the demands on them have esca­
lated and, more especially, as the 
numbers of people requiring long-
term support and assistance have in­
creased to levels never envisaged when the systems were designed. 
The costs of maintaining the systems 
and of providing extensive support 
have, therefore, risen significantly 
throughout the Union. At the same 
time, the income available to finance 
these costs has become increasingly 
constrained as long-term economic 
growth across Europe has slowed 
down markedly in relation to the 
rates prevailing before the mid-1970s 
when most of the systems were estab­
lished. The financial constraints have 
been particularly evident in recent 
years because of the recession of the 
early 1990s and the prevailing con­
cern of policy to reduce budget 
deficits and limit public expenditure 
growth in order to contain inflation­
ary pressure, to avoid imposing ex­
cessive costs on businesses facing 
increasing competition in markets in­
side and outside Europe. 
Although the commitment to pro­
moting a high level of social protec-
tion throughout the Union, as 
enshrined in the Maastricht Treaty 
(Article 2), remains undiminished 
and although attachment to the exist­
ing system of social support re­
mains deeply entrenched in popular 
opinion, financing problems and 
the growing demand for support, 
coupled with the high and increasing 
level of long-term dependency on 
social assistance, have given rise to 
fundamental questions being asked 
(e 
Summary and conclusions 
in many Member States about the 
function, scope and means of funding 
systems of social protection. 
Equally, there is growing awareness 
of the substantial economic, social 
and demographic changes which 
have taken place since the systems 
were, for the most part, developed 
and which are still occurring and of 
the very different context in which 
they have to operate. In particular, 
economies in the Union are becom­
ing ever more closely integrated, 
though at the same time more open to 
competition from outside. Partly, as 
a result, increasing economic flexi­
bility and the promotion of individual 
initiative have become major objec­
tives of policy, aims which systems 
of social protection can either work 
against by adversely affecting incen­
tives or help to achieve by providing 
support in the event of failure, so 
encouraging greater risk-taking. At 
the same Lime, the costs imposed on 
businesses by the need to finance so­
cial protection are a growing cause of 
concern, and prevailing demographic 
trends threaten to add significantly to 
the need for income transfers and for 
support throughout the Union in 10 
to 15 years time as the baby boom 
generation reaches retirement age. 
Moreover, in the context of the in­
creasing emphasis of policy across 
the Union on raising employment, 
there is a growing focus on the poten­
tial links between prevailing systems 
of social protection and the process 
of job creation. The 1993 Com­
mission White Paper on Growth, 
competitiveness, employment called 
for more detailed analysis of this 
issue, while successive Community 
Summits in Brussels, Corfu, Essen and Cannes, have drawn attention to 
the links between social protection 
and the way it is funded and incen­
tives both to offer and accept work. 
Against this background, there is not 
only general recognition that, despite 
their diversity, social protection sys­
tems across the Union are facing 
common problems and a common 
need to adapt to changing circum­
stances and priorities, but also a 
growing awareness of the potential 
advantages of cooperation. This was 
already evident in the adoption by the 
Council in 1992 of two Recommen­
dations to work towards the conver­
gence of social protection policies 
and objectives and to establish com­
mon criteria for defining minimum 
levels of income and social assist­
ance. The present Report, which is 
aimed at describing and analysing the 
systems operating in the different 
Member States and the way they are 
developing, is a product of those 
Recommendations. 
A new framework 
for debate 
There is now, however, widespread 
agreement on the desirability of 
going beyond the exchange of infor­
mation on policies and their effects, 
important as this is, to joint consider­
ation on the future development of sys­
tems of social protection in the Union 
and the appropriate responses to the 
common challenges which they face. 
In consequence, the Commission has 
proposed that the Community institu­
tions and the Member States should 
embark together on a process of co­
operative reflection on the future measures which should be taken to 
make social protection systems more 
conducive to employment growth and 
more efficient, to ensure that they 
facilitate the free movement of labour 
between countries as well as the reali­
sation of the potential benefits of the 
internal market and increasing econ­
omic integration and their equitable 
distribution. 
Aims of the Report 
This Report is intended to contrib­
ute to that process by analysing 
not only the way in which social pro­
tection systems are developing 
across the Union but equally the 
problems which they face and the 
forces to which they have to respond 
and so increase mutual under­
standing of the options for develop­
ment, in the light of their diverse 
forms of organisation and institu­
tional characteristics. 
The focus is on the links between so­
cial protection and employment. As 
such, it is intended as a complement 
(published every two years) to the an­
nual Employment in Europe Report, 
the latest issue of which was published 
in July. This examined trends in em­
ployment and unemployment across 
the Union, the changes which are oc­
curring in the nature of jobs and in the 
pattern of work, the factors which in­
fluence the process of job creation and 
the measures taken in Member States 
to increase the number of people em­
ployed. 
In particular, it analyses — in Chap­
ter 4 — rates of unemployment benefit 
in different parts of the Union as 
-8 
Summary and conclusions 
compared with take-home pay when in 
work, which is likely to be a major 
determinant of the incentive for people 
receiving benefit to seek employment 
and, therefore, of the scale of the un­
employment trap which exists. This 
complements the analysis both in Em­
ployment in Europe, 1995 and in 
European strategy for employment-
recent progress and perspectives 
(COM(95) 465), a recently published 
Commission report following up the 
Essen Council meeting, of the poten­
tial effect of social charges and payroll 
taxes levied to finance social protec­
tion on labour costs and so on the 
incentive of employers to take on more 
staff. The two together, therefore, give 
an indication of the effect of social 
protection, in terms of both its funding 
and the income support which it pro­
vides, on the two sides of the employ­
ment equation—on the willingness on 
the part of employers to create jobs and 
on the willingness of those out of work 
to take them up. 
In addition, it examines in detail two 
aspects of social protection systems 
which are becoming increasingly rele­
vant as a result of the structural 
changes in employment which are oc­
curring throughout the Union, in part 
in response to government policies. 
Specifically, it considers, in Chapter 6, 
the access of the self-employed to so­
cial insurance and support and their 
treatment as compared with those in 
waged employment, who are the tradi­
tional focus of systems of social pro­
tection. As such, it indicates how far 
policies in this area are consistent with 
labour market measures designed to 
encourage people, especially those out 
of work, to set up small businesses. It 
also considers, in Chapter 7, social pro­
tection arrangements in respect of those, mainly women, who have to 
give up paid work for a time, or work 
fewer hours, to look after children or 
disabled or elderly people, usually 
relatives, in need of care. Given the 
increasing number of women in work, 
coupled with the growing numbers of 
people living into old age and, there­
fore, likely to require care, this is be­
coming an important issue not only for 
social policy but also for employment 
policy across the Union. 
In addition to these employment-
related themes, the Report examines 
(in Chapter 1) the principal charac­
teristics of social protection systems in 
the Union and the way they differ 
between Member States; the main 
developments which have occurred in 
recent years in both the provision of 
support and its funding (Chapter 2); 
the scale and pattern of expenditure, its 
rate of growth in relation to people in 
need of support and the changing im­
portance of different sources of finance 
(Chapter 3); and the reforms which 
have been introduced in recent years in 
different parts of the Union to contain 
the costs of health care and to improve 
the efficiency of the service provided 
whilst maintaining standards of treat­
ment and care (Chapter 5). 
The main points to emerge from this 
analysis are summarised below. 
Similarities 
and differences 
As indicated above, social pro­
tection systems in the different 
Member States may differ in the 
details of their organisation and 
methods of funding but are similar in terms of their objectives and cover­
age. In particular, there is a common 
attempt in all 15 Member States to 
provide universal support and assist­
ance to all those in need whether 
temporarily or for longer periods of 
time. The major gap in coverage is in 
the Southern countries, in Greece, 
Spain, Italy and Portugal, where, un­
like elsewhere in the Union, there is 
no guarantee of at least a minimum 
level of all income support in all cir­
cumstances. Although efforts have 
been made to provide some support 
for the elderly and disabled, those not 
eligible for certain standard benefits 
(sickness and unemployment 
benefits, especially), because they 
are not, or have not been, in paid 
employment, either at all or for a 
sufficient period of time, can only fall 
back on assistance from local or re­
gional authorities, which to a large 
extent is discretionary and non-
standardised. 
There are, however, large differences 
in the scale of protection provided 
and, in particular, in access to in­
come- (or contribution-) linked in­
surance benefits, especially between 
those in work — and, more specifi­
cally, those in waged employment — 
and others, as well as in the extent of 
reliance on means-tested assistance 
as opposed to automatic payments. In 
these respects, Member States can be 
divided into four groups: 
• the three Scandinavian countries, 
where social protection extends 
to all citizens as of right and 
everyone is entitled to the same 
basic amount, with those in paid 
employment receiving addi­
tional, earnings-related benefits, 
and where only unemployment 
-9 
Summary and conclusions 
insurance is separate from the 
State-run integrated system and 
voluntary rather than compul­
sory; 
• the UK and Ireland, where 
coverage is virtually universal 
(though the national health sys­
tem in Ireland is only fully ac­
cessible free of charge to those 
on low incomes), where flat-rate 
basic amounts are also the norm, 
though on a lower scale, and 
there is extensive use of means-
testing; 
• Germany, Austria, France and 
the Benelux countries, where the 
insurance principle is more evi­
dent, where benefits are mostly 
earning:; ^laiea and, together 
with health care, are linked to a 
greater extent to employment 
and to contributions and vary in 
some degree between occupa­
tional groups (though in the 
Netherlands, a number of univer­
sal schemes, for pensions espe­
cially, have been established) 
and where gaps in coverage are 
filled by an extensive social as­
sistance scheme; 
• Italy, Spain, Portugal and 
Greece, where the attempt to es­
tablish universal systems is more 
recent and systems are a mixture 
of fragmented, occupational and 
insurance-based income main­
tenance schemes, with relatively 
generous pension formulas, but 
with gaps in coverage, as noted 
above, and national health ser­
vices, which are not yet fully 
universally-accessible except in 
Italy. There are, moreover, differences 
both between and within these four 
groups as regards the regulations 
governing eligibility to the various 
benefits and the duration of their re­
ceipt. In particular, pensionable age 
is around 65 in most countries, but is 
57 for women and 62 for men in Italy, 
60 for both in France and 67 for both 
men and women in Denmark. Simi­
larly, insurance-based unemploy­
ment benefits are payable almost 
indefinitely in Belgium, but for only 
a year in many countries, while ac­
cess to sickness and invalidity 
benefits in the Netherlands and the 
UK has generally been easier than 
elsewhere. These two aspects, eligi­
bility criteria and the duration of pay­
ment, more than the «<^1- or benefits 
paiJ have come under increasing 
scrutiny in recent years, in the search 
for ways of limiting expenditure and 
discouraging avoidable long-term 
dependency, as noted below. 
The scale of 
expenditure 
These differences in the features 
of prevailing systems between 
Member States are reflected in the 
cost of maintaining them. In general, 
expenditure on social protection 
tends to be much higher in the North 
of the Union than in the South, in part 
reflecting the difference in prosperity 
and, therefore, in the availability of 
resources to fund them, in part, the 
less developed nature of systems in 
Southern countries, Greece and 
Portugal, in particular. Although 
there is a clear tendency for countries 
to spend more on social protection 
in relation to GDP as the latter increases, some systems are evi­
dently more costly than others. 
In the Scandinavian countries, in par­
ticular, where coverage is universal 
and benefits relatively generous, total 
expenditure on social protection 
amounts to well over 30% of GDP 
(33% in Denmark in 1993, around 
35% in Finland — though the figure 
here is increased markedly by the 
severe recession in GDP (in 1990, it 
was 26%) — and probably about the 
same in Sweden, though comparable 
figures are not yet available). In the 
Netherlands, spending is also high as 
compared with other Member States in 
relation to the level of rcai income per 
v-aJ (around 33% of GDP in 1993 as 
against 31% in Germany and France 
where income per head is higher). In 
the UK and Ireland, on the other hand, 
where relatively modest flat-rate 
benefits are the norm and, in the former 
especially, where a relatively high pro­
portion of payments are subject to 
mean-testing, expenditure is compara­
tively low in relation to income per 
head (27% of GDP in the UK in 1993, 
2l72% in Ireland). Similarly in Italy, 
where there are more gaps in the cover­
age of the system than in Northern 
Member States with comparable levels 
of income per head, spending is also 
relatively low (just under 26% of 
GDP in 1993), as it is in Greece and 
Portugal, where systems are still being 
developed (1672% of GDP in 1993 in 
the former, 18% in the latter). 
The pattern 
of financing 
'he relative importance of differ­
ent sources of finance for social 
- 10-
Summary and conclusions 
protection reflects the systems in 
operation. In Germany, France and 
Belgium, two-thirds or more of the 
revenue levied to fund social protec­
tion comes from contributions, with 
employers being responsible for 
around 60% of these. In Greece, the 
proportions are similar, while in 
Spain, Italy and Portugal, as well as 
in the Netherlands and Luxembourg, 
contributions remain the main source 
of finance but taxes are more import­
ant. In the UK and Ireland, more 
revenue comes from taxes than from 
contributions, while in the Scandina­
vian countries, taxes predominate 
and revenue from contributions is 
small. 
The pattern 
of spending 
While the level of social protec­
tion expenditure varies, the 
division between the main functions 
is relatively similar, especially in the 
North,of the Union where systems 
are more developed, though there are 
a few significant differences, reflect­
ing variations partly in the people in 
need of support, partly in eligibility, 
partly in the rate of benefit paid or 
level of service provided. Old-age 
pensions are the largest element of 
spending throughout the Union 
— apart from in Ireland where the 
relative number of elderly people is 
less than elsewhere—accounting for 
some 43% of total spending in 1993, 
followed by health care and sickness 
benefits, which together absorbed 
around 24% of the total, invalidity 
benefits (9%) and unemployment 
compensation (7%). In Greece and Italy, however, around 
60% of expenditure in 1993 went on 
old-age pensions, in the former 
largely reflecting the comparatively 
low level of provision of other 
benefits and services, in the latter, the 
large number of people drawing a 
pension. Thus in Italy, there are not 
only a relatively high proportion of 
the population who are elderly as 
compared with other parts of the 
Union, but also the official age of 
retirement is fixed at a lower level 
than elsewhere (though, as noted 
below, reforms have recently been 
introduced to alter this). 
In the Netherlands, the relative 
amount spent on invalidity benefits 
in 1993 was over twice that in the rest 
of the Union (over 21% of the total), 
the result of the relative number of 
recipients being also twice as high as 
in other Member States, except for 
the UK. Here the number was simi­
larly high, though the average 
amount received was considerably 
lower (in 1994, 15-16% of those 
aged 55 to 64 in these two countries 
reported in the Community Labour 
Force Survey that they were not 
working because they were perma­
nently disabled as opposed to 7% in 
the Union as a whole) In both cases, 
the large number of recipients re­
flects in part the nature of the system 
and the fact that invalidity benefit has 
been used to provide income support 
for many who are effectively long-
term unemployed or prematurely re­
tired. Policy efforts have been made 
in the recent past in both countries to 
tighten the rules governing eligibility 
for benefit. 
In Spain, expenditure on income sup­
port for the unemployed in 1993 was over twice as high relative to GDF 
than in other parts of the Union, ac­
counting for 20% of total spending 
on social protection, but this was 
mainly because the relative numbers 
unemployed were also twice as high 
as in the rest of the Union. On the 
other hand, in Denmark, where un­
employment was below the Union 
average, relative expenditure was 
only slightly below the level in Spain, 
reflecting both a comparatively high 
rate of benefit paid and a high level 
of eligibility for benefit among those 
out of work. As in the Netherlands 
and the UK, the extent of income 
support has come under increasing 
scrutiny in recent years. 
The effectiveness 
of social protection 
One major issue which this 
Report has been unable to ad­
dress is the effectiveness of social 
protection systems in providing sup­
port and assistance to those in need 
and, related to this, their success in 
ensuring that no-one's income and 
access to services falls below a mini­
mum level. Although there is infor­
mation on the scale of support which 
is in principle available as well as on 
the rules and regulations governing 
access to them and although esti­
mates can be made of the numbers 
liable to be at risk, there are little or 
no satisfactory data on how many 
people are in need of support in prac­
tice, how many of these actually re­
ceive assistance and how much they 
receive in relation to their need. 
Until such data become available, it 
will remain impossible to assess 
11 
Summary and conclusions 
satisfactorily the adequacy or other­
wise of existing systems, especially 
as experience demonstrates that ac­
tual receipt of income support can 
differ markedly from the theoretical 
entitlement. This is even more the 
case as means-testing becomes more 
important since in these circum­
stances what is received depends not 
only on individual income and accu­
mulated savings but also on assist­
ance actually being claimed. 
The only effective way of providing 
these data is through detailed surveys 
of households. A new Household 
Panel Survey has been established 
by Eurostat to do precisely this. Spe­
cifically it aims to collect detailed 
information about household charac­
teristics, sources of income and liv­
ing conditions across the Community 
from a sample of households. As yet, 
however, results are not available 
(though they should be by around the 
end of 1995) and it remains to be seen 
how effective an instrument it will be 
in answering the kind of fundamental 
question posed above. 
The growth 
of expenditure 
Over the long-term, expenditure 
on social protection has tended 
to increase relative to GDP. In 1970, 
expenditure amounted to 19% of 
GDP over the Union as a whole (in 
this case excluding Spain, Portugal 
and Greece for which no figures are 
available). By 1980, the proportion 
had risen to 24% (2472% excluding 
the same three countries) and by 
1993, to just under 28%. It is this 
seemingly upward long-term trend which has been a cause of wide­
spread concern across the Union and 
has been one of the reasons for the 
recent emphasis on expenditure 
restraint. These figures, however, 
need to be interpreted with some 
care, in part, because of the signifi­
cant influence of fluctuations in 
GDP growth and the underlying 
level of economic activity on the per­
centage, in part because of the vari­
ation in experience between Member 
States. 
The increase has by no means been 
uniform across the Union. Unlike in 
the 1970s, when most countries ex­
perienced significant growth of ex­
penditure relative to GDP, between 
1980 and 1990, spending rose by 
only one percentage point in relation 
to GDP (from 24% to 25%). In four 
countries — Belgium, Germany, 
Ireland and Luxembourg—expendi­
ture was lower relative to GDP in 
1990 than in 1980. Only in the coun­
tries where systems were being de­
veloped — Greece, Spain, Italy and 
Portugal — plus France, did the in­
crease amount to more than 2 per­
centage points in relation to GDP. 
Moreover, in the second half of the 
1980s when the European economies 
were recovering from recession, ex­
penditure declined relative to GDP 
in the Union as a whole, though it 
continued to rise in the four Southern 
Member States (as well as in 
Denmark, where economic growth 
slowed down). 
Over the three years 1990 to 1993, 
spending on social protection went 
up in all Member States as a propor­
tion of GDP as their economies went 
into recession, in 7 countries 
— Denmark, Spain, France, Luxembourg, Portugal, the UK and 
Finland — by around 3 percentage 
points or more. This rise, however, 
was largely due to the marked slow­
down in GDP growth — or, in some 
cases, a fall in GDP — and the steep 
rise in unemployment which accom­
panied this. Although in real terms 
(adjusted by the increase in consumer 
prices), expenditure increased by 
4l/2% a year in the Union as a whole, 
significantly more than over the 
preceding five years (under 372%), 
excluding unemployment compen­
sation (which went up by almost 50% 
over the period), it rose by under 4% 
a year, only marginally more than 
over the preceding five years. Since 
part of the growth in pensions, sick­
ness and invalidity benefits was al­
most certainly recession-related 
(resulting from increased early retire­
ment, for example), there is little sign 
of any underlying acceleration in the 
growth of social protection spending 
over this period (expenditure on each 
the three items mentioned, in fact, 
grew by less between 1990 and 1993 
than between 1985 and 1990). 
Nevertheless, in the context of very 
little growth in GDP and a policy 
emphasis both on fiscal restraint and 
on limiting public expenditure in 
order to avoid excessive increases in 
taxes and social charges on business 
and the costs of employment, a 
growth of almost 4% a year — even 
after adjusting for unemployment — 
in a major component of public 
spending was a matter of widespread 
policy concern. Against this back­
ground, the common focus on 
measures to limit expenditure on so­
cial protection which has been fea­
ture of the recent past is perhaps 
understandable. 
12-
Summary and conclusions 
The impending 
demographic 
time-bomb 
The emphasis on cost contain­
ment is also understandable in 
terms of the increasing demands on 
systems of social protection which 
are almost certain to arise from the 
ageing of the population: In 1995, the 
population aged 65 or over (the pres­
ent or planned official age of retire­
ment in most Member States) 
amounted to some 23% of the popu­
lation of working age (15 to 64) in the 
Union as a whole. In ten years time 
in 2005, it will have risen to 26% on 
the latest projections (assuming no 
significant acceleration in net inward 
r^Vration flows of those below re­
tirement age). Vvniie Jiio ;;;!! rrt-
doubtedly increase expenditure on 
pensions, unless there is an increase 
in the actual age of retirement, in 
contrast to present trends, the amount 
involved is relatively small. If the 
average pension was to remain un­
changed in relation to GDP per head, 
for example, it would result in expen­
diture in the Union rising from 12% 
of GDP to just under 13 72% — much 
the same rate of increase as between 
1980 and 1993. 
The major expansion in potential ex­
penditure does not come until after 
2005 when the post-war baby boom 
generation begin to retire in large 
numbers. In 2015, the population 
aged 65 and over is likely to represent 
30% of that of working-age and in 
2025, 3572%. Whereas in 1995 there 
are 4-5 people of working age to 
support each person of retirement 
age, in 30 years time, there will be 
less than three. In some countries, Italy in particular, it will only be 
around 272. If average pensions 
remained unchanged relative to 
average income, then this growth in 
numbers alone will add almost 572% 
of GDP to the cost of social protec­
tion over the next 30 years in the 
Union as a whole. At the same time, 
the large expansion in the numbers of 
elderly people is likely to impose in­
creasing demands on the health care 
and social service systems. 
Nevertheless, despite the apparent 
scale of the pressures in prospect, it 
is important to keep them in perspec­
tive. In the first place, expenditure on 
social protection increased by 8% of 
GDP between 1970 and 1993 in the 
Union — half as much again as the 
rise in spending on pensions on the 
above assumption. Secondly, the 
ease Oi acmeving cue uamici to those 
above retirement age and the strain 
imposed on the future generation of 
working-age will depend critically 
on the underlying growth of the 
European economies between now 
and then and what happens to jobs. In 
recent years, the effective depend­
ency ratio has risen substantially not 
because of the ageing of the popula­
tion but because of earlier retirement 
and increasing unemployment, both 
the result of reduced job availability. 
In consequence, many fewer people 
in employment have had to support 
increased numbers not in work, both 
above and below retirement age. 
If job availability through GDP 
growth could be expanded over the 
next 30 years to reduce unemploy­
ment back to the levels of the early 
1970s and to accommodate a conti­
nuing increase in the participation 
of women in the work force, as well as perhaps a reversal of the trend 
towards early retirement, this would 
more than offset the effect on the 
dependency ratio of the ageing of the 
population and make it easier to 
effect the income transfer required. If 
on the other hand, underlying GDP 
growth does not improve and job 
availability remains low, then any 
significant transfer will present 
serious problems, irrespective of 
how pensions schemes are funded in 
the meantime. 
Changes in sources 
of finance 
In the light of the reduction in the 
numbers in employment em­
ployed which occurred over this 
period, the widespread shift from 
contributions to taxes as a source of 
finance is also understandable. Over 
the Union as a whole, the share of 
revenue raised from taxes rose from 
2772% to 2972% between 1990 and 
1993, with only Belgium and the 
Netherlands showing the reverse 
tendency. Moreover, this was ac­
companied by a parallel shift away 
from employers' contributions to 
these being levied on the person 
being protected, with only Portugal 
experiencing a shift in the opposite 
direction. Nevertheless, these 
changes have been comparatively 
small and over the 1980s and early 
1990s, the broad structure of financ­
ing of social protection remained 
largely the same. 
Although no data as yet exist for the 
period after 1993, it appears from the 
measures introduced in Member 
States since 1993, and noted below, 
13 
Summary and conclusions 
that these shifts in the pattern of 
financing have become more pro­
nounced. At the same time, the shifts 
to a large extent have been a tempor­
ary response to increased unemploy­
ment and, as noted below, have taken 
the form of a reduction in employers' 
contributions if firms take on the 
long-term unemployed, the young 
and other 'hard-to-place' people 
from the unemployment register, 
though rates have also been reduced 
in respect of the low-paid in a number 
of countries to stimulate job creation 
for the less skilled and younger mem­
bers of the work force (as in Belgium, 
France, Ireland and the UK). 
There is as yet, however, little sign of 
any fundamental change in the 
method of financing and in most 
countries contributions remain the 
major source of funding, largely be­
cause of the wish to refcun the insur­
ance-based nature of the system. 
Indeed, in Scandinavian countries, 
there have been some moves to in­
crease contributions relative to taxa­
tion, partly to widen sources of 
finance, partly to link benefit pay­
ments more closely to employment 
and so discourage working in the in­
formal or grey economy. On the other 
hand, in countries where finance 
comes mainly from contributions, 
attempts have been made to widen 
the sources of funding by identifying 
those elements of the social protec­
tion system which are not employ­
ment-related, such as health care and 
family allowances, and financing 
these from taxes, as well as earmark­
ing certain taxes for funding particu­
lar expenditure (such as the general 
social contribution, CSG, levied in 
France on personal income which is 
used to fund basic pensions). In addition, in some countries, the 
search for alternative sources of fin­
ancing has been combined with at­
tempts to shift the burden of taxation 
from the employment of labour to the 
use of natural resources, with the aim 
of stimulating job creation while 
encouraging energy and resource 
saving. 
Recent reforms 
affecting spending 
Almost all policy action taken in 
respect of social protection in 
recent years has been aimed at con­
taining costs and where possible re­
ducing them. This has taken the form 
of: 
• tightening the regulations on 
eligibility to benefit — espe­
cially insurance-based, income-
related payments; 
• increased targeting of support on 
those most in need, through 
more extensive use of means-
testing and by taxing benefits; 
• increased emphasis on active 
measures to get people into work 
so that they can support them­
selves as opposed to passive 
measures of income transfer; 
• increased privatisation in a var­
iety of forms, including not only 
contracting-out services but per­
haps more importantly shifting 
the responsibility of providing 
protection to individuals them­
selves or to those employing 
them. Such measures have been motivated 
not just by cost considerations but 
also by a concern to reduce depend­
ency on social protection both for the 
welfare of the individuals concerned 
and to maintain public support for 
social protection systems — or more 
'specifically their funding — by dem­
onstrating a willingness to minimise 
possible abuse. 
Responses to 
demographic and 
economic pressures 
The heightened policy concern 
with the growth of social protec­
tion expenditure in the recession 
years of the early 1990s has helped to 
focus attention on the longer term 
trend and on the underlying forces 
tending to push this up. In particular, 
it has helped highlight the conse­
quences for pensions of the conti­
nued ageing of the population in the 
Union and of the post-war baby 
boom generation reaching retirement 
age from around 2005 onwards. This, 
in turn, has led to widespread reform 
of pension systems in Member States 
and a shift away from a policy of 
encouraging early retirement, which 
was widespread in the 1980s, to one 
of trying to limit or reduce the pros­
pective amount of income trans­
ferred to pensioners. 
In five Member States — Germany, 
Greece, Italy, the UK and Finland 
(for public sector employees) — 
measures have been introduced since 
1992 to increase the official age of 
retirement in the coming years and in 
a sixth, France, much the same effect 
has been achieved by raising the 
14-
Summary and conclusions 
number of years of contributions re­
quired for a full pension (from 3772 
to 40). In most cases, the increase is 
planned to occur gradually over the 
next two decades and will have little 
effect on those retiring in the next few 
years (in Germany, for example, it 
will be raised from 63 for men and 60 
for women to 65 between 2001 and 
2012, in the UK, from 60 to 65 for 
women between 2010 and 2020). In 
all cases, a major aim has been to 
bring the retirement age for women 
into line with that of men for equity 
reasons, though this has been 
achieved by increasing the former 
rather than reducing the latter as was 
envisaged a few years ago. 
Whether this will result in a reduction 
in the numbers of people in retire­
ment is questionable. Despite the 
change in the emphasis of policy, the 
trend towards early retirement accel­
erated rather than diminished in 
the early 1990s, largely because of 
the economic recession which was 
accompanied by large-scale redun­
dancies and a lack of alternative em­
ployment opportunities for those 
losing their jobs. Nevertheless, the 
changes will tend to reduce the num­
bers in receipt of State pensions and 
so shift the burden of support from 
the State to the individual. 
At the same time, measures have also 
been introduced in a number of coun­
tries to reduce the amount of pension 
received, either by lowering the 
maximum proportion of earnings re­
ceivable (as in Finland for public sec­
tor employees) or by taking more 
account of other income in the calcu­
lation of tax (as in Denmark and the 
Netherlands) or by altering the basis 
for calculating entitlement (by increasing the number of years over 
which earnings on which the pension 
is based are assessed, as in France 
and Portugal). 
This latter kind of change has poten­
tially important implications for the 
position of women relative to men. 
Because they are more likely to have 
to interrupt their working careers 
to bring up children or look after in­
valid relatives, any increase in the 
number of years of contribution re­
quired for a full pension or in those 
used to calculate entitlement will 
tend adversely to affect women more 
than men. 
The growth of pension liabilities has 
also caused attention to be focused 
more generally on the schemes them­
selves and, specifically, on whether 
schemes should change towards 
being fully-funded (ie where future 
liabilities determine the amount of 
contributions) from being 'pay-as-
you-go' (ie where contributions are 
determined by present pension pay­
ments) as now in most countries. A 
shift towards more reliance on pri­
vate insurance schemes and giving 
more responsibility to individuals to 
decide on the level of pension and 
contributions, as in the UK, espe­
cially, is seen to be one means of 
achieving this, while at the same time 
relieving the direct financial cost to 
on the State. 
In most countries, however, there has 
been little attempt to move away 
from the 'pay-as-you-go' principle, 
perhaps because it is highly uncertain 
whether such a change would make 
it any easier to meet pension commit­
ments when the time comes for pay­
ment, since this ultimately depends on the state of the economy — on the 
level of real income, the rate of 
growth and the numbers unemployed 
who also require support — at the 
time. At the same time, it should be 
noted that, in practice, the distinction 
between 'pay-as-you-go' and funded 
pension schemes is by no means 
clear-cut. In most Member States, 
there has been a conscious policy of 
building up reserves to cover future 
pension liabilities, which has led to 
revenue collected to finance social 
protection being invariably higher 
than current expenditure, in some 
cases significantly so. 
Increased targeting 
As the cost of social protection 
has risen, so increased efforts 
have been made to direct expenditure 
more towards those most in need of 
support. This has been achieved 
through a variety of means, through 
tightening eligibility criteria (as with 
unemployment and invalidity 
benefits in particular), setting income 
limits to the receipt of benefits (as in 
Germany, the Netherlands, Italy and 
Spain, where family allowances have 
been linked to income), imposing or 
increasing taxes (as in the Scandina­
vian countries) or subjecting pay­
ments to means-testing. The latter 
has been most prevalent in the UK 
and Ireland, though in many Member 
States, the extent of means-testing 
has increased in recent years, espe­
cially of unemployment compensa­
tion, partly reflecting the growth in 
numbers of long-term unemployed 
whose entitlement to insurance-
related benefit has expired. 
-15 
Summary and conclusions 
In the UK, however, more than else­
where, the extension of means-
testing has been a deliberate policy 
move to contain costs. While this is 
arguably a way of concentrating the 
resources available more effectively, 
it can also give rise to problems. Most 
importantly perhaps, identifying 
those most in need is difficult and, in 
practice, the onus has to be placed on 
them to claim support, which signifi­
cant proportions for one reason or 
another do not do (up to 20% of those 
qualifying for Income Support, for 
example) and are so left inadequately 
protected. At the same time, concen­
trating support on a relatively small 
group who are classified as worst off 
by some criterion is liable to mean 
that those only slightly better off on 
the same criterion receive less assist­
ance tha they need. Moreover, 
means-testing is administratively 
costly, can discourage saving, if ac­
cumulated wealth is taken into ac­
count, as it tends to be, and reduce 
incentives to work if extensive sup­
port is withdrawn as soon as a reci­
pient finds a job or if the test is 
applied to household income and 
someone else's earnings from em­
ployment (a wife, for example) result 
in a reduction or loss of entitlement. 
Although efforts have been made to 
reduce these problems — by in­
creased publicity and by the intro­
duction and extension of in-work 
benefits (Family Credit) to increase 
income when in work — they remain 
important. The Job Seeker's Allow­
ance planned for 1996 will increase 
reliance on means-testing even more 
by restricting the receipt of flat-rate 
insurance benefits to the first six 
months of unemployment. From passive to 
active measures 
A further aspect of the planned 
XJLJob Seeker's Allowance in the 
UK is to impose more pressure on the 
recipient to look for work, while at 
the same time providing more help 
and advice though the Employment 
Services. The increased emphasis on 
getting people into work has been a 
common feature of policy in recent 
years in most Member States, moti­
vated in part by the persistence of 
large numbers of long-term unem­
ployed even through the years of high 
job creation in the late-1980s. This 
has taken the form, not only of 
improvements in the employment 
services to provide more effective 
help on job search, but also of in­
creased subsidies to employers or 
lower social charges levied on them 
(which have an equivalent effect). 
For the most part, these have been 
targeted on the long-term unem­
ployed, young people or other 'hard-
to-place groups'. 
How far such measures result in a net 
increase in the number of people in 
employment rather than a displace­
ment of existing workers by newly-
recruited subsidised ones, however, 
remains unclear, as does the net ef­
fect of special schemes for providing 
work for the unemployed ('work-
fare'), which are liable to result in a 
loss of trade for established busi­
nesses or the redirection of activity 
towards work of lower value (unless 
overall expenditure in the economy 
is raised). Nevertheless, increasing 
the rate of turnover of the unem­
ployed, even without reducing the 
numbers, can be a desirable objective in itself, though it is unlikely to lead 
to a reduced need for expenditure on 
social protection and could, indeed, 
result in an overall increase if the 
amount spent on subsidies is taken 
into account. 
In the Scandinavian countries, inno­
vative policies have recently been de­
veloped for reducing unemployment 
by sharing available work more 
evenly. Under these schemes, em­
ployers are encouraged to allow 
employees time-off for training, 
parental leave or simply to pursue 
their own activities, and to take on 
people from the unemployment reg­
ister to replace them, so effectively 
increasing the number of jobs per 
employee by each of these working 
less. 
Limited trends 
towards 
privatisation 
Increased pressure on social protec­
tion systems has also led to some 
shift from public to private sector 
provision and, more extensively, to 
active discussion about the possi­
bilities, and desirability of moving 
further, in this direction, and, as a 
corollary, about the scope of State-
provided support and services and 
the functions which should be in­
cluded. One suggestion, in particular, 
is that the State should concentrate on 
providing basic support and services 
and leave individuals to take care of 
their further needs, whether in terms 
of pensions, health care or income 
support at times of incapacity for 
work. Although this would not 
necessarily reduce the overall 
- 16 
Summary and conclusions 
amount ofresources going into social 
protection, widely defined—indeed, 
it could well lead to an increase, es­
pecially as regards health care — it 
would have the effect of relieving 
government of some of the financial 
burden and take decisions on the 
level of provision out of the public 
sphere. At the same time, the US 
example demonstrates that it would 
not necessarily avoid the need for 
difficult political choices to be made 
and may make it harder for adequate 
support to be provided for those who 
need it. 
Debate in this area, however, has pro­
ceeded further than action, partly be­
cause of the difficulties involved in 
making fundamental changes with­
out reducing the level of support for 
those in need, partly because of the 
entrenched popular belief in the de­
sirability of an extensive welfare sys­
tem. In many Member States, the 
development of private pension 
schemes has been encouraged in re­
cent years, though largely to supple­
ment public provision rather than to 
replace it. In the UK, on the other 
hand, it has been an explicit policy 
aim to devolve responsibility for sup­
plementary pensions to the private 
sector, to encourage individual? to 
have personal pension schemes and 
to increase the importance of such 
pensions by limiting the role of the 
basic pension. This has given rise to 
difficulties of regulation (especially 
of unscrupulous employers control­
ling the funds) and to problems of 
high contribution levels partly be­
cause of the need to cover future 
(rather than present) liabilities. 
An analogous solution to the problem 
of restraining costs has been applied to sickness benefits in both the UK 
and the Netherlands. In both coun­
tries, responsibility for paying 
benefit has been shifted to the em­
ployer — for the first six weeks in the 
Netherlands, for the first six months 
in the UK (compensated by a uniform 
reduction in employers' contribu­
tions) — who has also been made 
responsible for checking the validity 
of claims. The aim in each case is to 
give employers a cost incentive for 
reducing the incidence of sick leave 
and to shift the costs of monitoring 
from the State. Nevertheless, there is 
a danger that without more detailed 
and stronger regulation by govern­
ment, the change will discriminate 
against workers with records of poor 
health whom firms will be reluctant 
to take on or to retain, as well as 
against those employed in small 
firms which may fail to pay. 
Extensions 
in support 
While the main thrust of policy 
throughout the Union has 
been directed at cost containment, 
there are, nevertheless examples of 
increased levels of support in a 
number of countries, especially in 
Southern Member States where sys­
tems have continued to develop and 
improve. In Germany, moreover, the 
scope of the system has been ex­
tended to include compulsory social 
insurance cover for long-term care 
(Plegeversicherung), while in the 
Scandinavian countries as well as in 
Belgium, new entitlements to leave 
for employees have been introduced, 
to enable more time for training as 
well as for child care. Given the increased pace of technological 
advance, this should be beneficial 
both for workers who need to update 
their skills and for firms who need to 
be able to take advantage of new 
methods of working. 
Reforms in 
health care 
There has been a marked trend 
towards privatisation in the pro­
vision of health care. This has taken 
two related forms: the growth of pri­
vate treatment per se and an increase 
in the extent of co-payment for pres­
criptions and consultation (ie of 
patients paying an increasing propor­
tion of the costs). While expenditure 
on health care has risen significantly 
in relation to GDP since 1980 in most 
Member States — though by no 
means all (in Ireland and Sweden, 
it has declined and in Denmark 
and Germany, it has remained un­
changed) — much of this has been 
due to an increase in private sector 
provision, which increased its share 
of total spending markedly in most 
parts of the Union, the only excep-
tions being Belgium and the 
Netherlands. The relative rise was 
particularly pronounced during the 
early 1990s when restraints on public 
expenditure were intensified. 
The trend towards more private sec­
tor involvement has been accompa­
nied by increased efforts to raise the 
effectiveness of expenditure and the 
efficiency of the provision of treat­
ment and care without jeopardising 
standards. In the absence of a market 
to signal the costs of provision to both 
suppliers and purchasers, 
17 
Summary and conclusions 
incentives for the former to seek to 
minimise such costs while supplying 
to the latter what they need and for 
purchasers to take these into account 
when deciding what to buy, a com­
mon tendency has been to introduce 
cost signals where possible and to 
strengthen contractual arrangements 
where not. In many countries, the aim 
has been to develop contracts which 
specify more precisely the level and 
standard of service required of hospi­
tals and doctors and the amount that 
will be paid for this and which, at the 
same time, incorporate incentives for 
those responsible for expenditure 
(the regional or local authorities in 
national health systems and the insur­
ance funds in insurance-based sys­
tems) to allocate this efficiently and 
in line with consumer needs. 
A major obstacle to improving effi­
ciency in all systems is the pre­
valence of monopoly elements 
among both providers of finance and 
suppliers of service coupled with in­
built inertia to change (as well as 
collusion between those involved). 
Partly because of incomplete infor­
mation and the need for local supply, 
problems exist, for example, in giv­
ing patients effective freedom to 
choose between doctors or between 
insurance funds, and spending auth­
orities to choose between hospitals 
when each one may specialise in 
treating a particular illness or ailment 
or where these are geographically 
dispersed. Nevertheless, the intro­
duction of more choice and more ele­
ments of competition, coupled with 
imposing increased incentives, and 
deterrents, on purchasers and sup­
pliers alike to spend their budgets 
efficiently (by, for example, setting 
fixed limits on expenditure or requiring them to raise additional fin­
ance from their own resources) seem 
to have helped contain costs, though 
many of the reforms are still in their 
infancy and remain to have their full 
effect. 
One key issue which largely remains 
unresolved throughout the Union, 
and, in some cases, unaddressed, 
concerns the scope of health care sys­
tems and the basis on which re­
sources are allocated between 
alternative kinds of care and treat­
ment if the provision of service is 
limited below what it otherwise 
would be (whether by means of fixed 
budgets or of ceilings on contribu­
tions). This is becoming particularly 
acute as advances in technology and 
know-how expand what it is possible 
to provide as well as typically raising 
the cost of treatment. It is likely, 
moreover, to become even more so 
as the number of very elderly people 
who impose disproportionately high 
demands on services increase 
sharply over the coming decades. 
One commonly suggested solution 
to this is to limit the provision of 
public health care to basic needs and 
to those who cannot afford private 
treatment and to leave the private 
sector to meet other needs and to 
cover other sections of the popula­
tion. Nevertheless, such an approach, 
on US experience, is likely to result 
in an expansion in the overall re­
sources absorbed by health care as 
well as a diversion of resources 
(medical expertise and equipment) 
towards treatment and care which 
people are most willing to pay for, 
which is not necessarily those which 
are most desirable from a social 
perspective. Unemployment 
benefits and 
incentives to 
seek work 
Although expenditure on unem­
ployment compensation in 
most countries accounts for a rela­
tively low proportion of what is spent 
on social protection (over 10% only 
in Denmark, Spain and Ireland) and 
amounted to only 2% of GDP in the 
Union as a whole in 1993, it has been 
a major focus.of policy in many 
Member States. (These figures, how­
ever, understate the true scale of 
transfers associated with unemploy­
ment, since they leave out of account 
transfers to the dependants of the un­
employed as well as those to people 
who are classed as sick or disabled 
rather than unemployed and those 
who take early retirement because of 
lack of jobs.) This is not only because 
of the significant increase which has 
occurred as unemployment has risen, 
but also because of a concern to avoid 
high benefit levels deterring those 
out of work from actively looking for 
a job, especially the less skilled and 
less productive among them, who are 
capable of commanding only rela­
tively low rates of pay. Such a con­
cern is motivated hot only by the 
desirability of reducing dependency 
on the system and reducing costs but 
also by a need to reassure those in 
work who provide the finance for 
income support that excessive 
amounts are not being transferred 
unnecessarily. 
These concerns, however, need to be 
balanced against the aim of providing 
sufficient income that those out of 
-18 
Summary and conclusions 
work can maintain an acceptable 
standard of living for themselves and 
their families and, moreover, that they 
have sufficient time to look for a job in 
line with their skills and aptitudes, 
which is important for the efficient 
functioning of the labour market. 
In practice, there is a good deal of 
difficulty in comparing the level of 
income received when unemployed 
with take-home pay when in work, in 
part because restrictions on entitle­
ment to benefit of varying severity 
across the Union make it hard to assess 
what will be paid in reality to any given 
person out of work. The rates of com­
pensation prevailing in mid-1993 in 
Member States, together with the rules 
governing eligibility, suggest that a 
single person on the average wage of a 
production worker qualifying for in­
surance-based benefits would have re­
ceived disposable income if they 
became unemployed of less than half 
that when in work in Greece, Ireland 
and the UK — less than in the US — 
and around 60% or less in Germany 
and Italy. In Denmark, Spain and the 
Netherlands, however, the figure 
was above 70% and in France, 
Luxembourg and Portugal, 80% or 
higher. After two years of unemploy­
ment, in four of the latter six countries 
— the exceptions being Luxembourg 
and Portugal — the figures would still 
have been above 70%, though in all 
other Member States, it would have 
been 55% or less. 
If the person concerned was married 
with two children, then disposable 
income when becoming unemployed 
would have been 70% or more of that 
when in work in all Member States, 
except Belgium, Italy (66% in both) 
and Greece (55%). However, most of the unemployed 
earn less than the average wage, in 
many cases, because they are rela­
tively unskilled, women (who on 
average earn only around 75% of the 
male average wage) or young people 
under 25 without a sufficient em­
ployment record to qualify them for 
benefits. In most Member States, 
replacement rates (disposable in­
come when unemployed relative to 
that in work) increase when earnings 
fall, though not over the entire earn­
ings range in Germany, Spain, 
Luxembourg, the Netherlands and 
Portugal, and the extent varies con­
siderably (the rise being greatest in 
countries where benefits are flat-rate 
rather than related to earnings, such 
as Denmark, Ireland and the UK). At 
65% of average earnings, the re­
placement rate for a single person 
qualifying for benefit was over 80% 
in five Member States — Belgium, 
Denmark, France, Luxembourg and 
Portugal — but below 90% in all but 
Denmark — and 75% or above in 
another three •— Spain, Italy and the 
Netherlands; only in Ireland and the 
UK was it below 60%. For a couple 
with two children, however, it was 
around 80% or above throughout 
the Union. 
Even for someone on earnings as low 
as half the average, the replacement 
rate for a single person was below 
100% in all countries apart from 
Portugal and below 80% in five, while 
a young person not qualifying for in­
surance benefits who could command 
only this level of pay when in work 
received nothing in Greece and 
Portugal and under 60% in another six, 
with the rate being above 70% in only 
Denmark, Luxembourg and the 
Netherlands. (The analysis excludes the three new Member States; a recent 
OECD study suggests that replace­
ment rates in Sweden were typically 
slightly lower than in Denmark at earn­
ings below the average, but slightly 
higher than in Finland over most of the 
earnings range, except at very low and 
very high levels.) 
How high the level of disposable in­
come when out of work needs to be 
in relation to that when in work to 
constitute a significant disincentive 
to look for a job is open to question. 
At low levels of income, even the 
possibility of increasing income by 
20% could well prove attractive. 
Moreover, some survey evidence and 
observation seem to suggest that, 
even for similar levels of income, a 
substantial number of people tend to 
prefer to be in work rather than be 
unemployed, largely because career 
and income prospects depend on 
being employed and, in general, par­
ticipation in society is closely linked 
to working. Other research points to 
the risk in countries with high re­
placement rates and long duration of 
benefit that people might rationally 
decide to remain unemployed. In 
practice, the increased pressure on 
those in receipt of benefit to take up 
employment, which has been im­
posed in many Member States in re­
cent years, is likely to make it 
difficult to go on receiving income 
support for any length of time with­
out seriously seeking a job. 
At the same time, attention should 
be paid to the risk of increasing 
poverty if benefit levels are re­
duced significantly. If the level of 
benefits is regarded as preventing 
wages from falling by enough to 
stimulate the creation of jobs for the 
19-
Summary and conclusions 
less skilled, then perhaps the focus of 
policy attention might switch to in­
troducing or extending in-work 
benefits, aimed at keeping labour 
costs down whilst ensuring that in­
come from work is sufficiently 
higher than income when unem­
ployed to attract people into employ­
ment. The difficulty here, however, 
is that such benefits, because they are 
targeted on a relatively small group 
at the bottom end of the pay scale and 
are, therefore, withdrawn or reduced 
significantly as earnings increase, 
tend to result in very high marginal 
effective tax rates for these (in the 
UK, the rate for those in receipt of 
Family Credit can often exceed 90% 
— see Employment in Europe, 1995, 
Part 3, Section 1). The danger is, 
therefore, replacing one disincentive, 
that of discouraging job search when 
unemployed, with another, that of 
discouraging work effort when in 
employment. 
Social protection 
position of the 
self-employed 
In most Member States, measures 
are in place to encourage people, 
especially the unemployed, to start 
up their own business. The social 
protection provided for the self-
employed, however, who numbered 
22 million in the Union as a whole in 
1994, 15% of those in employment, 
is, in a number of cases, significantly 
less extensive or generous than that 
for employees, despite the indica­
tions that substantial numbers of the 
self-employed have very low earn­
ings and/or are in sectors of activity, where income fluctuates consider­
ably. 
Although efforts have been made in 
many Member States in recent years 
to improve the position, a number of 
gaps remain. In most countries, the 
self-employed will tend to receive a 
lower pension than an employee with 
comparable earnings, either because 
they have been incorporated into 
State earnings-related schemes only 
relatively recently or because they 
have to contribute to supplementary 
pension schemes on a voluntary 
basis. Some may choose not to con­
tribute on this basis and others may 
feel unable to do so because of the 
high level of contributions involved 
and uncertainty about future income 
levels. Similarly, in the case of 
maternity benefits, in many countries 
— Belgium, Greece, Italy, France 
and the UK, for example — the total 
amount received is typically less, in 
some cases significantly, and in 
Ireland, no benefit is payable at all. 
Perhaps the most serious gaps, how­
ever, relate to periods of incapacity and 
unemployment. In four countries — 
France, Ireland, Italy and the Nether­
lands — the self-employed are 
excluded from social insurance 
schemes in respect of the receipt of 
sickness benefits, as are a large propor­
tion in Greece, while unemployment 
benefits for the self-employed exist 
only in the three Scandinavian coun­
tries and Luxembourg. In other coun­
tries, a major obstacle is seen to be the 
difficulty of distinguishing genuine 
unemployment in the sense of business 
failure from cases where trading 
has ceased voluntarily. Moreover, 
though social assistance is available to 
those whose businesses fail in all Member States, apart from Greece, 
Portugal, Spain and Italy (though in the 
latter two countries regional or local 
support may be available on a discre­
tionary basis), support is not generally 
obtainable for temporary periods of 
low earnings in Denmark, France, 
Austria and the UK and is likely to 
have to be repaid in the Netherlands. 
Social protection 
and caring 
responsibilities 
As the population ages and as 
more women take up paid em­
ployment, the issue of the effect on 
the social protection rights of those 
who need to look after young child­
ren, disabled adults or elderly in­
valids of having to interrupt their 
working careers is becoming more 
important. Indeed the problems 
many face in this respect are increas­
ingly recognised across the Union, 
and in many Member States, 
measures have been introduced in 
recent years to improve the position. 
Nevertheless, most of the focus has 
so far been on caring for children and 
in many cases difficulties remain for 
those caring for the disabled and in­
valid. At the same time, even for 
child care, the amount of benefit 
payable and the extent of provision 
for time-off with job reinstatement at 
the end of the period vary markedly 
across the Union. 
Schemes for providing benefits for 
those caring for adults exist only in 
four Member States — the UK, 
which has the longest-standing 
scheme, Ireland, Finland and 
Germany, where social protection 
20 
Summary and conclusions 
arrangements for long-term nursing 
care were introduced in April 1995. 
More limited provision is available in 
six other countries, though in Spain, 
Luxembourg, the Netherlands, 
Austria and Portugal, no provision 
for benefits exists at all. 
There are, moreover, other aspects to 
the problem. Carers, either of child­
ren or adults, returning to work may 
have an insufficient employment rec­
ord to qualify for insurance-based 
benefits, especially for unemploy­
ment benefit. In addition, if carers 
work part-time, then in five countries 
— Germany, Spain, Ireland, Austria 
and the UK — they have to earn more 
than a minimum amount and/or be 
employed for more than a minimum 
number of hours a week to be eligible 
for social, insurance (the corollary of 
not having to pay contributions and 
giving rise to lower labour costs as a 
result). If they work part-time and/or 
earn relatively low wages because 
they have interrupted their working 
careers, they will tend to receive a 
lower level of earnings-related pen­
sion and in some cases may be 
ineligible for occupational pension 
schemes. 
In a number of Member States, how­
ever, arrangements exist to moderate 
the effect on the final pension, either 
in the form of calculating this on the 
basis of earnings over a limited num­
ber of best years rather than over the 
entire time spent in employment (as 
in Spain, Portugal, Italy or Finland), 
dropping years of caring explicitly 
from the calculation (as in the UK or 
Ireland), crediting contributions dur­
ing periods of caring (as in Luxem-
bourg, Germany, Austria or 
Belgium) or allowing voluntary payment of contributions (as in Italy 
or Greece). In many cases, however, 
such arrangements provide only par­
tial compensation. 
Divorce adds a further complication 
for those, especially women, who 
have been engaged in caring, particu­
larly where they can no longer rely 
on derived rights to social protection 
and where pension entitlements are 
not divided equally at the time of the 
divorce. 
Future issues 
The ageing of the population and 
the implications of this for in­
come transfers, health care and social 
services coupled with the continuing 
need to respond to changing econ­
omic and social conditions are not the 
only challenges for systems of social 
protection which he ahead. 
The development of systems across 
the Union in future years is almost 
certain to be affected by the increas­
ing integration of the European econ­
omies. As this takes place and 
remaining constraints on f^e free 
movement of labour, capital, goods 
and services are removed, it is an 
open question how far the systems 
which now operate can retain their 
present diversity. 
So far the main focus has been on the 
changes required to facilitate the free 
movement of labour, which at a mini­
mum requires that those moving from 
one country to another have their social 
protection rights, including their pen­
sion entitlement, safeguarded and can. 
therefore, effectively transfer the rights built up in one country to the other. 
Difficulties arise, however, in translat­
ing this requirement into practice 
where the level of provision and/or the 
method of funding (ie between con­
tribution-based and tax-based sys­
tems) vary significantly between 
Member States. Indeed recent trends 
towards the increased importance of 
supplementary schemes coupled with 
the more extensive use of means-
testing to target benefits on those most 
in need tend in themselves to impede 
mobility. 
Moreover, if methods of financing, 
and specifically the extent of reliance 
on employers' contributions, remain 
significantly different, transnational 
companies, which are becoming 
more prevalent, will face continuing 
difficulties in both setting wage le­
vels in different countries, because of 
the substantial difference in overall 
labour costs associated with a given 
net wage, and moving staff from one 
country to another. Such differences 
are liable to affect location policy 
disproportionately in relation to 
other, more fundamental, factors. 
More generally, there is a serious 
question over how far levels of pro­
vision of social protection, and, 
therefore, the scale of financing asso­
ciated with them, can vary between 
Member States within a single econ­
omic space without this affecting the 
underlying conditions of competi­
tion. Other things being equal, the 
level of charges imposed on business 
(almost irrespective of how revenue 
is raised) and, therefore, the costs of 
production are likely to be higher in 
countries where social support is 
both extensive and generous putting 
21 
Summary and conclusions 
them at a potential competitive disad­
vantage 
Such considerations suggest that 
policies designed to increase the in­
tegration of European economies 
have implications for systems of so­
cial protection, just as the operation 
of these systems is liable to affect the 
outcome of those policies. In conse­
quence, it would seem to be import­
ant to adopt an integrated approach 
when taking policy decisions on 
either front. The same considerations 
suggest that there is a need for more 
joint consideration of social protec­
tion issues between Member States, 
including not only the common chal­
lenges imposed by demographic, 
economic and social changes but 
equally importantly the organisation 
of systems and methods of funding in 
an integrated Union. The new Frame­
work for debate on the Future of 
Social Protection provides an 
opportunity for this (see Box). 
22 
Summary and conclusions 
The future of social protection — a framework for a European debate 
A new initiative on the future of social protection was published by the European Commission in October 1995 
(COM (95) 466). Its main features are set out below. 
While Member States remain responsible for achieving the common objectives set by the European Union in this area, 
they will continue to adapt their systems in line with the underlying objective of social cohesion and solidarity in order 
to maintain or attain a high level of social protection. Since it is responsible for freedom of movement of people and 
the freedom to provide services and to compete, the Union has an interest in social protection issues in these areas. It 
is, therefore, important to ensure that social objectives are taken into account in other policy fields. Care must be taken 
to prevent options made in other areas from predetermining major social protection choices. An integrated approach 
should be followed and the Commission accordingly proposes that the Community institutions and the Member States 
should embark together on a process of common reflection on the future measures which should be taken to make social 
protection systems more employment-friendly and more efficient. 
This common reflection should be a collective process in which the Commission, as well as the Member States, have 
a role and to which the social partners and all the other parties concerned will be called upon to contribute. The European 
Parliament, the Economic and Social Committee and the Committee of the Regions must also be fu'ly associated in the 
process. The aim is to take slock of this debate before the end of 1996 and to propose appropriate follow-up. 
The Commission will initiate this process of reflection, presenting analyses and directions for debate, with Member 
States and the other parties concerned also contributing material. The Commission's main counterpart for dialogue will 
be the consultation group of Social Security Directors-General, though other consultation groups will also be involved 
in the employment and internal market areas. The European social dialogue bodies will be asked to take an active part 
in the reflection. 
Several issues in particular appear to call for further analysis and a common reflection: 
• the challenges arising from the narrowing gap between the size of the labour force and the number of pensioners; 
• the ways of making social protection more employment-friendly; 
• the financing of social protection; 
• the changes in systems of health care and the establishment of more systematic exchanges of experience between 
Member States; 
• the coordination of social security schemes for people moving between Member States and the relationship between 
coordination and convergence of social protection systems; 
• the principles under which the institutions managing both statutory and supplementary schemes and insurance 
companies can operate alongside each other in the internal market; 
• the future of social protection in the longer term. 
-23 0^ 
Chapter 1 -Systems of social protection in the Union 
Chapter 1 Systems of social protection 
in the Union 
A common profile 
Together with liberal democracy 
and the market economy, exten­
sive systems of social protection rep­
resent a fundamental component and a 
distinguishing feature of the European 
model of society. Ever since the last 
decades of the 19th century, welfare 
institutions have played a prominent 
role in the modernisation of European 
countries, smoothing the strains aris­
ing from the economic cycle, demo­
graphic trends, changing social 
behaviour and the transition from ag­
rarian to industrial modes of produc­
tion — the prime reason for the 
development of social protection sys­
tems. 
Viewed from within Europe, the so­
cial protection systems of Member 
States of the Union appear to be very 
different: indeed so different that it 
may seem impossible to identify 
common traits and pointless to speak 
of the European welfare model. Each 
nation has followed a distinct path in 
the development of its social policy 
which has greatly influenced the pre­
cise characteristics of the present sys­
tem. To a large extent, this Report is 
concerned to highlight and measure 
this diversity, though it will also em­
phasise certain important similarities 
and converging trends. Indeed, from a broader comparative perspective, it 
is not difficult to discern the common 
nature of European social protection 
systems which distinguish them from 
other parts of the world, especially 
the US and Japan. In most respects, 
social protection systems in Europe 
are more different from systems in 
these latter two countries than they 
are from each other. It is noteworthy, 
moreover, that Central and Eastern 
European countries are row develo­ping systems of social protection 
which closely follow the Western 
European model. 
The most visible of these charac­
teristics is certainly the scale of ex­
penditure on social protection: 
governments in Europe tend to spend 
more on this than other developed 
parts of the world. At the beginning 
of the 1990s, public expenditure on 
social protection averaged 22% of 
1 Social protection expenditure in relation to GDP, 
1990 
%GDP 
Japan Australia US Canada N. Zeal E12 Austria Finland Sweden 
Souae: OECD 
?3b 
Chapter 1 - Systems of social protection in the Union 
2 Attitudes on the social role of government: basic 
income, 1992 
100 r n 100 
Source: See box 
Attitudes on the social role of government: care 
for the sick, the elderly and the unemployed, 1990 
100 
90 
80 
70 
60 
50 
40 
30 
20 
10 
0 DThe sick 
HThe elderly 
• The unemployed J 
West D East D Italy 
Source: See box US Australia GDP in the Union. By contrast, it was 
around 19% in Canada and New 
Zealand, 15% in the US, 13% in 
Australia and under 12% in Japan 
(Graph 1). 
Many factors account for the larger 
scale of social expenditure in the 
Union. The coverage of social pro­
tection tends to be more extensive in 
terms of the risks included (particu­
larly as regards short-term cash 
benefits, social services and labour 
market programmes). Access to the 
benefits and services provided is also 
greater, especially in comparison 
with the US (where, for example, the 
public health service only covers the 
aged and the least well off) or with 
Australia (where public pensions are 
confined to those whose income falls 
below a certain level). In addition, in 
Europe rates of benefit are typically 
more generous (especially in the case 
of pensions). 
Because of its wider scope and the 
higher level of benefits, social pro­
tection makes a greater difference to 
people's lives in Europe than else­
where in the world. Transfer pay­
ments account, for instance, for a 
larger share of household income and 
in comparison with the US, they also 
appear more effective in reducing 
poverty. 
The central position occupied by so­
cial protection in the European Union 
is also demonstrated by public atti­
tudes. Almost all the people in 
Europe consider social security a 
major achievement of modern so­
ciety. The contrast between Euro­
pean and non-European attitudes 
towards the role of the State in safe­
guarding the welfare of its citizens is 
24 
Chapter 1 ~ Systems of social protection in the Union 
indicated in a survey conducted in 
1992 (see Box), this revealed that 
most respondents in the Netherlands, 
Italy, the UK and Germany (the only 
Union Member States) believed that 
governments should provide a basic 
income for all, whereas less than half 
thought so in Canada and the US 
(Graph 2). Moreover, respondents 
from the former Czechoslovakia, 
Poland and Hungary, also manifested 
a marked preference for the public 
provision of a basic income. Simi­
larly, only a minority of Americans 
and a bare majority of Australians 
surveyed considered that the State 
has a responsibility for providing in­
come support to the unemployed, 
whereas in Germany, the UK and 
Italy more than 75% of respondents 
thought that it should (Graph 3). 
An extensive welfare system is, of 
course, costly. It is also liable to give 
rise to rigidities of various kinds, 
which could erode competitiveness 
relative to other trading areas and 
adversely affect economic growth. In 
the long run, the financial, social and 
economic implications of a costly 
and rigid social protection system 
might even undermine a high level of 
popular support and deeply entren­
ched political legitimacy. The chal­
lenges confronting the European 
welfare states have been widely dis­
cussed in recent years. They have 
been the subject of a number of Com­
mission documents (such as the 
White Papers on Employment and 
Social Policy). This Report provides 
additional material for the policy de­
bate. 
Throughout the European Union 
significant reforms of systems of so­
cial protection are at present under consideration, and in a number of 
cases being introduced, in response 
to the need to curtail costs, to adapt 
to rapidly changing social and econ­
omic conditions and to replace the 
old rigidities with more flexibility. 
While it is as yet unclear how far 
Europe will maintain its social dis­
tinctiveness in this process, the im­
plementation of change will not be 
made in a normative vacuum. If the 
values of European citizens ex­
pressed in surveys, as well as in pol­
itical elections, are to be taken 
seriously, it seems safe to predict that 
social protection will continue to oc­
cupy a central place in our societies: 
European governments are likely in 
the future as in the past to endeavour 
to ensure that nobody is left deprived 
when unemployed, poor, ill, or dis­
abled. 
Dimensions 
of diversity 
The diversity of systems of social 
protection across the Union has 
many aspects. One which is often 
identified for classification purposes 
is the basis of entitlement to social 
support and, in particular, whether 
this is through contributing to a social 
insurance scheme, usually one based 
on being in work with benefits linked 
to contributions, or through being a 
citizen and in need of assistance. The 
first approach predominates in the 
countries of Continental Europe, 
while the second approach is more 
important in the UK, Ireland and, 
most especially, in the Scandinavian 
countries. The International 
Social Survey 
Programme 
The ISSP was launched in 
1984 by a number of research 
institutes with the aim of 
collecting standardised and 
comparable data on popular 
attitudes in different coun­
tries on a broad range of 
issues. A new survey is con­
ducted every year. The 1990 
survey was on the role of gov­
ernment and the 1992 survey 
on social inequality. All data 
are stored in Cologne, at the 
Zentral Umfrage Archiv 
(ZUMA). 
Although the contrast between the 
'Bismarckian' (ie the first type) and 
'Beveridge' traditions corresponds 
to an important historical divide in 
the formation of European Welfare 
States, it is too imprecise a distinction 
to provide an accurate description of 
their configuration in the mid-1990s. 
All European social protection sys­
tems today display some elements of 
each basic system. 
Rather than starting from historical 
developments and ideal or typical 
models, the following attempts to 
summarise the main similarities and 
differences between the social pro­
tection systems of the 15 Member 
States by reference to four distinct 
aspects: 
• risk coverage and eligibility; 
• the structure of benefits; 
-25 
Chapter 1 - Systems of social protection in the Union 
• financing regulations; 
• organisational arrangements. 
These aspects are the most relevant 
from both an analytical and a practi­
cal viewpoint. Since they are not 
necessarily the same as regard each 
of the three main broad functions of 
social protection — to maintain in­
comes, to provide health care and to 
supply social services — the latter 
are examined separately below. 
Income support 
All 15 Member States provide 
specific income maintenance 
benefits to cover the classic risks of 
old age and retirement, the death of a 
provider, disability, sickness, mater­
nity, dependent children and unem­
ployment. Most countries also have 
some specific form of benefit for oc­
cupational injury or disease, though 
in the Netherlands and Greece, these 
are covered by general sickness and 
disability insurance. 
These risks, however, are often 
defined differently in the various 
countries. There are, for example, 
differences in the age of retirement, 
and different definitions of disability. 
Beside the classic risks, in some 
countries other contingencies are 
also covered. Perhaps the most novel 
is long-term care, for which social 
insurance was recently introduced 
in Germany (as described in Chapter 
2). Others include the cost of child­
ren's education (eg the education 
allowances paid in France, Germany 
and Luxembourg), the cost of caring for disabled or sick relatives (eg the 
invalid care allowance in the UK, the 
'accompanying' allowance in Italy 
or the various allowances paid to 
families with disabled children in 
Belgium, Greece, Spain, France, 
Ireland, Luxembourg and Portugal) 
or sole parenthood (specifically sub-
sidised in Denmark, Finland, 
Germany, Greece, France, Ireland, 
Sweden and the UK). 
The residual risk of having insuffi­
cient resources is also covered by 
minimum income allowance 
schemes in all Member States except 
Greece, Portugal, Spain and Italy. In 
the latter, those not eligible for the 
standard benefits can only rely on 
discretionary, non-standardised cash 
support from local authorities 
(though in Italy, minimum income 
schemes operate in a number of 
regions and in Spain, a system guar­
anteeing levels of income is being 
progressively introduced at the 
regional level and in Portugal, the 
social security non-contributory 
scheme aims to provide minimum 
resources to those who do not qualify 
for insurance-based old-age, inva­
lidity and family benefits). 
Differences in eligibility — the ex­
tent of protection — are much more 
pronounced than differences in the 
risks covered. Here, there are notice­
able differences not only between 
countries but also between risks in 
some countries. 
In the case of old-age pensions, four 
countries (Denmark, Sweden, 
Finland and the Netherlands) have 
national schemes covering everyone 
who is resident. The UK and Ireland 
also have national insurance schemes which cover only those who are 
working or looking for work (ie who 
are part of the labour force) and 
whose earnings exceed a minimum 
level (around 70 ECU a week in the 
UK and 40 ECU a week in Ireland). 
In the UK, however, others not in the 
labour force or earning below the 
lower limit for paying social con­
tributions can make voluntary con­
tributions to obtain a national 
insurance pension (though this is not 
the case for other insurance benefits). 
In the remaining 9 countries, there is 
no national, single scheme. Eligi­
bility is based on occupational status 
and rules (eg regarding the age of 
retirement) often vary between those 
working in the public sector and 
those in the private sector as well as 
between wage or salary earners and 
the self-employed. Membership of 
one of the several insurance schemes 
is compulsory for the vast majority in 
employment. There are no minimum 
earnings requirements except for 
Germany (compulsory coverage 
starts at a minimum of 580 DM — 
around 285 ECU — per month) and 
Austria (250 ECU per month). There 
are gaps in eligibility in a number of 
cases, affecting some categories of 
self-employed (as described in 
Chapter 6), as well as some atypical 
workers who are not covered, includ­
ing as a rule family workers. 
Minimum benefits are available in all 
countries, however, to all those 
people who reach the age of retire­
ment without adequate insurance 
coverage. 
In addition to the basic pension (the 
so-called first pillar), there are sup­
plementary pensions (the second 
26-
Chapter 1 - Systems of social protection in the Union 
pillar) in all 15 Member States. 
Membership of supplementary pen­
sion schemes is compulsory in 8 
countries for particular groups and 
voluntary for others. In Sweden and 
Finland, all workers (employees and 
self-employed), however, are 
covered; in Denmark, the UK and the 
Netherlands, only wage and salary 
earners (and only in some industries 
in the latter, where they are mostly 
based on contractual agreements 
between employers and employees); 
in France, all wage and salary 
earners plus some categories of self-
employed and in Greece, only certain 
categories of employees and self-
employed. In all these countries, 
supplementary pensions are adminis­
tered by statutory bodies, although 
in the UK, people can contract out 
and become members of a private 
scheme instead of the State scheme. 
In a number of cases, however, there 
are voluntary schemes to supplement 
compulsory schemes. In the remain­
ing 7 countries (Ireland, Belgium, 
Luxembourg, Austria, Italy, Spain 
and Portugal), supplementary pen­
sion insurance is largely a matter of 
contractual agreement between em­
ployers and employees and is also 
somewhat less developed (though 
private individual schemes do exist 
in a number of cases). 
Entitlement to retirement pensions 
generally carries with it a right to 
survivor and disability benefits. In 
the case of disability benefits, in 
countries where the national scheme 
does not cover all residents, non-
contributory payments are available 
to those not eligible for insurance 
benefits, though means-tests for this 
are applied everywhere except in 
Luxembourg, Greece and Italy. In the case of sickness benefits, eligi­
bility is confined to wage and salary 
earners in Austria, France, Greece, 
Ireland, Italy and the Netherlands, 
but also covers the self-employed in 
Belgium, Denmark, Spain, 
Luxembourg, Portugal, Sweden, the 
UK and (partially) Germany. In 
Finland, everyone who is resident 
whether in employment or not (in­
cluding housewives and students) is 
eligible for at least a minimum daily 
allowance. 
In the case of maternity benefits, all 
women who are economically active 
are eligible in all countries, except 
Ireland and the Netherlands, where 
the self-employed are excluded, 
while in Luxembourg, Sweden and 
Finland women who are not in em­
ployment are also covered. In a few 
countries, fathers who are in work 
can claim benefit for a new-born 
child instead of the mother (for de­
tails, see Chapters 6 and 7). 
Only wage and salary earners are 
typically eligible for cash benefits in 
case of occupational injuries and dis­
eases, though the self-employed are 
partially covered in Denmark, 
Finland, France, Germany, Italy, 
Luxembourg, Spain and Sweden, 
while in a few countries, students are 
also included in compulsory insur­
ance schemes. As already noted, 
there are no specific schemes 
to cover this in Greece and the 
Netherlands. 
In the case of unemployment 
benefits, rules governing eligibihty 
vary not only across countries, but 
also in respect of the type of benefit 
scheme in force. In Denmark, 
Finland and Sweden membership of unemployment insurance funds 
is voluntary and also open to the self-
employed. Finland and Sweden 
provide specific assistance benefits 
to those who are not members of 
insurance funds. In all the other coun­
tries, unemployment insurance is 
compulsory, but only for employees: 
Luxembourg is the only country 
which offers insurance benefits to the 
self-employed. Some countries pro­
vide specific unemployment assist­
ance which is paid when eligibility to 
insurance benefits has not matured or 
has expired — France, Germany. 
Spain, Portugal and Ireland, for 
example. In the latter, eligibihty to 
unemployment assistance also ex­
tends to the self-employed. In all 
countries except Portugal and 
Greece, private sector employees in 
industry are eligible for special 
benefits in case of partial or tempor­
ary unemployment. This type of 
benefit is especially relevant in Italy, 
where agricultural workers are also 
eligible. It should also be noted 
that in some countries (Belgium, 
Denmark, Germany, Ireland and 
Luxembourg) young people in 
search of their first job are also 
eligible for benefit. 
Finally, all families are entitled to 
child allowances irrespective of their 
income in Belgium, Denmark, 
Finland, France, Ireland, Luxem­
bourg, the Netherlands, Portugal, 
Sweden and the UK; whereas in the 
other countries allowances depend 
on income (though not in all cases in 
Spain, such as in respect of disabled 
with children). In Belgium, allow­
ances are paid at a lower rate to the 
self-employed, while in Greece and 
Italy, with minor exceptions, they 
27-
Chapter 1 ~ Systems of social protection In the Union 
receive nothing at all (see Chapter 6 
for details). 
The structure 
of benefits 
The formulas used for the calculation 
of income maintenance allowances 
probably represent the most diverse 
aspect of European social protection 
systems. Like the niles governing 
eligibility, formulas vary not only be­
tween countries, but also between risks 
within each country, between types of 
benefit in respect of each risk and 
(especially in Continental Europe) 
between occupational groups. 
A fundamental divide can be drawn 
between 'Beveridge', flat-rate for­
mulas and 'Bismarckian', earnings-
related formulas. In Northern 
Member States, the former type ap­
plies to the benefits paid by the 
various national insurance schemes. 
Thus, a basic pension is payable to all 
residents in Denmark, Sweden and 
Finland when they reach retirement 
age, and to all those who have been 
in employment (and paid contribu­
tions) in the UK and Ireland. In addi­
tion to the basic pension, workers in 
these countries who are eligible (ie 
have paid contributions) also receive 
a supplementary pension which is 
earnings-related. Means-tested pen­
sion supplements are available for 
those in need. In general, short-term 
cash benefits are also flat-rate. How­
ever, for certain occupational groups 
they are earnings-related in some 
cases. Sickness, maternity and occu­
pational injury benefits are earnings-
related for all those in employment in 
Denmark, Finland and Sweden, 
where members of unemployment ;nsurance funds also receive 
earnings-related benefits when un­
employed. In the UK, Statutory Sick 
Pay became flat-rate in 1995, though 
Statutory Maternity Pay is earnings-
related. In Ireland also, maternity 
benefits are earnings-related for cer­
tain women. 
In Continental Europe, all benefits ex­
cept family allowances are normally 
earnings-related. In the Netherlands, 
however, old-age pensions are flat-rate 
as are disability benefits for non-
employees. In many Member States, 
pensions are raised to a minimum level 
if the calculations based on earnings or 
contributions result in amounts which 
are too low (Belgium, Spain, France, 
Italy, Luxembourg and Portugal, in 
particular). In Belgium, Greece, Spain, 
France and Portugal, minimum levels 
also apply in respect of unemployment 
benefits. There are, on the other hand, 
ceilings on earnings used as the basis 
for the calculation of basic pensions 
(first pillar) in Belgium, Greece, Spain, 
France, Italy and Luxembourg. 
Benefit formulas also often vary be­
tween occupational groups. In general, 
formulas applying to public sector em­
ployees tend to be more favourable 
than those in the private sector and are 
usually least favourable for the self 
employed (see Chapter 6). 
The actual statutory amounts of 
benefits vary a great deal. The flat-rate 
benefits in Scandinavian countries are 
generally higher than those in the UK 
and Ireland. The earnings-related rates 
of Southern European countries (at 
least in the case of pensions) are, in 
turn, higher than in the other Continen­
tal countries (where supplementary 
pensions are, however, more wide­
spread). It should be noted, however, that the generosity of protection does 
not only reflect the statutory rates, but 
depends on other important aspects of 
the benefit formulas such as the exist­
ence of ceilings and the availability of 
supplements, indexation, tax rules, the 
duration of benefits, the existence of 
waiting periods and so on. The vari­
ation in all these aspects is, again, very 
marked, especially as regards the self-
employed (detailed information can be 
found in the annual MISSOC reports 
—the Community information system 
on social protection). 
Financing 
Social security contributions are the 
main source of financing of income 
maintenance benefits in the Union. 
The primary exception is Denmark 
where benefits are predominantly 
tax financed, though in 1994, 
employees' contributions were intro­
duced for sickness and unemploy­
ment benefits. In addition, in the UK, 
Statutory Sick Pay and Statutory 
Maternity Pay are financed through 
general taxation. 
Contribution rates vary a great deal 
between Member States and between 
the different types of risk. In Ireland, 
the UK, Finland, Sweden, Belgium, 
Spain and Portugal no distinction is 
made between risks and a global rate 
is applied to earnings (separate rates 
exist, however, for unemployment 
insurance in Finland, Sweden and 
Spain). In the remaining countries, 
different rates apply to the various 
risks. Contributions are normally 
divided between employers and em­
ployees, in proportions which also 
vary between risks and occupational 
groups, and regulations usually exist 
28 
Chapter 1 ~ Systems of social protection in the Union 
for civil servants and the self-
employed (see the MISSOC report 
for further details). In schemes relat­
ing to industrial injuries, contribu­
tions are often defined on the basis of 
actuarial principles and fixed sector 
by sector. 
Revenue from general taxation pro­
vides part of the funding in all the 
Member States, even though relying 
heavily on social contributions. The 
State is responsible for all non-
contributory benefits (such as 
means-tested pensions) and in a num­
ber of cases also contributes to cer­
tain insurance funds on a statutory 
basis. Family allowances are fully 
financed by taxes in six countries — 
Denmark, Germany, Ireland, the 
Netherlands, Sweden and the UK. In 
addition, the State assumes the role 
of payer of last resort to cover deficits 
of insurance funds if they arise. In all 
Member States, long-term benefits 
(predominantly old-age pensions) 
are financed on a pay-as-you-go 
basis (ie present contributions go to 
meet present rather than future 
liabilities), except to some extent in 
respect of earnings-related and sup­
plementary pensions. 
Organisation 
Three distinct models of administra­
tion of social protection systems can 
be distinguished in the Union. In the 
Anglo-Saxon model, overall respon­
sibility for the provision of virtually 
all cash benefits generally hes with a 
single government department (the 
Department of Social Security in the 
UK — though the Northern Ireland 
Office has responsibility for admin­
istering social security in that part of the UK — and the Department of 
Social Welfare in Ireland); there is 
little involvement (and only of an 
advisory nature) of either the social 
partners or benefit recipients in man­
agement or policy. In the Scandina­
vian model, there is also a unitary 
system (instead of there being separ­
ate schemes), but administration is 
more decentralised (especially in 
Denmark) and the social partners 
participate in the management of 
national insurance (in the National 
Insurance Board in Sweden and 
the Social Insurance Institution in 
Finland). In all thre». Member States, 
unemployment insurance is run sep­
arately by the trade unions. 
In the Continental model of adminis­
tration, the system is fragmented in 
a number of semi-autonomous 
schemes for different occupational 
groups. The administrative structure 
is extremely varied and each country 
to a large extent has a unique con­
figuration, reflecting its historical de­
velopment as well as socio-economic 
and institutional characteristics. 
The contrasts between these three 
models should not, however, be over­
stated. In all countries, social security 
institutions are relatively tightly con­
trolled by government, even in the 
seemingly more pluralistic Con­
tinental systems. However, organisa­
tional char-cteristics are not totally 
devoid of significance. In the South­
ern European countries, for example, 
the various pro. .ssional schemes 
have proved very jealous of their 
autonomy (however small this is) 
and have recently resisted attempts 
by central government to unify them 
with the larger schemes for purposes 
of financial rationalisation. Health care 
All Member States have mature 
.health care systems providing 
benefits in kind and services for the 
cure and prevention of illnesses and 
rehabilitation. Virtually everyone in 
the Union is covered and — as indi­
cated by the 1992 Eurobarometer on 
social protection — most of them 
seem relatively happy with the 
quality of services they receive. 
To illustrate the way in which health 
care is organised in different parts of 
the Union, a distinction is often made 
between 'national health services' and 
'health insurance systems'. The for­
mer typically provide care through a 
single universal scheme accessible to 
the whole population and financed 
through taxation; the latter provide 
care through a number of social insur­
ance funds catering to different occu­
pational groups and financed mainly 
by contributions. The prototype of all 
European national health services was 
established in the UK between 1946 
and 1948. Eight other Member States 
— Ireland, Denmark, Sweden, 
Finland, Italy, Spain, Portugal and 
Greece — have followed suit, estab­
lishing national systems. The other six 
countries — Germany, France, 
Belgium, Luxembourg, the 
Netherlands and Austria — have by 
contrast maintained and developed 
their health insurance systems. 
A better understanding of the dif­
ferences between these two models of 
health care provision, as well as of the 
most significant differences within 
them, requires closer inspection of 
eligibility rules, sources of financing 
and overall organisation, each of 
which is examined in turn below. 
29-
Chapter 1 - Systems of social protection in the Union 
Eligibility 
In the national health services in the 
UK Denmark, Sweden, Finland and 
Italy all resident? are compulsoiily 
covered and are equally entitled to all 
benefits and services. The Irish service 
also covers all residents, but only the 
holders of means-tested medical cards 
(around 35% of the population) are 
entitled to the full range of benefits free 
of charge. In the three other countries 
with national health services, eligi­
bility rules are in a process of transi­
tion. In Portugal, all residents are 
entided to public health care, but the 
national health service as such only 
covers around 75% of the population. 
The others (mostly civil servants) re­
main members of traditional occupa­
tional insurance schemes, with 
different rules regarding treatment 
conditions. A similar situation exists in 
Spain, where universal coverage was 
enacted in 1986 as an objective to be 
achieved in progressive steps. In 1989, 
beneficiaries of public assistance pro­
grammes were brought into the health 
service, which covers at present 
around 93% of the population. There 
remains, however, a special system, 
with separate rules, for public servants 
who may opt for private coverage. 
Moreover, people in the highest in­
come groups are exempt from compul­
sory insurance. Finally, in Greece, 
eligibility is still primarily based on 
occupational and family status, with 
significant variations in conditions of 
treatment and the national health ser­
vice (formally established in 1983) 
only covers those who are not mem­
bers of an insurance fund. 
In Germany, Austria, France, 
Belgium, Luxembourg and the 
Netherlands, eligibility to public health care primarily depends on em­
ployment status. Typically, those in 
employment and the recipients of 
cash benefits are covered by one of 
the several health funds. Their family 
dependants have, in turn, a derived 
right to the same coverage. Those 
who slip through the social insurance 
net are covered by social assistance 
(which subject is to means testing). 
In these systems as well as in national 
health service ones, virtually every­
one is, therefore, covered either on 
the basis of individual or derived 
rights or means-tested need. Only in 
Germany and in the Netherlands is 
coverage of State systems signifi­
cantly lower than 100%, largely be­
cause those earning above a certain 
amount (around 37,500 ECU a year 
in the old Lander, 30,500 ECU a year 
in the new and 27,500 ECU in the 
Netherlands) have no obligation to 
insure with State schemes. In the 
Netherlands, however, there is a 
universal scheme for the reimburse­
ment of 'exceptional medical costs'. 
What distinguishes national health ser­
vices (typically the British, Scandina­
vian and Italian ones) from health 
insurance systems with respect to 
coverage is more internal variations in 
eligibility than the overall scope. In­
deed, in the health insurance systems 
the different funds sometimes operate 
under different rules, giving rise to 
various differences in the range and 
types of service available, the margin 
of consumer choice, the payment or 
reimbursement procedures, and so on. 
A marked example of this is the poorer 
provision for the self-employed in the 
case of 'small risks' in Belgium and 
France (see Chapter 6). Moreover, in 
the insurance systems, those who are 
ehgible through social assistance may face restrictions on the range of 
benefits or the choice of providers 
open to them (as in France in the case 
of the assistance publique). 
Financing 
The British and Scandinavian na­
tional health services are almost en­
tirely financed from taxation (though 
in the UK, a proportion of social con­
tributions goes to help finance the 
service). In Ireland the major source 
of finance is also general taxation, 
though a health contribution of 
1.25% is levied on all earnings. 
In Southern Europe, a shift from con­
tributions to tax financing was set as 
an objective under the reforms which 
established national services, but this 
has not yet been completed. In Italy 
and Greece, earmarked health con­
tributions are still levied on earnings. 
In Spain and Portugal, part of the 
overall contribution revenue is used 
to finance the national service — 
most notably the traditional occupa­
tional funds which still exist. In all 
four Southern Member States, the 
share of expenditure which is fin­
anced from taxes has risen continu­
ously over the past decade. 
Health contributions (with differing 
rates) are a primary source of finance 
of the various funds operating in 
Germany, Austria, France, Belgium, 
Luxembourg and the Netherlands, 
though in a number of these countries 
general taxation has also been used to 
cover the increasing gap between con­
tributory receipts from contributions 
and expenditure. 
30-
Chapter 1 - Systems of social protection in the Union 
Besides general taxation and ear­
marked contributions a third source of 
financing has been gaining importance 
over the past decade, namely 
user charges. In all countries, patients 
are liable to pay part of the cost of 
prescriptions. In Belgium, France, 
Luxembourg, Portugal and Sweden 
patients share part of the cost of medi­
cal consultations and a small fee is 
charged for hospital stays in Belgium, 
Germany, France, Luxembourg and 
Finland. Broad exemptions from 
charges apply in most countries for 
special illnesses and/or economically 
disadvantaged groups. 
Organisation 
National health services and health in­
surance systems tend to be organised 
differently. Since the former are single, 
all-inclusive schemes, their organisa­
tions are typically more unitary and 
homogeneous. In the UK, Ireland, 
Denmark, Sweden, Finland and Italy, 
general policies are determined by the 
Ministry of Health, while responsi­
bility for the implementation of 
policies and the actual provision of 
care hes with lower tiers of govern­
ment (regions, municipalities or local 
health districts or units), which have 
varying degrees of autonomy. Again, 
Spain, Portugal and Greece are in a 
process of transition. Parallel to the 
new, unitary and decentralised na­
tional health service administration, 
the old funds continue to operate na­
tionwide (in a few regions in Spain) on 
a sectoral basis and still occupy a very 
prominent position in Greece. 
Health insurance systems tend to be 
organised both sectorally and territor­
ially. Health Ministries have overall policy responsibility, though some re­
sponsibility hes with regional or local 
governments. The various health funds 
enjoy, however, a certain organisa­
tional autonomy (especially in 
Germany and the Netherlands) in the 
actual provision ofcare and sometimes 
over financing, as in Germany, for 
example. The funds are also organised 
on a territorial basis and are governed 
by boards in which consumer interests 
are directly represented. As in the case 
of income maintenance schemes, each 
country has its own individual organi­
sational structure, shaped to a signifi­
cant extent by history. In Belgium and 
the Netherlands, for example, the 
health funds still retain their original 
ideological and/or religious denomi­
nation — even though many members 
chose between them purely on com­
mercial grounds. 
Other relevant organisational aspects 
of health care systems concern the re­
lationship between financing institu­
tions and providers (most notably 
health professionals), the specific 
method of operation of the various le­
vels of care (eg hospitals), the public/ 
private mix, overall budgetary proce­
dures, and so on. These aspects are 
important from the point of view of 
cost containment and are currently 
under reform in many countries (see 
Chapter 5 of this Report). 
Social services 
Besides income maintenance and 
health care, social protection in­
cludes in all countries a wide variety 
of other services aimed at taking care 
of special needs. There are three 
main target groups: children and 
young people, adults in difficult economic or psycho-physical condi­
tions (disabled or drug addicts, for 
example) and the elderly. Social ser­
vices to these people may be pro­
vided in relatively standardised 
forms (day care centres for infants 
and children or residential care for 
the elderly, for example) or in a more 
personalised way (such as home 
care). These kinds of service have 
grown in importance in recent years 
and have proved themselves to be 
potentially flexible means of combat­
ing various forms of social exclusion. 
The responsibility for providing so­
cial services lies in most countries 
with regional and/or local govern­
ments. Only in Spain is this sector 
managed centrally by a national or­
ganisation (INERSO), though the re­
gional authorities have acquired 
some autonomy in this area as well. 
In the Scandinavian Member States, 
most services are provided directly 
by public authorities. In Continental 
countries there is a more varied mix 
between public sector direct provi­
sion and subsidised private or volun­
tary (third sector) provision. General 
taxation is the main source of financ­
ing throughout the Union, though in 
some countries small fees are 
charged for certain services. 
One, four or 
fifteen models? 
What pattern emerges from a 
close examination of social 
protection systems in the Union? At 
the cost of some simplification, it 
can be said that the Member States 
tend to cluster into four distinct 
'geo-social' groups, sharing similar 
31 
Chapter 1 ~ Systems of social protection in the Union 
traditions and institutional charac­
teristics. 
The first group comprises the 
Scandinavian countries: Denmark, 
Finland and Sweden. Social protec­
tion is here a citizen's right, coverage 
is fully universal (even as regards 
sickness and maternity cash benefits 
in Sweden and Finland) and every­
body is entitled to the same 'basic 
amount' when a 'risk' arises, though 
the gainfully employed receive addi­
tional benefits through mandatory 
occupational schemes. General taxa­
tion plays a predominant (though not 
exclusive) role in financing. The 
various functions of social protection 
are closely integrated within a uni­
tary administrative framework and 
state authorities (centrally or locally) 
are directly responsible for service 
provision. The only aspect which re­
mains somewhat separate from the 
public core of social protection is 
unemployment insurance, which is 
voluntary and managed by the trade 
unions (though it is heavily subsi­
dised by the State). 
The second group comprises the UK 
and Ireland. In the former also, the 
coverage of social protection is univer­
sal and in the latter almost so (some 
gaps exist for those at the margin or 
outside the labour market and the Irish 
national health service provides full 
eligibility only on the basis of econ­
omic need). The basic amounts of 
benefits are more modest than in Scan­
dinavia and there is a wider use of 
means-testing. Health care is financed 
through general taxation, but contribu­
tions play an important role in the 
financing of cash benefits. As in 
Scandinavia, there is an integrated ad­
ministrative framework centred on public authorities. The social partners 
are only marginally involved in policy 
determination or management. 
The third group includes Germany, 
France, the Benelux countries and 
Austria. Here the 'Bismarckian' 
tradition of coverage through em­
ployment or family status is still evi­
dent in both income maintenance 
and health care systems. Only the 
Netherlands has partially deviated 
from this tradition by establishing 
some universal schemes. The insur­
ance principle still underlies the 
determination of benefits (mostly 
earnings related) and the method of 
financing (mostly based on contribu­
tions) — with distinct regulations 
often applying to different occupa­
tional groups. Though extensive, 
social insurance nevertheless still 
leaves some gaps in protection, 
which are filled by the (highly de­
veloped) social assistance scheme. 
Professional funds play a prominent 
administrative role, with high invol­
vement of the social partners. 
The fourth group comprises Italy, 
Spain, Portugal and Greece. In these 
countries, the institutional design of 
social protection systems shares a 
similarly 'mixed' pattern. On the one 
hand, there are highly fragme :ed 
and 'Bismarckian' income mainten­
ance systems, with very generous 
pension formulas, but no national 
minimum income scheme, so that 
gaps in coverage are greater than 
elsewhere in the Union. On the other 
hand, these countries have estab­
lished national health services with 
universal and standardised coverage 
(though this is not yet fully realised 
in Spain, Portugal and Greece). 
Occupational funds and the social partners play a prominent role in in­
come maintenance, but no longer in 
health care and for the latter, general 
taxation is gradually replacing con­
tributions as the source of financing. 
The four-way partition presented 
here should not be interpreted rigidly. 
As noted at the outset, with the eyes 
of an outside observer the similarities 
across the four groups would prob­
ably appear greater than their dif­
ferences, while a detailed inspection 
would suggest treating each system 
as a unique configuration. Classifica­
tions, moreover, tend by their nature 
to be static artefacts. As the following 
chapters will show, social protection 
systems in the Union have been grad­
ually changing in the past few years, 
often in response to common chal­
lenges, and in the long run, adapta­
tions and change may well result in 
the social geography of Europe be 
redesigned in a similar way. 
-32 
Chapter 2 - Adapting to change: recent reforms and key developments 
Chapter 2 Adapting to change: recent 
reforms and key developments 
Throughout the European Union, 
systems of social protection 
have been a focus of increasing 
policy concern over recent years, 
irrespective of their precise charac­
teristics. In all Member States, even 
in countries in the South of Europe 
where their present form is of much 
more recent origin, the systems pain­
stakingly developed over the years to 
provide an extensive level of support 
and assistance have faced growing 
pressure for change and even re­
trenchment. Although in most coun­
tries this pressure has stopped well 
short of threatening the principle of 
universal support for those in need on 
which European social protection 
systems have been constructed, the 
great majority of changes introduced 
in Member States over the past few 
years have been aimed at reducing 
expenditure. Moreover, active con­
sideration is being given in a number 
of countries to wide-ranging reform 
of the way in which systems operate 
— their coverage, the level of 
benefits paid and the sources of fin­
ance — with the common objective 
of curbing costs, in many cases by 
targeting what is spent more nar­
rowly on those most in need. 
At the same time, there are examples 
of systems being modified to respond 
more effectively to the changing nature of demands on them or being 
extended to cope with new needs — 
most notably in Germany with the 
introduction of a special nursing 
allowance for those engaged in full-
time caring. 
This increasing emphasis on cost 
containment stems from a range of 
economic, social and demographic 
factors, which affect most parts of the 
Union and which share the common 
characteristic of imposing increasing 
demands on systems of social protec­
tion and/or tightening constraints on 
the funds available for their financ­
ing. While individually each seems 
to be manageable, in combination 
they present a formidable challenge 
to the systems now in place. 
None of the factors are new. All have 
been evident for some time and sys­
tems have already adapted to some 
extent in response to them. Indeed, in 
all parts of the Union, systems which 
differ in detail in the way they func 
tion have, in general, proved very 
effective in maintaining social cohe­
sion and preventing widespread pov­
erty in the face of the economic and 
other upheavals of the past 20 years. 
The two major factors which both 
represent serious challenges to the 
systems now in place are the ageing of the Union's population resulting 
from declining birth rates and in­
creased life expectancy and the per­
sistence of high unemployment 
combined with the depressed rate of 
long-term economic growth which it 
reflects. The former implies rising 
expenditure not only on retirement 
pensions and an increasing share of 
income going to people who no 
longer contribute directly to its 
generation but also on health and 
other forms of care. The latter im­
plies, on the one hand, high levels of 
expenditure on income support for 
those not able to find a job and on 
active labour market measures for 
improving their employability and 
preventing their social exclusion, on 
the other, reduced income for fund­
ing expenditure because of the smal­
ler numbers in work. This latter effect 
has been reinforced by increased par­
ticipation in education by the young 
coupled with early retirement among 
older people. 
While high unemployment has repre­
sented a serious and growing problem 
in most parts of the Union since the 
mid-1970s, especially because of the 
significant increase in its average dur­
ation which has occurred at the same 
time, the ageing of the population has 
so far had only a relatively modest 
effect on the need for expenditure as 
-33-
Chapter 2 - Adapting to change: recent reforms and key developments 
compared with what hes ahead as 
those who are part of the post-war baby 
boom generation reach retirement age. 
Although the full impact of this will not 
be felt until 15-20 years time, the pen­
sion rights which those concerned 
have accumulated is a source of in­
creasing alarm in many countries as the 
time when they will be exercised 
draws closer. How far such alarm is 
warranted and how far it justifies the 
cutbacks in prospective expenditure 
which are now being made or pro­
posed are matters for debate. There is 
no question, however, that the strain 
imposed on the European economies 
and societies by growing numbers of 
people in retirement will be very much 
more difficult to bear if long-term 
economic growth remains depressed 
and unemployment remains high. 
A third factor threatening to push up 
expenditure, which has been a no less 
important focus of policy concern, is 
the rising cost of health care which 
stems not only from the greatly in­
creased numbers of people living to an 
old age and, therefore, imposing 
greater demands on health systems, 
but also from advances in techniques 
and know-how which make it possible 
to treat incurable illnesses as well as 
from a marked tendency for the de­
mand for health care to increase as 
income rises. Although by no means 
all new treatments involve increased 
costs — micro-surgery which greatly 
reduces the time it takes to recover 
from an operation being a major case 
in point — a significant proportion do 
and by increasing life expectancy add 
to the costs of care. 
A fourth factor is the increasing partici­
pation of women in the labour market 
which has been a consistent trend in the more developed parts of the Union for 
the past 20-30 years, but which dates 
back only to the 1980s in the less 
(socially as well as economically) 
developed parts (in Greece, Spain and 
Italy, the activity rate for women of 25 
to 49 was still below 60% in 1994 and 
in Ireland, below 55%). Although 
there are recent signs of the upward 
trend coming to an end in the Scandi­
navian Member States, where activity 
rates of women have reached a level 
only slightly below that of men (in 
Denmark, 84% of women aged 25-49 
were economically active in 1994), it 
still almost certainly has some way to 
go in other countries. There will, there­
fore, continue to be a growing need for 
the provision of support facilities 
which enable women to pursue work­
ing careers while bringing up children. 
The same tendency, moreover, gives 
rise to pressure for the development of 
arrangements within social protection 
systems which avoid penalising 
women for interrupting working 
' careers to take care of children. 
A fifth factor is the changing struc­
ture of the traditional family unit and 
the growth in importance of 'atypi­
cal' households, such as lone parents, 
divorcees or cohabiting couples, 
which also involve a need for the 
modification and extension of social 
protection systems to provide spe­
cific support as well as for the devel­
opment of individual in place of 
derived rights for the women con­
cerned. 
A sixth factor is the increased open­
ness of Union economies which has 
led to the intensification of competi­
tion and the growing necessity to 
maintain competitiveness on world 
markets. This, in turn, has restricted the scope for independent action in 
Member States and imposed greater 
pressure to contain production costs 
and to avoid policies which could 
push these up, including, in particu­
lar, the growth of social protection 
expenditure and the higher charges 
which might fall on businesses as a 
result. 
A seventh factor is the significant 
growth in the number of people de­
pendent on social protection which 
has resulted from the developments 
listed above, particularly from the 
emergence of long-term unemploy­
ment as a major feature of the labour 
market and the significant numbers 
who stand little chance of finding a 
job. Such a growth in dependency, 
and the financial burden on the re­
duced numbers who have to finance 
the associated expenditure, threatens 
to undermine popular support for the 
maintenance of systems of social 
protection in their present form, es­
pecially in the context of slower 
growth in real incomes. Partly as a 
response to this, governments have 
sought to shift the balance of policy 
from passive measures of income 
support to active measures of getting 
people into work and reduce their 
dependency on social benefits. In ad­
dition, they have intensified efforts to 
detect fraud and prevent abuse of the 
system in order to boost public con­
fidence in existing arrangements, as 
well as to curb expenditure, and have 
begun to look more closely at the 
level of benefits paid in relation to the 
disposable income of those in work 
who are providing the finance. 
These factors have by no means af­
fected Member States to the same 
extent — the ageing process, for 
-34-
Chapter 2 ~ Adapting to change: recent reforms and key developments 
example, is taking place at differing 
rates across the Union, as shown 
below, and unemployment has risen 
to much higher levels in some places 
than others — but all have had to 
respond in some degree to the chal­
lenges which they pose and all will 
have to continue to do so in the years 
ahead. Moreover, in Southern coun­
tries, governments have had to cope 
with significant growth of expendi­
ture inherent in the development of 
systems comparable to those in the 
North of the Union as well as the 
effects of these factors per se. 
Common reactions on the expendi­
ture side have so far taken the form 
of: 
• tightening regulations and qual­
ifying conditions governing en­
titlement to income support and 
restricting eligibility for benefit 
to the more 'deserving' cases 
more than cutting rates of benefit 
directly; 
• increased targeting as part of 
this, by greater use of means-
testing, by linking the amount of 
benefit received to income and 
by taxing benefits; 
• increased privatisation of a num­
ber of aspects of the system, in­
cluding not only the contracting 
of the provision of services to 
firms in the private sector but 
also giving more responsibility 
to individuals to provide for their 
own protection against risks, es­
pecially so far as pensions and 
health care are concerned; 
• increased emphasis on active 
rather than passive measures, as noted above, in order to prevent 
long-term dependency on in­
come support. 
On the financing side, the wide­
spread reaction has been to: 
• reduce social charges falling on 
businesses, particularly in the 
form of non-wage labour costs, 
in order to prevent these from 
both eroding international com­
petitiveness and deterring em­
ployment directly and to 
stimulate job creation; 
• seek alternative forms of funding 
social protection in order to 
spread the burden more widely 
and prevent it being overly con­
centrated on businesses and 
those in employment. 
Outline 
In what follows, the main specific 
measures implemented in Mem­
ber States over the recent past are 
examined and compared, on both the 
expenditure and financing side, 
together with the proposals for 
change which are at present under 
active consideration. In addition, the 
more general issues to which these 
changes give rise and their potential 
consequences for those at risk as well 
as for public sector finances are dis­
cussed in the light of the economic, 
social and demographic develop­
ments taking place, which were listed 
above. 
More specifically, the analysis fo­
cuses, first, on the response of 
Member States to demographic developments, especially those in 
prospect, concentrating on changes 
relating to retirement pensions which 
are a major item of expenditure in all 
countries. In addition, it considers the 
underlying scale of the impending 
demographic problem with which 
pensions systems have to contend 
and attempts to put these into per­
spective by relating them to the diffi­
culties imposed by the high and 
rising levels of unemployment ex­
perienced over the past 20 years. 
Secondly, it examines the move to­
wards more targeting and the greater 
concentration of spending on those 
most in need, including, in particular, 
the increased deployment of means-
testing and its potential drawbacks as 
well as advantages. 
Thirdly, it considers the shift towards 
more active social policies in the con­
text of both high unemployment 
generally and high long-term unem­
ployment more specifically and the 
cost implications, as well as the in­
creasing focus on the potential disin­
centive effects of overly-generous 
income maintenance schemes. 
Fourthly, the major developments in 
sources of finance are examined 
together with the implications of any 
radical restructuring of funding 
towards more reliance on general 
taxation and less on contributions, 
whether by employers or by em­
ployees. 
Finally, the various moves to pri­
vatise particular aspects of social 
protection are considered. 
-35 
Chapter 2 - Adapting to change: recent reforms and key developments 
Responses to 
demographic and 
economic pressures 
In most Member States, the em­
phasis of policy has switched dur­
ing the first half of the 1990s from 
active encouragement of earlier re­
tirement — including, in some cases, 
reducing pensionable age as well as 
increasing income support for those 
no longer working — to containing 
the growth of expenditure on pen­
sions. This has been motivated by 
two principal concerns which have 
reinforced each other: the growing 
numbers opting to retire early as re­
dundancies rose during the recession 
and jobs became scarcer and the 
prospective escalation in the propor­
tion of the population above retire­
ment age from around 2010 onwards 
as the post-war baby boom gener­
ation reaches 65, as described below. 
The changes introduced have taken 
several different forms and in some 
cases have had other aims in view — 
in particular, equalising the treatment 
of men and women — but all have 
had the effect of reducing prospec­
tively the amount transferred in pen­
sions. 
. Increases in 
the age of retirement 
In five Member States, the official 
age of retirement has either been in­
creased or is in the process of so 
being. In Germany, the retirement 
age will be progressively increased 
from 63 for men and 60 for women 
to 65 for both between the years 2001 
and 2012, while those opting for early retirement will have their pen­
sion reduced by 3.6% for each year 
before the official age that they leave 
work. In Greece, the age of retire­
ment was also raised for women as 
well as men to 65 as part of the re­
forms introduced in 1992 to make the 
pension system more coherent. In 
Portugal, the retirement age for 
women is in the process of being 
raised from 62 to 65 (by six months 
each year beginning in January 1994) 
to match that for men, while in the 
UK, it is planned to bring the retire­
ment age for women (now 60) pro­
gressively into line with that for men 
over the period 2010 to 2020 (though 
only for those aged under 44 in 
1995). Similarly, in Finland, the re­
tirement age for public sector em­
ployees has been increased from 63 
to 65 to match that of those working 
in the private sector. In Italy, where 
the retirement age is now 62 for men 
and 57 for women, it is planned to 
move progessively by 2008 to a flex­
ible situation where both men and 
women can retire any time between 
57 and 65. 
In a sixth Member State, France, 
while the age of retirement has been 
kept at 60, the number of years of 
contributions required for entitle­
ment to a full pension has been raised 
from 37V2 to 40, which, in practice, 
has much the same effect as the pel 
icy followed in the five countries 
listed above, especially for those re­
maining in education or training into 
their 20s. (Though this is, therefore, 
hkely to mean that such people have 
to postpone retirement until a later 
age than those starting work earlier, 
at the same time, they will tend to 
have higher than average incomes, 
giving them more choice about when to retire as well as more possibility 
for remaining in work to a later age.) 
Although these changes will tend to 
reduce social protection expenditure in 
future years, it does not necessarily 
follow that the numbers in retirement 
will diminish. Despite the general 
change in policy away from encoura­
ging early retirement, the numbers 
leaving the labour force before reach­
ing pensionable age have risen at a 
higher rate since 1990 than before (see 
below), largely because of the increase 
in redundancies and the difficulties of 
finding alternative employment ex­
perienced by those losing their jobs 
during the recession years. The main 
effect, therefore, might simply be to 
shift the burden of support from the 
state to the individual. 
Other measures 
affecting pensions 
In addition to these changes, which 
effectively serve to diminish the 
numbers in receipt of pensions, espe­
cially in future years when demo­
graphic trends begin to bite, there has 
been a widespread tendency to re­
duce the scale of benefits paid, taking 
the form, in particular, of changing 
the basis on which pensions are based 
and/or uprated. 
In France, from 1994, the basis for 
determining the amount of pension 
receivable has been changed from the 
earnings received over the 10 years 
of employment when these were 
highest to the best 25 years, while 
both reference earnings and the pen­
sions paid are now revalued or up­
rated on the basis of price increases 
rather than wage rises (see box on 
36-
Chapter 2 -Adapting to change: recent reforms and key developments 
pension reforms). Similarly, in 
Portugal, from the same year, the 
basis ofcalculation has been changed 
from earnings in the best five of the 
last 10 years to those in the best 10 of 
the past 15, and the minimum con­
tributions' requirement to qualify for 
any pension was increased from 120 
months to 15 years. 
At the same time, however, in 
Portugal, this effective reduction in 
the amount payable has been offset 
by indexing the earnings serving as 
the basis for calculation in line with 
price rises rather than not at; all, while 
pensions at the lower end of the scale 
have been increased significantly, as 
they were in Greece in 1992. Such 
changes demonstrate that not all the 
reforms undertaken have been moti­
vated by the aim of reducing expen­
diture — in some cases, especially in 
Member States where systems are 
still being developed, they have 
served to meet genuine needs and to 
improve the extent of social protec­
tion. 
In Finland, on the other hand, a re­
duction in expenditure has been 
achieved more straightforwardly by 
lowering the maximum pension re­
ceivable by public sector employees 
from 65% of previous earnings to 
60%. 
A similar effect has resulted in 
Denmark jyid the Netherlands by tak­
ing more account of additional in­
come received by pensioners or their 
partners in the determination of the 
amount payable in the form either of 
basic pension or supplementary 
allowances as well as, in Denmark, 
by making pensions and minimum 
income guarantees taxable (though with compensatory increases in 
the sum received) and, in the 
Netherlands, by restricting entitle-
ment to higher rate basic pensions. 
In a number of cases, moreover, such 
as in Italy and Sweden (for sup­
plementary pensions), changes have 
beçn introduced with the aim of en­
suring that sufficient funds are avail­
able to meet future pension liabilities 
by basing the amount of pension re­
ceived more closely on contributions 
paid rather than on past income. At­
tempts to shift responsibility for pro­
viding pensions more on to the 
individual and away from the State 
and to encourage the growth of pri­
vate insurance schemes for sup­
plementary pensions — which has 
occurred in the UK, in particular —-
are partly motivated by the same ob­
jective though it is not necessarily the 
majn reason behind them. Such 
moves represent a shift away from 
the prevailing 'pay-as-you-go' sys­
tem under which present generations 
in work finance those in retirement to 
one where the contributions paid by, 
or on behalf of, those now in employ­
ment are earmarked for the pensions 
they will receive when they retire. 
In practice, however, whatever the 
formal arrangements adopted, it is 
debatable how far the effective posi­
tion is altered and prospective future 
funding problems alleviated. There is 
no guarantee that the future stream of 
(national) income out of which pay­
ment has effectively to be made will 
be expanded to the extent required 
simply by increasing the amount of 
forced saving. Unless this leads to 
more savings overall which is trans­
lated into higher growth of invest­
ment or to an increased rate of return — both of which will depend on the 
counterpart changes in the company 
sector profits as savings rise in the 
personal sector (ie there is no direct 
link between a rise in personal sav­
ings and an increase in investment or 
increased efficiency with which 
loanable funds are deployed) — the 
rate of economic growth and the level 
of future GI?P out of which transfers 
have to be made will remain the 
same. Indeed, if it leads to lower 
economic growth — which, for 
example, might be the case if an in­
creased proportion of investment 
funds are channelled abroad — then 
although pension funds might be in 
balance and capable of meeting lia­
bilities, those in employment might 
nevertheless, be in a worse position 
than if they were responsible directly 
for financing pensions. 
The uncertainty of the effect of mov­
ing over to a fully-funded system per­
haps explains why the impending 
expansion of the relative numbers of 
retirement pensioners has not led to a 
more widespread move across the 
Union to restructure pensions 
schemes more radically than has so 
far occurred. At the same time, there 
is evidence of a general trend across 
the Union, especially in respect of 
supplementary pension schemes, to 
shift towards systems where it is the 
amount of contributions paid which 
is the key determinant of the value of 
pension received rather than earnings 
when in work, however computed. 
Finally, when tne changes which 
have occurred have been predomi­
nantly been aimed at reducing expen­
diture and increasing the financial 
viability of pension schemes, men­
tion should be made of the recent 
37-
Chapter 2 - Adapting to change: recent reforms and key developments 
Reforms of retirement pensions 
France 
Structural reforms of the pension insurance system 
were introduced in 1993 with the aim in part of bal­
ancing finance and expenditure. Changes were made 
in the method of calculating the average annual salary 
taken as reference for computing the amount of pen­
sion payable as well as in the length of the period over 
which contributions need to be paid for entitlement to 
a full pension. The period for determining the refer­
ence salary, which was previously the 10 years when 
salary was highest, is to be increased every year by one 
year up until 2008 when it will be the best 25 years. At 
the same time, the period over which contributions 
have to be paid for the person concerned to be entitled 
to a pension equal to the maximum of 50% of the 
reference salary is to be increased progressively from 
150 quarters to 160 (40 years) by 2003. For each year 
by which the contributions record falls below 40, 
benefit is reduced by 5% for each missing year of 
contributions if a person retires before 65, thereafter 
the reduction in the rate payable is based on age. For 
particular categories (such as employees with 50% 
incapacity, manual workers with 3 children, veterans 
or war victims), the full rate is payable irrespective of 
the number of years of contributions. 
Italy 
In Italy, where there has been a particularly marked 
growth of expenditure on pensions over the past two 
decades owing to a low retirement age and high benefit 
rates, a first pension reform was introduced in 
1992/1993, raising the age of retirement and restricting 
access to 'seniority' pensions (claimable after 35 years 
of contributions, or 20 in the public sector, regardless 
of age). In the Summer of 1995, a new pension bill was 
approved, phasing in a system of flexible retirement 
under which by 2008 both men and women will be 
allowed to retire between 57 and 65. The same rules 
will apply to all occupational categories — a signifi­
cant change, given the marked disparities in the pres­
ent system. The most important modification, 
however, concerns the basis of calculation of benefits 
which will be no longer be related to earnings but to 
contributions. The total amount of contributions paid 
during working life will be divided by a 'conversion 
coefficient' ranging from 4.719% (at 57) to 6.13% (at 
65). This coefficient will be reviewed every ten years and potentially adjusted in line with demographic and 
economic developments. The rate of contribution 
payable is reviewed annually on the basis of changes 
in GDP aver a five-year period. The pension itself will 
be inflation-proofed and a state-financed social allow­
ance will continue to be paid to those not eligible for 
a contributory benefit The system will remain pay-as-
you-go but actuarial criteria will in future govern the 
determination of benefits. In addition to the *first pil­
lar* contributory pension, the development of 'second 
pillar* voluntary supplementary pensions will be en­
couraged. 
Sweden 
The Swedish Parliament decided on principles for 
reforming the old-age pension system in 1994. Prior 
to this, it provided a universal flat-rate pension (with 
means-tested supplements) and a national supplemen­
tary pension (ATP) financed by contributions but the 
amount of which was related to earnings. Under the 
new system, there will be an integrated scheme of 
earnings-related pensions, linking benefits more di-
recdy with contributions. The pension received will be 
a function of total contributions paid during a person's 
working life (adjusted by a wage index), which will be 
divided by a factor to determine the annual pension at 
the age of retirement. This factor will be the same for 
everybody in an age group but may vary between age 
groups depending on average life expectancy. The 
amount of pension in the first year of retirement will 
then be adjusted according to both price changes and 
the real growth in the economy. The pay-as-you-go 
system will be retained, but will be supplemented by 
elements of an individually funded pension entitle­
ment, under which 2% of the 18.5% pension contribu­
tion will be saved in a premium reserve system and on 
retirement, the individual will receive their saved capi­
tal and the yield accrued. Although this new 'defined 
contribution' (and partially funded) formula will con­
stitute the central pillar of the reformed system, basic 
protection, in the form of a state financed guaranteed 
pension, will continue to be provided to those unable 
to mature contributory benefits. In addition, supple­
ments will also be paid to those who only mature a low 
contributory pension. Voluntary occupational pen­
sions (the 'third pillar') will continue to exist The new 
system will be introduced gradually and the new rules 
will apply in full only to those bom in 1954 or after. 
-38-
Chapter 2 - Adapting to change: recent reforms and key developments 
reduction in the rate of contribution 
for retirement pensions in Germany 
(from 19.2% to 18.6% of earnings) 
which would seem to demonstrate 
that problems of funding pensions 
are not universally becoming more 
severe (though in part this might re­
flect the effects of recent substantial 
immigration on the German work 
force and, therefore, on those making 
contributions). Recent studies sug­
gest, however, that even in Germany, 
funding problems he ahead. 
The effect of changes 
on men and women 
One aspect of the changes in the basis 
of determining pension entitlement 
concerns the impact on women in 
relation to men. Because women are 
much more likely to be involved in 
taking care of children or invalid 
relatives than men, they are, there­
fore, more hkely to need to interrupt 
periods of employment. This tends to 
make it more difficult for women to 
meet the qualifying conditions for 
receipt of a full pension, a fact recog­
nised in the regulations in a number 
of Member States, where either the 
number of years of contributions is 
lower for women than for men (as in 
Belgium or the UK — five years less 
in both cases) or some allowance.is 
made for years of caring in the calcu­
lation of the contributions' record 
(though not necessarily a full allow­
ance — see Chapter 7 below for de­
tails). In the UK, this allowance is 
planned to be extended to the state 
supplementary pension scheme to 
compensate in some degree for the 
increase in the retirement age, while 
in Ireland a similar allowance (in this 
case, enabling those concerned to exempt up to 20 years of caring from 
their contributions record) was intro­
duced from April 1994 in respect of 
people caring for disabled or invalid 
dependants and children below 
school age. 
At the same time, eligibility for survi­
vors' pensions, which tend to affect 
women more than men, have recently 
been extended in Austria and Portugal. 
The potential discriminatory effect of 
pension regulations, however, also 
applies to the earnings used in the 
computation of pensions. Because of 
women having to take more time off 
work than men, extending the period 
of reference over which the earnings 
basis is calculated, as in France or 
Portugal, is liable to penalise women 
more than men since the cumulated earnings in question are likely to be 
lowered to a greater extent. 
The result of the changes introduced 
or planned in Member States has in 
general been to make pension sys­
tems more similar, ie towards con­
vergence rather than divergence. 
Thus at the beginning of 1995, in 7 
Member States, the age of retirement 
for men was 65, in another, Belgium, 
it was between 60 and 65 and in 
Germany, it is in the process of being 
raised to 65, leaving only France 
(lower at 60), Denmark (higher at 67) 
and, prospectively, Italy (where it 
will be between 57 and 65) with a 
different age. At the same time, the 
retirement age for women was also 
65 in four Member States (and be­
tween 60 and 65 in Belgium) and will 
be increased to 65 in the future in 
Germany, Greece, Portugal and the 
70 
60 
50 
40 
30 
20 
10 Retirement ages and number of years of 
contributions required for full pension by sex in 
Member States, January 1995 
Retirement age Years of contributions 
h 
• Years of contributions men • Retirement age men 
• Years of contributions women • Retirement age women mim™ 70 
60 
50 
40 
30 
20 
10 
B • DK GR E F IRU ! L NL P UK 
O years of contributions not specified, DK & NL number of years of residence required 
39 
Chapter 2- Adapting to change: recent reforms and key developments 
5 Population 65+ in relation to population 15-64 in 
the Union, 1970-2025 (mean projection) 
% population 15-64 
50 r 
6 Population 65+ in relation to population 15-64 in 
Member States, 1995, 2015 and 2025 (mean 
projection) 
% population 15-64 50 
40 
30 
20 
10 • 1995 
02015 
• 2025 -, 50 
40 
30 
20 
10 
B DK D GR E F IRL 
D includes new Lander L NL P UK A SF S E15 UK, leaving only the three countries 
noted above with a different age 
(Graph 4). 
On the other hand, there continues to 
be more diversity in the number of 
years of contributions required for a 
full pension, which varies from only 
35 in Spain and Greece to 48 in 
Ireland, though the recent increase in 
France was a move towards conver­
gence with most other countries. In 
Denmark and the Netherlands, unlike 
elsewhere, the qualification for a 
pension is based on residence rather 
than contributions (in the former 
case, because pensions are funded by 
general taxation rather than by con­
tributions, as noted below). 
The impending 
demographic 
time-bomb 
The increases in the age of retirement 
discussed above are for the most part 
timed to coincide with the baby-
boom generation reaching pension­
able age, on the general expectation 
that this event will increase substan­
tially the numbers drawing pensions 
and, therefore, the cost burden im­
posed on economies. In 1995, around 
15% of the population in the Union 
is aged 65 or over and these amount 
to some 23% of the population of 
working age (ie those between 15 and 
64), who through their employment 
and the income they generate have 
effectively to support them in their 
retirement. In ten years time, in 2005, 
those of 65 and over will, according 
to the latest projections, amount to 
26% of working-age population, in 
20 years time in 2015, to 30% and in 
30 years time in 2025 to 3572%. In 
40 
Chapter 2 ~ Adapting to change: recent reforms and key developments 
Changes in population/activity and employment 
While it is undoubtedly the case that the numbers of 
people aged 65 and over have, over recent years, risen 
in relation to those of working age — the dependency 
ratio as usually measured — and stand to increase 
dramatically from the year 2010 on, the increase so far 
has been dwarfed by other factors which, in practice, 
have proved more important determinants of the effec­
tive degree of dependency as more appropriately 
measured. Moreover, since 1980, the growth of the 
numbers in retirement has been the consequence more 
of people withdrawing from the labour force prema­
turely than of demographic factors, which in turn has 
been a reflection of increasing unemployment and the 
scarcity of jobs (see Employment in Europe 1995, 
Part 1). In addition, two factors have been much more 
important in determining the rise in the effective de­
pendency ratio—more appropriately measured by the 
number in retirement relative to the number in employ­
ment — than demographic trends. The first is the 
decline in the rate of participation of those aged 15 to 
64 in the labour force, especially of younger people 
under 25 (which has fallen over the Union as a whole 
from 54.3% in 1980 to 45.7% in 1994 — see Graph 7) 
and of older people aged between 50 and 64 (which 
has declined in the Union from 51.3% in 1980 to 47.1 % 
in 1994 as job shortages became more acute — see 
Graph 8). In practice, lower rates of participation in 
younger and older age groups have over the past 15 years been compensated by strongly rising participa­
tion of women, a trend which is as potentially import­
ant as the demographic one in determining the future 
size of the Union's labour force. 
The second factor underlying the rise in the effective 
dependency ratio is the fall in employment of those 
who are part of the labour force and the growing 
numbers of the economically active—and if working-
age— who are unemployed (Graph 9). 
Despite the scale of the impending expansion in the 
relative numbers of those of 65 and over, the future 
path of employment, and unemployment, is likely to 
be equally, if not more, important in determining the 
extent of dependency and of financing problems. In­
deed, areturn to the levels of unemployment prevailing 
across the Union before the oil price crisis in the 
mid-1970s (2-3% of the labour force) allied to a con­
tinuing upward trend in the participation of women in 
the work force would more than offset the rise in the 
numbers of people aged 65 and over and make it easier 
to finance pensions in 20 or 30 years than now. If on 
the contrary, economic growth and the rate of job 
creation remains depressed and unemployment stays 
high, then the difficulties of achieving the necessary 
transfer from those below 65 to those above will be 
acute and the pressure radically to reform pension 
systems could prove irresistible. 
7 Active population 15-24 in relation to total 
population 15-24 in Member States, 1980 and 
100 F t 100 
E12 B DK D GR E F IRL I L NL P UK 
0 exclude* new tender 8 Active population 50-64 in relation to total 
population 50-64 in Member States, 1980 and 
E12 B DK D GR E F IRL I L NL P UK 
0 excludes new Lander 
41 
Chapter 2 - Adapting to change: recent reforms and key developments 
other words, whereas now there are 
4-5 people of working age for every 
person of 65 and over, in 30 years 
time, there will be less than 3 (see 
Graph 5). In some Member States, 
Italy, in particular, the dependency 
ratio will be even higher (people of 
65 and over are projected to increase 
to almost 40% of those of working-
age in Italy over the next 30 years — 
Graph 6). 
Such prospective developments, 
however, are only part of the picture. 
Other potential changes have also to 
be taken in to account before it is 
possible to assess the overall effects 
on expenditure and, more especially, 
the availabihty of finance, particu­
larly the number of people who will 
actually be in work of those of work­
ing age who in practice will be the 
ones supporting those in retirement (as well as those who are unem­
ployed) (see box on changes in popu­
lation, activity and employment). 
The scale of future funding prob­
lems, in other words, depends as 
much on the path of employment, 
and unemployment, as on demo­
graphic trends. 
Targeting 
Growing concern about the scale 
of expenditure on social pro­
tection, both actual and prospective, 
in a context where, for the most part, 
there is an equal concern to maintain 
the fundamental principles of univer­
sal coverage and common access to 
the services and support provided, 
has led to an increasing focus of 
policy on improving the efficiency of 
Employment in relation to active population in 
Member States, 1980 and 1994 
, -,.. % active population IUU r 1980 11994 100 
E15 B DK D GR 
O excludes new Lander E F systems and their effectiveness. As a 
result, measures have been intro­
duced in a number of Member States, 
and proposals have been made in 
others, to target expenditure more 
closely on those in most need of as­
sistance. This has taken a number of 
forms, varying both between Mem­
ber States, according to the specific 
problems they face, their traditions 
and institutional arrangements, and 
between different parts of the system. 
Although often used as a synonym 
(or euphemism) for means-testing, 
the notion is much wider, encompas­
sing efforts both to ensure that ade­
quate levels of support are provided 
for specific groups (Uke the mentally 
ill, severely disabled or lone parents) 
and to tailor assistance to meet spe­
cial needs (such as housing), as well 
as the linking of rates of assistance to 
income (which is not the same as 
means-testing per se, as explained 
below), the taxation of benefits and 
the imposition of eligibihty criteria. 
The more restrictive definition of 
those eligible for income support, in 
particular, has been a common means 
in recent years of both increasing the 
effectiveness of expenditure and pre­
venting abuse as well as reducing the 
amount spent, unemployment and 
invalidity benefits being principal 
targets throughout the Union. 
Means-testing 
Means-testing, in the sense of those 
requiring support needing to make 
specific claims and having to demon­
strate that their lack of income and 
savings qualifies them for assistance 
(as opposed to the withdrawal, or 
reduction, of benefits from those 
42-
Chapter 2 - Adapting to change: recent reforms and key developments 
whose income exceeds a certain level 
— ie 'affluence testing' rather than 
means-testing), has, however, been 
perhaps the most discussed method 
of targeting. Its application, on the 
other hand, has been by no means 
widespread across the Union and has 
largely been confined to the UK and, 
to a lesser extent, Ireland, where the 
earnings-related element of unem­
ployment benefit has recently been 
abolished. 
Since 1980, in particular — though it 
was more prevalent than in other coun­
tries even before then—the proportion 
of social protection expenditure sub­
ject to means-testing has increased sig­
nificantly in the UK as entitlement to 
national insurance benefits have been 
more narrowly restricted and the 
amount payable reduced m real terms 
and as assistance specifically aimed at 
lower income groups, such as Housing 
Benefit, Family Credit or Income Sup­
port, has been given more emphasis. 
As a result, the numbers dependent on 
means-tested support, including many 
of those in receipt of insurance benefits 
whose income still leaves them below 
the minimum level as defined, has 
risen markedly. At the same time, a 
loans scheme (and some grants) has 
been introduced to provide those re­
ceiving assistance with the means of 
meeting one-off needs (such as the 
purchase of new furniture or house­
hold appliances). 
The most recent example of the exten­
sion of means-testing in the UK is the 
proposed introduction from October 
1996 of a Job Seeker's Allowance to 
replace the present system of unem­
ployment benefits and income support 
for the unemployed. This will be 
payable as a flat-rate sum without a means-test to those satisfying con­
tribution requirements for the first six 
months of unemployment (instead of 
the present 12 months), but thereafter 
will be means-tested (though those 
with dependants will be able to claim 
an additional allowance if there in­
come falls below a minimum level in 
the first six months as well afterwards). 
It will also be accompanied by in­
creased pressure on the unemployed to 
find work, though with increased help 
and advice from the employment 
services (see box). 
While means-testing has some at­
traction as a way of concentrating 
support on those most in need and 
economising on what is spent and 
while it potentially enables individ­
ual circumstances to be taken into 
account in the payments made and 
the kinds of assistance provided, it 
has a number of drawbacks, espe­
cially if it becomes a principal com­
ponent of the social protection 
system. These drawbacks also apply 
in some degree to targeting per se, 
whatever forms it takes as discussed 
in more detail below. In the first 
place, the imposition of means-
testing, and indeed targeting gener­
ally, implies that it is possible to 
identify those most in need of assist­
ance. In practice, because of the dif­
ficulties involved, the onus has to be 
put on the individual or household 
concerned to claim assistance. For 
many reasons — ignorance, lack of 
education, the social stigma attached, 
indolence and so on — a significant 
proportion of those entitled to sup­
port tend not to claim (in the UK, 
estimates suggest that some 34% of 
those entitled to Family Credit and 
20% of those qualifying for Income Support fail toclaim, though many of 
these appear to be only just ehgible). 
Secondly, because it is applied to 
accumulated wealth and not just 
income, means-testing can act as a sig­
nificant disincentive to saving (in the 
UK, those with accumulated savings 
of more than around 10,000 ECU are 
not ehgible for Income Support at all 
until these are run down). 
Thirdly, it can also act as a major dis­
incentive to work, not only because 
wide-ranging support (including hous­
ing benefits if a mortgage rather than 
rent is being paid) is withdrawn when 
an individual finds work and starts to 
earn a wage — unless they are ehgible 
for Family Credit — but because 
means-testing is applied to households 
rather than individuals. Thus a woman 
in employment, even working part-
time so long as she works more than 
16 hours a week (increased to 24 under 
the proposed Job Seeker's Allowance) 
can find that the hours worked 
(regardless of income earned) prevents 
her husband receiving Income Support 
if he loses his job or, more especially, 
if he is unemployed for any length of 
time and benefits are means-tested. By 
the same token, there is an equal disin­
centive for someone not to look for 
work under such à system if their 
spouse is receiving Income Support. 
Although some effort has been made 
in the UK to find ways of reducing the 
incidence of such disincentive effects 
— part of the reason for the introduc­
tion of Family Credit for those in low-
paid jobs with dependent children was 
to raise disposable income when in 
work above that received when unem­
ployed — these remain important. 
43-
Chapter 2 ~ Adapting to change: recent reforms and key developments 
The planned UK Job Seeker's Allowance 
From October 1996, it is planned in the UK to replace the existing National 
Insurance benefits and Income Support paid to the unemployed by a single 
scheme, the Job Seeker's Allowance. Those who become unemployed and 
meet the requirements in respect of National Insurance contributions and 
other conditions will receive the new benefit as of right without a means-
test. This will be the case, however, only for the first six months of 
unemploymentinstead of the first 12 months as at present After six months, 
the payment of benefit will be subject to a means-test All other people, 
including the self-employed, will have their allowance subject to a means-
test from the beginning as now. The official expectation is that at any one -
time 75% of claimants will be paid the allowance on a means-tested basis. 
Rates of benefit will be based on current Income Support rates, so that those 
under 25 will receive a lower rate as now. The new allowance is to be 
accompanied by increased efforts to help people find jobs and to give them 
more encouragement to do so. 
The underlying idea, according to the White Paper on Job Seeker's Allow­
ance, (1994), is to help people in their search for work while ensuring that 
they understand and fulfil the conditions for receipt of benefit. As part of 
the scheme, therefore, the intention is to draw up a Job Seeker's Agreement 
with each individual, setting out a course of action designed to achieve a 
return to work as soon as possible, assisted where appropriate by measures 
to improve their employability. Conditions for receipt of benefit will be 
designed to reinforce the obligation of claimants to look for work and, as 
previously, claimants will not be able'to refuse jobs without good cause, 
and there will be reduced access to benefit for those who fail to meet the 
entitlement conditions, including actively seeking work and completing a 
satisfactory Job Seeker's Agreement. Their partners will also be encour­
aged to work. At present, unemployed on means-tested allowances lose 
entitlement to benefit if their partner works in paid employment for 16 
hours a week or more. This will be increased to 24 hours or more under the 
new proposals to exclude those working .relatively few hours a week. In 
addition, individuals working part-time while on income support will be 
able to build up a 'back to work bonus', a lump-sum equal to half their 
part-time earnings (up to a maximum of £1,000 —just over 1,200 ECU). 
In addition, a partner's earnings can build up the bonus, while the bonus is 
also payable if the claimant, or more generally, the partner goes into 
employment which takes the family off Job Seeker's Allowance. 
Other forms 
of targeting 
In other Member States, there has not 
been the same shift from social insur­
ance to means-tested assistance. In 
most of these countries, the principle of social insurance to provide adequate 
levels of income when a person is un­
able to work is more firmly entren­
ched. Nevertheless, there has been 
some move away from everyone being 
entitled to receive an equal amount of 
benefit in all cases and income thre­
sholds governing the receipt of benefits have increased in importance. 
In particular, in Germany, the Nether­
lands, Italy and Spain, the amount of 
family allowance receivable has in 
most cases been made dependent on 
income in recent years as well as 
numbers of children (those earning 
more receive less) and similar moves 
are being considered in Belgium 
and Portugal. In addition, in the 
Netherlands and Italy income limits 
have been introduced with respect to 
survivors' benefits, while in the latter 
country limits have also been imposed 
as regards the receipt of minimum pen­
sions. 
A third variant of this general trend is 
observable in Southern European 
countries. As well as the imposition 
of income thresholds, in Greece and 
Italy, in particular, efforts have been 
made in recent years to reduce the 
opportunity for cumulating benefits 
(such as pensions) which can result 
in certain groups receiving much 
more in the way of income support 
than intended and in their effective 
'over-protection'. This has been mo­
tivated by a desire not only to avoid 
excessive expenditure and to target 
what is spent more on those in need 
but also to diminish the perception 
that the social protection system is 
being widely abused and so maintain 
support for its maintenance and fur­
ther development. At the same time, 
measures have been taken in South­
ern Member States to improve social 
assistance schemes, which need in­
herently to be means-tested, which 
remain under-developed and have 
moved closer to establishing systems 
which guarantee than everyone 
receives at least a minimum level of 
income, which are a feature of other 
parts of the Union. 
44 
Chapter 2 - Adapting to change: recent reforms and key developments 
In the Scandinavian Member States, 
there has so far been less of a move 
towards a more selective approach. 
Though the problems created by 
universalism are being widely de­
bated, in Denmark, Finland and 
Sweden, reductions or containment 
of expenditure have largely been 
achieved through general cuts in 
benefits, in particular, by reducing 
the rate in relation to earnings. At the 
same time, since most benefits are 
taxable in these countries, propor­
tionately more of what is paid out 
tends to be clawed back from higher 
income groups than from those more 
in need. 
The attachment to universalism is il­
lustrated by the debate in Sweden in 
early 1995 on the proposal to link 
child allowances to income as part of 
budgetary cutbacks. This was re­
jected for fear that it might erode 
broad public support for the all-
embracing system of social protec­
tion which operates. Instead 
allowances were reduced for every­
one — for the first time since their 
introduction in 1948. 
Cash benefits have not been the only 
area where attempts have been made 
to target expenditure more selec­
tively. In most Member States, as 
discussed below, free access to 
health and medical care has tended to 
be restricted more narrowly in recent 
years on those on low incomes or 
most in need, such as the elderly. 
The problems 
of targeting 
As indicated above, there has been a 
pronounced tendency across the Union towards targeting social expenditure 
on those most in need of support This 
is set to continue in the future, perhaps 
at an accelerating rate given the chal­
lenges facing Member States and the 
constraints within which governments 
have to operate. There are, however, 
potential problems which could arise 
as the strategy is extended. First, as 
noted above in respect of means-test­
ing, for targeting to be effective, those 
most in need of assistance have to be 
identified. The difficulty here, quite 
apart from the administrative costs in­
volved, is not only lack of information 
—we have only a very hazy idea of the 
numbers living below any given level 
of income in Member States or of the 
conditions in which they live — but 
equally importantly a lack of an agreed 
definition of need except in very 
general terms. Because individual cir­
cumstances are likely to vary consid­
erably, even among those on similar 
levels of income, it is unlikely that 
targeting support on households with 
income below a certain level will en­
sure that adequate assistance is pro­
vided to everyone in need of help. 
Secondly, the more support is targeted 
on a narrowly defined group, the more 
important are disincentive effects and 
dependency likely to be. If those re­
ceiving support lose a significant part 
of it if their income or circumstances 
change only slighdy, there will inevit­
ably be a major incentive to avoid such 
a change. In other words, if those 
deemed to be living in poverty, how­
ever defined, have their income lifted 
to an acceptable level but support is 
withdrawn once that level is reached or 
tapers off considerably, then it may be 
extremely difficult for them to improve 
their circumstances substantially by, in 
particular, finding a job — or in the case of in-work benefits finding a bet­
ter job — and becoming independent 
of State support They are, in essence, 
caught in an unemployment or poverty 
trap which it is hard to escape from (see 
Employment in Europe 1995, Part 3, 
Section 1 for details of the high effec­
tive marginal rates of deduction from 
income in some countries, the UK and 
Luxembourg especially, for those at 
the bottom end of the earnings scale 
which result from attempts to bring 
their income up to acceptable levels). 
Thirdly, the inevitable counterpart of 
targeting benefits more narrowly on 
those in need is that those in less 
need, or in no need at all, receive less 
or even nothing. The principle of 
universality is, therefore, eroded 
which could have repercussions on 
the degree of public support for so­
cial protection systems and wider im­
plications as regards those which are 
strongly based on an insurance prin­
ciple and funded predominantly by 
contributions. In particular, as in the 
case of the Swedish proposal in re­
spect of child allowances noted 
above, relating benefits inversely to 
income could undermine the support 
of the high income groups who get 
less or nothing. (On the other hand, it 
is equally arguable that paying 
benefits to wealthy members of so­
ciety who do not need them could 
threaten the support of those lower 
down the income scale.) Where 
benefits are funded by contributions 
and linked closely to the payment of 
these, the problems are likely to be 
much more acute since targeting ine­
vitably means breaking the link 
between the two and eroding the 
insurance-basis of the system. In 
countries with insurance-based sys­
tems, therefore, targeting has tended 
45-
Chapter? - Adapting to change: recent reforms and key developments 
to be concentrated on those benefits 
which are funded by general taxa­
tion, such as child, or family, allow­
ances or the provision of health care, 
rather than by contributions. 
Work and welfare 
In all Member States, as unemploy­
ment has risen and remained at a 
high level, attention has focused in­
creasingly on both the regulations 
governing entitlement to income 
support and the scale of benefits paid, 
with the aim not only of reducing 
expenditure but of preventing abuse 
and trying to ensure that those draw­
ing benefits have sufficient incentive 
to look for work. There has, there­
fore, been a general tendency throug­
hout the Union to tighten conditions 
for eligibility for receipt of benefits 
and to avoid rates of support being so 
high in relation to the wage whichthe 
unemployed could earn in work that 
they discourage them from finding a 
job (see Chapter 4 below for an ana­
lysis of the scale of unemployment 
compensation in relation to dispos­
able income when in work across the 
Union). 
While Germany and Sweden have 
been two of the few countries to cut 
benefits direcdy in the recent past (in 
Germany by 1% of previous earnings 
for those with dependent children and 
by 3% for those without in January 
1994, in Sweden, by 10% of previous 
earnings and by a further 5% from 
January 1996). In Belgium, however, 
the period young people have to wait 
before receiving benefits has been in­
creased and the duration of certain 
benefits curtailed and in Ireland, the earnings-related supplement has been 
abolished (though accompanied by a 
10% rise in basic benefit). In a number 
of countries, moreover, the definition 
of what is deemed to constitute a 'suit­
able' offer of employment has been 
narrowed to make it more difficult for 
those drawing benefits to turn down 
jobs without valid reason. 
In the UK, more radically than else­
where, under the new Job Seeker's 
Allowance, planned to be introduced 
in 1996, unemployment compensa­
tion, even paid at a flat, and relatively 
low, rate, will only be available with­
out being means-tested for six 
months, as noted above, while there 
will be increased pressure on those 
being assisted to explore every 
possible job opportunity with poten­
tial loss of benefit if they turn down 
what is regarded as a suitable offer. 
The new scheme is being introduced 
against a policy background in which 
the development of low-paid jobs has 
been encouraged to a much greater 
extent than elsewhere in the Union, 
partly through the abolition of re­
strictions on the payment of low 
wages, partly through setting unem­
ployment compensation at a low 
level and partly through a system of 
paying in-work benefits to those 
whose earnings fall below a particu­
lar level. This system, known as 
Family Credit, is designed to ensure 
that those in employment are hkely 
to be better off than if they were 
unemployed and thus represents an 
incentive to work even in a poorly 
paid job. At present, it applies only to 
workers with dependent children 
(though there is also a parallel 
scheme for disabled workers), but active consideration is being given to 
extending it more generally. 
A potential problem of Family Credit 
and other similar in-work benefit 
schemes in operation or being con­
sidered in other parts of the Union is 
the high implicit marginal tax (or de­
duction) rates which they inherently 
involve for those on low pay. As 
noted above, since to keep down 
costs they tend to be targeted on a 
comparatively small group at the bot­
tom end of the earnings scale, they 
are usually withdrawn at a relatively 
high rate (in the UK, at 70% of any 
increase in pay, which with taxes and 
contributions tends to mean marginal 
deduction rates of 90% or more for 
many recipients) as income from 
work rises. The net gain from earning 
more is, therefore, likely to be small 
if not negligible which means that it 
is difficult for those concerned to 
achieve a significant increase in real 
income and escape from the poverty 
trap so created and, in turn, implies 
that there is little incentive to look for 
a better, and more productive, job. 
The move from passive 
to active measures 
The UK system in essence is aimed at 
providing active encouragement to 
those unemployed to find a job as soon 
as possible. In other parts of the Union 
as well, in addition to the focus on 
systems of compensation as such, 
there has been a growing emphasis, 
encouraged by the Commission (in its 
two recent White Papers) and by the 
Council (most recendy at the Essen 
Summit), on shifting the balance of 
both employment and social pohcy 
from passive measures of income sup-
-46 
Chapter 2-Adapting to change: recent reforms and key developments 
port to active measures to get people 
into work and reduce dependency on 
social protection systems. This has 
been motivated by the increasing num­
bers drawing benefits for prolonged 
periods and the costs involved both to 
the State and the people concerned. 
Though these are most commonly the 
long-term unemployed whose num­
bers have grown markedly to reach 
almost 8V2 million in 1994, almost half 
of the total unemployed in the Union, 
they also include those registered as 
sick or disabled, whose numbers also 
seem to be affected by the state of the 
job market (increasing significandy 
during the recent recession). In all 
Member States, a primary aim of pol­
icy has become one of reintegrating 
these people into employment and of 
preventing those losing their jobs or 
becoming disabled in the future suffer­
ing the same experience, not only in 
order to reduce expenditure over the 
long-term but equally importantiy for 
the self-fulfilment, self-esteem and 
general well-being of the people 
concerned. 
Indeed, it is quite likely that expanding 
active measures increases rather than 
reduces overall social expenditure at 
least in the short-term. Those assisted 
in this way, through training, rehabili­
tation programmes, counselling and so 
on, still need income support while 
receiving such help. On the other hand, 
active measures need not involve sub­
stantial cost, especially if they take the 
form of eliciting private sector cooper­
ation, whether by persuasion or legis­
lation (by, for example, compelling all 
firms above a certain size to employ a 
minimum number of disabled people), 
or by trying to alter the way in which 
the labour market functions (by, for 
example, making it easier for firms to take on or dismiss workers, abohshing 
restrictions on the operation of private 
sector employment agencies or by 
removing obstacles to low rates of pay 
so as to make it profitable for com­
panies to employ relatively low 
productive workers). 
The more interesting question is 
whether in practice expanding active 
labour market measures of whatever 
form is likely to reduce what is spent 
on social protection in the long-term. 
The answer is by no means clear-cut 
Ultimately, it will depend'on whether 
the measures taken increase the 
capacity of the Union economies to 
maintain and expand jobs, which in 
turn depends on their effect on growth 
potential, including in particular on 
competitiveness, on the efficient func­
tioning of the labour marked and on the 
employment-intensity of output. If 
they have tittle effect in these regards, 
then their main impact will tend to be 
on the distribution of unemployment 
and on job rotation. In other words, if 
there is no overall expansion in the 
number of jobs in the economy, then 
to the extent that people are helped into 
work by active measures it will inevit­
ably be at the expense of someone else. 
Spreading the incidence of unemploy­
ment, however, might well be regarded 
as a desirable end itself, especially in­
sofar as it is accompanied by a reduc­
tion in long-term unemployment and 
social exclusion. 
The active measures 
introduced in 
Member States 
The balance of pubhc expenditure as 
between active and passive measures 
has not changed greatly over recent years in the Union (in most Member 
States, the former increased relative 
to the latter over the period 1985 to 
1990 as unemployment — and the 
need for income support of the unem­
ployed — fell markedly but declined 
again in the early 1990s as unem­
ployment rose and increased the need 
for support once more — see 
Employment in Europe 1995, Part II, 
Section 4). Nevertheless, expendi­
ture on active policies has generally 
risen in relation to GDP, while in 
addition measures not directly in­
volving public spending as such have 
expanded in importance. 
In particular, as well as more being 
spent on pubhc employment services 
to provide help and advice for people 
to find jobs (in 8 of the 14 Member 
States for which data are available 
expenditure on such services rose 
relative to GDP even when adjusted 
to allow for the rise in unemploy­
ment), services were reorganised and 
their efficiency improved in a num­
ber of countries. Private placement 
agencies were legalisedin Sweden in 
1993 and in Germany and Austria in 
1994, as were non-profit making 
agencies and those specialising in 
temporary placements in Spain. In 
addition, in Italy the obligation to 
notify all job vacancies to the pubhc 
employment services was abolished 
in 1995. In both Belgium and Ger­
many, moreover, local employment 
agencies were established with the 
specific purpose of placing the unem­
ployed in temporary jobs. 
In many countries, pohcy has in­
creasingly been targeted on the long-
term unemployed. In France, special 
placement initiatives were taken in 
1992 under 'Programme 900,000' ; in 
47 
Chapter 2 - Adapting to change: recent reforms and key developments 
Belgium, a plan to monitor all long-
term unemployed of 45 and below 
was introduced in 1993. In trie UK, 
'Restart' interviews were introduced 
to provide systematic assistance and 
advice to those who had been unable 
to find a job for a long period; more­
over, from April 1996, employers 
taking on those previously unem­
ployed for two years or more will 
receive a refund of employers' social 
contributions for the first. 12 months. 
In Denmark, the 'Employment Op­
portunities' plan was developed with 
the aim of offering a job to all the 
unemployed who were still without 
work after a year. 
In the latter country, as well as in 
Germany, France, Finland and 
Sweden, wage subsidies have been 
expanded significandy in the 1990s 
to stimulate increased job creation 
for the long-term unemployed and 
others who are hard to place, in par­
ticular. In all of these Member States, 
expenditure was around twice as high 
in relation to GDP in 1993 than in 
1990 and has continued to increase 
since (see Employment in Europe, 
1995, Part II, Section 4). In addition, 
in Spain, a series of measures di­
rected at the same abjective have 
been introduced since 1992, partly in 
the form of reductions in employers' 
contributions. In France, for 
example, an extensive range of sub­
sidies are now in place to provide 
incentives for firms to hire low 
skilled workers. Here as elsewhere, 
however, there is a questionmark 
about their effectiveness as means of 
expanding the numbers in employ­
ment overall insofar as firms may 
merely replace existing, higher cost 
workers by new recruits for whom 
they receive a subsidy. Studies have, therefore, tended to show that such 
substitution effects can be signifi­
cant. 
Similar potential problems arise over 
'workfare' programmes of various 
kinds which involve persuading the 
unemployed to take up work, how­
ever funded. Such schemes are at 
first sight attractive in the sense that 
the unemployed do something rather 
than nothing for the income support 
they receive while at the same time 
adding to economic output. More­
over the additional costs involved to 
government over and above the 
benefits paid can be relatively small, 
especially if the unemployed receive 
no additional financial inducement 
for taking up such work. Neverthe­
less, the displacement effects can be 
substantial, whether work is per­
formed in the public sector which 
would otherwise have been under­
taken by pubhc sector employees or 
contracted out to private firms or in 
the private sector under subsidy. In 
addition, it raises questions about the 
value of such work if it is not econ­
omic to carry it out without subsidy 
(whether explicit or implicit). 
Equally, however, are clearly areas 
of the economy where potentially so­
cially valuab'e activities are not 
undertaken because of market imper­
fections (see the Commission report 
on Local development and employ­
ment initiatives, SEC 564/95, pub­
lished in 1995). These could 
potentially be carried out by the un­
employed at the same time as provid­
ing them with work experience and 
training at relatively littie financial 
cost or damage to wider economic 
interests if concentrated in areas 
where only the pubhc sector is hkely to be involved (and where, therefore, 
there is no possibility of firms losing 
business or jobs in the private sector 
being displaced). This applies espe­
cially to collective services, and en­
vironmental activities, in particular, 
and in a number of Member States, 
projects of this kind have been intro­
duced in recent years. For example, 
in Spain, a large number of the young 
unemployed have worked on restor­
ing historical buildings and in France 
in national parks; in Berlin, the un­
employed receiving benefit are 
allowed to work 32 hours a week on 
the renovation of schools, while in an 
experiment in a town in the UK, the 
unemployed have been building eco­
logically-sound houses, which, for 
lack of funds, would not otherwise 
have been built. 
A question about such projects con­
cerns not so much their value to the 
community but their effectiveness in 
integrating the unemployed back into 
work on a permanent basis rather 
than providing temporary tasks for 
them to do. So far there is littie evi­
dence on this and further studies are 
called for. 
At the same time, there is some evi­
dence that these kinds of active 
measure for providing employment 
can give rise to problems over financ­
ing. In particular, since responsibility 
for providing the unemployed with 
work or finding jobs in the private 
sector for them often resides with 
regional or local authorities, while 
the pohcy itself is usually designed 
and launched by central government, 
the costs involved, which are prone 
to being under-estimated, and who 
bears these, are liable to be causes of 
some conflict. In Germany, for 
-48-
Chapter 2 - Adapting to change: recent reforms and key developments 
example, the Federal Government 
devised an extensive plan for refor­
ming social assistance aimed at 
combining income support with 
personalised assistance to find each 
person a job. The scheme, however, 
had to be abandoned because of the 
opposition of municipalities faced 
with the supplementary costs gener­
ated by the project. A similar conflict 
arose in Denmark in 1994 over the 
Employment Opportunities plan. 
Subsidies to encourage job creation 
do not necessarily have to take the 
form of expenditure. The same effect 
on the costs of employment can 
equally be achieved through reduc­
ing charges on firms, in particular by 
relieving employers in part or in total 
of the need to pay social contribu­
tions. (Indeed in a number of coun­
tries, despite their equivalence, this 
measure seems to be more acceptable 
than subsidies, which in part reflects 
a greater reluctance to increase pub­
hc expenditure than to reduce tax and 
other government receipts.) As de­
scribed in more detail below, such 
reductions have been made in a num­
ber of Member States in recent years, 
though for the most part they have 
been targeted on particular groups, 
especially the young and long-term 
unemployed. 
A somewhat different approach to pro­
viding jobs for the unemployed is 
through exphcitly trying to share avail­
able work more evenly. This has been 
developed in the Scandinavian coun­
tries in particular, where it is linked to 
training and other forms of leave for 
existing employees. In Sweden, the 
'trainee temporary replacement sche­
me' was introduced in 1991 to encour­
age employers, through reductions in Labour market reform to establish a more active 
employment policy in Denmark 
In January 1994, legislation was introduced in Denmark with the aim of 
expanding vocational training and achieving a greater rotation of jobs, A 
significant innovation was the introduction of three types of leave, training, 
parental and sabbatical leave, which can be integrated into a programme 
of work sharing allowing workers to have more free time while providing 
more jobs for the unemployed. The idea is that if, for example, three 
workers decide to take sabbatical leave of one week each month, someone 
unemployed can be hired to replace each in turn so that they also work for 
three weeks a month. During the week when they are on leave, each of the 
three workers receives 72% of their salary. 
This measure already seems to have had some success. In 1994,73% of the 
workers on leave had been replaced by someone unemployed. 
The measure is financed from the 'Labour Market Fund', partly financed 
in turn by the introduction of a new contribution levied on employees 
amounting to 5% of earnings, while employers will also have to contribute. 
the training levy, both to allow workers 
time-off to improve their skills and to 
take on someone temporarily to re­
place them. In Denmark, a similar 
scheme, though extending to sabbati­
cal and parental leave as well as train­
ing, was introduced in 1994 with the 
aim of stimulating a rotation of jobs 
between those in work and those 
unemployed (see box). In Finland, 
moreover, there are plans to introduce 
a job rotation system for the same rea­
sons. 
Active measures have not only been 
confined to those registered as unem­
ployed. They have been extended 
also to the sick and disabled who 
have tended to increase in number as 
well. In the Netherlands and the UK 
— where the relative numbers of dis­
abled and working days lost to sick­
ness are both higher than elsewhere 
in the Union — as well as in Spain, 
responsibility for providing income 
support for those reporting sick has been shifted, at least for the initial 
period of illness from the State to the 
employer, with the aim of encoura­
ging more effective policing of entit­
lement, as discussed further below. 
In Sweden, moreover, occupational 
injury and sickness benefits have re­
cently been reduced significantly, in 
part to encourage beneficiaries to 
participate in active rehabilitation 
programmes. 
Financing 
As pressure has increased on 
social expenditure, so too has 
attention focused on both the scale of 
finance required to fund social pro­
tection systems and the methods of 
raising it. In particular, attempts have 
been made in many parts of the 
Union to relieve the burden on em­
ployers who, through their contribu­
tion to insurance-based systems 
-49 
Chapter 2 -Adapting to change: recent reforms and keydevelopments 
especially, have traditionally pro­
vided a significant proportion of the 
income required. This has been mo­
tivated by a concern to avoid unduly 
adding to labour costs in a context of 
both high unemployment and in­
creasing exposure of producers to 
external competition. In almost all 
Member States, therefore, the share 
of finance for social protection pro­
vided by employers' contributions 
has tended to decline in recent years 
(see Chapter 3 below). Though no 
data are as yet available, the indica­
tions from the measures introduced 
by Member States suggest that this 
decline has, moreover, accelerated 
since 1993 as increased efforts have 
been made to reduce the costs of en> 
ployment. 
The concern to keep down em­
ployers' contributions and to com­
pensate for any reductions made in 
these has led to an intensified search 
for alternative forms of financing 
and, associated with this, a reassess­
ment of the balance between insur­
ance contributions and taxation. The 
insurance-based nature of social pro­
tection systems in most Member 
States, however, represents a formi­
dable obstacle to any substantial, 
wide-ranging restructuring of fin­
ance. The link between contributions 
and benefits, in other words, is an 
integral element of the system which 
cannot easily be loosened, let alone 
broken, without altering fundamen­
tally the way it functions. 
This inherent problem has led gov­
ernments in a number of Member 
States to seek to differentiate 
between those elements of social 
protection expenditure which are an 
integral part of the social insurance system, where the payment of con­
tributions gives entitlement to 
benefits, such as unemployment and 
earnings-related pensions, and others 
where the transfers or services pro­
vided are not so closely linked to 
contributions, more uniform and 
more universally available, such as 
health care and family allowances. 
Making such a distinction, therefore, 
opens up the possibility of shifting 
from contributions to taxes, in what­
ever form, as a means of financing 
the latter. This approach has been 
followed, for example in Germany, 
where, there have been recent at­
tempts to differentiate between un­
employment benefits linked to 
employment records and the con­
tributions paid and other aspects of 
labour market policy which are more 
generally open to those who are in 
need of assistance. Similarly in 
Luxembourg, the funding of family 
benefits was shifted from employers 
to general taxation in 1994, while in 
Greece and Spain increasing con­
sideration is being given to the same 
kind of restructuring of finance. 
As a corollary, there is also a tend­
ency to earmark the taxes which are 
raised or introduced to compensate 
for reductions in contributions 
specifically for social protection. In 
France, a new 'solidarity' tax, the 
'Generalised Social Security 
Contribution' (CSG), levied on all 
personal income, was introduced in 
1991 and increased in 1993, the 
revenue raised going towards financ­
ing basic (ie non-contributory) 
pensions. A similar contribution (the 
'Personal Social Contribution') has 
been levied on all taxable income in 
Belgium since 1994 and part of en­
ergy and value-added taxes as well as excise duties and property taxes have 
been earmarked for social protection, 
while in Luxembourg, a special levy 
on fuel has been introduced to help 
fund employment promotion. 
These latter two changes are part of 
a tendency in many parts of the 
Union to shift, the burden of taxation 
from employment (the demand for 
which needs to be encouraged) to 
natural resources (the excessive use 
of which needs to be discouraged). 
This is in line with the Commission 
proposal to combine a CO^energy 
tax with a reduction in employers' 
contributions to stimulate job cre­
ation while at the same time encour­
aging energy saving and lower 
emissions to help safeguard the envi­
ronment. Other examples of Member 
States following this principle are 
Denmark, where taxes on labour 
have been reduced and taxes on en­
ergy increased, the UK, where em­
ployers' contributions have recently 
been reduced and VAT imposed on 
fuel as well as a new landfill tax 
announced, and the Netherlands, 
where a tax on energy use is being 
considered. 
On the other hand, in Scandinavian 
countries, an opposite trend is appar­
ent. Here social expenditure has al­
ways been predominantly financed 
by general taxation and insurance-
type contributions have played a very 
minor role in most respects. Increas­
ing consideration, however, is being 
given to the extension of contribu­
tions, partly to diversify sources of 
finance, but mainly to establish a 
closer link between funding and en­
titlement to benefit, which poten­
tially provides a means of restricting 
access to the benefit concerned or of 
50 
Chapter 2 -Adapting to change: recent reforms and key developments 
varying the amount paid out or 
the level of service provided in line 
with what has been contributed. In 
Denmark, in particular, where in the 
past social protection, at least so far 
as statutory aspects are concerned, 
has been financed entirely from tax­
ation, since 1994, all workers have 
had to make a contribution (of 5% of 
their gross salary, though 8% as from 
1998) to labour market funds out of 
which unemployment and early re­
tirement benefits as well as support 
for the new forms of leave discussed 
above are paid. From 1997, more­
over, employers will also have to 
contribute. 
At the same time, in Germany, fol­
lowing reductions in the contribu­
tions rates for pensions between 1991 
and 1994, contributions for em­
ployers as well as employees were 
raised in 1994 (by equal amounts) on 
the introduction of the new long-term 
care insurance scheme (discussed 
below). To compensate employers 
for the additional cost, however, this 
was accompanied by the cancellation 
of a public holiday. 
Given the difficulties of across-the-
board reductions in contributions of 
any size (though in a number coun­
tries, employers' contributions have 
been cut in the recent past—in Spain 
and Portugal, for example in the for­
mer, together with a cut in em­
ployees' contributions) two trends 
are apparent. One is to shift the 
burden of contributing from em­
ployers to employees, which seems 
to have occurred in Northern Mem­
ber States (particularly in Belgium, 
France, the Netherlands and, more 
recently, the UK) though less so in 
the South of the Union (where, except in Italy, the share of total fin­
ance provided by employees fell be­
tween 1980 and 1993 — see Chapter 
3 below). The other is to make selec­
tive rather than general reductions in 
employers' contributions. This has 
especially been the case in respect of 
low-paid workers. A particular aim 
in many countries has been to en­
courage the employment of those 
with relatively low skill levels or of 
young people who are capable of 
commanding only comparatively 
low rates of pay and account for a 
disproportionate share of the unem­
ployed. For these especially, high 
social charges can represent a signi­
ficant deterrent to firms which other­
wise might take them on. 
In Belgium and Ireland, for example, 
employers' contributions were re­
duced in 1994 in respect of employees 
on low pay, and in Ireland a further 
reduction (from 9% instead of 12% for 
those earnings less than around 15,000 
ECU a year) was made in 1995. In the 
UK, a further reduction was made in 
employers' contributions in 1995. In 
addition, in France employers in 1993 
were granted a five-year exemption 
from contributing to family allow­
ances as regards employees paid less 
than 1.3 times the statutory minimum 
wage (SMIC). 
The young, the long-term unem­
ployed and the disabled have been 
particular target groups. In Italy as in 
Portugal, a special reduction in con­
tributions has been introduced for 
employers recruiting anyone belong­
ing to these groups (with wider con­
cessions applying in the South), 
while in Belgium, employers are 
entitled to a reduction of contribu­
tions for a three year period (of 100% in the first year and 50% in the third) 
if they take on someone who has been 
employed for a year or more or who 
is under 26 and has been out of work 
for at least six months. Similarly, in 
Spain, firms which take on young 
people, someone unemployed of 45 
or over or a disabled person on a 
temporary contract (of 1-3 years) 
have their contributions reduced by 
75% and for small firms reductions 
apply for anyone taken on who was 
previously unemployed. 
A further tendency apparent across 
the Union is to supplement tradi­
tional sources of finance by user 
charges, which in some sense can be 
considered a form of taxation. These 
are discussed below. 
Privatisation 
— towards a new 
welfare mix? 
Awidespread reaction to the evi­
dent pressures from economic 
and impending demographic devel­
opments has been to search for 
radically new approaches to the 
organisation, operation and funding 
of social protection systems in Eu­
rope. A particular focus has been on 
the possibilities of increasing private 
sector involvement in a number of 
ways as well as of shifting responsi­
bility for certain risks from the State 
to the individual, or sometimes the 
employer. In the extreme, it has been 
suggested in some quarters that the 
concept of universal coverage and of 
equal access of all citizens to social 
protection according to need is 
outdated and/or too costiy for mod­
ern economies to support and that 
51 -
Chapter 2 -Adapting to change: recent reforms and key developments 
State systems should be confined to 
providing basic assistance and sup­
port to those without the means of 
providing for themselves. 
Although the more general issue of 
defining the desirable scope of social 
protection, especially in areas such as 
health care or pensions, has been a 
major topic of debate, there has been 
little support for this kind of extreme 
solution to the funding problems of 
existing systems. Indeed, as noted in 
Chapter 1, there is deep-seated popu­
lar attachment in all Member States 
to a broadly-based social protection 
system, and successive European 
Summits have reiterated the central 
importance of maintaining present 
systems in the Union not only for 
reasons of social cohesion but also to 
strengthen the basis for economic 
growth and improving competitive­
ness. 
Nevertheless, the role of the private 
sector and the desirable scope of indi­
vidual responsibility are both issues of 
importance which are likely to become 
more so in future years as real incomes 
continue to grow and demographic 
trends unravel. Already tendencies to­
wards privatisation in various senses, 
of contracting out activities to the pri­
vate sector, of encouraging private 
provision of services or support, of 
shifting responsibility for protection to 
individuals or part of the costs of pro­
vision onto them, are evident in most 
Member States. While the aim of re­
ducing costs to the government is a 
major motivation underlying such 
moves, it is also argued that greater 
private sector involvement is a means 
of introducing more competition in the 
delivery of services and, therefore, of 
increasing efficiency. Equally, giving more responsibility to individuals to 
provide for their own protection 
widens their freedom of choice over 
how much and what kind of insurance 
to have and so arguably is a way of 
increasing the effectiveness of expen­
diture, in the sense of the pattern of 
what is spent conforming more closely 
to consumer — and social — pref­
erences. 
A point worth emphasising given the 
prevailing preoccupation with cost 
containment is that privatisation in 
these senses does not necessarily re­
duce what is spent overall on protec­
tion though it may help to keep down 
public expenditure and, therefore, 
taxes and contributions. In a number of 
areas leaving consumers freer to 
choose what they spend may well re­
sult in higher expenditure, especially 
as real incomes increase. This is most 
notably the case as regards health care 
as witnessed by the scale of spending 
and the range of services provided in 
the US — where it is also open to 
question how far economic efficiency 
is boosted by greater freedom of con­
sumer choice—but it may also be true 
of saving for retirement as people look 
forward to a longer period of old age 
as life expectancy increases. 
The trend towards privatisation is 
wide-ranging but is most apparent in 
respect of retirement pensions, health 
care and social services and sickness 
and invalidity benefits. Recent devel­
opments in each of these areas are 
examined in turn below. 
Retirement pensions 
In a number of Member States, gov­
ernments have introduced incentives to encourage the development of pri­
vate insurance schemes for the provi­
sion of pensions over the past few 
years. With the major exception of 
the UK, however, such schemes are 
not intended to replace public sector 
provision directly but to enable 
people — occupational groups in 
particular — to supplement their 
state pensions if they so wish. In this 
way, as well as giving people more 
choice over how much they wish to 
contribute, it is hoped to relieve 
pressure for an expansion of State 
supplementary schemes. Occupa­
tional schemes of this kind have 
existed for some time in both 
Belgium and Germany, while in Italy 
legislation took effect in 1994 to fa­
cilitate the development of company 
pensions. 
In the UK, on the other hand, a major 
aim of pohcy in this area for the past 
decade and more has been to hive off 
responsibility for a large part of pen­
sion provision to private insurance 
companies and employees have the 
right to contract out of the State sup­
plementary system so long as they 
belong to an approved privately man­
aged scheme. In the past, such 
schemes were predominantly or­
ganised by employers and were spe­
cific to particular occupational 
groups or companies. Over the past 
few years, however, attempts have 
been made, through financial incen­
tives and publicity, to encourage the 
development of personal pensions as 
a substitute for, rather than as an ad­
dition to, State supplementary pen­
sions. 
This approach, however, has recently 
been called into question for two rea­
sons. First, the Maxwell scandal, 
52-
Chapter 2 - Adapting to change: recent reforms and key developments 
where pension fund money was used 
by an employer for his own purposes 
and lost as the company failed, has 
demonstrated the need for closer 
supervision and much tighter con­
trols on private pension funds. Sec­
ondly, members have had to pay 
higher levels of contributions to 
cover the higher costs associated 
with running individual pension 
schemes as compared with large oc­
cupational schemes. Given such 
costs and the costs of supervising 
private schemes effectively, added to 
the greater inflexibility associated 
with a multitude of different occupa­
tional schemes which in some cases 
increase the costs of moving between 
jobs, it is open to question how far 
privatisation on the scale obtaining in 
the UK represents a more efficient 
and lower cost solution to the provi­
sion of adequate pensions. 
Health care and 
social services 
A combination of public and private 
provision is most prevalent in respect 
of health care. In all Member States, 
the private sector is involved to some 
extent in the supply of treatment and 
services and in most countries its im­
portance has increased since 1980 
(the only exceptions between 1980 
and 1993 were Belgium, the Nether­
lands and Finland — see Chapter 3 
below). At the same time, an increas­
ing proportion of the cost of treat­
ment and of prescriptions has been 
passed onto patients. Moreover, in 
two countries, in particular, the 
Netherlands and the UK, significant 
reforms have taken place in the way 
the system is organised, both with 
the intention of introducing more competition and so increasing effi­
ciency (see Chapter 5 below). 
In Sweden, privatisation has in recent 
years been extended to social service 
activities, in particular, to the provi­
sion of various personal services, 
such as child care, where there was 
previously a public sector monopoly, 
though this is essentially bringing the 
situation into line with that existing 
in other parts of the Union. To en­
courage this development, State 
grants have been introduced for those 
providing such services. 
A different example of privatisation, 
in a broad sense, in this general area 
is the establishment of the Child Sup­
port Agency in the UK in 1993, set 
up to identify and trace absent par­
ents — fathers, in particular — with 
the aim of increasing the amount that 
they pay to support their children 
(through the application of a fixed, 
and controversially rigid, formula to 
their present income) and, accord­
ingly, to reduce the amount the State 
has to pay? 
Sickness and 
invalidity benefits 
Concern about the scale and growth 
of sickness and invalidity benefits 
has, in recent years, led governments 
in two countries, in particular — the 
Netherlands and the UK — to look 
for ways of reforming the system of 
payments in order to curb expendi­
ture, partly through tightening eligi­
bility criteria and partly through 
reducing the level of income support 
or abolishing benefits completely. In 
both countries, policy has been 
aimed at shifting responsibility for payment and, therefore, for checking 
the validity of claims onto employers 
(see box on the relative numbers of 
people who regard themselves as per­
manently disabled in these two coun­
tries). 
In the Netherlands, legislation was 
introduced in 1993 to make the level 
and duration of benefits dependent 
on age, to widen the definition of 
what is deemed to be suitable em­
ployment for the claimant and to 
introduce regular medical examin­
ations. In 1994, further legislation 
was enacted to make employers en­
tirely responsible for income support 
for the first six weeks of sickness and 
to encourage them to check that the 
person concerned is really too ill to 
work and to set up counselling ar­
rangements. At the same time, com­
panies are required to develop 
policies on reducing the prevalence 
of sick leave. 
Similar measures have been intro­
duced in the UK. As from April 1995, 
short-term sickness and longer-term 
invalidity benefits were amalga­
mated into a single Incapacity 
Benefit, with the level of payment 
increasing with duration and with 
regular independent and more strin­
gent medical checks being required. 
In addition, from April 1994, em­
ployers have become responsible for 
covering the first 28 weeks of sick­
ness. The extra cost, however, has 
been offset by a reduction in their 
social insurance contributions (pro­
portionately greater for lower'than 
higher wage-earners), which on aver­
age more than compensates for the 
expected additional expenditure they 
are likely to incur. 
53 
Chapter 2 - Adapting to change: recent reforms and key developments 
Numbers of disabled in the Union 
Comparable and reliable data on the number of people drawing invalidity 
or disability benefits in the Union are not available. Some indication of the 
numbers involved can be gained from the Community Labour Force Survey 
which includes a question on why respondents were not actively seeking 
work and suggests being permanently disabled as a possible reason. 
The relative numbers of people classified as permanently disabled in the 
Netherlands and the UK on this basis in relation to other parts of the Union 
is striking. In both countries, some 7% of people in the 45 to 54 age group 
and 15-16% of those in the 55 to 64 age group considered themselves to 
be permanently disabled in 1994 (Graph 10). These proportions, which 
almost certainly reflect the kind of income support which they are receiving 
rather than the actual number of people who are disabled, are twice as high 
as the averages for the Union as a whole — though it should be noted that 
the data are incomplete for some countries, France, in particular, for which 
there are no data at all. Around half of all the disabled people in the Union 
were, therefore, living in these two countries. Moreover, in both cases, the 
proportions have tended to increase over time, though there was some fall 
in the Netherlands for the younger of the two age groups between 1993 and 
1994, perhaps in response to the tightening of eligibility conditions. 
10 People aged 45-54 and 55-64 economically inactive 
because of being permanently disabled, 1987 and 
1994 
% pop 45-54 
18 r % pop 55-64 As in the Netherlands, such a change 
is deliberately designed to give em­
ployers a marked incentive to reduce 
the incidence of sick leave. Never­
theless, while more systematic moni­
toring of leave might be called for, 
there is a danger that a result of the 
change will be to discourage em­
ployers from hiring people who are 
regarded as likely to be prone to 
spells of absence for illness or to 
retain those who have already shown 
themselves to be. 
The experience in Germany, where 
employers have been responsible for 
some time for the payment of sick­
ness benefit, seems to indicate that 
this is not so much of a potential 
problem. The experience also sug­
gests, however, that it is important to 
have rules governing hiring and fir­
ing which specifically prevent 
employers having access to an appli­
cant's detailed medical record or 
being able to fire someone purely 
because of their state of health and 
which are strictly enforced. In prac: 
tice, the people hkely to suffer most 
from the change in arrangements are 
those employed by small companies 
where controls, are deliberately rela­
tively lax. At the same time, the Ger­
man experience also seems to 
suggest that there is unlikely to be 
much if any saving in overall expen­
diture on sickness benefits as a result 
of the change, even though pubhc 
spending will be lower. 
As governments in these two countries 
and others in the Union have focused 
on reducing social expenditure, in 
Germany, the scope of the system has 
been extended to include a new func­
tion, insurance against long-term care 
{Pflegeversicherung), financed, as 
54 
Chapter 2 - Adapting to change: recent reforms and key developments 
noted above, by a general increase in 
contributions. The novelty of this 
move is not the provision of support for 
care itself — in a number of other 
Member States, care is provided as part 
of health or social services or as part of 
their social assistance arrangements— 
but its incorporation in the social insur­
ance system as such. 
Concluding 
remarks 
One conclusion to be drawn 
from the above is that, just as 
Member States are characterised by 
significant differences in their social 
protection systems, as emphasised in 
Chapter 1, so too have there been a 
number of disparate developments 
over recent years. Nevertheless, 
there are clear signs of some conver­
gence in the measures taken and in 
the focus of policy effort, which 
should not be too surprising given the 
common nature of the problems and 
challenges faced. 
Most particularly, in all Member 
States, governments have been in­
creasingly concerned with contain­
ing costs, especially of old-age 
pensions and unemployment com­
pensation, two areas where the actual 
and impending pressure for expendi­
ture growth is acute. The action taken 
in this respect has also been similar, 
taking the form of targeting entitle­
ment to benefit more narrowly — in 
respect of pensions, by raising the 
age of retirement — as much as di­
rectly reducing the rates of benefit 
paid. Cost containment has also been a 
major objective in the provision of 
health care where in a number of coun­
tries, in addition to the Netherlands and 
the UK where reforms have been most 
substantial, such as Italy, Germany and 
Spain, attempts have either been made 
or are being considered to introduce 
more competition into the system with 
a view to raising efficiency. 
In addition, there is a common trend 
away from a passive policy of in­
come support towards active 
measures to get people into a position 
where they can support themselves 
rather than having to rely on the 
State. The precise measures taken, 
however, vary somewhat across the 
Union, especially in respect of the 
role played by government, at the 
regional and local as well as central 
level. In some Member States, the 
pubhc authorities are much more ac­
tively engaged in the job creation 
process than in others, where they 
have concentrated more on an enab­
ling role, removing restrictions and 
obstacles to employment growth. 
What is meant by active policy, 
therefore, differs in some degree 
across the Union and has come to 
cover a broad range of widely differ­
ing measures and approaches. In 
most Member States, however, im­
proving the functioning of the em­
ployment services and the help and 
advice given to job seekers has been 
a central part of policy. 
In financing, there has been a wide­
spread shift away from contributions, 
especially those levied on employers 
towards increased reliance on taxa­
tion on the grounds that the former is 
liable to add to labour costs and so 
deter job creation and damage cost competitiveness. As part of this, a 
general search for alternative forms 
of funding is evident, as well as the 
development of taxes earmarked for 
the financing of specific benefits or 
services. On the other hand, in 
Denmark the opposite is occurring 
with the introduction and expansion 
of contributions, though from an­
other perspective this can be seen as 
move towards convergence with the 
rest of the Union where there is a 
more mixed pattern of financing. 
Common trends are also apparent 
with regard to privatisation, if this is 
defined in very general terms to 
encompass any changes which lead 
to more private sector involvement in 
the provision of social protection or 
individuals having more responsi­
bility and choice over the amount and 
form of protection provided. At the 
same time, there is little sign of any 
general move to narrow the scope of 
social protection coverage or away 
from universal entitlement to income 
support and access to services. 
Indeed, in the Southern countries of 
the Union as well as in Ireland, sub­
stantial progress has been made 
towards the establishment of systems 
comparable in their coverage and the 
level of support provided to those in 
other Member States. Equally, in a 
number of countries, protection has 
been improved or extended to meet 
new needs, not only in Germany, 
with the introduction of its long-term 
care insurance, but also in Denmark 
and Sweden, where entitlement of 
workers to periods of leave for train­
ing or parental care has been intro­
duced or extended and combined 
with the provision of temporary jobs 
for the unemployed. 
55 
Chapter 2 - Adapting to change: recent reforms and key developments 
56 
Chapter 3 - Trends in social protection and its financing 
Chapter 3 Trends in social protection 
and its financing 
In 1993, expenditure on social pro­
tection — defined to include old-
age pensions, health care, sickness 
and invalidity benefits, unemploy­
ment compensation and spending on 
pubhc employment services, family 
allowances and maternity benefits 
and housing benefits as well as ad­
ministrative costs — averaged 
around 29% of Community GDP. 
This was equivalent to just over 
4,500 ECU per person living in the 
Member States. for other countries in the Union) on 
social protection for every person 
resident in the country, Greece spent 
only 1,600 ECU per person (stand­
ardised in the same way), a difference 
of over 4 times. Although the extent 
of variation was less for other Mem­
ber States, it was still the case that 
there was a considerable difference 
between the level of expenditure in 
the more developed, more pros­
perous countries in the North of the Union and those in the South together 
with Ireland. Both the Netherlands 
and Denmark, therefore, spent al­
most twice as much per head on so­
cial protection in purchasing power 
terms in 1993 than Spain, over twice 
as much as Ireland and almost three 
times as much as Portugal. 
Although these differences largely re­
flect differences in levels of real in­
come — and purchasing power — per 
Variations in the scale of spending 
across the Union, however, are sub­
stantial. Whereas in Denmark and the 
Netherlands, expenditure amounted 
to over 33% of GDP (and to around 
35% in Finland, where the figure has 
been increased markedly by the 
slump in GDP, and around 30% in 
Sweden, though for the latter not di­
rectly comparable figures as yet 
exist), in Ireland, it was only around 
2l72%, in Portugal 18% and in 
Greece just over 16% (Graph 11). 
In terms of average expenditure per 
head of population, differences are 
even wider. While Luxembourg in 
1993 spent an average of over 6,600 
ECU (expressed in purchasing power 
standards to make the figure more 
comparable, in terms of the com­
mand over real resources, with that 11 Social protection expenditure per head and in 
relation to GDP, 1993 
5 V Social protection expenditure per head, PPS (1000s) % GDP 
LM 35 
30 
25 
20 
15 
10 
GR P IRL E UK I E1 B F D NL DK L GR P IRL E UK I E1 B F D NL DK L 
2 2 
D includes new Lander 
57 
Chapter 3 - Trends in social protection and its financing 
head, it is, nevertheless, the case that 
there is a perceptible tendency, even if 
by no means uniform, for social expen­
diture to be higher in relation to GDP 
the higher the level of real income 
(Graph 12). In other words, as econ­
omies develop and become richer, they 
tend to devote an increasing proportion 
of resources to social protection in its 
various aspects. The extent to which 
this happens, however, itself varies be­
tween countries. The Netherlands and 
Italy with much the same levels of 
GDP per head when expressed in 
purchasing power standard terms 
have very different levels of spending 
on social protection in relation to GDP. 
Whereas in the former it amounted 
to 33'/2% in 1993, in the latter it was 
under 26%. Indeed, in all Northern 
Member States where GDP per head 
was higher than in the Netherlands 
(or Denmark), social protection expenditure was lower, in some cases 
significantly so. The choice of how 
much to spend on social protection 
even between countries with similar 
levels of real income, therefore, differs 
markedly between Member States. 
Real income, on the other hand, is by 
no means the only determinant of ex­
penditure levels. Countries also vary in 
terms of the need for social protection 
because of different population struc­
tures (the proportion of elderly 
people), different levels of unemploy­
ment, different disparities in under­
lying income distribution and so on. 
Outline of analysis 
'hese differences, and the 
changes which have occurred in 
12 Social protection expenditure and GDP per head, 
1993 
35 Social protection expenditure {% GDP) 
30 h 
25 
20 V 
15 
10 • NL OK 
•D •F 
,E12 
'UK • B 
• I 
• E 
• IRL 
• P 
• GR i 35 
H 30 
^ 25 
1 20 
15 
10 
6 8 10 12 
D includes new Lander; excluding L 14 16 18 20 
GDP per head, PPS (1000s) them over time are among the issues 
examined in this chapter, which is 
concerned not only to review the 
comparative levels of social protec­
tion expenditure across the Union 
and how these have changed over 
time in relation to economic growth, 
but also to try to identify the proxi­
mate reasons for the differences 
which exist and the variations in rates 
of change. In particular, a major aim 
is to consider how far demographic 
trends, and more specifically change-
s in the numbers potentially in need 
of protection, or support, can account 
for the changes in social expenditure 
which have occurred over the past 
decade or so. 
Such an analysis, however, is by no 
means straightforward. What can be 
achieved is very much limited by 
data problems. Thus while there is 
now a relatively well developed set 
of data on social protection expendi­
ture in the Union designed to be as 
comparable as possible (though not 
as yet including two of the three new 
Member States), which forms the 
basis for the analysis here (see Notes 
and sources at the back of the report), 
there is considerably less information 
about the number of people in receipt 
of social protection, whether of in­
come support or of the various ser­
vices provided. In general, the lack of 
data on beneficiaries means that 
population or labour market figures 
for groups at risk (for example, the 
number of people above retirement 
age in the various countries) have to 
be used instead to serve as a proxy for 
the numbers receiving support. As a 
result, it is not possible to examine 
what is happening to the extent of 
coverage of social protection sys­
tems, in the sense of whether an 
-58-
Chapter 3 - Trends In social protection and its financing 
increasing or declining number of 
people at risk have access to assist­
ance, or, in other words, to the pro­
portion of people at risk who are 
assisted. 
This is a major weakness of the ana­
lysis since it hes at the root of any 
assessment of the effectiveness of 
systems in actually reaching the 
people in need and providing adequ­
ate levels of protection and support. 
(Prospectively, the new Household 
Panel Survey established by Eurostat 
will provide information about the 
numbers receiving income support in 
various forms from the social protec­
tion system across the Union at any 
one time and the amount involved. 
The first results of the survey should 
be available around the end of 1995.) 
In what follows, the growth of total 
expenditure on social protection in 
Member States between 1980 and 
1993 (the latest year for which data 
are available) is first examined in 
relation to the growth of GDP and 
population in order to try to assess the 
long-term trend — ie whether and to 
what extent there is a tendency for 
social protection to absorb an in­
creasing proportion ofresources over 
time. 
Secondly, the pattern of expenditure 
on the main functions and the way in 
which this varies between Member 
States are considered together with 
the changes which have occurred 
over time to identify the areas of 
growth and decline. 
Thirdly, expenditure on each of the 
main areas, or functions, of social 
protection is examined, in turn, in 
some detail in order to assess how far the changes which have occurred re­
flect changes in the numbers of 
people potentially in need of support 
(for example, growing numbers of 
people in retirement) as opposed to 
changes in the average level of 
benefit provided. In addition, the 
changing structure of individual 
kinds of benefit — in particular, the 
extent to which they are subject to 
means-testing and the relative im­
portance of supplementary payments 
— is also considered. 
Finally, the changes in sources of 
finance for social protection systems 
over the past decade or so are ana­
lysed, focusing especially on the 
amounts raised from contributions in 
relation to the revenue obtained from 
general taxation. 
Growth in 
expenditure, 
1980 to 1993 
Between 1980 and 1993, total ex­
penditure on social expenditure 
increased in relation to GDP in all 
Member States with only two excep­
tions — Belgium and Germany 
where it declined. Over the Union as 
whole, average expenditure went up 
from 24% to just under 28% (29% if 
the new Lander are included), a 
slower rate of increase than in the 
1970s when all Member States with­
out exception experienced a marked 
expansion of spending (Table 1). 
Countries showing the largest rises 
since 1980 include in particular the 
Southern Member States, Greece, 
Spain, Italy and Portugal, all of 
which were engaged to differing extents in developing their social 
protection systems to be comparable 
in coverage with those in the North 
of the Union. On the other hand, they 
also include the UK, where pohcy 
was directed perhaps more than else­
where at restraining social expendi­
ture growth. (It should be noted that 
because the figures for social protec­
tion expenditure in Austria and 
Sweden are not directly comparable 
with those for the rest of the Union, 
the levels, either in value terms or in 
relation to GDP, are not included in 
the graphs and tables in this chapter. 
The changes over time, however, are 
included wherever possible since 
these ought to be more comparable 
with the changes shown for other 
Member States. For Finland, com­
parable data are available but only for 
the years 1990 to 1992 and these are 
included in the analysis wherever 
possible. Changes for years before 
1990 are based on national data.) 
However, the change over the period 
as a whole conceals markedly differ­
ent developments within the period. 
In particular, most of the growth in 
spending which occurred between 
1980 and 1993 was concentrated in 
the three years of recession between 
1990 and 1993 when GDP expanded 
only slowly or not at all. Over the 
Union as a whole, whereas social 
expenditure rose by 2V2% of GDP in 
the early 1990s, it went up by only 
1% of GDP over the whole of the 
1980s and between 1985 and 1990, 
when economic growth was rela­
tively high, spending declined in re­
lation to GDP. 
A similar pattern is evident in most 
Member States. (The level of expen­
diture relative to GDP is, however, 
-59 
Chapter 3 - Trends in social protection and Its financing 
Table 1 — Current social protection expenditure, 1970-1993 
B DK D GR E F IRL I L NL P UK E12 A* SF* S* 
Total social expenditure as % of GDP 
1970 
1980 
1985 
1990 
1993 18.7 19.6 21.5 - - 19.2 13.2 17.4 15.9 20.8 - 15.9 19.0 
28.0 28.7 28.8 9.7 18.2 25.4 20.6 19.4 26.5 30.1 12.9 20.6 24.1 
29.3 27.8 28.4 15.4 20.0 28.8 23.6 22.6 23.4 31.7 14.2 23.8 25.9 
27.0 29.8 26.9 16.1 20.6 27.7 19.5 24.1 22.1 32.2 15.0 22.1 25.2 
27.6 33.2 27.6 16.3 24.0 30.9 21.4 25.8 24.9 33.6 18.3 27.3 27.7 
(31.0) (28.7) 
Annual change in expenditure as % of GDP 
1970-80 
1980-85 
1985-90 
1990-93 0.9 
0.3 
-0.5 
0.2 0.9 
-0.2 
0.4 
1.1 0.7 
-0.1 
-0.3 
0.3 0.1 
0.0 0.4 
0.1 
1.1 0.6 
0.7 
-0.2 
1.1 0.7 
0.6 
-0.8 
0.6 0.2 
0.6 
0.3 
0.6 1.1 
-0.6 
-0.3 
0.9 0.9 
0.3 
0.1 
0.5 0.3 
0.2 
1.1 0.5 
0.6 
-0.3 
1.7 0.5 
0.4 
-0.1 
0.8 
Social expenditure excluding unemployment compensation as % of GDP 
1970 
1980 
1985 
1990 
1993 18.2 19.2 21.3 .19.0 9.4 17.4 15.9 20.2 12.5 18.1 
25.6 25.7 28.0 '9.5 ' 15.5 24.3 19.0 19.0 26.3 28.3 12.6 19.1 22.9 
26.3 24.7 27.0 ^5^ 16.5 27.4 20.5 21.8 23.1 28.1 13.9 21.5 24.2 
24.6 26.6 25.8 15.7 17.4 26.2 17.2 23.7 22.0 29.6 14.8 21.3 23.9 
25.0 29.1 26.1 
(29.0) 15.7 19.2 28.9 18.4 25.3 24.7 30.7 17.4 25.6 25.9 
(26.7) 
Annual change in expenditure as % of GDP 
1970-80 
1980-85 
1985-90 
1990-93 0.7 
0.2 
-0.3 
0.1 0.6 
-0.2 
0.4 
0.8 0.7 
-0.2 
-0.2 
0.1 0.9 
1.1 
0.1 
0.0 1.5 
0.2 
0.2 
0.6 0.5 
0.6 
-0.2 
0.9 1.0 
0.3 
-0.7 
0.4 0.2 
0.6 
0.4 
0.5 1.0 
-0.6 
-0.2 
0.9 0.8 
0.0 
0.3 
0.4 1.3 
0.3 
0.2 
0.9 0.7 
0.5 
0.0 
1.4 0.5 
0.3 
-0.1 
0.6 0.2 
0.0 
0.6 
0.1 
•0.1 
0.4 26.0 
35.4 
0.8 
0.3 
25.4 
32.0 
0.8 
0.4 
3^3 0.1 
0.1 
0.2 
0.0 
0.1 
-0.5 
Note: The figure for the EC in 1970 refers to the 9 Member States for which data are available. The change between 1970 and 1980 
relates to the average for these 9 Member States. Figures in parenthesis are for total Germany, including the new Lander; other 
figures for Germany exclude new Lander. The figures for the UK have been adjusted to a calendar year basis (and therefore, 
differ very slightly from those published in Eurostat, Social Protection Expenditure and Receipts, 1980-1993 
* A, SF, S 1990-92. 
Source: Eurostat, ESSPROS database; A and S from national sources; SF for 1980-90 from national sources and for 1990-92 from 
ESSPROS 
60 
Chapters- Trends In social protection and its financing 
very sensitive to the economic cycle 
and though the timing of this is fairly 
uniform between countries, the pre­
cise years in which turning-points oc­
curred vary slightiy which affects the 
changes shown over specific periods 
of time.) In five countries — 
Belgium, Germany, France, Ireland 
and the UK—social expenditure fell 
relative to GDP in the second half of 
the 1980s and only in Denmark, Italy, 
Portugal and Finland was there a sig­
nificant rate of increase (more than 
0.1 % of GDP a year). In all countries 
without exception, social expendi­
ture went up in relation to GDP be­
tween 1990 and 1993, in six Member 
States — Denmark, Spain, Luxem­
bourg, Portugal, the UK and Finland 
— by more than 1% of GDP a year. 
A major reason for the rise in expen­
diture in relation to GDP over this 
period was clearly the economic re­
cession. This both added to the need 
for spending, because of the steep 
rise in unemployment with which it 
was associated, and more importan­
tly depressed GDP directly. In prac­
tice, in most countries only a small 
part of the rise in expenditure relative 
to GDP during the early 1990s was 
due to higher payment of unemploy­
ment compensation (on average over 
the Union as a whole, it accounted for 
just 0.2 percentage points a year of 
the 0.8 percentage points by which 
expenditure rose as a proportion of 
GDP — Table 1). On the other hand, 
in Germany and Spain, it accounted 
for half or more of the rise and in 
Sweden for more than all of the in­
crease (here spending excluding un­
employment pay declined relative to 
GDP — in this case over the two 
years 1990 to 1992). In order to isolate the effect of the 
depressed state of GDP on the 
figures, it is instructive to examine 
the rate of growth of expenditure on 
social protection in itself. Between 
1980 and Ï993, average expenditure 
on social benefits in the Union (ie 
excluding administrative expenses) 
grew by 3-3 V2% a year in real terms 
(deflating by the change in consumer 
prices — the growth in the total in­
cluding administration was much the 
same). Growth, however, was far 
from uniform over time. Between 
1980 and 1985, it averaged just over 
272% a year in the Union as a whole, 
between 1985 and 1990, as economic 
growth picked up, it rose to almost 
372% and between 1990 and 1993, 
when for the most part when the 
European economies were into re­
cession, it increased further to almost 
4V2% a year (Table 2). Much of this 
acceleration, however, reflects the 
effect of variations in the rate of un­
employment. If social transfers to the 
unemployed — social assistance as 
well as benefits — are excluded, the 
difference in the rate of growth of 
expenditure both between the first 
and second half of the 1980s and 
between the second half of the 1980s 
and the early 1990s narrows appreci­
ably. Indeed, on this basis, growth of 
expenditure on social benefits was 
only very slightly higher in the years 
1990 to 1993 than over the period 
1985 to 1990 (just over 3'/2% a year 
as opposed to just under). 
Moreover, the effect on social pro­
tection expenditure of changing le-
vels of unemployment is not 
confined solely to unemployment 
transfers. Spending on family allow­
ances will also be affected to the ex­
tent that transfers are made to support the dependent children of the unem­
ployed, while spending on old-age 
pensions will also tend to be affected 
through changes in early retirement 
(see Chapter 2 above). The under­
lying rate of spending growth in the 
early 1990s, therefore, was probably 
no higher than over the latter part of 
the 1980s, and possibly slightly 
lower. Nevertheless, even taking ac­
count of thèse other elements, the 
underlying growth rate between 
1990 and 1993 was still over 3% a 
year, higher than the long-term of 
growth of the Union economies over 
the past 15-20 years, implying an 
upward trend in expenditure on so­
cial protection relative to GDp. This 
in large measure reflects the growing 
needs for social support from both an 
ageing population and a changing 
structure of households. 
The pattern of expenditure growth 
over time has by no means been uni­
form between Member States. In 
most countries, even allowing for ris­
ing expenditure on unemployment 
benefits, spending on social benefits 
in real terms rose at a faster rate be­
tween 1990 and 1993 than over the 
preceding five years, which perhaps 
explains in part the widespread em­
phasis on cost containment described 
in Chapter 2. 
In terms of expenditure on social 
benefits per head, this increased in 
real terms by just under 3% a year 
between 1980 and 1993 — slightly 
less than the overall growth because 
of the (small) rise in population. The 
growth, however, varied from under 
2% a year in Sweden, Belgium, 
Germany and the Netherlands, to 5% 
a year or more in Finland and Portu­
gal (Graph 13). 
-61 -
Chapter 3 - Trends In social protection and Its financing 
Table 2 — Growth of expenditure on social benefits at constant prices by function, 
1980-85,1985-90 and 1990-93 (annual % change) 
Old-age Sickness Invalidity Unempl. Family Maternity Total 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EUR12 
A 
SF 
S 1980-65 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-92 
1980-85 
1985-90 
1990-92 
1980-85 
1985-90 
1990-92 1.2 
3.0 
3.2 
2.5 
2.4 
2.5 
0.0 
3.2 
1.7 
11.3 
2.3 
-0.9 
4.5 
5.5 
4.5 
4.6 
2.3 
3.1 
2.8 
1.9 
3.6 
6.7 
6.0 
4.8 
0.8 
6.2 
8.0 
1.1 
6.0 
1.8 
1.2 
11.4 
8.9 
4.3 
1.8 
6.9 
1.6 
2.7 
2.2 
3.1 
3.7 
3.3 
5.8 
47 
4.5 
2.5 
3.4 
4.0 -0.8 
4.8 
2.2 
-2.1 
0.6 
3.3 
0.1 
3.3 
2.5 
1.8 
0.8 
16.9 
0.1 
8.3 
5.0 
3.3 
3.9 
3.7 
1.0 
1.0 
7.7 
3.0 
7.1 
-0.5 
1.0 
6.2 
8.6 
-1.0 
3.9 
3.3 
6.0 
4.6 
12.3 
1.6 
3.7 
5.1 
1.1 
4.3 
3.2 
1.3 
4.4 
8.7 
6.6 
5.2 
-2.2 
0.3 
4.2 
-15.1 0.1 
0.1 
1.4 
2.2 
3.6 
4.2 
0.9 
2.5 
3.2 
16.9 
0.9 
-4.3 
3.3 
5.4 
4.7 
2.0 
2.6 
0.5 
5.9 
2.8 
6.7 
3.5 
4.9 
1.3 
0.8 
3.4 
5.8 
-0.1 
3.9 
1.6 
2.7 
7.9 
5.3 
4.4 
7.2 
6.1 
1.7 
3.7 
3.1 
1.1 
1.0 
3.4 
7.3 3.4 
-0.3 
4.7 
3.3 
1.7 
9.8 
11.2 
-1.4 
15.9 
9.1 
6.4 
6.3 
6.5 
3.0 
15.2 
7.4 
4.7 
11.0 
17.6 
-1.0 
12.8 
13.2 
-8.4 
12.4 
14.3 
-7.7 
24.7 
15.6 
-3.3 
5.5 
0.3 
4.6 
46.1 
10.2 
-14.6 
24.5 
9.0 
-2.1 
13.9 
17.6 
4.5 
15.1 
7.4 
-0.7 
116.4 
15.5 
-4.8 
83.0 -2.5 
0.1 
-2.9 
-0.3 
5.8 
4.2 
-4.9 
3.9 
1.0 
8.7 
-17.6 
-9.5 
-10.4 
-6.5 
12.9 
1.4 
0.8 
2.4 
8.4 
3.5 
6.3 
-0.9 
2.5 
-7.2 
-1.4 
9.8 
13.5 
-2.6 
-2.0 
-2.0 
1.5 
5.9 
1.3 
2.4 
1.4 
7.4 
-1.2 
1.4 
2.3 
-1.9 
0.0 
1.7 
8.9 
M 5.2 -0.5 
3.4 
16.8 
12.9 
6.4 
2.4 
-4.1 
4.5 
2.4 
5.1 
-2.3 
-1.2 
-1.3 
1.7 
4.3 
-0.1 
1.2 
0.2 
-1.8 
0.8 
6.9 
3.3 
-1.5 
2.9 
3.9 
6.0 
6.9 
-0.5 
7.2 
13.2 
-0.8 
6.4 
6.7 
0.2 
-3.0 
15.6 
-0.6 
1.0 
5.0 
-0.4 
3.9 
31.2 
6.2 0.6 
2.3 
2.3 
1.7 
2.8 
5.0 
0.1 
3.3 
2.6 
10.4 
1.7 
1.5 
3.1 
5.7 
6.8 
3.8 
2.8 
3.8 
4.1 
1.1 
6.7 
5.3 
5.6 
3.0 
0.9 
6.5 
8.0 
1.2 
3.4 
1.8 
2.3 
8.5 
10.6 
4.8 
1.3 
8.3 
2.6 
3.3 
4.4 
2.7 
3.5 
6.0 
6.6 
LI 8.6 
1.8 
3.5 
-1.9 Total 
excl. 
unempl. 
0.3 
2.6 
2.1 
1.4 
2.9 
4.4 
-0.3 
3.5 
2.0 
10.4 
1.6 
1.4 
2.4 
6.3 
4.9 
3.7 
2.7 
3.3 
2.7 
1.5 
5.8 
5.1 
6.0 
2.9 
0.8 
6.6 
7.9 
0.0 
4.2 
1.5 
2.4 
8.8 
9.6 
4.3 
2.6 
7.5 
2.2 
3.6 
3.8 
1.9 
3.4 
5.2 
6.5 
5,5 
4.5 
1.4 
3.8 
-4.9 
Note: Expenditure figures are deflated by the consumer price index in each case. Old-age includes survivors; invalidity includes disability 
and occupational accidents and diseases; A: invalidity consists of occupational accidents and diseases only; SF: family includes 
maternity. D exclude new Lender 
Source: Eurostat, ESSPROS database; A and S from national sources; SF 1980-90 from national sources and 1990-92 from ESSPROS. 
62 
Chapter $ - Trends in social protection and its financing 
In practice, as for differences in levels 
of expenditure, there is some tendency 
for the growth of social expenditure 
per head in real terms to vary with the 
rate of growth of GDP per head, 
though there are number of Member 
States where GDP growth per head 
grew relatively slowly in which social 
expenditure increased at a compara­
tively high rate (Greece and Finland, in 
particular) (Graph 14). 
In five Member States, the growth in 
social expenditure per head increased 
progressively over these three periods, 
though the changing amount spent on 
unemployment compensation ac­
counts for part of the rise (Graph 15). 
In ten countries, growth occurred at a 
higher rate between 1990 and 1993 
than over the 1980s. In six of these — 
Spain, Ireland, Luxembourg, Portugal, 
the UK and Finland — growth aver­
aged 6% a year or more in the early 
1990s. In four countries — Belgium, 
Germany, Greece and the Netherlands 
— on the other hand, the rise in real 
spending per head was kept down to 
below 2% a year over this period, 
while in Sweden (at least on the national data available) expenditure 
was reduced. 
The structure 
of expenditure 
Although the pattern of social 
protection expenditure, in the 
sense of what is spent on the different 
kinds of function, varies across the 
Union, it is relatively similar for 
many of the more developed coun­
tries in the North. In all Member 
States, with the sole exception of 
Ireland — then only just — the lar­
gest share of expenditure is devoted 
to old age pensions (which is here 
defined to include survivors' pen­
sions). Over the Union as a whole, 
these accounted for almost 45% of 
total social spending in 1993, though 
in Greece and Italy theyamounted to 
over 60% of the total (Table 3). Only 
in the Netherlands (37%) and 
Denmark (34%) in addition to 
Ireland (28%), was the proportion 
lower than 40%. However, in Denmark and the 
Netherlands, the difference from the 
Union average largely reflects the 
high level of social spending on other 
functions (in relation to GDP, spend­
ing on pensions in both countries is 
close to that in most other Member 
States) and in Greece, the low level 
of expenditure elsewhere. In Italy, 
on the other hand, expenditure on 
pensions was higher in relation to 
GDP than any other country in the 
Union (15V2% as against a Union 
average of 12%) and in Ireland, sub­
stantially lower (under 6% of GDP). 
Health care and sickness benefits 
(not separately distinguished in the 
ESSPROS data, but mainly compris­
ing the former) are the second largest 
element together accounting for an 
average of almost 25% of expendi­
ture in the Union in 1993, though 
varying from around 30% in Ireland 
and Portugal to under 20% in 
Denmark and the UK and under 15% 
in Greece. In the other 7 countries, 
however, the proportion was not 
markedly different from the Union 
average (see Chapter 5 below for a 
13 Growth in expenditure on social protection 
benefits per head, 1980-93 
7 ^Annual growth at 1985 prices (%) 
S D B NL DK F E12 A IRL L UK QR E I SF P 
D excludot new Under, A, SF, a 1960-92 14 Growth of social expenditure per head and 
growth of GDP per head, 1980-93 
j Annual change in social expenditure per head (%) 
• P 
6 r • 
8F 
*QR «UK . 
E12«A •mi 
2 • 
1 DK 
* • • 
D excludes new Under, A, SF, S: 1980-92 
2 3 4 
Annual change In GDP per head {%) 
63 
Chapter 3 - Trends in social protection and Its financing 
separate analysis of health care ex­
penditure based on OECD figures). 
Invalidity, disability and occupa­
tional injury benefits are the third 
largest item accounting for 9% of the 
total over the Union as a whole, but 
in this case varying somewhat more 
markedly than the former two kinds 
of spending, from over 22% of the 
total in the Netherlands, where ex­
penditure was as large as on sickness 
and health care in 1993, to only 
around 7V2% in France and Ireland. 
In relation to GDP, the scale of Dutch 
spending was even more striking, 
amounting to over 7% as compared 
with a Union average of 2V2% and a 
figure of only lV2% in Ireland and 
Greece. Expenditure on this function 
alone is a major part of the explana­
tion of the relatively high expendi­
ture on social protection in the Netherlands as compared with other 
countries in the Union, though it is 
important to be cautious in this re­
gard since those who are supported 
by means of invalidity benefits here 
might well be supported by other 
kinds of benefit elsewhere (such 
as unemployment benefits, for. 
example). 
Similarly, the high level of overall 
expenditure in Denmark owes much 
to the comparatively high level of 
spending on unemployment compen­
sation and the public employment 
services, which, despite the rate of 
unemployment being below average, 
together accounted for 19% of the 
total in 1993 as opposed to a Union 
average of around 8%. Indeed, 
spending on this function was almost 
as high in Denmark as in Spain and 
higher than in Ireland, in both of 
15 Growth in expenditure on social protection 
benefits per head, 1980-85,1985-90 and 1990-93 
Annual growth at 1985 prices (%) 12 r 
B DK D GR E F IRL I L NL P UK E12 A SF S 
D excludes new Lânden A. SF. S: 1990-92 which unemployment was substan­
tially greater. Though the com­
parative level of spending on 
unemployment compensation re­
flects in some degree the scale of 
unemployment, differences in the 
average benefit paid and in the cover­
age of assistance seem to be equally 
if not more important factors, as 
examined further below. 
Family benefits, which are the fifth 
largest category of spending, vary 
equally widely between Member 
States. On average, they accounted 
for 6'/2% of total spending on social 
protection in 1993, but for over 10% 
in Denmark, Ireland, Luxembourg 
and the UK and for only 1% or less 
in Spain and Greece, though in some 
degree, this difference reflects the 
method of paying benefits (directly 
from employers in Greece) and the 
extent of tax concessions and allow­
ances which serve the same essential 
purpose (and which should ideally be 
incorporated in the analysis if the 
data were available). 
Maternity benefits vary somewhat 
less, though expenditure was signifi-
cantiy larger in 1993 in Denmark, 
especially in relation to GDP, than 
elsewhere in the Union and signifi­
cantly smaller in the Southern 
Member States — Greece, Italy and 
Portugal, in particular (where it 
amounted to only 0.1% of GDP). 
For the rest, there are marked dif­
ferences in housing benefits, which 
in part reflect the way in which those 
receiving income support are as­
sisted. In the UK, in particular, hous­
ing benefits, which are much more 
important than in other parts of the 
Union, effectively compensate for 
-64 
Chapter 3 ~ Trends in social protection and its financing 
Table 3 — Division of social protection expenditure by function. 1993 
B DK D GR E F IRL I L NL P UK E12 SF 
% total expenditure 
Old-age + survivors? . 43.2 33.1 39.0 63.0 39.1 41.2 26.8 59.7 45.1 35.4 38.6 39.7 42.3 32.1 
Sickness 21.8 18.3 25.7 14.1 24.4 24.9 28.3 21.1 23.9 21.2 29.2 18.9 23.3 21.0 
Invalidity, disability + 10.4 9.1 11.2 9.4 9.6 7.2 7.1 8.5 14.0 21.4 13.1 11.5 10.4 15.2 
occupational 
accidents and diseases 
Unemployment 9.5 12.3 6.4 3.2 19.9 6.4 13.8 2.0 0.8 8.7 4.6 6.0 6.9 9.4 
Placement, vocational 1.6 6.1 2.6 0.0 0.5 1.4 2.5 0.1 0.1 0.0 1.6 1.1 1.6 4.0 
guidance, resettlement 
Housing 0.0 2.5 0.8 0.5 0.4 3.0 2.9 0.0 0.2 1.0 0.0- 6.5 1.9 1.1 
Family 6.7 9.8 7.0 0.5 0.9 7.7 10.1 3.1 10.8 4.6 4.3 9.7 6.5 10.0 
Maternity 0.8 1.7 0.7 0.5 0.9 1.3 2.0 0.4 1.4 0.5 0.8 1.2 0.9 2.4 
Other 1.3 4.5 2.4 3.9 1.0 1.4 2.0 0.0 0.1 2.6 2.8 1.5 1.7 2.0 
Administration 4.6 2.6 4.3 4.8 3.3 5.6 4.4 5.0 3.5 4.5 5.0 3.9 4.5 2.9 
Total 100 100 100 100 100 100 10tf 100 100 100 100 100 100 100 
B DK D GR E F IRL I L NL P UK E12 SF 
%GDP 
Old-age + survivors 11.9 11.0 12.1 10.2 9.4 12.7 5.7 15.4 11.2 11.9 7.0 10.8 11.9 11.4 
Sickness 6.0 6.1 8.0 2.3 5.9 7.7 6.1 5.4 5.9 7.1 5.3 5.1 6.5 7.4 
Invalidity, disability + 2.9 3.0 3.5 1.5 2.3 2.2 1.5 2.2 3.5 7.2 2.4 3.1 2.4 5.4 
occupational 
accidents and diseases 
Unemployment 2.6 4.1 2.0 0.5 4.8 2.0 3.0 0.5 0.2 2.9 0.8 1.6 1.9 3.3 
Placement, vocational 0.4 2.0 0.8 0.0 0.1 0.4 0.5 0.0 0.0 0.0 0.3 0.3 0.3 1.4 
guidance, resettlement 
Housing 0.0 0.8 0.2 0.1 0.1 0.9 0.6 0.0 0.1 0.3 0.0 1.8 0.5 0.4 
Family 1.9 3.3 2.2 0.1 0.2 2.4 2.2 0.8 2.7 1.6 0.8 2.6 1.8 3.5 
Maternity 0.2 0.5 0.2 0.1 0.2 0.4 0.4 0.1 0.4 0.2 0.1 0.3 0.3 0.8 
Other 0.4 1.5 0.0 0.6 0.2 0.4 0.4 0.0 0.0 0.9 0.5 0.4 1.1 0.7 
Administration 1.3 0.9 1.3 0.8 0.8 1.7 1.0 1.3 0.9 1.5 0.9 1.1 1.3 1.0 
Total 27.6 33.2 30.3 16.3 24.0 30.9 21.4 25.8 24.9 33.6 18.3 27.3 28.5 35.4 
Note: D includes the new Lander, SF 1992 
Source: Eurostat, ESSPROS database 
-65 
Chapter 3 - Trends in social protection and Its financing 
relatively low levels of compensa­
tion paid as of right by means of 
unemployment benefits or through 
basic pensions. The level of expendi­
ture, therefore, reflects the more 
extensive reliance in the UK on 
means-testing, of which housing 
benefits are one element. 
Expenditure 
by function 
Distinguishing between the 
changes which have occurred 
in expenditure on the different func­
tions of social protection gives an 
indication of the areas in which the 
main growth of spending has oc­
curred. In practice, there was an in­
crease in spending relative to GDP in the Union in all the main areas of 
expenditure between 1980 and 1993, 
with the exception of family benefits 
where spending declined from just 
over 2% to just under 2%. The in­
crease was especially marked in 
respect of pensions, on which spend­
ing went up from an average of 10% 
of GDP in 1980 to 12% in 1993, 
rising in all Member States, apart 
from Germany and Ireland. 
The rise was particularly high be­
tween 1990 and 1993 (almost 1% of 
GDP), though as noted above this 
partly reflects the effect of the de­
pressed growth of GDP during this 
period. Expenditure on unemploy­
ment compensation also rose over the 
early 1990s as unemployment in­
creased. In the Union as a whole, 
however, the rise amounted to only 
around 72% of GDP and despite the 
18 Expenditure on old-age pensions per person above 
retirement age in relation'to GDP per head, 1980, 
1990 and 1993 
100 % GDP per head 100 
B DK D GR E F IRL I 
Includes survivors' pensions; D excludes new Lander UK E12 large numbers out of work, expendi­
ture in 1993 represented under 2% of 
GDP. 
A key issue in respect of both pen­
sions and unemployment benefits as 
well as the other main functions is 
how far the increases which have oc­
curred are the result of expanding 
need, as reflected in underlying 
demographic trends — or, in the case 
of unemployment, economic trends 
— and, therefore, changes in the 
number of potential claimants, and 
how far they reflect the development 
of more generous systems, in terms 
of the average level of income sup­
port provided and the extent of cover­
age. This is considered below by 
examining each ofthe major types of 
benefit in turn. 
Old-age pensions 
Expenditure on old-age pensions (in­
cluding survivors' pensions), in rela­
tion to GDP can be decomposed, as 
for benefits in general, into two ele­
ment — the average pension paid per 
recipient relative to GDP per head 
(not the same, it should be empha­
sised, as average earnings) and the 
number of recipients relative to total 
population (see Box for a description 
ofthe approach). In practice, because 
satisfactory data on the number of 
people receiving pensions are not 
available (partly because ofthe diffi­
culties of avoiding over-counting of 
beneficiaries when they can receive 
more than one pension), a proxy in­
dicator has to be used instead — in 
this case, the number of people over 
the official retirement age in each of 
the Member States plus those who, 
according to the Community Labour 
66-
Chapter 3 - Trends in social protection and its financing 
Force Survey, have retired early (see 
Box). Such an indicator itself is not 
entirely satisfactory, since it leaves 
out of account both those who retire 
before they reach the official age and 
those over the official age who are 
not in receipt of a pension. Neverthe­
less, there seems tittle effective alter­
native. 
As noted above, expenditure on pen­
sions relative to GDP over the Union 
as a whole rose from 10% in 1980 to 
just under 12% in 1993 (Table 4). At 
the same time, the number of people 
over retirement age increased from 
16% of total population to 19%, 
while those who had retired early 
also rose slightly. The overall num­
bers potentially in receipt of pen­
sions, therefore, went up by 
marginally less than the rise in ex­
penditure relative to GDP. Average 
pension, measured as spending 
divided by the number above retire­
ment age plus the number of people 
retiring early, relative to average 
GDP per head, accordingly, also in­
creased very shghtiy between 1980 
and 1993, but went up by more be­tween 1990 and 1993 than over the 
preceding 10 years. In the early 
1990s, therefore, the growth of ex­
penditure relative to GDP was the 
result of an increase both in the el­
derly population and in the average 
pension. 
Although there was a general rise in 
the proportion of people above retire­
ment age in most of the Member 
States'between 1980 and 1993 — all 
except for Luxembourg — the rate of 
increase varied considerably. It was 
highest in Italy where the proportion 
above retirement age went up from 
18% to almost 25% while those tak­
ing early retirement also rose, and 
where the growth of expenditure on 
pensions was substantial. While the 
average pension appears to have 
risen in Italy, therefore, the rise was 
less than in a number of other coun­
tries, and most of the increase in 
spending seems to have been due to 
demographic trends. 
In Greece and Portugal, where 
spending on pensions also rose mar­
kedly relative to GDP, the rise was predominantly the result of an in­
crease in the average value of pen­
sion relative to GDP per head, though 
in this case, this almost certainly re­
flects an increased proportion of 
those above retirement age receiving 
pension as well as more generous 
benefit rates. Other countries show­
ing relatively large rises in the aver­
age value of pension over this period 
were Luxembourg, the Netherlands 
and the UK. 
In Germany, on the other hand, 
where expenditure on pensions de­
clined relative to GDP between 1980 
and 1993, population above retire­
ment age increased and, accordingly, 
average pension relative to GDP per 
head fell significantly, from 65% to 
52%, by more than anywhere else in 
the Union. The average value also 
fell in Ireland, more than offsetting 
the relatively small growth in retire­
ment-age population and giving rise 
to a decline in expenditure relative to 
GDP, though this was confined to the 
1980s. 
19 Old-age pensions: the extent of means-testing of 
basic pensions (first pillar), 1980,1988 and 1993 
I Other a Means-tested 
" Jl 
20 
F 1981; L 1989; B 1992; left bar 1980, middle bar 1968, fight bar 1993; 0 exclude» new Lander 100 
60 20 Old-age pensions: importance and structure of 
supplementary pensions, 1980,1988 and 1993 
40 % total pension 
67 
Chapter 3 - Trends in social protection and its financing 
Estimates of the relative numbers entitled 
to social protection support and expenditure per person 
The lack of reliable data on numbers of recipients of 
the main kinds of social benefit make it difficult to 
identify the proximate reasons for both differences in 
the scale of expenditure between countries and 
changes over time—in particular, whether these result 
from differences or changes in the number of people 
requiring support, in the number who actually receive 
support (ie in the extent of coverage of systems) or in 
the average benefit received. AH that it is possible to 
do in practice is to estimate the number of people 'at 
risk' — or potentially in need of support — in the 
different Member States, in the sense that they are 
above the official age of retirement, registered as un­
employed or young enough to be eligible for child 
allowances. This, of course, does not mean that all of 
these will actually receive benefit or that others will 
not — such as, in particular, those who retire early — 
but it at least provides some indication of the potential 
demand on social protection systems and how this 
varies across the Union, as well as how it has tended 
to change over time. 
Old-age pensions 
In practice, the analysis of old age pensions is particu­
larly difficult since it is affected by a number of factors 
— both demographic and institutional. Not only do 
retirement ages differ between Member States, but 
there are a variety of different types of pension avail­
able, including supplementary occupational ones. Any 
one person in retirement might therefore be in receipt 
of more than one and sometimes several types. Ident­
ifying the number of beneficiaries, even if complete 
information were to be available, gives rise to signifi­
cant problems of over-counting. 
The analysis here is based instead on estimates 
(derived from detailed population data) of the number 
of people over retirement age in each of the countries 
plus the numbers below retirement age reporting in the 
Community Labour Force Survey that they have re­
tired (retirement age is held constant over the period 
at the official age in 1993) and expenditure on pen­
sions is decomposed into the following two elements: 
• the proportion of the total population (POP) 
entitled to old-age pensions (POPRET) • the average pension received by each pensioner 
(OAP/POPRET) in relation to GDP per head 
(GDP/POP) 
These two elements are equal by identity to expendi­
ture on pensions in relation to GDP: 
OAP/GDP = POPRET/POP x (OAP/POPRET)/ 
(GDP/POP) 
The two elements are shown separately in Table 4. It 
should be emphasised that GDP per head in this con­
text relates to GDP divided by total population, which 
is not the same as average earnings. 
Early retirement 
These estimates take account of early retirement which 
is important in all Member States, especially in the 
case of men. In 1994, according to Community Labour 
Force Survey data, despite the fact that the official age 
of retirement for men was 65 or above in all countries 
except Belgium (60 to 65), France (60), Italy (61) and 
Germany (63), 52% of men aged between 60 and 64 
were retired in the Union and only in Ireland and the 
UK was the proportion below 40% (though in the UK, 
as in the Netherlands, a much larger proportion than 
elsewhere were classed as disabled, as noted in Chap­
ter 2 above) (Graphs 16 and 17). Moreover in all 
Member States apart from Portugal, where it was 
unchanged, and the UK, where it declined shghtiy, the 
proportion has tended to increase over time. 
Even below 60, significant numbers of men are retired 
— 17% of the 55 to 59 age group in the Union as a 
whole in 1994,32% in Italy, 29% in Belgium and 25% 
in France, though only 4% in the UK and 9% in 
Ireland. Again the proportion has increased over time 
in most Member States. 
Unemployment benefits 
Analysing expenditure on unemployment involves 
similar difficulties. Not all those recorded as unem­
ployed in Member States will be eligible for benefit. 
Moreover, the registered numbers of unemployed tend 
to differ markedly from the numbers complying with 
the official ILO definition of unemployment (in the 
-68-
Chapter 3- Trends In social protection and its financing 
sense of being available for work and actively seeking 
a job). 
Nevertheless, outiays on unemployment benefits 
(UNB) in relation to GDP can be analysed in a similar 
way to old-age pensions by distinguishing the follow­
ing factors: 
• working age population (15-64 years) in relation 
to total population (POP15-64/POP) 
• the activity rate, or active population in relation to 
population of working age (POPACT/ POP15-64) 
• the unemployment rate, or the number of unem­
ployed in relation to active population 
(UN/POPACT) 
• the average benefit received by each person unem­
ployed in relation to GDP per head 
(UNB/UN)/(GDP/POP) Combining these factors produces the identity: 
UNB/GDP = POP15-64/POP x POPACT/POP 15-64 
x UN/POPACTx (UNB/UN)/(GDP/POP) 
Family benefits 
Potential recipients of family benefits have been taken 
as the number of children under the official age of 
eligibility for allowances, which is 18 in all Member 
States except Germany (16), Ireland (16), the Nether­
lands (17), Portugal (15) and the UK (16). However, 
in many cases, concessions will be made for young 
people in full-time education who are likely to be 
eligible for benefit in certain circumstances. The esti­
mates, therefore, will be affected by differences be­
tween Member States in the numbers remaining in 
education beyond the normal age for receipt of allow­
ances. 
16 Inactive and retired men aged 55-59 as a 
proportion of the male population aged 55-59 in 
the Member States, 1985 and 1994 
f% of population aged 55-59 100 
80 
60 I •Other tnacfve 
• Retired 100 
80 
60 17 Inactive and retired men aged 60-64 as a 
proportion of male population aged 60-64 in the 
Member States, 1985 and 1994 
100 f% of population aged 60-64 
•Other inactive 
• Retired 1 100 
69 
Chapter 3 - Trends in social protection and its financing 
Table 4 — Decomposition of expenditure on old-age pensions 
Old-age 
pensions 
(% GDP) 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 
EUR12 1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1993* 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 11.0 
11.3 
11.9 
10.0 
10.6 
11.0 
11.9 
11.0 
11.0 
12.1 
6.1 
10.5 
10.2 
7.2 
8.5 
9.4 
10.5 
11.7 
12.7 
6.2 
5.7 
5.7 
9.9 
13.6 
15.4 
12.0 
9.9 
11.2 
9.5 
11.4 
11.9 
4.6 
6.0 
7.0 
8.5 
9.1 
10.8 
10.0 
11.0 
11.9 People over 
retirement age 
(% total) 
16.4 
16.9 
16.8 
12.5 
13.7 
13.7 
17.1 
18.9 
20.3 
19.9 
14.6 
17.0 
18.0 
11.0 
13.4 
14.4 
17.1 
19.1 
19.7 
10.1 
11.4 
11.4 
18.1 
23.7 
24.7 
14.0 
13.4 
13.8 
11.5 
12.8 
13.0 
12.6 
14.9 
15.6 
17.6 
18.3 
18.2 
16.0 
18.3 
19.0 Early 
retirement 
(% total 
population) 
2.8 
3.6 
3.5 
2.3 
3.0 
3.1 
1.1 
0.7 
0.9 
1.1 
1.9 
3.6 
3.6 
1.8 
1.9 
2.1 
1.2 
1.3 
1.1 
0.7 
1.0 
1.0 
1.5 
1.8 
1.9 
2.2 
2.7 
4.1 
1.1 
1.0 
1.6 
4.5 
4.5 
4.4 
1.0 
0.8 
0.7 
1.6 
1.7 
1.7 Total 
retirement 
(% total 
population) 
19.2 
20.6 
20.3 
14.7 
16.7 
16.7 
18.3 
19.6 
21.2 
21.8 
16.5 
20.6 
21.5 
12.8 
15.3 
16.5 
18.3 
20.4 
20.8 
10.8 
12.4 
12.4 
19.5 
25.4 
26.6 
16.2 
16.0 
17.9 
12.5 
13.8 
14.6 
17.1 
19.4 
19.9 
18.5 
19.1 
19.0 
17.6 
20.0 
20.8 Expenditure 
per person 
(% GDP 
per head) 
57.5 
55.1 
58.9 
67.7 
63.6 
65.6 
65.3 
55.9 
51.9 
55.6 
37.0 
51.2 
47.6 
55.8 
55.5 
56.7 
57.4 
57.5 
61.2 
57.3 
45.8 
46.2 
50.9 
53.6 
57.8 
74.2 
62.0 
62.8 
76.1 
82.6 
81.4 
26.7 
31.0 
35.3 
45.8 
47.6 
57.1 
57.0 
55.2 
57.2 
: Note: Old-age includes survivors; Germany 1993* includes the new Lander. 
Source: Eurostat, ESSPROS database, Demographic Statistics and Community Labour Force Survey (for early retirement the 1983 LFS 
data are used to represent 1980). 
-70-
Chapter 3 - Trends in social protection and its financing 
Ireland also illustrates the benefits of 
having fewer numbers of people 
above retirement age relative to total 
population than other Member States 
(only ll72% in 1993) and fence ap­
parently taking early retirement. 
Though in practice this is combined 
with a relatively low level of average 
pension, it is the major reason for for 
the low level of expenditure to GDP. 
Similarly, the higher number of 
people potentially in receipt of a pen­
sion is the main explanation for high 
spending relative to GDP in Italy. 
Indeed, the average level of pension 
in Italy in 1993 was, in practice, 
much the same relative to GDP as the 
average for the Union. The generos­
ity of the Italian pension system, 
therefore, lies not in a high average 
amount of benefit paid but more in 
the low age of retirement (60 for men, 
55 for women — lower than else­
where in the Union). As noted in 
Chapter 2 above, one of the objec­
tives of the recent Italian reforms was 
to raise the retirement age. 
The structure of pensions 
Unfortunately details of the structure 
of pensions in terms of the import­
ance of supplementary payments 
('second pillar') relative to basic pen­
sions ('first pillar') and of means-
tested payments relative to payments 
as of right are available only up to 
1988 for most countries in the Union. 
These show, first, that there is only a 
limited degree of means-testing in 
this area — the main exception being 
Ireland — and that there was no 
general tendency for its importance 
to increase over the 1980s — only in 
Spain, Portugal and the Netherlands 
did any rise occur, and in the latter 21 Expenditure on sickness per .resident in relation to 
GDP per head, 1980,1990 and 1993 
% GDP per head 
7 r-
5 H 
4 H 
3 H 
2 H; 1 01980 
B1990 
• 1993 
B DK D GR E F IRL I L NL P UK E12 
D excludes new Lànder 
22 Expenditure on invalidity benefit per person aged 
15-64 in relation to GDP per head, 1980,1990 and 
1993 
°/<rGDP per head 
B. DK D GR E F IRL I L NL P UK E12 
Includes occupational accidents and diseases; D excludes new Lander 
71 
Chapter 3 - Trends in social protection and Its financing 
Table 5 — Decomposition of expenditure on invalidity, 
disability, occupational accidents and diseases 
Benefits 
(% GDP) 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 
EUR12 1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1993* 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 3.4 
2.9 
2.9 
2.5 
2.8 
3.0 
3.4 
3.1 
3.3 
3.5 
0.9 
1.8 
1.5 
1.8 
2.0 
2.3 
2.2 
2.2 
2.2 
1.3 
1.4 
1.5 
1.9 
2.1 
2.2 
4.3 
3.3 
3.5 
7.0 
7.0 
7.2 
1.8 
2.2 
2.4 
2.0 
2.6 
3.1 
2.1 
2.2 
2.4 Population Expenditure 
15-64 per person 
(% total) (%GDP 
per head) 
65.6 
67.0 
66.4 
64.7 
67.4 
67.5 
66.3 
69.5 
68.6 
68.5 
64.0 
66.9 
67.4 
63.1 
66.9 
67.9 
63.7 
65.9 
65.5 
58.9 
61.5 
62.9 
64.6 
68.6 
68.8 
67.6 
69.2 
68.3 
66.2 
68.9 
68.6 
63.1 
66.2 
67.2 
64.1 
65.3 
64.9 
64.5 
67.3 
67.1 5.2 
4.3 
4.3 
3.9 
4.1 
4.5 
5.1 
4.5 
4.8 
5.1 
1.4 
2.7 
2.3 
2.9 
3.0 
3.4 
3.5 
3.3 
3.4 
2.2 
2.3 
2.4 
2.9 
3.1 
3.2 
6.4 
4.7 
5.1 
10.6 
10.2 
10.5 
2.9 
3.3 
3.5 
3.1 
4.0 
4.8 
4.2 
4.0 
4.4 
Note: D 1993* includes the New Lander. 
Source: Eurostat, ESSPROS database and Demographic Statistics. country, this was followed by a fall 
between 1988 and 1993 (Graph 19). 
Secondly, there was a general tend­
ency for supplementary pensions to 
become more important, their share 
ofthe total pension received increas­
ing in most Member States over the 
1980s and reaching over 30% in the 
Netherlands in 1988 (though remain­
ing at that level during the sub­
sequent five years) and over 25% in 
the UK (Graph 20). There was also 
some tendency for payments from 
voluntary schemes to rise relative to 
those from compulsory ones. 
Sickness 
Expenditure on sickness benefits and 
health care combined went up in the 
Union as a whole from 6% of GDP 
in 1980 to 6V2% in 1993 (and since 
the potential recipients in this case 
are all those people resident in the 
Union, average spending per person 
also rose relative to GDP per head), 
with almost all of the rise occurring 
in the early 1990s. Since population 
growth has been relatively small, 
most of the increase reflects an ex­
pansion in spending per person 
(Graph 21), though given the dispro­
portionate pressures on the service 
imposed by very elderly people, it 
also partly reflects the changing age 
structure of the population and the 
growing numbers living into old age. 
It is difficult, however, to identify the 
effect of the latter and to gauge its 
importance as compared with other 
factors, such as rising real income 
levels, technical progress and in­
creased know-how in respect of 
medical treatment which might well 
have been more significant. 
72-
Chapter 3 - Trends in social protection and its financing 
Nevertheless, expenditure has not 
expanded over the past decade 
throughout the Union. In Denmark, 
Germany and Ireland, it was lower in 
relation to GDP in 1993 than in 1980, 
though, apart from in Italy, in all 
countries, including these three, it 
rose between 1990 and 1993. The 
increase over the period as a whole 
was particularly pronounced in 
Greece and Portugal where the ser­
vice was being developed (see Chap­
ter 5 for an analysis of expenditure on 
health care, including private as well 
as pubhc spending). 
Invalidity, disability 
and industrial injuries 
Between 1980 and 1993, expenditure 
on invalidity benefits (defined to in­
clude payments for disability and in­
dustrial injuries) went up from an 
average of 2% of GDP in the Union 
to almost 2'/2% (Table 5). In this case, 
however, the rise was less general. 
In Belgium, Germany, France and 
Luxembourg, spending was either 
less in 1993 than in 1980 or the same. 
In relation to the population poten­
tially ehgible for benefit (in this case, 
those of working-age, taken here as 
15 to 64), the average amount paid 
relative to GDP per head rose only 
slightly between 1980 and 1993 and 
in the four countries listed above as 
well as in the Netherlands (where 
average benefit is substantially 
higher than elsewhere in the Union, 
but has been for some time), declined 
(Graph 22). 
In terms of the structure of benefits, 
the prevalence of means-testing 
tended to increase over the 1980s, the 
only exceptions being Ireland, where 23 Invalidity: structure of benefits, 1980 and 1990 
% total pension • Basic benefit H Means-tested • Supplementary 
100 mm tum rn nn mm nn mm mm SH nn mm mm 100 
80 
60 
40 
20 80 
60 
40 
20 
B DK 0 GR E F IRL I L NL P UK 
F 1981; B. DK, GR, UK 1988; E 1989; left bar 1980. right bar 1990; D excludes new Lander 
24 Expenditure on unemployment per registered 
unemployed in relation to GDP per head, 1980, 
1990 and 1993 
% GDP per head 120 r I Placement, vocational guidance, resettlement 
•I Unemployment n 120 
Left bar 1980, middle bar 1990, right bar 1993; D excludes new Lander 
-73 
Chapter 3 - Trends in social protection and its financing 
Table 6 — Decomposition of expenditure on unemployment benefits 
Pop. 15-64 
(% total) Activity rate 
(%) 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
: Portugal 
UK 
EUR12 1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1993* 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 65.6 
67.0 
66.4 
64.7 
67.4 
67.5 
66.3 
69.5 
68.6 
68.5 
64.0 
66.9 
67.4 
63.1 
66.9 
67.9 
63.7 
65.9 
65.5 
58.9 
61.5 
62.9 
64.6 
68.6 
68.8 
67.6 
69.2 
68.3 
66.2 
68.9 
68.6 
63.1 
66.2 
67.2 
64.1 
65.3 
64.9 
64.5 
67.3 
67.1 41.3 
41.8 
42.2 
51.1-
55.1 
54.8 
45.3 
48.0 
47.7 
47.6 
35.2 
38.0 
37.5 
35.6 
39.7 
38.3 
43.4 
44.0 
43.8 
36.8 
38.7 
40.4 
39.1 
44.9 
44.2 
43.7 
50.1 
52.4 
39.3 
44.1 
46.1 
47.4 
49.0 
49.0 
47.9 
49.5 
48.1 
42.6 
45.4 
44.9 Unemploy­
ment rate 
(%) 
9.1 
97 
12.9 
6.7 
9.4 
12.1 
3.2 
6.2 
7.3 
8.9 
1.1 
3.6 
4.5 
9.6 
15.2 
17.0 
6.2 
10.0 
12.6 
8.1 
16.5 
20.4 
7.2 
16.4 
19.3 
0.7 
1.1 
1.7 
5.4 
5.4 
5.9 
5.1 
6.3 
7.2 
5.9 
5.8 
10.4 
5.9 
9.6 
12.0 Unemploy­
ment benefits 
(% GDP) 
2.4 
2.4 
2.6 
3.0 
3.2 
4.1 
0.9 
1.1 
1.6 
2.0 
0.3 
0.4 
0.5 
2.7 
3.2 
4.8 
1.0 
1.5 
2.0 
1.6 
2.3 
3.0 
0.4 
0.4 
0.5 
0.1 
0.1 
0.2 
1.8 
2.6 
2.9 
0.3 
0.3 
0.8 
1.5 
0.8 
1.6 
1.2 
1.3 
1.9 Expenditure 
per person 
(% GDP 
per head) 
65.3 
59.6 
48.2 
88.0 
61.3 
61.8 
58.7 
36.0 
45.0 
46.8 
64.9 
32.6 
31.1 
79.6 
52.5 
73.7 
38.6 
33.2 
36.1 
51.9 
35.8 
35.8 
14.6 
5.1 
6.2 
49.2 
22.1 
23.4 
83.5 
107.5 
108.5 
13.2 
9.4 
23.7 
53.2 
28.8 
32.6 
48.1 
29.8 
34.9 
Note: D 1993* includes the new Lander. 
Source: Eurostat, ESSPROS database. Activity rate relates to employed plus registered unemployed. Employment data are from National 
Accounts, except for Italy, the Netherland and Portugal where data are from the Community Labour Force Survey. 
Unemployment rate relates to registered unemployed (data from Eurostat, SOCI database). 
74-
Chapter 3 - Trends in social protection and its financing 
it was already relatively high in 1980, 
Denmark, Greece and Luxembourg, 
where it is insignificant or non­
existent (Graph 23). In 1990, how­
ever, the proportion of payments 
which were subject to means-testing 
was over 10% only in Belgium, 
Spain, France (where it was over 
25%, higher than anywhere else in 
the Union), Ireland, Italy and the UK. 
On the other hand, there was little 
tendency for supplementary benefits 
to increase in significance, the only 
countries where payments were of 
any size being the Netherlands 
(where they accounted for 30% of the 
total paid in 1990, though this was 
less than ten years earlier), Germany, 
Greece and France (where in each 
case they accounted for 7% or less of 
the total). 
Unemployment 
compensation 
The amount paid in unemployment 
compensation (social assistance as 
well as insurance benefits) rose 
relative to GDP in all Member States 
between 1980 and 1993, and most 
especially in the early 1990s (Table 
6). Expenditure per person unem­
ployed relative to GDP per head, 
however, declined throughout the 
Union, except in two Member States 
— the Netherlands, where it rose to 
over 100% of GDP per head, and 
Portugal, where though it rose signi­
ficantly, it remained at a relatively 
low level (see Box above for a de­
scription of the method of calcula­
tion). The fall was especially marked 
over the early 1980s and between 
1990 and 1993, the rise in unemploy­
ment was accompanied in many cases by an increase in the average 
level of benefit — from 30% of GDP 
per head over the Union as a whole 
to 35% (Graph 24). 
The latter rise reflects in part the ef­
fect of the steep increase in unem­
ployment itself. Since this was 
associated with a marked growth in 
the numbers coming onto the unem­
ployment-register, who were likely to 
be ehgible for higher rates of benefit 
than those who had been on the reg­
ister for some time (because rates 
tend to decline the longer someone 
has been out of work), the average 
amount paid to each person was 
likely to have risen. At the same time, 
a growing number of young people 
receiving relatively low benefits also 
joined the unemployment register. 
As the rise in unemployment^oder-
ates, it may well be the case that average benefits decline once more, 
as over the 1980s. 
In terms of average benefit levels, 
these vary significantly between 
Member States, from over 100% in 
the Netherlands in 1993, as noted 
above, to under 24% in Portugal and 
only 6% in Italy (though here the 
unemployed receive income support 
in other ways). 
In general, differences in average 
levels are not closely related to 
variations in GDP per head. In 
Luxembourg, which has by some 
way the highest GDP per head in the 
Union, the average benefit paid to the 
unemployed, as measured here, 
amounted to under 30% of GDP per 
head, below that of Greece, and in 
France, the country with the second 
highest GDP per head, only 36%, 
25 Unemployment: structure of benefits, 1980 and 
1992 
% total pension I Basic • One-off D Means-tested 
nn nn m.. .. nn nn m 100 
B DK D OR E F IflL I L NL P UK 
OK 1984; E, F 1981, GR 1991; left bar 1980, right bar 1992; D excludes new Lander 
75 
Chapter 3 - Trends in social protection and Its financing 
Table 7 — Decomposition of expenditure 
on family allowances 
Family 
allowances 
(% GDP) 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 
EUR12 1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1993* 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 2.8 
2.1 
1.9 
2.8 
3.0 
3.3 
2.6 
1.9 
1.8 
2.2 
0.2 
0.1 
0.1 
0.5 
0.2 
0.2 
2.6 
2.2 
2.4 
1> 
2.0 
2.2 
1.2 
1.0 
0.8 
2.2 
2.0 
2.7 
2.6 
1.7 
1.6 
0.8 
0.8 
0.8 
2.3 
2.1 
2.6 
2.1 
1.7 
1.8 Children 
(% total 
population) 
25.0 
21.9 
21.8 
25.6 
21.3 
20.9 
19.9 
16.2 
17.0 
17.4 
22.8 
23.8 
22.3 
31.1 
24.7 
22.6 
27.3 
24.5 
23.8 
30.4 
29.0 
27.5 
27.3 
16.5 
15.4 
23.4 
20.6 
21.2 
25.9 
20.8 
20.7 
25.8 
20.4 
18.6 
22.7 
20.2 
20.6 
25.3 
21.2 
20.6 Expenditure 
per person 
(% GDP per 
head) 
11.4 
9.7 
8.5 
10.8 
14.0 
15.7 
12.8 
11.6 
10.8 
12.4 
0.9 
0.5 
0.4 
1.6 
0.6 
1.0 
9.4 
9.1 
10.0 
5.0 
6.9 
7.8 
4.5 
4.8 
4.2 
9.5 
9.9 
12.6 
10.0 
8.2 
7.5 
3.1 
4.0 
4.2 
10.2 
10.3 
12.8 
8.5 
7.9 
8.6 
Note: Children are defined as those below age limit for receipt of family benefit. 
Germany 1993* includes new Lander. 
Source: Eurostat, ESSPROS database and Demographic Statistics. much the same as in Ireland. By con­
trast, in Spain, which is among the 
poorer Member States, the average 
benefit in 1993 was 74% of GDP per 
head (see Chapter 4 below for a de­
tailed analysis of unemployment re­
placement rates). 
The structure of 
unemployment 
compensation 
The form in which unemployment 
benefit is paid differs markedly be­
tween Member States. In particular, 
whereas in four Member States — 
Belgium, Denmark, Italy and 
Luxembourg — benefits tend to be 
related to earnings when in work 
and do not depend on current in­
come or accumulated savings, in a 
number of others, the receipt of in­
come support is subject to means-
testing. In Ireland and the UK, over 
60% of unemployment compensa­
tion was means-tested in 1992, in 
each case substantially higher than 
12 years earlier (Graph 25). In the 
Netherlands, around 45% of pay­
ments were means-tested, while in 
Germany, it amounted to some 30% 
and in Spain, 25%, in all three cases 
a considerably greater proportion 
than in 1980. Of the countries where 
means-testing is part of the system, 
only Greece and Portugal witnessed 
a decline in its importance over this 
period — in the latter, reflecting a 
move away from complete means-
testing of all payments. 
Family allowances 
Family or child allowances are 
the only broad function to have 
-76 
Chapter 3 - Trends In social protection and its financing 
experienced a reduction in expendi­
ture relative to GDP since 1980, 
though even here, spending rose be­
tween 1990 and 1993. This pattern of 
change was repeated in the majority 
of Member States (Table 7). 
Expenditure per child (where the 
latter is defined in terms of entitle­
ment to allowance), however, 
remained unchanged relative to 
GDP per head in the Union over the 
period as a whole (at 872%), reflect­
ing the fall in the number of eligible 
children relative to total population 
(Graph 26). Nevertheless, in the ma­
jority of Member States (8 ofthe 12), 
as in the Union as a whole, average 
benefit levels rose between 1990 and 
1993. 
In terms of average levels, dif­
ferences are substantial, average 
benefit per child in Denmark and 
Luxembourg amounting to 15V2% of 
GDP per head in 1993 and to almost 
13% in Germany and the UK, as 
against 1% or less in Spain and 
Greece. 
As in the case of unemployment 
compensation, there was a wide­
spread increase over the 1980s in the 
use of means-testing to determine 
family allowance levels. The only 
country experiencing a decline was 
Denmark — though in Belgium and 
Greece, they remained largely un­
used (Graph 27). In Spain, the UK 
and Ireland, the expansion in their 
use was substantial, and in the latter 
two countries, around 40% of spend­
ing on allowances paid to support 
children was subject to means-test — 
the money being paid largely to the 
unemployed. 26 Expenditure on family benefit per child in relation 
to GDP per head, 1980,1990 and 1993 
„ % GDP per head 
16 r 
B DK D GR E F IRL I L NL P UK E12 
O excludes new Lander 
27 Family: structure of benefits, 1980 and 1990 
100 
80 
60 
40 
20 % total pension I Basic benefit • Means-tested D Supplementary 
100 
8 DK D QR E F IRL I L NL P UK 
Left bar 1980, right bar 1990; D excludes new Lander 
-77 
Chapter 3 - Trends In social protection and Its financing 
28 Expenditure on maternity benefit per live birth in 
relation to GDP per head, 1980,1990 and 1993 
50 % GDP per head 
40 
30 
20 
10 
B DK D GR E F IRL 
D excludes new Lander L NL P UK E12 
29 Financing of social protection expenditure by 
source, 1980,1990,1993 
50 
40 %GDP 
• Other receipts 
O General government 
• Protected person's contributions 
• Employers' contributions 
D excludes new Lander, left bar 1980, middle bar 1990, right bar 1993 Maternity benefits 
Spending on maternity benefits, 
which is very small in relation to 
GDP, declined slightly over the 
period 1980 to 1993. This was at a 
time when the number of births ex­
pressed as a proportion of total popu­
lation fell (markedly so in Greece, 
Spain, Ireland and Portugal or re­
mained stable — the case in most 
Member States. In Denmark and 
Luxembourg, however, the birth rate 
increased over the period. 
Average expenditure per birth rose 
marginally, and most especially be­
tween 1990 and 1993 (Graph 28). 
Indeed in all Member States apart 
from Germany and France, the aver­
age amount paid was higher in 1993 
than 13 years earlier. In Denmark, 
average benefit doubled over the 
period and in 1993, at 42% of GDP 
per head, was by far the highest in the 
Union, and at the same time the num­
ber of live births went up signifi­
cantly. 
The rise in average benefits which 
occurred in many Member States 
however, was not necessarily the re­
sult of benefit rates becoming more 
generous. Given the marked increase 
in the participation of women in the 
labour force over this period, it partly 
reflects an increase in the proportion 
of births to working mothers who are 
ehgible for benefit. 
The changing 
structure of finance 
'he relative importance of the 
various sources of finance for 
78-
Chapter 3 -Trends In social protection and its financing 
social protection systems is just as 
much an aspect of divergence be­
tween Member States as the pattern 
of expenditure. In 1993, whereas 
most countries in the Union funded 
their systems mainly from social in­
surance contributions, in three coun­
tries — Denmark, in particular, 
Ireland and the UK, general taxation 
played the predominant role (Graph 
29). 
Between 1980 and 1993, however, 
there was a widespread tendency 
to increase reliance on taxes relative 
to contributions. This was espe­
cially the case after 1990. Over the 
Union as a whole, the share of taxes 
in total finance rose from 2772% to 
2972%, with only Belgium and the 
Netherlands showing a fall in the im­
portance of tax revenue. 
Within contributions, there was a 
parallel shift from levying charges on 
employers to levying them on em­
ployees, the major motivation being 
to relieve pressure on labour costs at 
a time of high unemployment. On 
average, therefore, the proportion of 
contributions collected from em­
ployers in the Union fell from 6772% 
in 1980 to 6372% in 1990 and to 
under 62% in 1993. The reduction 
was common to most Member States, 
the only exception being Portugal, 
where employers' contributions rose 
markedly between 1990 and 1993 
(from 68% of the total to almost 
75%). 
These shifts in the relative reliance 
on different sources of funding have 
resulted in employers' contributions 
declining shghtiy in relation to GDP 
since 1980. In relation to labour 
costs, however, they have tended to Table 8 - Decomposition of expenditure 
on maternity benefits 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 
EUR12 1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1993* 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 
1980 
1990 
1993 Maternity 
benefits 
(% GDP) 
0.2 
0.2 
0.2 
0.3 
0.5 
0.5 
0.3 
0.2 
0.2 
0.2 
0-1 
0.1 
0.1 
0.2 
0.2 
0.2 
0.5 
0.4 
0.4 
0.6 
0.4 
0.4 
0.1 
0.1 
0.1 
0.3 
0.3 
0.4 
0.1 
0.1 
0.2 
0.1 
0.1 
0.1 
0.3 
0.2 
0.3 
0.3 
0.2 
0.3 Number of Expenditure 
births per person 
(% total (%GDP 
population) per head) 
1.3 
1.2 
1.2 
1.1 
1.2 
1.3 
1.0 
1.2 
1.1 
1.0 
1,5 
1.0 
1.0 
1.5 
1.0 
1.0 
1.5 
1.3 
1.2 
2.2 
1.5 
1.4 
1.1 
1.0 
0.9 
1.1 
1.3 
1.3 
1.3 
1.3 
1.3 
1.6 
1.2 
1.2 
1.3 
1.4 
1.3 
1.3 
1.2 
1.1 12.5 
12.4 
19.4 
22.9 
42.7 
42.4 
26.0 
18.1 
19.4 
21.7 
5.9 
8.8 
8.5 
16.2 
18.0 
21.3 
32.9 
30.0 
32.5 
27.4 
26.1 
31.1 
10.9 
10.3 
11.9 
28.1 
24.8 
26.0 
8.4 
9.3 
13.7 
8.5 
11.1 
12.6 
23.6 
14.8 
24.7 
21.9 
18.8 
22.6 
Note: Germany 1993* includes the new Lander. 
Source: Eurostat, ESSPROS database and Demographic Statistics. 
79 
Chapter 3 - Trends in social protection and Hs financing 
30 Employers' and protected person's contributions 
in relation to labour costs, 1980,1990 and 1993 
50 
40 % labour costs 
I Protected person's contributions 
I Employers1 contributions -, 50 
D excludes new Lander; left bar 1980, middle bar 1990, right bar 1993 
Financing and expenditure 
In most Member States, total receipts to finance social protection systems 
in 1993 exceeded total expenditure, including the costs of administration 
as well as of benefits and services. This is especially so in countries with 
funded pensions systems, such as the Netherlands and the UK, where 
receipts are determined in relation to future liabilities rather than present 
spending. In the former, therefore, receipts were almost 14% higher than 
expenditure in 1993 and in the latter 10% higher. In 1990, the difference 
was 15% and 21%, respectively. In a number of other countries supposedly 
without funded systems, however, receipts were also significandy higher 
than expenditure, reflecting, in part, the building up of reserves to cover 
future pension payments. 
Receipts also tend to exceed expenditure as a result of governments 
maintaining a reserve against contingencies, which is usually reduced 
during periods of recession when the yield from contributions and taxes is 
depressed. It is comparatively rare, however, for social protection to be in 
deficit. In 1993, at the depth of the recent recession, only three Member 
States, France, Portugal and, to a very small extent, Ireland, were in deficit, 
while Denmark and Luxembourg has surpluses almost as large as the 
Netherlands and the UK. In 1990, only Ireland was in deficit, and then only 
to a small extent. rise, reflecting the fall in labour costs 
relative to GDP (Graph 30). Only in 
the Netherlands were employers' 
contributions significantly lower 
relative to labour costs in 1993 than 
in 1980, though this largely reflects a 
change in classification (employers' 
contributions were reduced and those 
of employees' increased but gross 
wages were raised at the same time 
to compensate). In Portugal and 
Belgium (in the former despite their 
rise as compared with employees' 
contributions), employers' contribu­
tions fell between 1990 and 1993. 
At the same time, employee's con­
tributions have shown an even more 
marked increase relative to labour 
costs, rising from 1072% to 14% be­
tween 1980 and 1993. 
80 
Chapter 4 - Unemployment compensation and incentives to look for work 
Chapter 4 Unemployment compensation 
and incentives to look for work 
The persistence of high levels of 
unemployment in most parts of 
the Union throughout the 1980s and 
the significant increases experienced 
in virtually all Member States during 
the period of economic recession in the 
early 1990s have focused attention 
both on the underlying causes and on 
the economic and social conse­
quences. The continuing concern of 
pohcy has been, on the one hand, to 
develop effective responses to the fac­
tors which have given rise to the prob­
lem and, on the other, to alleviate the 
effects on the people who have been 
hit. In both regards, systems of social 
protection have come under increasing 
scrutiny. Not only have they had to 
withstand increasing financial and ad­
ministrative pressure as the numbers 
needing support have risen, but they 
have been singled out as one ofthe root 
causes of high unemployment 
Thus it has been widely argued that the 
generosity of unemployment benefit 
and income maintenance schemes 
across the Union has provided an 
overly attractive alternative to employ­
ment, especially in low-paid jobs, and 
have given people too little incentive 
to look for work. The sums available 
have, therefore, on this view tended to 
depress effective labour supply, not 
necessarily in the sense of reducing the 
labour force as measured but more in the sense of pushing down the numbers 
in the labour force who are genuinely 
looking for work. On the same view, 
they have potentially reduced the de­
mand for labour by effectively setting 
a floor to wages and so preventing 
these from falling to levels at which it 
is profitable for employers to take on 
lower skilled workers. In other words, 
it is argued that benefits have been 
fixed in many Member States, above 
the level which firms can afford to pay 
to employees who are capable of con­
tributing relatively little to value-
added, which has meant that too few 
jobs have been created for such people. 
Few would seriously claim that the 
operation ofthe social protection sys­
tems and the scale of benefits avail­
able are the main, or even a major, 
cause of the present high level of 
unemployment in the Union, which, 
it is commonly accepted, is due 
largely to macro-economic and 
structural factors. Nevertheless, it is 
possible that they have contributed to 
the problem and made it more diffi­
cult to resolve by effectively prevent­
ing wages from falling to a level low 
enough to stimulate demand for rela­
tively low skilled labour. 
The fact that a growing concern of 
pohcy has been to help stimulate job 
creation at the lower end of the pay-scale, principally by reducing the 
costs of employing young people or 
those with comparatively low skill 
levels, who make up a large propor­
tion of the unemployed, has given 
governments added reason for reas­
sessing the relationship between 
wage and benefit levels. 
The task facing governments in the 
Union is to balance the conflicting 
concerns, on the one side, about 
spending too much and on the other 
of spending too litde. Thus the objec­
tives on the former side consist of: 
• restraining the growth of social 
protection expenditure within the 
capacity of the economy to fund 
it; 
• maintaining adequate incentives 
for those out of work to look for 
jobs; 
• preventing abuse of the system, 
which is important not only to 
keep expenditure down but also 
to maintain society's willingness 
to fund pubhc spending on in­
come support. 
On the other side, they consist of: 
• ensuring that those who cannot 
find a job have an adequate, and 
81 -
Chapter 4 - Unemployment compensation and Incentives to look for work 
The data and method used 
The analysis in this chapter is based heavily on a model ofthe tax and social protection 
system developed by the Central Planning Bureau in the Hague for the Commission 
Services. It enables the social contribution and taxes payable by a single person, a 
married couple and a couplé with two children to be estimated at different levels of 
gross earnings. It also enables the unemployment benefit or social assistance receiv­
able by such a person to be estimated, taking account of their age, employment record 
and how long they have been unemployed. The new Member States were not included 
in the exercise and, therefore, are not incorporated in the analysis here. The exercise 
did include, however) three selected US States, and the calculations for New York 
have been used to represent the US here, though it should be emphasised that taxes 
and benefits vary somewhat across States, as do, therefore, replacement rates. For 
Italy, where social assistance (as opposed to social insurance) is organised on a 
regional basis and varies across the country in terms of amount and the conditions 
attached to payment, the estimates for a person not entitled to social insurance benefits 
(or whose entitlement has expired) relate to Liguria, a region with GDP per head 
somewhat below the .average for Northern Italy and unemployment above the average, 
but with a well-developed social assistance scheme. As such, they may be indicative 
of other parts of Northern Italy but may well differ significantly from the position in 
the South of the country.. For Spain, where social assistance is also regionally 
organised, the estimates relate to Aragon, a region with above average GDP per head 
and below average unemployment. 
The calculations include the effects of housing benefits on the replacement rate by 
assuming that the individual concerned pays an average rent (though estimates of what 
constitutes an average are very approximate because of lack of reliable data). The 
replacement rate is, therefore, defined,as disposable income when in work relative to 
disposable income when unemployed, including housing benefits as part of disposable 
income which is defined before deducting housing costs (see the section on housing 
costs for more details). Other costs, such as the cost of child care, travel to and from 
work (as opposed to travel undertaken to look for a job) or working expenses are not 
included in the calculations, partly because ofthe difficulties of estimating them and 
the wide variation between individuals in otherwise similar circumstances, but in 
some cases they may have a significant effect on replacement rates (where, for 
example, women have to pay for child care in order to take up a job). 
The average gross wage of a manual worker in industry, as estimated by OECD, has 
been taken as the benchmark against which to compare rates in the different Member 
States and to assess the way that these change as earnings and family circumstances 
vary. Although other figures for the average could have been used instead, it should 
be emphasised that the results depend only to a minor extent on the precise figure used 
for the benchmark. It does not mean, in particular, that the results apply only to 
workers in industry or even only to full-time workers. Indeed when interpreting the 
results for those on low earnings, it should be borne in mind that a large number of 
workers, especially women, are employed part-time and, therefore, may earn a wage 
which represents only a small proportion of the average as defined here. 
It should also be borne in mind, however, that the tax and benefit position of a married 
women living with her husband may be different from a single person so that the 
calculations cannot necessarily be assumed to apply in this case. 
82-
Chapter 4- Unemployment compensation and incentives to look for work 
acceptable, level of income to 
support both themselves and 
their dependants; 
• giving those unemployed suffi­
cient time to look for employ­
ment which suits their particular 
skills and abilities, which is im­
portant for the efficient function­
ing of the labour market and the 
overall efficiency of the econ­
omy; 
• providing access to effective 
support and advice for those 
searching for jobs, through de­
veloping efficient employment 
services and placement agencies 
(in the private as well as the pub­
lic sector); 
• improving the employability of 
the unemployed and the incen­
tive for employers to take them 
on through providing access to 
training and other active labour 
market measures. 
The concern of this chapter is with 
the income support measures avail­
able to those who are unemployed 
across the Union and, specifically, 
with how the scale of unemployment 
benefit or social assistance provided 
relates to income when in work — in 
other words, with the replacement 
rate as it is technically termed. As 
such, its focus is both oh the potential 
incentive for those in employment to 
stop working and be supported by the 
state and the potential disincentive 
for those out of work, whether offi­
cially recorded as unemployed or 
economically inactive, actively to 
look for a job. Because the major 
pohcy issue concerns those on rela­
tively low rates of pay when in work, the analysis concentrates on this 
group of people, without ignoring the 
relationship between social benefits 
and earnings for those further up the 
pay-scale. 
Methodology 
The. analysis is based on the re­
sults of a simulation model of 
the social protection and fiscal sys­
tem in each of the Member States 
developed for the Commission by the 
Central Planning Bureau in the 
Netherlands. This is designed to en­
able the amounts payable to the un­
employed with given characteristics 
in terms of their previous level of 
earnings, their age, employment rec­
ord and number of dependants to be 
calculated and compared with their 
disposable income when in work. It 
also enables such features as housing 
benefits or social assistance to be 
taken into account. Other than hous­
ing costs, however, it stops short of 
including tax concessions or benefit 
payments, in cash or in kind, which 
are specific to individual circum­
stances, such as allowances for work­
ing expenses or relief from medical 
costs, such as prescriptions charges 
(see Box). 
Although these kinds of calculation 
are useful in throwing light on the 
scale of the transfers of income re­
ceivable by those who are out of 
work, it should be emphasised that 
they reveal only part of the picture. 
While they indicate the theoretical 
amounts payable in hypothetical 
cases, they cannot by their very na­
ture show how much those who are 
unemployed receive in reahty. The only way of discovering this is 
through a survey of the unemployed 
themselves, such as through the new 
Household Panel Survey set up by 
Eurostat to investigate income, living 
conditions and other household cir­
cumstances across the Union. 
Differences between theoretical and 
actual payments will arise particu­
larly in cases where benefits vary 
with individual circumstances and 
are subject to various regulations 
restricting entidement or are means-
tested. In particular, a common tend­
ency in many Member States as high 
unemployment has persisted has 
been to tighten up the regulations 
governing continued entitlement to 
benefit as people remain unem­
ployed (in terms of both actively 
looking for work and having to ac­
cept suitable jobs when they are of­
fered). The way in which such 
regulations are applied in practice in 
different Member States is difficult 
to judge from the way that they are 
worded and can only really be deter­
mined by examining actual cases. 
This point should be borne in mind 
throughout the analysis and is a 
potentially important factor qualif­
ying the results which are obtained, 
especially comparisons between 
Member States which might have 
similar regulations governing entitle­
ment to benefit but very different 
degrees of enforcement. 
An additional qualification is that the 
model and analysis relate to a spe­
cific period of time, July 1993, and 
while the results ought to be broadly 
valid for later periods, especially in 
terms of comparisons between coun­
tries, it should also be borne in mind 
83-
Chapter 4 - Unemployment compensation and incentives to look for work 
that changes in tax rates and benefits 
have been introduced in a number of 
Member States since then which 
might alter the findings. Moreover, 
the model is confined to the 12 coun­
tries of the Union as they were in 
1993 and does not as yet cover the 
three new Member States. It does, 
however, for purposes of comparison 
cover three US States, and the results 
for New York are included here 
(though the results for the other two 
States are broadly similar). 
A further qualification is that the 
cases incorporated in the model are 
confined to a single person, a couple, 
one of whom is working, and a 
couple with two children. Although 
this enables most cases to be exam­
ined, it excludes a couple who are 
both working and, specifically, mar­
ried women who are working, who are treated in different ways by the 
tax and benefit system in different 
countries. These have often been 
found by research studies to be espe­
cially hkely to be influenced in their 
decision of whether or not to seek 
employment by the amount they 
would have to pay in tax, on the one 
hand, and the amount they receive in 
benefit, on the other. While in many 
cases, they might be subject to the 
same tax rates and be entitled to the 
same rates of benefit as single people, 
this is not invariably so and their 
exclusion represents an important 
limitation of the analysis (as noted 
below, some 25% ofthe unemployed 
in the Union were married women). 
While the main part of the analysis is 
concerned with estimating and com­
paring disposable income from work 
and when unemployed in hypotheti-
31 Proportion of men and women unemployed in 
Member States, 1994 
% total unemployed 
E12 B DK D GR E F IRL L NL P UK cal cases, an important starting-point 
is to examine the actual charac­
teristics of the unemployed in the 
Union in order to determine the cases 
which are typical in practice. This is 
one way, at least, of narrowing the 
gap between the simulation model 
and reality. 
The characteristics 
of the unemployed 
In 1994, the latest year for which 
detailed data are available (from 
the Community Labour Force Sur­
vey), almost 17.7 million people 
were unemployed in the Union (of 12 
Member States). Of these just over 
half were men (52%), just under half 
women, of whom almost half (49%) 
were married. These figures vary in 
some degree between Member 
States. The proportion of men ranged 
from 63% in Ireland and 67% in the 
UK to 47% in Denmark and 43% in 
Greece, with the proportion being 
more than half in seven of the 12 
countries, the exceptions, as well as 
Ireland and the UK, being Spain, 
Luxembourg and the Netherlands, 
though in each case the figure was 
only slightly above 50% (Graph 31). 
It should be noted, however, that so 
far as women are concerned, a signi­
ficant proportion of those who are 
making the decision of whether to 
work or not, who are not in education 
or initial training, are not officially 
recorded as unemployed, in the sense 
that they are actively looking for 
jobs, but as economically inactive. In 
other words, many of the women 
who enter employment each year 
have spent a period of time looking 
-84-
Chapter 4 -Unemployment compensation and Incentives to look for work 
after young children or taking care of 
other family responsibilities. As 
such, in most cases they will not be 
in receipt of social benefits, other 
than perhaps, maternity benefits 
which in all Member States are only 
payable for a limited (relatively 
short) period of time (see Chapter 7 
of this Report). They are, therefore, 
in many cases, not subject to the in­
fluence ofthe scale of unemployment 
benefits relative to the income they 
could receive by working. They are, 
however, hkely to be influenced by 
the taxes and social charges they and, 
in some cases, their husbands, need 
to pay out of the gross wage which 
they can obtain. This is an issue 
which is not examined here, but its 
importance should be borne in as­
sessing the potential effect of the so­
cial protection system on incentives 
to find work. (The scale of deduction 
from gross earnings across the Union 
is examined in Employment in 
Europe, 1995, Part ffl, Section 1.) 
Almost 28% of the unemployed in 
Member States taken together were 
under 25, the proportion being much 
the same for men and women. Under 
8% of these, however, were under 20. 
Again, the proportion of the under 
25 s in total unemployment varied 
across the Union, from around 40% 
in Greece and Italy to 23% in 
Denmark and only 13% in Germany. 
Of these, some 43% in the Union as 
a whole were seeking their first job 
— ie they had no employment record 
which in most Member States is a 
requirement in order to be eligible for 
unemployment benefit — the figure 
varying from over 70% in Greece and 
Italy (which means that around 30% 
of the total unemployed in these two 
countries were both under 25 and had never had a job before) to only 14% 
in Germany and 10% in Denmark 
(Graph 32). 
Of the unemployed of 25 and over, a 
significant proportion are in the 25 to 
34 age group. Across the Union as a 
whole, these accounted for just over 
30% of the total people unemployed 
in 1994, the figure varying relatively 
little between Member States. This 
means, in practice, therefore, that on 
average 60% of the unemployed 
were under 35 years old in the Union, 
though in general, more in the South­
ern Member States than in the North­
ern ones. A further 20% were 
between 35 and 44, in this case more 
in most Northern countries (just 
under a quarter), less in the South 
(just under 15% in Greece and Italy 
and 17% in Spain). In consequence, only around 20% of 
the unemployed in the Union were 45 
or over in 1994. In this case, there is 
a marked variation between Member 
States, the Union average being 
boosted by relatively high numbers 
in two of the larger countries, Ger­
many and the UK, whereas in all but 
these two countries and Denmark, 
the proportion was under 20%. In 
Germany, the figure was as high as 
35%, in the UK, 26%. 
In sum, therefore, there is a good deal 
of variation across the Union in the 
age composition of the unemployed, 
though in most Member States, a 
substantial proportion were under 25, 
well over half under 35 and only a 
comparatively small number 45 and 
over. This has implications for the 
level of benefit typically receivable 
by those out of work, which in some 
32 Share of people under 25 and under 35 in total 
unemployment in Member States, 1994 
g0 %of total unemployed men 
70 
60 
50 
40 
30 
20 
10 I- • 25-34 
• Under 25 % of total unemployed women^ 80 
70 
60 
50 
40 
30 
20 
10 
E12 3 DK D QR.E F IRL i NL P UK E12 B DK O GR E F IRL I NL P UK 
No data for L 
85 
Chapter 4 - Unemployment compensation and incentives to look for work 
countries varies with age and em­
ployment record. unemployed of 25 and aver received 
benefits) (Graph 34). to be more restrictive (see Employ­
ment in Europe, 1994, Chapter 1). 
A substantial proportion of the unem­
ployed in all age groups in the Union 
have been out of work for a long 
period of time. Of the total numbers 
unemployed in 1994, almost half 
(48%) had been out of work for one 
year or more and around half of these 
for two years or more. The former 
figure varied from over 60% in Italy 
and just under 60% in Belgium and 
Ireland to under 40% in France and 
around 30% in Denmark and 
Luxembourg (Graph 33). 
Perhaps most importantly from the 
perspective of this analysis, well 
under half (42%) of those recorded as 
being unemployed, according to the 
ILO international standard definition 
of being available for work and ac­
tively seeking work, were in receipt 
of benefit or assistance in 1994, 
around 70% or more in Belgium, 
Denmark, Germany and Ireland and 
under 10% in Greece and Italy, only 
partly because of the high proportion 
under 25 (in Italy, only 11 % of the Moreover, only 23% of those under 
25 across the Union were receiving 
benefit, two-thirds or more in 
Belgium, Germany and Ireland, but 
under 15% in Spain, under 10% in 
Portugal and only 2-3% in Greece 
and Italy. 
At the same time, it should be noted 
that the evidence shows that many of 
those in receipt of unemployment 
benefit across the Union are not offi­
cially recorded as unemployed ac­
cording to the international standard 
definition. Some have already found 
jobs to start at some later date, others 
may not be available for work in the 
immediate future as required by the 
ILO definition and yet others may not 
be actively seeking work in the sense 
of doing something tangible to find a 
job. The evidence also shows that 
this is more likely to be the case in 
the North of the Union than in the 
South where eligibility for unem­
ployment benefit or assistance seems At the same time, those out of work 
in a number of Southern Member 
States may be in receipt of other 
kinds of income support, such as the 
Cassa Integrazione in Italy or aid 
from regional authorities in Spain, 
which are not necessarily reported in 
the LFS as unemployment assist­
ance. These are not taken into ac­
count in the analysis here. 
Nevertheless, the comparatively few 
people who are recorded as being in 
receipt of income support when un­
employed in a number of Member 
States is an important point to bear in 
mind when interpreting the estimates 
of the amounts of benefit which 
people are theoretically entitled to 
receive according to prevailing regu­
lations. In the South ofthe Union, in 
particular, therefore, the calculations 
of benefit and of replacement rates 
would seem not be relevant for most 
people. 
33 Proportion of unemployed out of work for 1 
year or more, 1994 
70 Jfc of total unemployed 34 Proportion of unemployed in receipt of 
unemployment benefit or assistance, 1994 
100% total unemployed 100 
E12 B DK D GR E F IRL I L NL P UK 
86-
Chapter 4 - Unemployment compensation and incentives to look for work 
The earnings 
potential of 
the unemployed 
Afurther point to clarify is the 
typical pay levels of the unem­
ployed when in work or the earnings 
which they are hkely to be able to 
command if they find a job. Again, 
this question can only be satisfactor­
ily answered by means of a survey of 
those concerned. Unfortunately, the 
Community LFS does not contain 
details of income. The Community 
Household Panel Survey does in­
clude such information, but the first 
results are not yet available at the 
time of writing. 
Nevertheless, some indication of the 
potential earnings which the unem­
ployed might command can be ob­
tained from their level of education 
attainment, details of which are in­
cluded in the Community LFS. These 
indicate, as is well known, that the 
unemployed are more hkely to have 
fewer educational qualification and 
less years schooling and vocational 
training than those in employment. 
Nevertheless, it also indicates that a 
significant proportion of the unem­
ployed have educational and training 
qualifications beyond basic school­
ing, some with university degrees. 
In 1994, half of the unemployed had 
completed only basic education and 
had no further education or voca­
tional training qualifications beyond 
this. This compares with 36% in the 
case of those in employment. The 
figure, however, was in general much 
higher in the Southern parts of the 
Union, together with Ireland, than in 
the North. In Portugal, it was as high as 80%, in Ireland, only slightly 
lower, in Spain over 70% and in Italy 
over 60%, though only 47% in 
Greece. In all these countries, how­
ever, the relative numbers in employ­
ment with only basic education were 
also comparatively high, though 
lower than for the unemployed (over 
70% in Portugal, over 60% in Spain 
and over half in Italy, but under 45% 
in Ireland). By contrast, in Denmark 
and the Netherlands, it was under 
30% and in Germany, only just over 
20%, in each case reflecting the rela­
tively high numbers who go on to 
further education courses after com­
pulsory schooling, while in most 
other Northern Member States, with 
the exception of Belgium and the 
UK, the proportion was under half 
(Graph 35). An average of around a third of the 
unemployed in the Union in 1994 had 
completed an education or training 
course beyond basic schooling but 
below university level, over half in 
Denmark and the Netherlands and 
over 60% in Germany, but less than 
20% in Ireland and under 15% in 
Spain, Portugal and Italy. 
In the Union as a whole, therefore, 
some 16% of the unemployed in 
1994 had university degrees or equi­
valent qualifications (as compared 
with 26% of those in work). As such, 
they may well have been capable of 
commanding relatively high rates of 
pay. Nevertheless, in general, the 
average level of earnings in the 
Union for the unemployed when in 
work is likely to bé below average, 
though perhaps not so much below 
average as is sometimes suggested 
35 Proportion of unemployed and employed with 
various levels of educational attainment in 
Member States, 1994 
% total unemployed . % total employed 
• Basic level BUpper secondary level •University level 
100 
80 
60 
40 
20 n D D D m ninr 100 
80 
60 
40 
20 
El? B DK D QR E F IRL I NL P UK 
No data for I E12 B DK O GR 6 F IF*. I NL P UK 
-87 
Chapter 4 - Unemployment compensation and incentives to look for work 
— except in the case of women 
whose average earnings are signifi­
cantly below those of men in most 
Member States. 
Replacement rates 
at average earnings 
From the above, it would seem that 
the typical person who in the 
Union is unemployed is under 35 as 
hkely to be a woman as a man and 
whose earnings when in work are less 
than the average, perhaps signifi­
cantly so. As a starting-point for the 
analysis of levels of income support 
available to the unemployed in dif­
ferent parts of the Union, however, it 
is useful to examine the level of trans­
fers payable to someone on average 
earnings. This provides in some sense a benchmark against which 
payments at lower wage levels can be 
assessed. (The average earnings 
figures used relate to the gross wage 
for a production worker in manufac­
turing in the different Member States 
in 1993 and come from OECD—see 
earlier Box.) 
The basic assumption is that the per­
son concerned is ehgible for unem­
ployment benefit for the maximum 
period allowed by their employment 
record and that where benefits are 
fixed in relation to prt-'.ous earnings, 
the figure used is the average for 
1993 as defined above. This will tend 
to bias upwards the estimates of the 
amount received because of infla­
tion, though in most cases the extent 
of bias is hkely to be small, both 
because of the relatively low rate of 
inflationin 1993 — except in Greece, where it was over 14%, wage infla­
tion in the Union was around 4% — 
and because the previous earnings in 
question are usually for the preceding 
three or six months rather than the 
preceding year (only in Portugal are 
they the average for the previous 
year; in Greece, where inflation is 
much higher than anywhere else, 
they are for the previous month). As 
the period of unemployment goes on, 
however, the upward bias will in­
crease since the amount of benefit or 
allowance received will increasingly 
be based on a level of earnings which 
because of inflation will decline in 
relation to the wage that the person 
concerned would receive if they went 
back into precisely the same kind of 
job. The replacement rate calcula­
tions, therefore, are most relevant for 
the initial spell of unemployment and 
become less meaningful for long 
periods out of work. 
36 Replacement rate at average earnings for a single 
person* 
100 Replacement rate (%) 
6 months unemployed 
80 
60 
40 
20 2 years unemployed 
1 100 
H 80 
A 60 
40 
20 
B DK D GR E F IRL I L NL P UK US B DK D OR E F IRL I L NL P UK US 
*35 year old person with 10 ysart employment record; tie estimais lor 2 yeans unemployed relates lo Llgurta tor I In 1993, the replacement rate — or 
the disposable income receivable in 
benefits and assistance when unem­
ployed in relation to that when in 
work — for a 35 year-old single per­
son who has become unemployed 
and who was on average earnings 
when in work with 10 years' employ­
ment record (the precise age, so long 
as the person concerned is 25 or over, 
and the exact number of years in em­
ployment, so long as they are more 
than one or two, tend in most coun­
tries to have relatively littie effect on 
the results, as described below) var­
ied from 85% in Luxembourg, 
around 80% in France and Spain and 
just below in Portugal (though the 
above discussion of the relatively 
small numbers of benefit recipients 
should be borne in mind) to around 
48% in Greece, 44% in Ireland and 
88 
Chapter 4 - Unemployment compensation and incentives to look for work 
only just over 41 % in the UK (Graph 
36). 
In the latter two countries, in contrast 
to elsewhere in the Union, unem­
ployment benefits are wholly (in the 
UK) or mainly (in Ireland) calculated 
as a flat-rate sum rather than as a 
percentage of previous earnings 
when in work. As such, they are fixed 
in order to meet the basic needs ofthe 
individuals — or families — con­
cerned rather than, in some sense, to 
replace previous earnings as is the 
case in other Member States. 
For the remaining Member States, in 
two cases — Denmark and the 
Netherlands — the net amount re­
ceived by the person in question 
when unemployed amounted to over 
70-75% of disposable income when 
in work, in Belgium and Germany to 
over 60% and in Italy to 55% (though 
in this case, a range of different in­
come support mechanisms exist and 
only one — the 'mobility benefit' to 
be eligible for which the person con­
cerned has to have been laid off due 
to industrial restructuring — has 
been chosen for the calculation). 
For comparison, the replacement rate 
in the US (here represented by the 
State of New York) was just over 
50% for the same person, below the 
rate in all Member States except 
Ireland and the UK. 
In all the Member States, the amount 
received in the form of unemploy­
ment benefit remains the same for at 
least six months after the spell of 
unemployment begins and in all, 
apart from Spain, it remains at this 
level for at least the first year. In Spain, the amount declined after 
180 days by 10% in relation to pre­
vious earnings and then remained at 
this reduced rate for another 18 
months for the person in question 
(though less for those with employ­
ment records of less than six years or 
so, the duration of benefit being re­
duced by two months for each 180 
fewer days of employment. 
After-a year, however, when insur­
ance-based benefits tend to come to an 
end, the amount received declines in 
half of the countries but remains the 
same as initially in Denmark, France, 
the Netherlands and Portugal as well 
as in Ireland and the UK. In the other 
countries, it is lower as people moved 
from social insurance benefits to social 
assistance or basic income support. In 
Greece, where there is no minimum 
income guarantee, the insurance benefit was reduced by 50% for three 
months for the person in question and 
was then replaced by a very low flat-
rate which amounted to only around 
7% of disposable income when in 
work for the person concerned (though 
it was higher for first-time job seekers). 
In Italy, the position varies between the 
North and South ofthe country as well 
as between older and younger workers, 
those living in assisted areas in the 
South or those aged 40 or more being 
able to receive social insurance 
benefits for a further year, while others 
have to fall back on social assistance 
which is organised on a regional basis. 
The conditions attached to the latter 
and the amount payable vary from re­
gion to region, but in general the un­
employed receive substantially less 
once they move from unemployment 
benefit to social assistance (in Liguria, 
the region chosen as an example—see 
37 Replacement rate at average earnings for a 
couple with 2 children* 
100 Replacement rate (%) 
6 months unemployed 
80 
60 
40 
20 2 years unemployed 
I 100 
80 
60 
40 
20 
B DK O GR E F IRL I L NL P UK US B DK D QR E F IRL I L NL P UK US 
*35 year old person wtth 10 years employment record; the estimate tor 2 years tnemployed relates to Uguria for I 
89-
Chapter 4 - Unemployment compensation and incentives to look for work 
Box above — the replacement rate 
halved for the person examined). 
The reduction in income support at 
the end of one year was also particu­
larly marked in Luxembourg, where 
the replacement rate declined from 
85% to 45% and in Belgium, where 
it fell by around 20 percentage points. 
By contrast in both Germany and 
France, the reduction was compara­
tively small — only around 6-7 per­
centage points — signifying that 
there was littie difference between 
the amounts payable from the unem­
ployment insurance system and from 
assistance schemes. 
After a further six months ( 18 months 
of unemployment in total), the re­
placement rate in the Netherlands 
was reduced by 17V2 percentage 
points for the person concerned 
(though if contributions had been 
paid for 15 years rather than 10, the 
reduction would have been post­
poned for six months and by an addi­
tional six months for each extra five 
years of contributions). In Portugal, 
where the duration of insurance-
based benefits is related to age rather 
than contributions, the rate was re­
duced from 79% to 42% after 18 
months for someone aged 35 (for 
someone aged 40, the reduction 
would have come after 21 months, 
for someone of 45 or over, after two 
years). In France, the rate was re­
duced after 20 months of unemploy­
ment by 7 percentage points. 
At the end of two years of unemploy­
ment, for the person in question, on the 
average wage when working, the net 
income support received was under 
half disposable income when in em­
ployment in 7 Member States, though above 40% in all except Greece and 
Italy, and 55-60% in two others — 
Germany and the Netherlands. In three 
countries, however, Denmark, Spain 
and France, it was still over 70% of 
disposable income even after this 
period of time (Graph 36). 
Beyond two years of unemployment, 
however, the replacement rate in 
France declined to 64%, followed by 
a further reduction to 55% after an­
other four months, while in Spain, the 
person concerned had to fall back on 
regionally-based social assistance, 
involving a substantial fall in the 
amount received (in the Aragon re­
gion, taken as an example in the ana­
lysis, the replacement rate declined 
to only 23% in this case). In Portugal, 
where as in Greece, there is no mini­
mum income guarantee for those 
without work, the rate fell to zero. 
By comparison, in the US, after two 
years of unemployment, the rate for 
a person with the same charac­
teristics was only 30% of disposable 
income when in work, significantly 
below the level in the North of the 
Union countries, except those in the 
South. 
The effect of 
dependants 
In Member States where the amount 
initially receivable when becoming 
unemployed is related to previous 
earnings, it tends to be invariant to 
family circumstances —: except inso­
far as the latter affects other benefits or 
allowances which might be payable, 
such as housing benefits in particular 
as described below. Indeed, since disposable income when in work tends 
to be higher for people with depend­
ants than without because of lower 
effective tax rates, the replacement rate 
can be lower for the former than the 
latter. The effect of tax on disposable 
income, however, is offset to some 
extent by the fact that where there are 
children, the allowances payable for 
these are usually the same whether the 
person is working or not (the addition 
of a flat-rate sum to both amounts, in 
other words, pushes up the ratio). 
For someone who became unem­
ployed in 1993, therefore, the re­
placement rate was lower if they had 
dependent spouses or children in 
Belgium, Spain, France and Portugal 
(Graph 37). In the majority of the 
other countries, it was significantly 
higher. — 10 percentage points or 
more. This was particularly the case 
in Ireland and the UK, reflecting the 
perceived greater need for income 
support for those with families than 
for those without. Thus in both coun­
tries, the replacement rate in 1993 
was around 30 percentage points 
higher (over 70% higher in terms of 
the amount received) for a married 
person with two children than a 
single person. 
In the UK, however, the higher sum 
payable in such circumstances also 
reflects the fact that transfers to the 
unemployed cover housing costs 
which, in turn, are assumed in the 
analysis to increase with family size 
for any given level of earnings when 
in work. As described more fully 
below, such transfers can account for 
a significant proportion ofthe dispos­
able income received by someone 
unemployed in the UK and can radi­
cally change the comparative picture 
-90 
Chapter 4- Unemployment compensation and Incentives to look for work 
of replacement rates. Housing 
benefits are also an important factor 
in particular cases in Denmark, 
Germany, France, Ireland and the 
Netherlands. 
Taking family circumstances into 
account narrows the difference in 
relative benefit levels between Mem­
ber States. In all countries, apart from 
Belgium, Greece and Italy, dispos­
able income when becoming unem­
ployed for someone on average 
earnings with a family of two de­
pendent children was 70% or more of 
disposable income when in work. In 
Denmark and Luxembourg, it was as 
high as 90% (in the former partly 
because of housing benefits). In 
Belgium and Italy, it was only 
slightly below 70% (66% in both) so 
that Greece was the only country in 
the Union where the replacement rate 
was substantially below 70% (55%). 
By contrast, in the US the replace­
ment rate for a person with these 
characteristics was under 50% in 
1993, lower than all the countries in 
the European Union, including 
Greece. 
The level of income support in this 
case does not tend to change much as 
the period ofunemployment in­
creases. Only in Greece and Portugal, 
was the net amount receivable re­
duced by more than 10% after two 
years of unemployment, in the latter 
by around 25% to just under 40% of 
disposable income when in work. 
These are the only two countries in 
the Union, however, where the re­
placement rate after two years ofun­
employment was less than 66% in 
1993. By comparison, in the US, 
though the net amount of income support receivable by a family with 
two children was higher if they were 
long-term unemployed rather than 
out of work for a relatively short 
period of time, this still amounted to 
only 57% of disposable income for 
someone on average earnings. 
Longer periods 
of unemployment 
In the US, the net amount received 
remained unchanged if unemploy­
ment went on for longer than two 
years. This was also the case in most 
European countries, the only excep­
tions being Spain and France, as 
noted above and Portugal (Graphs 38 
to 49, which illustrate for each Mem­
ber State the change in the net 
amount of assistance receivable by 
people with different family circum­
stances at various length of time un­
employed; in these cases, the 
earnings when in work are assumed 
to be 75% of the average wage as 
defined above, which is more repre­
sentative of reality, though the pat­
tern of change in the amount received 
would be much the same at different 
wage levels). 
In Portugal, the most extreme case, 
the amount receivable by both a 
single person and a married couple 
out of work fell to nothing after two 
years of unemployment, while for 
someone with two dependent child­
ren it was reduced to under 7% of 
disposable income when in work for 
someone on 75% of average earnings 
(the only transfer being child allow­
ances). In Spain, the sum payable fell 
by almost 60% for a single person 
after on this level of earnings when in work this length of time had 
elapsed, though for a couple with two 
children, the reduction was only 
around 25%. In Italy, the reduction in 
the latter case was only very small, 
but for a single person it was almost 
50%, while in France, it was also 
very small for a family with two 
children and only 20% for a single 
person. 
Replacement rates 
on earnings below 
the average 
As indicated above, a large pro­
portion of the unemployed are 
hkely to earn wages below the aver­
age when in work. This is not only 
because of the lower levels, on aver­
age, of educational attainment of the 
unemployed, but also because of the 
higher representation of young 
people among those out of work as 
compared with those in employment. 
Moreover, a further factor is that 
almost half of the unemployed are 
women who, again on average, earn 
only around 75% ofthe average wage 
of men in the Union (only 70% in the 
UK and Ireland, 75% in Germany, 
Belgium and Portugal, over 75% in 
Greece, Spain and the Netherlands, 
80% in France and 85% in Denmark 
— figures based on Eurostat data on 
average gross hourly earnings of ma­
nual workers in industry for October 
1993). 
At 80% of average earnings, the 
replacement rate in 1993 for the 
single person of 35 with 10 years 
employment record used in the cal­
culations presented above who has 
just become unemployed ranged 
91 
Chapter 4 - Unemployment compensation and incentives to look for work 
Replacement rates at varying lengths of time unemployed 
(35 year old, at 75% of average earnings with 10 years employment record) 
38 Belgium 
Replacement rate 
120 r 
100 
80 
60 
40 
20 
0 v. 
• Single 
Married 
Married win cMWten 
• ' * i ... i • « . i : 120 
100 
1 80 
60 
40 
20 
0 
6 12 18 24 30 36 42 -i8 
Spel of unemployment (months) 
40 Germany 
Replacement rate 
120 
100 
80 Y 120 
100 
H 80 
-Sine* 
-Married 
• Married with chBdren 
_J 1 _! , l_ 60 
40 
H 20 
6 12 18 24 30 36 42 48 
Spell of unemployment (months) 39 Denmark. 
Replacement rate 
6 12 18 24 30 36 42 48 
Speft of unemployment (months) 
41 Greece 
Replacement rate 
120 
100 
80 h 
60 
40 t-
20 -Slngl**curriad 
•Married with chadren 
-1 120 
100 
H 80 
60 
40 
20 
6 12 18 24 30 36 42 48 
Spefl of unemployment (months) 
42 Spain 
Replacement rate 
120 
100 
80 
60 
40 -
20 • 
0 Single 
Married 
Married with children -I 120 
100 
-\ 80 
60 
40 
H 20 
0 
0 6 12 18 24 30 36 42 48 
Spell of unemployment (months) 43 France 
Replacement rate 
120 
100 K 
80 
60 
40 
20 Single 
-Married 
Married with chfldren 120 
100 
— --i" 80 
1_: 60 
- 40 
• 20 
0 6 12 18 24 30 36 42 48 
Spell of unemployment (months) 
-92 
Chapter 4 - Unemployment compensation and Incentives to look for work 
Replacement rates at varying lengths of time unemployed 
(35 year old, at 75% of average earnings with 10 years employment record) 
44 Ireland 
Replacement rate 
120 
100 
80 
60 K 
40 
20 120 
100 
H 80 
SlngW 
Married» 
* •i 60 
- 40 
• 20 
6 12 18 24 30 36 42 48 
Spefl of unemployment (months) 
46 Luxembourg 
Replacement rate 
120 r 
100 
80 
60 -
40 -
20 —Single 
-•Married 
• - Married win children 1 120 
100 
A 80 
60 
40 
20 
0 6 12 18 24 30 36 42 48 
Spell of unemployment (months) 45 Italy 
Replacement rata 
120 r.. _-_. 
100 
80 h-
60 
40 
20 1 120 
100 
80 
-Single 
-Married 
•Married «Hi chadren 60 
40 
20 
6 12 18 24 30 36 42 48 
SpeS of unemployment (months) 
47 Netherlands 
Replacement rate 
•120 
100 
80 
60 
40 
-Single 
2Q L " Married 
' • Married «Rh children 120 
100 
80 
-i 60 
40 
20 
6 12 .18 24 30 36 42 48 
Spell of unemployment (months) 
48 Portugal 
Replacement rate 
120 
100 
80 j-_ 
60 -
40 
-8lngle 
20 L ••••••Married 
• Married with children 120 
100 
80 
60 
40 
20 49 United Kingdom 
Replacement rate 
120 r 
100 
80 r-
60 h 
40 h 
20 —Single 
•••Married 
--Married with children 120 
100 
80 
60 
40 
20 
0 6 12 18 24 30 36 42 48 
Spell of unemployment (months) 6 12 18 24 30 36 42 48 
Spell of unemployment (months) 
93-
Chapter 4 - Unemployment compensation and incentives to look for work 
from 85% of disposable income 
when in work or just above in 
Denmark, France and Luxembourg, 
just under 80% in Belgium and 
around 75% in the Netherlands and 
Portugal to just under 60% in Greece 
and 50% or slighdy below in Ireland 
and the UK (Graphs 50 to 61, which 
show the variation in the replacement 
rate with gross earnings for each of 
the Member States). 
For a married couple with two child­
ren, the replacement rate was 80% or 
above at this level of earnings in six 
Member States (almost 100% in 
Luxembourg) and around 75% in an­
other four. Only in two countries, 
therefore, Greece and Spain, was the 
rate below this (66% in the former, 
70% in the latter). 
By contrast, in the US, the replace­
ment rate for a single person with 
these characteristics was only just 
over a half, lower than in all Euro­
pean countries apart from Ireland and 
the UK, and for a couple with two 
children, it was even lower at only 
47% — well below the level in any 
European country. 
Comparing the replacement rate at 
80% of average earnings with that at 
the average, in five Member States — 
Germany, Spain, Luxembourg, the 
Netherlands and Portugal — it was 
much the same for a single person, 
reflecting the linking of benefit levels 
to previous earnings, while in the other 
7 countries, it was higher, reflecting the 
effect of the flat-rate element payable 
(in Ireland and the UK, especially) or 
of the ceiling imposed on benefit 
amounts (in the other five countries). 
Such ceilings can effectively mean that 
an earnings-related system is much the same as a flat-rate one at wage levels 
above the ceiling (which is set at a 
relatively low level relative to average 
earnings in the latter five countries). 
As earnings fall below 80% of the 
average, replacement rates in most 
cases tend to increase further. For a 
single person with the characteristics 
defined above, the rate in 1993 at 
65% of average earnings was 80% or 
above in six Member States and 75% 
or above in another two. Only in Ire­
land and the UK, was it under 60%. 
For a couple with two children, it was 
around 85% or above in 9 Member 
States and in the other three around 
80% or just below. 
For a single person earning half the 
average wage when working, the re­
placement rate was 90% or above in 7 
countries — and above 100% in Por­
tugal (where the minimum benefit 
payable was equal to the minimum 
wage before deductions, which, in 
practice, was higher than the net wage 
received at this level of earnings) —-
and between 70 and 77% in another 
four. Only in the UK, was it below 70% 
and then only slighdy. For a couple 
with two children in the same circum­
stances, the rate was above 100% in six 
countries and 90% or above in all the 
others except for the UK (where it was 
85%). 
In the US, even at half average earn­
ings, a single person who became 
unemployed received under half of 
their disposable income when work­
ing, though for a couple with two 
children, the rate increased to just 
over 80%. 
As the period of unemployment 
lengthens for someone on half average earnings, so the replacement 
rate falls in 7 of the Member States 
— Belgium, Germany, Greece, 
France, Italy, Luxembourg and 
Portugal, though by 10 percentage 
points or less in all except Greece 
(where the rate declined in 1993 to 
only 16% of disposable income when 
in work after 15 months of unem­
ployment) and Portugal, and in all 
except Greece and Luxembourg, 
only for single people—but remains 
the much the same in the other five. 
Replacement rates 
at earnings above 
the average 
For those who become unem­
ployed after earning a higher 
wage than the average, the amount 
they can expect in the way of income 
support is generally lower relative to 
their former disposable income, as 
might be expected, than for someone 
on average earnings. For a person 
earning 150% of the average wage 
when working (but with the same 
characteristics as used in previous 
examples), there were only two 
countries for which this was not the 
case in 1993 — the Netherlands, 
where the relative amount receivable 
was much the same and Portugal 
where it was higher (as high as 84% 
of previous disposable income, much 
higher than anywhere else in the 
Union, reflecting the linking of 
benefits to earnings before deduc­
tions which results in benefits in­
creasing relative to net earnings up to 
three times the minimum wage). 
For four Member States, including 
these two together with France and 
Luxembourg, the replacement rate at 
94 
Chapter 4 - Unemployment compensation and Incentives to look for work 
this level of earnings was around 
75% or more. In four others, Greece, 
Ireland, Italy and the UK, it was 
under 40% (only just over 30% in the 
last). 
For a couple with two children at the 
same level of earnings when in work, 
the replacement rate was around 80% 
or more in the former four countries 
and around 70% or more in an­
other three — Germany, Spain and 
Luxembourg. In Ireland, Italy and the 
UK, by contrast, it was only around 
50% and in Greece, under 40%. 
At twice average earnings, the re­
placement rate in Portugal was even 
higher at 88% of former disposable 
income and still around 75% in 
France, though elsewhere in the 
Union, in five Member States, it was 
30% or less. 
In the US, the replacement rate for a 
single person at both 150% and twice 
average earnings was higher, at just 
under 50% in the former case and 
40% in the latter, than in four Euro­
pean Union countries. 
Replacement rates 
for people without 
employment records 
The example used above for esti­
mating the replacement rate, 
however, is not necessarily typical of 
all those who are unemployed in 
Union countries. As noted above, a 
relatively high proportion are young 
and may be looking for their first job 
and, therefore, without any previous 
employment record — usually a con­
dition for receiving insurance-based benefits. Alternatively, they may be 
women returning to work who have 
lost their entitiement to unemploy­
ment benefit. In these cases, the 
people concerned may have to rely 
on some form of social assistance or 
minimum income guarantee. 
To illustrate the position of such 
people in different Member States, a 
person aged 24 with potential earn­
ings of only half the average of a 
production worker in manufacturing 
is taken as an example (it makes rela­
tively litde difference to the com­
parative results in most cases if 
someone older or with higher earn­
ings is taken instead). 
In the first place, for someone of this 
age with a two years' employment 
record, the replacement rate, whether 
they were single or married with 
children, was precisely the same in 
all Member States, except in the UK, 
as for the 35 year old with 10 years 
employment record used in the ear­
lier examples. In the UK, the overall 
amount of assistance received was 
slightly lower for someone under 25, 
because of a reduction in their hous­
ing benefit entitlement, resulting in a 
replacement rate of around 65V2% 
instead of 68V2%. 
Without an employment record at all, 
the position was somewhat different. 
In two countries, Greece and Portu­
gal, the person concerned was not 
entitied to any assistance. In Ireland, 
they received only 15% ofthe dispos­
able income they would have earned 
at half the average wage and in 
France, only 30% (which consists of 
housing benefit alone, since someone 
under 25 is not ehgible for social 
assistance — minimum d'insertion', for someone of 25 or over in the same 
circumstances, the replacement rate 
increases to 65%) (Graph 62). In two 
other countries, moreover, Spain and 
Italy, where social assistance is ad­
ministered at regional rather than na­
tional level and so varies in amount 
across the country, the amount 
payable was typically under 50% of 
what they would have received at this 
level of earnings and only in three 
countries, Denmark, Luxembourg 
and the Netherlands, was it higher 
than 70%. 
In all Member States, apart from 
France and the UK, the replacement 
rate was the same for someone in 
similar circumstances over 25 as 
under 25. In France, as already noted, 
the rate for the former was over twice 
as high as for the latter, while in the 
UK, it was 8 percentage points 
higher. 
In the US, by comparison, the income 
support receivable in this case was 
52% of disposable income at half the 
average wage, higher than in six of 
the European countries. 
For the same person with a family, 
the position is markedly different. In 
five Member States, they received 
the same amount as if they had had a 
previous employment record and in 
two others only slightiy less. The 
only two countries where they re­
ceived small amounts were Greece 
and Ireland, just 4% of disposable 
income at half average earnings in 
the former, 21% in the latter. Else­
where in the Union, the replacement 
rate for such families was below 85% 
only in Belgium (79%) and Spain 
(73%) (Graph 63). 
95-
Chapter 4- Unemployment compensation and incentives to look for work 
Replacement rates at varying levels of earnings 
(35 year old unemployed for 6 months with 10 years employment record) 
50 Belgium (6 months unemployment) 
Replacement rate 
120 r 51 Denmark (6 months unemployment) 
Replacement rate 
120 
100 t 
80 -
60 
40 
20 Single 
Married 
Married, with 8 dtfdten 120 
100 
60 
60 
•\ 40 
20 
50 tS » tO 100110 125 150 200 
Wage a» % average wage 50 «S SO 90 100110 125 150 200 
Wage aa % average «age 
52 Germany (6 months unemployment) 
Replacement rate 
120 r 53 Greece (6 months unemployment) 
Replacement rate 
120 r 
100 K 
50 66 SO 90 100110 125 150 200 
Wage aa % average wage 50 68 80 90 100110 125 150 200 
Wage aa % average wage 
54 Spain (6 months unempl,) 
Replacement rate 
120 r 55 France (6 months unemployment) 
Replacement rate 
120 > -, 120 
50 65 60 90 100110 125 150 200 
Wage a» % average wage 50 68 80 90 100 110 125 150 200 
Wage aa % average wege 
-96 
Chapter 4 - Unemployment compensation and Incentives to look for work 
Replacement rates at varying levels of earnings 
(35 year old unemployed for 6 months with 10 years employment record) 
56 Ireland (6 months unemployment) 
Replacement rate 
120 
100 |- \ 
60 
60 
40 
20 81ngte 
-•—Married 
- Married. w«h 2 120 
100 
80 
60 
40 
20 
50 66 80 90 100110 125 160 200 
Wage aa % avenge wage 
58 Luxembourg (6 months 
unemployment) 
Replacement rate 
120 r i 120 
Single 
•-.-•Married 
•jpg t'*~"V . > Married.win2 children J IQQ.': 
80 
60 
40 -
20 -80 
60 
40 
20 57 Italy (6 months unemployment) 
Replacement rate 
120 
100 
80 
60 |-
40 
20 —"Single 
'Married 
-"—Married, win 2 children -, 120 
20 
50 65 80 «0 100110 125 150 200 
Wage a» % avenge wage 
59 The Netherlands (6 months 
unemployment) 
Replacement rate 
120 r 
100 
80 
60 
40 
20 < 'Single 
"•"•Married 
Married. wW» 2 chadren 120 
100 
80 
60 
40 
20 
50 65 60 00 100110 125 150 200 
Wage aa % average wage 50 65 60 90 100110 125 ISO 200 
Wage aa % average wage 
60 Portugal (6 months unemployment) 
Replacement rate 
120 
100 
80 
60 
40 
20 r Single 
Married 
. Married, with 2 children 120 
100 
80 
60 
40 
20 61 The UK (6 months unemployment) 
Replacement rate 
50 65 80 90 100110 125 150 200 
Wage aa % average wage 50 65 80 90 100 110 125 ISO 200 
Wage aa % average wage 
97-
Chapter 4 - Unemployment compensation and incentives to look for work 
62 Replacement rate for 24 year old single person at 
50% of average wage* 
120 Jtepk060180* f810 (%) 
No employment record 
100 1-
80 2 years employment record 
60 
40 
2Ô1 120 
100 
80 
60 
40 
20 
B DK D 3R E F IM. I -1 NL. P UK US 8 DK D SR E F IRL I I NL P UK US 
•With 6 month» unemployment; the estimate far no employment record relates a? Uguria for ) 
63 Replacement rate for 24 year old married person 
with 2 children at 50% of average wage* 
Replacement rate (%) 
120 r No employment record 
100 
80 
60 
40 
20 2 years employment record -j 120 
I 100 
80 
60 
40 
20 
B DK D GR E F IRL I L NL P UK US B DK 0 GR E F IRL I L NL P UK US 
'With 6 months unemployment; the estimate for no employment record relates to Uguria Housing benefits 
In 5 Member States, Denmark, 
Germany, France, the Netherlands 
and the UK, housing benefits or 
allowances are payable to those on 
low incomes — and in some cases, to 
those on not so low incomes — to 
help cover housing expenses. In all 
cases, benefits are available irrespec­
tive of whether the head ofthe house­
hold is in work or is unemployed. In 
a sixth country, Ireland, a housing 
allowance is paid only to those who 
are out of work. 
Except in the UK, however, they only 
apply to rent. In the UK, this is the 
case for those in work, but for those 
who become unemployed, housing 
benefits also cover the cost of servic­
ing mortgages if the person con­
cerned owns their own house. (The 
unemployed in the UK also receive 
an allowance to cover local taxes 
linked to housing but these are not 
included in the calculation which 
means that the replacement rate for 
the UK is a slight underestimate.) 
Housing benefits have been included 
in the calculations reported above — 
specifically, they have been added to 
disposable income—the assumption 
being that the person for whom the 
estimates are made lives in rented 
accommodation and pays an average 
rent. (An alternative basis for calcu­
lating the replacement rate, adopted 
in a recent OECD study, is to define 
disposable income to exclude hous­
ing costs — see Box for a discussion 
of the two methods.) Since, however, 
housing costs can vary significantly 
between people with similar levels of 
income and sizes of family, accord­
ing to where they live or the size of 
98 
Chapter 4 - Unemployment compensation and incentives to look for work 
house they have, how much they re­
ceive in housing benefit is not fixed 
and can affect the replacement rate. 
(Concessions in respect of housing 
costs also exist in three other Mem­
ber States. In Belgium, those who are 
unemployed are in some cases en­
titled to a reduction in the rent they 
pay, which means that their housing 
costs are effectively subsidised by 
the local authority, though it is diffi­
cult to take this into account in the 
calculation of replacement rates. In 
Greece and Spain, a proportion of 
housing costs is allowed as a deduc­
tion against income tax, though in 
these cases, the replacement rate is 
not affected.) 
The effect of including housing 
benefits in the calculation varies con­
siderably between Member States re­
flecting the scale of assistance 
available and the regulations govern­
ing eligibility (see Table 9). In 
Denmark, it has relatively little effect 
for those on low earnings (increasing 
the replacement rate by only lV2 per­
centage points for a couple on half 
the average wage — all the estimates 
in this section relating to a couple 
with one person earning), but is more 
significant for those on higher earn­
ings (increasing the rate by 4V2 per­
centage points for those on average 
earnings), especially if their rents are 
above average. In France also the 
effect is greater at higher earnings 
levels, though the level of rent makes 
comparatively little difference to the 
calculation. 
In the other Member States, on the 
other hand, the effect tends to be 
greater for those on low earnings, 
though in the Netherlands, the effect 
depends on the precise level of Housing benefits and the calculation 
of the replacement rate 
The regulations in place concerning housing benefits and, 
therefore, their potential effect on incentives to work, differ 
markedly from country to country. In those, like the UK 
especially, where they are an integral part of the means of 
support and granted almost automatically when a person 
becomes unemployed, there is a case for defining the replace­
ment rate to be net of housing costs entirely — more precisely, 
to measure disposable income either when in work or unem­
ployed after deducting housing costs net of housing benefit. 
The rationale is that housing costs are a fixed liability which 
has to be met whether a person is working or not and since 
housing benefits are tied to a particular level of cost, they 
should arguably be excluded completely from the calculation 
of the replacement rate. The effect of doing this is generally, 
but not invariably (in particular, where the replacement rate is 
over 100%), to reduce the replacement rate as compared with 
the calculations reported here, simply because a fixed amount 
is deducted from both numerator and denominator, though in 
many cases the difference is relatively small (see Table 9). 
Where there are no housing benefits payable to cover rent, 
however, which is the case in six Member States, the effect is 
larger (if, for example, housing costs are 25% of disposable 
income when in work, and the replacement rate on the method 
adopted here is 70%, the rate calculated after deducting hous­
ing costs would be 60%; the higher the rent and the lower the 
replacement rate as defined here, the greater the effect of 
deducting housing costs). 
Whether this approach or the one adopted here is preferable is 
hard to judge — clearly there is no ideal measure. However, it 
is open to question how far housing costs are fixed in practice. 
In particular, those renting accommodation might decide to 
move to somewhere less costly if they lose their job and have 
difficulty finding another or postpone payment for a time if 
unemployment is expected to be of short duration. To this 
extent, they are not so different from other items of expenditure 
out of disposable income which could also be deducted when 
calculating the replacement rate. Moreover, housing costs can 
vary significantly between individuals in otherwise similar 
circumstances — a reason for not deducting other expenses 
from disposable income — which affects the interpretation of 
the replacement rates calculated on the alternative method 
more than it does for the method adopted here. Whichever 
approach is adopted, given the difficulties surrounding housing 
benefits, it is important to distinguish them from other kinds 
of income support when assessing the replacement rate and its 
potential effect on work incentives. 
-99 
Chapter 4 - Unemployment compensation and incentives to look for work 
Table 9 — Effect of housing costs at different rent levels on replacement rates 
— couple with head of household aged 35 unemployed for 6 months 
and 10 years employment record (% of disposable income when in work) 
; Denmark 
Replacement rate 
After housing costs 
Housing benefit effect 
Germany 
Replacement rate 
After housing costs 
Housing benefit effect 
France 
Replacement rate 
After housing costs 
Housing benefit effect 
Ireland 
Replacement rate 
After housing costs 
Housing benefit effect 
The Netherlands 
Replacement rate 
After housing costs 
Housing benefit effect 
UK* 
Replacement rate 
After housing costs 
Housing benefit effect 
US 
Replacement rate 
I After housing costs 
Housing benefit effect 50% average 
earnings 
average 50% 
rent higher 
96.4 
95.1 
1.5 
81.3 
73.8 
16.3 
94.7 
92.6 
1.8 
91.7 
90.0 
13.5 
109.5 
112.6 
83.3 
77.3 
21.0 
38.4 
18.8 
9.6 96.8 
94.8 
1.4 
89.9 
83.1 
22.8 
95.2 
92.0 
1.9 
99.7 
99.6 
21.6 
108.7 
113.1 
85.3 
77.3 
18.5 
42.0 
9.2 
13.2 75% average 
earnings 
average 50% 
rent higher average earnings 
92.8 
90.4 
3.4 
68.1 
57.0 
5.9 
83.7 
78.9 
4.1 
73.2 
68.9 
2.4 
88.7 
85.6 
7.0 
66.1 
56.3 
22.5 
42.9 
27.6 
0.4 94.7 
91.8 
4.5 
80.4 
68.0 
18.2 
84.5 
76.7 
4.3 
80.1 
74.9 
9.4 
89.5 
84.9 
6.5 
77.4 
65.9 
33.8 
44.8 
19.1 
2.2 average 
rent 
81.5 
76.0 
4.6 
63.2 
52.6 
1.2 
77.7 
72.1 
4.8 
58.5 
53.0 
1.2 
78.5 
73.2 
3.1 
53.6 
42.5 
19.3 
48.7 
36.8 50% 
higher 
89.1 
83.5 
11.9 
66.1 
49.1 
4.1 
78.2 
69.0 
5.1 
64.4 
56.8 
7.1 
84.5 
78.1 
9.1 
63.3 
48.3 
28.9 
48.7 
28.4 150% average 
earnings 
50% 
higher average 
rent 
66.5 
49.6 
6.3 
59.8 
50.7 
76.4 
71.6 
3.2 
42.3 
33.9 
2.1 
76.0 
71.1 
39.8 
9.9 
15.7 
42.5 
31.8 79.1 
48.7 
14.2 
60.1 
44.4 
0.4 
76.4 
68.4 
3.2 
47.1 
30.2 
6.9 
76.0 
67.8 
47.7 
0.6 
23.6 
42.5 
24.9 
Notes: Average rent is an estimate of the mean rent paid by a household on each level of income in the country in question. 50% higher 
means rent 50% higher than the mean. 
The replacement rate is calculated to include housing benefits in disposable income when in work and unemployed. 
Housing benefit effect indicates the percentage point difference in the replacement rate betwen including and excluding housing 
benefits. 
* Housing costs assumed to be rent. An owner-occupier servicing a mortgage is eligible for housing benefits only when 
unemployed. In this case at 50% of average earnings, the replacement rate is 88.3% if mortgage payments equal the average 
rent and 102.5% if they are 50% higher than this. 
- 100 
Chapter 4 - Unemployment compensation and incentives to look for work 
earnings. At very low rates of pay — 
half the average, for example — the 
effect is very small since much the 
same amount of housing benefit is 
payable whether the person is work­
ing or not. As pay increases, benefit 
is withdrawn from those in work, 
while those who become unem­
ployed have a sizeable proportion of 
their rent covered, so the effect on the 
replacement rate is greater (adding 7 
percentage points at 75% ofthe aver­
age wage). But as pay approaches 
average earnings, housing benefit for 
those out of work is reduced, because 
of a ceiling being imposed on the 
overall amount of unemployment 
benefit receivable, and the effect on 
he replacement rate declines corre­
spondingly. 
In Germany, where benefit covers 
not only housing costs but heating 
and light, the effect on the replace­
ment rate is substantial at very low 
earnings and declines markedly as 
earnings increase (16V2 percentage 
points at half the average wage, 6 
percentage points at 75% ofthe aver­
age), becoming very small at average 
earnings (except where rents are well 
above average) and disappearing al­
together at earnings above the aver­
age, the reason for this pattern being 
the same as in the Netherlands. This 
is also the case in Ireland, where 
housing allowances increase benefits 
receivable by the unemployed signi-
ficantiy at very low earnings (adding 
13 72 percentage points to the replace­
ment rate at half the average wage), 
but by relatively little at earnings 
only slightly higher than this (by 2'/2 
percentage points at 75% ofthe aver­
age wage), except if above average 
rents are paid. The effect of housing benefits is most 
pronounced in the UK since, for the 
unemployed at least, the scheme in 
operation is much more generous 
than anywhere else in the Union. 
Here, for all those aged 25 or over, all 
housing costs, whatever form they 
take and however large, are met by 
the State if a person becomes unem­
ployed (though those under 25 
receive a reduced amount, some 
8-9% less than the rent they pay). 
(Measures are being introduced, 
however, under which only 'average' 
rents will be covered in full for those 
aged 25 and over, with local authority 
discretion to pay more in individual 
cases.) 
For someone (with a dependent 
spouse) on half average earnings and 
paying around the average rent, 
housing benefits added 32% to their 
disposable income when out of work 
and 21 percentage points to the re­
placement rate (26V2 percentage 
points in the case of someone paying 
a mortgage instead of rent who was 
not entitled to housing benefit when 
working). If their housing costs are 
higher than average, then the effect is 
even greater. 
Although in the US, housing benefits 
do not exist as such, housing ex­
penses are partly covered through the 
system of food stamps, designed to 
help pay for basic living costs. For 
someone on half average earnings 
and with average rent, food stamps 
accounted for around 25% of the 
benefit received as against nothing at 
all if they had been in work and in­
creased thé replacement rate by 
972%. However, though housing benefits 
are included in the estimates of the 
replacement rate here — and they 
cannot justifiably be left out of ac­
count since in the countries where 
they exist they are an important part 
of the income support given when a 
person becomes unemployed—their 
effect on individual behaviour is ar­
guably hkely to differ from that of 
other forms of assistance, especially 
those which are paid automatically. 
Whereas in these cases, the amount 
that any individual can expect to re­
ceive and the timing of payments are 
largely known, neither is necessarily 
the case for housing benefits, except 
in the UK where total housing costs 
are covered. The amount of entitle­
ment usually depends on a compli­
cated calculation and the actual 
payment can often take some time 
before it is received. (In the UK, to 
help overcome this problem, from 
January 1996, prospective recipients 
will be able to apply for details ofthe 
hkely amount of rent which will be 
used to calculate their Housing 
Benefit entitlement before taking on 
a tenancy.) Nor is the calculation that 
much simpler when a person moves 
from being unemployed to taking up 
a job if the pay they will earn still 
makes them eligible for benefit. 
How far housing benefits are hkely 
to be taken into account in decisions 
about whether to work or not is, 
therefore, difficult to assess. 
Concluding remarks 
The above analysis indicates that 
the level of income support re­
ceivable when out of work can be 
- 101 
Chapter 4 - Unemployment compensation and incentives to look for work 
high in most countries of the Union 
in certain cases relative to take-home 
pay when in employment. This is 
especially so for those on low pay 
and particularly for people with de­
pendants. However, even for those 
earning only half the average wage 
when in employment, the replace­
ment rate in 1993, even during the 
early stages of unemployment, was 
below 100% in all Member States 
except Portugal and below 80% in 
five of them in the case of a single 
person with an adequate record of 
employment. For someone with no 
employment record, the replacement 
rate was under 60% in 7 Member 
States and under 70% in another two. 
Such rates do not seem overly 
generous in terms of ensuring that 
those out of work can avoid living in 
poverty, especially in a relative sense 
(usually taken as half the average 
household income in the country in 
question) though many of the unem­
ployed live in households where 
there is more than one potential wage 
earner. Whether, on the other hand, 
they are high enough to represent a 
serious discouragement to look for 
work is an open question. Survey 
evidence and observation seem to 
suggest that a substantial number of 
people would prefer to work and be 
earning rather than to receive the 
same amount of income for doing 
nothing. This can be explained in part 
by the fact that participation in so­
ciety as well as personal fulfilment 
for many people is linked very 
closely with the job of work that; they 
do. In addition, future job prospects 
tend to depend very much on being 
in work. The results, moreover, need to be 
quahfied by two important consider­
ations. In the first place, far from all 
the unemployed are ehgible for the 
benefits estimated here, as noted at 
the outset. Indeed, in Portugal, where 
replacement rates of over 100% are 
estimated for a single person on half 
average earnings, under 10% of those 
recorded as unemployed on the ILO 
standard definition were in receipt of 
benefits or assistance in 1994 and in 
Spain, where rates were also high, the 
proportion was under 15%. 
In the second place, to an increasing 
extent in most countries, those draw­
ing unemployment benefit have to 
satisfy the officials concerned that 
they are actively and seriously look­
ing for work, nor can they easily turn 
down jobs if they are offered, irre­
spective of the level of wage. 
A further point to bear in mind is that 
even if benefit levels were to be re­
duced, there is no certainty that 
wages at the lower end of pay scale 
would correspondingly decline as 
well. The constraint on wage reduc­
tions does not come only, or even 
perhaps mainly, from the level at 
which unemployment benefits are 
set. Other factors, such as obstacles 
to geographical and occupational 
mobility, the actions of trade unions, 
the imposition of social charges and 
taxes on labour, minimum wage 
legislation and social attitudes to­
wards what constitutes acceptable 
pay levels, are equally important. 
Moreover, replacement rates are not 
only determined by the level of in­
come support for the unemployed. 
They are also affected by the level of 
take-home pay when in work. If high replacement rates represent a disin­
centive for those out of work actively 
to seek employment, then the prob­
lem can equally be tackled from the 
other side — in other words, by rais­
ing take-home pay rather than by re­
ducing unemployment benefits. One 
means of doing this without revising 
the cost of labour to employers is 
through in-work benefits, such as the 
Family Credit scheme in the UK, 
which increases disposable income 
in relation to the gross wage paid by 
employers but is only available to 
those in work. It is also, on the other 
hand, only available to those with 
families (except for a relatively small 
number of disabled), which repre­
sents a significant limitation on its 
potential effectiveness (a limitation 
which is in the process of being reas­
sessed by the UK authorities with a 
view possibly to broadening its appli­
cability). 
One inherent problem of in-work 
benefits, however, is that they tend to 
be associated with high implicit mar­
ginal tax rates, in the sense that, if 
targeted on the lowest paid, the 
amount receivable usually declines 
significantly as wages increase, so 
effectively reducing the extent to 
which take-home pay rises in re­
sponse to higher wages. In the UK, 
this results in marginal tax rates of 
over 90% for some recipients of 
Family Credit (see Employment in 
Europe, 1995, Part HI, Section 1, for 
a fuller discussion of this issue and 
for estimates of marginal deduction 
rates in Member States). 
In this way, there is a danger of re­
placing one disincentive effect — 
that of discouraging job search — by 
another — that of discouraging work 
102 
Chapter 4 - Unemployment compensation and incentives to look for work 
Two-earner families and disincentive effects 
The analysis in this chapter is confined to one person 
earning whether they are single or married (or coha­
biting). In reality, a high proportion of households 
consist of at least two wage-earners, or at least, two 
people who are economically active. This is an import­
ant limitation, though in terms of disincentive effects 
it is perhaps more important to consider the general 
position of women contemplating seeking a job 
whether they are receiving unemployment compensa­
tion in any form or not (and, indeed, whether they are 
registered as unemployed or not). As such, it is a 
broader and slighdy different issue than the one exam­
ined here which concerns the potential effect of social 
transfers to the unemployed on their incentive to be in 
employment 
Research recently sponsored by the Commission (Pro­
tection sociale et activité économique des femmes en 
Europe, CERC) indicates that the position of married 
women contemplating taking a job varies markedly 
across the Union in terms of the level of deductions 
from gross earnings and the costs associated with 
working, such as the costs of child care if she has small 
children. The extent to which she is able to add to 
household income by working, therefore, also differs 
considerably. 
For example, in Belgium, someone with a dependent 
wife and two young children on a relatively modest 
wage (75% of the average) and paying an average 
amount of rent typically has a disposable income, after 
social contributions, payroll tax and housing costs and 
including child benefits, of around 58% of gross earn­
ings (ie net deductions amount to some 42% of earn­
ings). If the wife takes a job (at a shghtiy lower level 
of wages), the amount which she adds to household 
disposable income will be under half (47%) of her 
gross earnings because of a higher effective tax rate 
and the costs of child care. Net deductions in her case, 
therefore, are around 53% of earnings. At the same 
time, she is able through working to increase house­
hold disposable income significandy — by some 80% 
of the increase in household gross earnings (ie if she 
earns 90% of what her husband earns she will be able 
to increase household disposable income by just over 
70%). Whether the relatively high deduction rate from earnings or the relatively large extent to which she can 
add to household disposable income is the more im­
portant factor determining whether or not she takes a 
job is a question for debate,and investigation. 
In France, where taxes on payroll are lower, the 
amount which a sole wage earner with the same level 
of pay and in the same family circumstances keeps out 
of gross earnings tends to be correspondingly higher 
and net deductions are under 30% of earnings. If the 
wife takes a job, net deductions from her earnings are 
much the same as in Belgium (54%), largely because 
of the costs of child care, so that again the amount 
which she adds to household disposable income is 
under half of her gross wage. In this case, however, 
because of the relatively high initial level, household 
disposable income is increased by less than in Bel­
gium, by 65% of the increase in combined gross earn­
ings. 
In the UK, where payroll taxes are higher but social 
contributions lower, the disposable income ofthe same 
household with a sole wage earner is much higher in 
relation to gross earnings than in Belgium but slightly 
lower than in France, net deductions amounting to 
31% of earnings. On the other hand, because of the 
high costs of child care, if the wife takes a job, a higher 
proportion of her earnings is liable to be absorbed by 
deductions of one kind or another than in the other two 
countries. Net deductions amount to over 75% of her 
earnings and she is able to increase household dispos­
able income by only 23% of the percentage by which 
she raises combined gross earnings. 
Additional problems can arise in certain cases, as 
noted in Chapter 2, when one of the wage earners in 
the household is unemployed and begins to claim 
social assistance (when entidement to insurance 
benefits expires, for example), which may, in fact, not 
be payable if the other person is still in employment. 
The incentive then for the latter to stop working — 
which has much more to do with the regulations gov­
erning social assistance and the application of means-
testing than the level of transfers or'the interaction 
between the tax and benefit system — may well be 
significant. 
103-
Chapter 4 - Unemployment compensation and incentives to look for work 
effort. By the same token, there is 
also a danger of replacing an unem­
ployment trap, in the form of those 
out of work being unable to find jobs 
which pay significantly more than 
they receive from social benefits, by 
a poverty trap, in the form of those in 
low-paid jobs having difficulty in in­
creasing their take-home pay signifi­
cantly, because a substantial part of 
any additional pay they earn is effec­
tively taken away as their benefits are 
reduced. 
An analogous problem applies to 
married women, in particular, and the 
second wage earner in a household, 
in general. As emphasised above, the 
analysis in this chapter has not in­
cluded examination of replacement 
rates for couples where both partners 
are working. This is an important 
limitation since a large number of 
studies suggest that disincentive ef­
fects are particularly important in 
respect of married women. Never­
theless, the major disincentive to 
married women seeking employ­
ment, in addition to family responsi­
bilities, almost certainly stems not 
from high levels of unemployment 
benefit which most will not be 
eligible to receive in any event, but 
from the potentially high level of de­
ductions from household income and 
the additional costs, especially of 
child care, which can result if they 
take up paid employment. Further 
difficulties can also arise in the event 
of her husband being unemployed 
and receiving means-tested social as­
sistance assessed in relation to total 
household income, including her 
earnings (see Box). This is an issue 
meriting further research. 
104 
Chapter 5 - Reforms in healthcare 
Chapter 5 Reforms in health care 
Introduction 
In recent years, a major concern of 
policy throughout the Union has 
been to contain the costs of health 
care provision against a background, 
on the one side, of the increased de­
mands imposed by an ageing popula­
tion, and rising real income levels, 
and, on the other, of the increased 
costs resulting from new develop­
ments in treatment, technological ad­
vances and the inherent tendency for 
those responsible to seek to expand 
their budgets. In all Member States, 
expenditure on the health service has 
grown significantly in real terms 
since 1980 (see Box). With a few 
exceptions, however, governments 
have succeeded in preventing expen­
diture from absorbing a substantially 
larger share of GDP, though inevit­
ably few were able to avoid spending 
expanding in relation to a falling or 
stagnant level of GDP during the re­
cession years ofthe early 1990s. This 
experience combined with the evi­
dent long-term pressures for growth 
has intensified the search for ways of 
keeping down expenditure without 
jeopardising the maintenance of a 
high quality service, accessible to all 
who have a need of treatment. 
The search has led, in particular, to 
detailed consideration of the organi­
sation of systems and ofthe means of 
allocating resources and deciding the pattern of care, with the primary aim 
of increasing the effectiveness of ex­
penditure. A common focus in this 
regard has been on the possibilities of 
introducing elements of competition 
with a view to improving efficiency. 
As a result, in a number of Member 
States, major reforms have either 
been introduced over the past few 
years or are being currently con­
sidered. 
The purpose of this chapter is to re­
view the changes which have been 
made in each of the countries in the 
light of both their institutional char­
acteristics, which differ from country 
to country and which are a key deter­
mining factor ofthe kind of measures 
hkely to prove effective, and of basic 
principles. 
Basic principles 
and problems 
While all countries in the Union 
face common general prob­
lems in respect of methods of con­
taining health costs and ensuring an 
adequate extent and level of service, 
the methods of organising the provi­
sion of care and the means of financ­
ing differ between them. As a result, 
the detailed nature of problems and 
their manifestation also vary, as do the measures likely to prove effective 
in resolving them. 
A principal difference which has 
major implications for the appropri­
ate response to demand and cost 
pressures is between national health 
systems which are financed predomi­
nantly through general taxation, 
where services are provided directly 
by the State and for the most part are 
freely accessible to all, and insur­
ance-based systems where a number 
of insurance funds are responsible for 
providing services to various occu­
pational groups and which are fin­
anced mainly by contributions. In 
this case, therefore, the State exer­
cises only indirect control over what 
is spent. The majority of Member 
States have the former type of sys­
tem; the Benelux countries plus 
Germany, France and Austria have 
the second, though in some Southern 
European countries where the devel­
opment of national health systems 
has not yet been fully completed, es­
pecially in Greece, elements of an 
insurance-based occupational sys­
tem remain. 
A second important difference is be­
tween a centralised organisation of 
health care and a decentralised one 
where regional and local authorities 
have more autonomy, though this is 
essentially a question of degree since 
in countries with a more centralised 
- 105-
Chapter 5 - Reforms in health care 
Trends in health expenditure 
Total expenditure on health care averaged 872% of GDP in the Union in 1993 
(according to OECD figures). The scale of spending, however, varies significantly 
between Member States from almost 10% of GDP in France to only 472% of GDP 
in Greece (Graph BRU927). In general, the level tends to be higher in countries with 
insurance-based schemes — the Benelux countries, Germany and Austria as well as 
France — than in those with tax-financed national health systems (though Italy and 
Finland are major exceptions). This partly reflects the relatively high level of real 
income per head ofthe former group as compared with the latter and, therefore, the 
higher demand for health care. 
Expenditure throughout the Union has tended to expand over time in relation to GDP, 
the only exceptions being Ireland and Sweden, where it declined between 1980 and 
1993 (though for the latter, it seems likely that there is a break in the OECD figures ), 
and Denmark, where it remained unchanged. In all other Member States, spending 
was higher relative to GDP in 1993 than in 1980. This was especially so in France 
and Finland, where it rose by 2 percentage points over this ]>eriod and Belgium, 
Spain, Italy, Portugal and the UK, where the increase was 172 percentage points or 
more. Much ofthe rise in these countries, however, occurred between 1990 and 1993 
when GDP either grew slowly or not at all (in Finland and the UK, it declined). 
Nevertheless, the experience during the 1980s, when expenditure increased at much 
the same rate relative to GDP during the period of comparatively high growth in the 
second half as in the first when growth was depressed, suggests; that a higher rate of 
economic growth is no guarantee against the rising absorption of resources by the 
health care sector. In such periods, it is likely that there is less pressure on govern­
ments to depress expenditure and, therefore, that its growth more closely reflects the 
rising demand for services which seems to be a feature of economic development. 
The growth in health care expenditure during the period of economic upturn between 
1985 and 1990 averaged 3 72% a year in real terms (ie deflated by a health price index) 
in the Union as a whole, significantly more than in either the preceding five years 
or the subsequent three (Graph BRU928). In Spain and Portugal, where universail 
systems were being developed it was 8% and 1072% a year, respectively. Between 
1990 and 1993, average growth in the Union fell to 2% a year, and only in Spain, 
France and Portugal was it more than 3% a year. In Finland and Sweden, where GDP 
fell significantly, health expenditure also declined markedly. 
Public expenditure on health has tended to grow less rapidly than overall spending 
in most countries. Only in Belgium and the Netherlands was the proportion of 
expenditure accounted for by the public sector higher in 1993 than in 1980, though 
in Finland it was much the same. In a number of countries, including Italy and 
Portugal, where national health services were being developed over this period, the 
fall in the relative importance of public spending was substantial. This was particu­
larly the case in the period 1990 to 1993, reflecting the budgetary constraints which 
prevailed over this period. Overall, therefore, private involvement in health care 
provision and, partly as a corollary, the charges levied on individuals for treatment 
have expanded in virtually all parts of the Union in the past few years. 
- 106 
Chapter 5 ~ Reforms In health care 
approach the lower level authorities 
responsible for actually providing the 
services have some discretion over 
the expenditure. A more centralised 
form of organisation is used in 
France, the UK, Portugal and Spain. 
In the Scandinavian countries, as 
well as Germany, there is a more 
decentralised system. There is, there­
fore, no close correlation between the 
method of financing and the form of 
organisation. 
Under a tax-financed system, central 
government, in principle, has direct 
control over total expenditure in the 
sense that it sets an overall budget 
each year, or for a specific period of 
time, which is then distributed to the 
authorities actually responsible for 
providing care and services. In prac­
tice, however, given the pressures 
which can arise for additional expen­
diture, especially in situations where 
the regional or local authorities over-
commit themselves to spending, con­
trol can be difficult to exercise unless 
central government is prepared to see 
services withdrawn or rationed. 
Problems experienced by national 
health services of this kind typically 
take the form of inflexibility (insofar 
as changing local and patients needs 
are not necessarily transmitted effec­
tively to the central authorities which 
may be reluctant to expand budgets), 
waiting-lists (which are an inevitable 
consequence of controlling expendi­
ture so that it is kept below the level 
of effective demand), and potential 
waste (which results from inadequate 
incentives to increase efficiency and 
use budgets more effectively). 
Though they do not necessarily need 
to arise in practice, these problems 
are in some degree inherent in this 
kind of system and have been an 64 Total and public expenditure on health in relation 
to GDP, 1980,1990 and 1993 
% GDP -i 12 
410 
GR I 
D excludes new Lander; left ba/1980, middle bar 1990, right bar 1993 
66 Growth in health expenditure per head, 1980-85, 
1985-90 and 1990-93 
Annual change at 1965 (health care) prices 
B DK D GR E F IRL I L NL A P SF S UK E15 
D excludes new Lander 
107 
Chapter 5 - Reforms in health care 
increasing focus of pohcy in recent 
years as governments have sought to 
maintain or improve health care ser­
vices without expanding expendi­
ture. A common approach has been 
to try to increase incentives to im­
prove efficiency in the way resources 
are allocated and achieve cost sav­
ings, partly through the introduction 
of competition or pseudo-market 
mechanisms. 
In countries with insurance-based 
systems, the major problem tends not 
to be long waiting-lists or inadequate 
levels of service and care, but more 
control over expenditure. Since, in 
general, the insurance funds which 
manage the system do not supply ser­
vices directly but contract these out 
to health care providers (general 
practitioners, consultants, hospitals 
and so on), they are potentially able, 
through the incorporation of effec­
tive sanctions and incentives in the 
contractual arrangements, to ensure, a 
sufficient quality and level of service. 
The focus of policy in these countries 
has, therefore, tended to be on the 
design of contracts as well as on the 
means of exercising control over 
overall expenditure and the resources 
absorbed by the system. 
Differences in the degree of centrali­
sation or decentralisation also give 
rise to some difference in the nature 
of problems, in that more centralised 
systems ought, again in principle, to 
be able to distribute budgets more 
equitably between regional or local 
providers than more decentralised 
systems, though less able to exercise 
detailed control over what is spent. In 
practice, determining an equitable 
budget allocation is by no means 
straight-forward since this will de­pend on being able to identify dif­
ferences in the need for expenditure, 
which in turn will depend on a range 
of characteristics of the population 
potentially requiring care. 
Nevertheless, whatever the prevail­
ing method of organisation or of 
funding, because of the common 
need for cost containment, in all 
countries governments have faced 
the problem of increasing the effec­
tiveness of expenditure and of trying 
to ensure that what is spent and how 
it is allocated between different treat­
ments and different types of care, 
adequately reflects the needs of so­
ciety. In other words, given that the 
provision of health care needs to be 
'rationed' in some sense (or, more 
precisely, given that all governments 
accept the need to limit what is pro­
vided, not only to contain public ex­
penditure growth as such but also to 
avoid the seemingly insatiable de­
mand for health care leading to ex­
cessive absorption of resources by 
this sector even in a market-based 
system), the key question is how this 
can best be achieved in practice. 
Belgium 
In Belgium the main issue in respect 
of health care concerns the cost of 
medical treatment which have ex­
panded markedly year after year. 
This is especially the case for labor­
atory tests, pharmaceuticals, hospital 
care and home care for elderly 
people. 
Over time, the system has been pro-
gessively modified from being one 
where payment is determined ex post 
in relation to costs to one where it is fixed ex ante in relation to a standard 
charge based on the expected costs of 
treatment or care. A global budgetary 
objective is set each year for health 
care as a whole as well as for each 
subsector. Provision for the im­
plementation of corrective measures 
is included in agreements and con­
ventions in the event of expenditure 
exceeding these amounts. 
In general, increased efforts have 
been made to reduce the provision of 
medical care without jeopardising 
the quality of service, to make all 
those involved in the sector (health 
professionals, mutualities, pharma­
ceutical companies and so on) more 
responsible for the expendimre they 
incur or initiate and to put more em­
phasis on primary health care in rela­
tion to specialised care and highly 
technical treatment. 
In order to expand finance, charges 
were increased significantly in 1994, 
continuing the pohcy of imposing a 
greater share of the cost of care on 
patients. This is tempered, however, 
by fixing a ceiling on the amount any 
individual pays for treatment (though 
not drugs) during a year. At the same 
time, certain obligations have been 
placed on general practitioners to 
avoid prescribing expensive drugs of 
doubtful effectiveness, with sanc­
tions being available in the form of 
fee reductions if they ignore this. In 
addition, awareness campaigns have 
been introduced to inform doctors 
when their prescription rate per pa­
tient exceeds the average. 
A long-standing problem inherent 
in an insurance-based system of the 
Belgian kind is imposing effective re­
sponsibility on the mutual funds which 
108 
Chapter $ - Reforms In health care 
manage the system for the expenditure 
they incur. From 1995, part of the 
revenue of each mutual fund will be 
determined not by the actual medical 
expenditure of their members but by a 
fixed amount per member which de­
pends on their characteristics (age, sex, 
income and so on). This part will 
amount to 10% of the health insurance 
budget in the period 1995 to 1997,20% 
between 1998 and 2001 and 30% 
thereafter. If the expenditure of a mu­
tuality exceeds its revenue, then it will 
have to use its reserves to cover part of 
the deficit and if necessary increase its 
members' contributions. This new 
system is intended to give an incentive 
to the mutualities to moderate their 
expenditure. 
Denmark 
The health care system in Denmark 
as in other Scandinavian countries is 
financed by taxes and has a decen­
tralised organisation. Though the 
system seems to operate with fewer 
problems than elsewhere in the 
Union, a number of reforms have 
been introduced in the last few years. 
In particular, to introduce some com­
petition between health care pro­
viders especially in the hospital 
sector, in 1993, people were given 
free choice of which hospital to go to 
and the right to demand and receive 
health care where they wished. As a 
result, the role of the general practi­
tioner in advising the patient where 
to go was increased. 
Tax-financed, national health sys­
tems like that in Denmark also tend 
to have an inherent problem of wait­
ing lists. An experimental measure has, therefore, been introduced of 
guaranteeing a maximum waiting 
time of three months with incentives 
for hospitals to comply and an obli­
gation on the counties which admin­
ister the system to meet this target. 
In addition, there are moves to intro­
duce a system of contracts between 
counties and individual hospitals. 
Germany 
In Germany, a major reform of the 
health insurance system became ef­
fective at the beginning of 1993. Fol­
lowing the reforms introduced in 
1988, expenditure increased sharply 
in 1991 and new measures of cost 
containment had to be implemented 
immediately. The approach was to 
introduce a system of budget control 
under which increases in expenditure 
between 1993 and 1995 have to be in 
line with the increase in income of 
the sickness funds from the contribu­
tions of the people insured. In the 
hospital sector, differentiated 
charges were introduced which vary 
according to the kind and intensity of 
care. The system of federal funding 
is also being changed in order to re­
duce the number of beds. Budget 
control has also been applied to doc­
tors and dentists in private practice. 
From 1999, new doctors and dentists 
will only be allowed to provide ser­
vices under the health insurance sys­
tem if there is need. In addition, a 
freeze on drug prices was introduced. 
There is a general consensus that the 
measures taken in 1993 were only a 
first emergency step in a more 
general reform ofthe health care sys­
tem, the aim being to maintain the high standard of health care, to avoid 
imposing additional costs on con­
sumers and to contain costs. It is also 
considered that rates of contribution 
which now differ between sickness 
funds should be more similar. An­
other idea is to give more flexibility 
to sickness funds for contracting with 
health care providers. At the same 
time, there are moves to give general 
practitioners à greater role in order to 
avoid expensive diagnoses by sev­
eral specialists and to encourage 
them to work as coordinators. In ad­
dition, it is planned that there should 
be greater competition between sick­
ness funds in terms of both benefits 
services they provide and the con­
tributions they charge. 
The latter will become effective from 
the beginning of 1996 while the other 
proposals are still being discussed. 
The latest proposal of the Federal 
Ministry of Health is generally to 
give the self-governing institutions in 
the sector more autonomy, though, 
according to a number of experts, the 
incentives and disincentives incor­
porated in the system are not power­
ful enough for such a move. 
Greece 
In Greece, there is a commonly 
perceived need to modernise the 
National Health system. In 1992 and 
1994, amendments were introduced 
to modify administrative and organi­
sational aspects and to improve 
primary health care, emergency pre­
hospital services and the manage­
ment of hospitals. 
A report proposing a radical reform 
of the health care system was 
109 
Chapter 5 - Reforms In health care 
presented in 1994 by an International 
Committee of experts appointed by 
the government and is now under 
discussion. A central recommenda­
tion is the estabhshment of a Unified 
National Health Insurance Fund in­
corporating existing sickness bran­
ches of social insurance funds which 
would negotiate health services on 
behalf of the insured. Other propo­
sals are the development of preven­
tive pohcies on a decentrahsed basis, 
the participation of family doctors 
and general practitioners in the pro­
vision of primary health care servi­
ces, the introduction of management 
techniques in the administration of 
pubhc hospitals and the application 
of cost containment arrangements, 
especially in respect of drugs and 
diagnostic centres. 
Spain 
For many years, the main issue as 
regards the health care system in 
Spain was achieving full coverage. 
At the same time, the system as es­
tablished tended to exhibit the typical 
weaknesses of centralised budget, in 
that there were inadequate incentives 
for those providing care to take ac­
count of costs. 
In recent years, there has been a tend­
ency to increase the role of private 
providers of care and of more effec­
tive management techniques. This 
was first evident in the changes intro­
duced in Catalonia in 1990 under 
the Health Reform Law, which in­
itiated a national discussion leading 
to the Abril Committee report which 
suggested deep-seated structural re­
forms to introduce managed compe­
tition, a proposal which was reflected in the changes made between 1992 
and 1994. 
In 1993, a proscribed list of pharma­
ceuticals too expensive for the pubhc 
system to supply was produced for 
the first time. In 1994 a compromise 
was reached between the central gov­
ernment and the regional autono­
mous authorities over a more realistic 
budgeting. Since 1993, an explicit 
contract with public non-profit mak­
ing hospitals has been introduced on 
an experimental basis, which spe­
cifies levels of activity and the ex­
pected costs for each kind of 
treatment, with the aim of achieving 
forward budgeting of hospital care. 
An additional medium-term aim in 
the same direction is to separate fin­
ancing from the provision ofcare and 
to contract out part of the public ser­
vice to private non-profit making 
hospitals. 
A further issue under discussion is the 
extent to which the system should be 
regionalised in Une with the division of 
government in Spain. In practice, there 
is some tendency towards the develop­
ment of 17 different and separate re­
gional health care systems. 
France 
In the French system, the health bud­
get is centralised and health care pro-
viders, in general, work on a 
contractual basis; public hospital 
budgets are paid by the insurance 
funds but have to be approved by the 
Ministry of Health. 
A major concern is the efficiency of 
the pubhc hospital sector as well as 
the drawbacks of a centralised budgetary system, under which it is 
difficult to forecast the actual need 
and create incentives for efficient use 
of available resources when the bud­
get is provided on the basis of the 
planned supply of services. Oversup-
ply and waste are potential results. To 
avoid this, there is a trend towards 
agreements being drawn up between 
the insurance funds providing bud­
gets and the pubhc hospitals. Bud­
gets tend to include incentives for 
efficient management and the avoid­
ance of oversupply. 
Ireland 
Partly because of its high rate of 
economic growth, public expendi­
ture on health in Ireland remained 
broadly unchanged between 1988 
and 1993 in relation to GDP at 
around 5%, which is low as com­
pared with other countries in the 
Union. 
Measures of reform are, therefore, 
aimed at increasing equity, quality of 
service and accountability and there 
is less urgent need to improve effi­
ciency or to control costs. There are, 
nevertheless, efforts to improve the 
organisation and integration of 
general practitioner services and to 
encourage health promotion. 
Italy 
Measures were introduced in Italy in 
1992 aimed at containing costs and 
improving efficiency, which took ef­
fect from 1994. 
Under these measures, the USL 
(local health units which form the 
110 
Chapter 5 - Reforms In health care 
basic structure of the national health 
service) were transformed into public 
enterprises with significant auton­
omy and local responsibihty. Instead 
of being administered by a political 
committee, these are now under the 
control of a professional manager ap­
pointed by the region, with a contract 
renewable every five years. Larger 
hospitals, formerly acting as bran­
ches of the USL, are able to become 
independent pubhc hospital agencies 
with autonomous organisation and 
administration, which have to oper­
ate with balanced budgets. 
This reform also brought changes in 
financing regulations, with central 
government maintaining overall 
planning responsibility and effec­
tively paying for a standard set of 
services that must be guaranteed to 
each citizen in each region. Each 
region continues to receive a pre­
determined sum from the centre ac­
cording to its population, but any 
expenditure in addition to this has to 
be covered from its own resources. In 
this way, it is intended to encourage 
regions and USL managers to co­
operate in containing costs and 
achieving an efficient use of re­
sources. 
Luxembourg 
In Luxembourg a major reform ofthe 
health care sector occurred in 1992, 
which as elsewhere was aimed at in­
creasing efficiency. The main as­
pects were a reorganisation of the 
administration of the health insur­
ance system, a new system of financ-
ing health insurance, a new 
procedure for negotiations between 
insurance funds and providers of health care and a new financing sys­
tem for hospitals. Of these, the latter 
two measures are the most important 
as regards improving efficiency. 
Since the former negotiation system 
was virtually unregulated and there 
were inadequate mechanisms for 
controlling expenses, more detailed 
rules for negotiating agreements 
were introduced together with a list 
of services to be provided and the 
relative value compared with other 
services. In the hospital sector, a sys­
tem of individual budgets negotiated 
between each hospital and the health 
insurance funds will replace the 
existing system after 1995. 
The Netherlands 
As described in Social Protection in 
Europe 1993, the reforms introduced 
in the early 1990s in the Netherlands 
were a radical attempt to introduce 
market forces into the health care 
system. In essence, the aim was to 
bring about competition between 
both providers ofcare and insurers. 
An important aspect was that the 
sickness funds were no longer ob­
liged to contract with all institutions 
offering health care services, while 
individuals became free to choose 
which sickness fund to belong to. 
This was to be accompanied by the 
integration of all the different insur­
ance schemes into a single scheme 
for all residents. 
The experience of the Netherlands, 
however, demonstrates how difficult it 
is to introduce fundamental reform. 
The market approach succeeded in 
bringing about market-type behaviour, 
but this did not always achieve what the initiators of the reform had in mind. 
New cost containment measures 
turned out to be necessary, requiring 
intervention by the State, in a situation 
where, as a consequence ofthe reform, 
the acceptance of the dominant role of 
government had been eroded. The ef­
fects of the reform were at best mixed 
and have prompted opposition from 
several sides. 
Following a change of government, 
the more far-reaching aspects of the 
reform have been abandoned. There is 
no longer to be a basic health insurance 
scheme covering all residents and the 
changes being made to the system are 
tending to increase the degree of gov­
ernment intervention and impose stric­
ter budgetary control, though whilst 
retaining the market elements which 
have been established. 
Austria 
The health care system in Austria 
incorporates insufficient means of 
preventing overconsumption on the 
demand side and excessive provision 
of service on the supply side and 
tends to encourage expensive in­
patient treatment, which in turn has 
led to the overexpansion of hospitals. 
The reforms which are now under 
discussion attempt to address these 
problems in detail, by for example 
expanding forms of care between 
hospitalisation on the one hand and 
outpatient visits on the other hand or 
by replacing the present system of 
hospital funding based on a daily 
lump-sum rate by a system that is 
related to the costs of each case of 
treatment. 
- 111 
Chapter 5 - Reforms in health care 
Portugal 
The problems experienced by the 
National Health Service in Portugal 
in the late 1980s included a maldis­
tribution of resources between re­
gions, dissatisfaction with the quality 
of the pubhc service, inefficient or­
ganisation and management of the 
system and so inadequate means of 
containing costs. 
Since 1993, the approach has been to 
increase the extent of regional decen­
tralisation and within each of the five 
health regions, to group together health 
centres and hospitals as 'units of heal­
th'. In addition, the National Health 
Service is now allowed to provide ser­
vices directly, while there is a move 
away from pubhc to private insurance, 
the main aspect being that private in­
surers receive payment from the gov­
ernment for each member at a rate 
below the average cost per head of the 
National Health Service. They are then 
free to contract with providers ofcare. 
The system thus contains incentives 
for insurers to contain costs. 
Finland 
As in the other Scandinavian coun­
tries, the health care system in Fin­
land is based on municipalities 
having responsibility for providing 
services. The main problems concern 
inadequate coordination of infra­
structure and a lack of incentives to 
increase productivity. 
Instead of increasing the degree 
of centrahsation, the reforms which 
became effective in early 1993 in­
creased the freedom of the munici­
palities to decide on charges and to organise the provision of services 
and, in general, regulations control­
ling the activities of municipalities 
were relaxed significantly. In addi­
tion, municipalities were given effec­
tive control over the hospital sector, 
since they became essentially the 
customers for their services. 
Sweden 
The health care system in Sweden — 
hospitals as well as most out-patient 
clinics — is mainly run by the re­
gional county councils and primarily 
financed through local income taxes. 
During the 1980s, health care costs 
were contained and output was sim­
ultaneously raised. Nevertheless, 
there were significant differences be­
tween the county councils in perfor­
mance on both fronts. In particular, 
in the large cities long waiting lists 
built up for certain treatments 
thereby causing unnecessary costs 
for sickness insurance funds. 
A series of reforms during the 1990s 
have aimed at combining the advant­
ages of budget-controlled health care 
systems in terms of democratic trans­
parency and financial control with 
the flexibility, freedom of choice for 
patients and cost efficiency of decen­
trahsed management and market-like 
mechanisms, such as reimbursing 
doctors through capitation fees. Re­
sponsibility for caring for the elderly 
(in 1992) and the mentally disturbed 
(in 1995) has been transferred from 
county councils to local authorities. 
In addition, a number of experiments 
have been carried out on coordinat­
ing social insurance and health care. The reform of the general practitioner 
system in 1994 was aimed at giving 
everyone the freedom to choose their 
family doctor in order to strengthen the 
position of the patient as well as to 
improve primary care. After the 
general election in 1994, however, 
parts of the legislation relating to 
general practitioners will cease to 
apply at the end of 1995, though the 
provisions for strengthening the posi­
tion of the patient will remain 
The UK 
In the UK, the national health service 
with centralised decision-making has 
existed since 1948. Since 1991, how­
ever, fundamental reforms have been 
introduced aimed at containing costs 
and increasing efficiency. Partly be­
cause of the UK system being the 
model for national health services de­
veloped elsewhere and partly be­
cause of the market-oriented 
approach adopted, these reforms 
have attracted a good deal of atten­
tion in other Member States (and are, 
therefore, described in somewhat 
greater detail here than develop­
ments elsewhere). 
The basic philosophy underlying the 
reforms was to distinguish between 
purchasers and providers of care and 
to encourage providers to compete 
with each other and supply their ser­
vices on the basis of contracts nego­
tiated with the purchasers. The latter 
consists of two kind. The largest are 
the district health authorities (DHA) 
whose role is that of both organising 
and supplying hospital care and to 
select the services needed and con­
tract with providers. The other type 
of purchaser are general practitioner 
112 
Chapter 5 ~ Reforms In health care 
fundholders (GP fundholder), self-
employed doctors responsible for 
primary care who manage a budget 
(based on the number registered with 
them) to be used for securing a 
defined range of hospital and primary 
care services for their patients. These 
have incentives to make good use of 
their budget in order to attract more 
patients and so raise their income. On 
the provider's side, competition be­
tween hospitals and between com­
munity services has been estabhshed, 
at least in principle. 
Such fundamental reforms are hkely 
to take some time before having their 
full effect. Nevertheless, four years 
after they were initiated some evalu­
ation of their impact is possible. So 
far it seems that the effect is mixed. 
Evaluations by the Kings Fund in 
1994 and the National Audit Office 
in 1995 concluded that the conse­
quences were limited, though with a 
greater impact on GP fundholders 
whose performance seemed to be 
better than the DHAs. It appears that 
in practice only a relatively limited 
amount of competition has been es­
tablished in the system, primarily be­
cause under the old arrangements 
local monopolies had been created 
among providers (local or regional 
hospitals, in particular) so that the 
DHAs do not have much effective 
choice over the supply of particular 
types of care or treatment. 
At the same time, DHAs themselves 
are effectively in a monopoly posi­
tion and management is liable to 
possess neither the skills (since they 
were trained under the old system) 
nor the motivation to change their 
behaviour substantially. An essential requirement for a mar­
ket to work effectively is sufficient 
information about the cost implica­
tions of particular kinds of action and 
details about the actual costs of 
carrying out various kinds of treat­
ment remain inadequate; even 
though the situation is improving, 
progress is slow. This lack of detailed 
information makes it difficult for 
purchasers to assess the offers made 
by providers — or indeed for the 
latter to fix 'prices' in line with the 
costs of provision — and for market 
mechanisms to bring about an im­
proved allocation of resources. 
This does not mean, however, that 
the attempts to introduce market ele­
ments and more choice into the sys­
tem, to obtain better information 
about costs and to take these more 
into account when deciding patterns 
of expenditure is necessarly mis­
placed. 
Comparative 
developments 
The review of developments in 
Member States indicates that the 
reform of health care systems is a 
topical issue and an objective of pol­
icy throughout the Union, since all 
countries have to grapple with prob­
lems of rising costs, inefficiency, 
waste, distorted incentives and in­
flexibility. A major focus is on rela­
tions between financers of services 
and providers of care and on the es­
tablishment of effective incentives 
for achieving a better use ofthe avail­
able resources. The quality of medi­
cal care is not a common issue of 
concern. All of the systems have the ostensible aim,of combining cost ef­
fectiveness with a high quality of ser­
vice and, though there is a good deal 
of variation in the mechanisms of 
quality control in place, all govern­
ments claim that their system pro­
vides a high standard. 
Despite the broad similarity of sys­
tems, of the problems faced and of 
the approaches followed, reforms 
differ in detail and can only be as­
sessed in terms of the specific fea­
tures of the arrangements for 
providing and financing health care 
in the individual Member States. 
In nearly all countries, there is some 
tendency to adopt what might be 
termed a 'contractual' approach, 
though the way in which this has 
been used differs significantiy be­
tween Member States. In broad 
terms, this is simply a way of orga­
nising the provision of care. In 
France and in some degree in Spain, 
contracts are essentially being used 
to contain costs by limiting budgets, 
though under centralist systems they 
can also incorporate provisions re­
garding quality and standards as well 
as serving to give incentives. 
Contracts can also be established be­
tween the different bodies providing 
the finance (the State and/or sickness 
funds) and those providing care. This 
has strong similarities with collective 
bargaining. There is rarely effective 
competition on either side and nego­
tiations tend to take place between 
two monopolistic organisations. A 
tendency here is to constrain the out­
come of negotiations to avoid them 
being at the expense of third parties 
— in practice, either governments or 
patients. This can sometimes be a 
113 
Chapter 5- Reforms in health care 
problem, of contracts made between 
insurance funds and health care pro­
viders. In Belgium, therefore, re­
forms are aimed at imposing more 
responsibility on the mutual funds to 
moderate their expenditure by intro­
ducing a system of incentives. Much 
the same is the case in Luxembourg. 
In both countries, therefore, the con­
tractual approach has been modified 
to incorporate additional regulations 
in order to control the implications 
for public spending. On the other 
hand, in Germany, the expectation is 
that giving more flexibility to1 insur­
ance funds to contract with health 
care providers might help to increase 
the effectiveness of the system. 
The way in which contracts are used, 
the potential outcome and the need for 
constraints tend to differ according to 
whether insurance funds are obliged to 
contract with any health care provider 
fulfilling certain requirements or are 
free to choose between them as in tjie 
Netherlands. At the same time, the out­
come may not be desirable if there is a 
monopoly on one side and a number of 
providers offering services on the 
other. The reforms in the Netherlands, 
therefore, are aimed at introducing 
competition between insurers as well 
as between providers. The latest pro­
posals in Germany go in the same di­
rection but remain to be defined in 
detail. 
A third major aspect of the contrac­
tual approach is its potential for in­
creasing competition (or more 
precisely managed competition), 
both between health care providers 
and also between insurance funds or 
budget holders, as in the Netherlands. 
As in the case of the latter, a further 
means of increasing competition is to incorporate private insurers into the 
public system, as happened in Portu­
gal. A managed competition ap­
proach has also, been suggested by 
the Abril Committee for Spain. 
The possibility of introducing more 
competition is not confined to social 
insurance systems but also applies to 
those financed by general taxation. 
The major example is the 1991 re­
form in the UK, which especially in 
terms of the creation of GP fund-
holders seems to have had some suc­
cess. There are certain parallels in 
this regard with 'the family doctor 
reform' in Sweden, though the latter 
is paralysed at present by political 
factors. More generally, a wide­
spread tendency towards increasing 
the role of primary care doctors is 
evident across the Union. 
A fourth aspect of a 'contractual' ap­
proach is that of decentralisation in 
tax-financed systems as well as in 
insurance-based ones. A decen­
trahsed form of organisation is an 
important feature of the Scandina­
vian countries and here problems of 
growing waiting lists have been 
tackled by allowing patients to seek 
treatment outside their county of 
residence, so creating competition 
between regional authorities. This 
has been coupled with a tendency to 
give regions greater freedom in the 
way they provide and organise health 
care services. A further aspect of the 
arrangements in these countries is 
that the central government allocates 
a fixed budget amount to each of the 
counties which then have to cover 
deficits from their own resources. 
Since patients can exercise influence 
in local elections, the counties have 
an incentive to contain costs. A simi­lar approach has been introduced in 
Italy and to some extent in Portugal. 
Increased decentralisation is also an 
aspect ofthe UK reforms, in this case 
the district health authorities (DHA) 
being given responsibility for pur­
chasing health care services and hav­
ing to manage on fixed-amount 
budgets; though this example illus­
trates the hmitations of what can be 
expected to be achieved where local 
monopoly elements predominate. 
A particular kind of decentralisation is 
being pursued in Spain, where in­
creased autonomy is being given to the 
regions to develop their own systems. 
A contrary tendency is evident in 
Greece, where unfortunate experi­
ences with a very diversified system 
has led to moves to develop a more 
uniform one with a single sickness 
fund. A further part ofthe reform, how­
ever, is to extend the role ofthe general 
practitioner and improve management 
of health care provision. 
Recent political developments in 
Sweden and the Netherlands demon­
strate, at the same time, that ambi­
tious reforms programmes are liable 
to provoke a good deal of opposition 
since they are attempting to change a 
system with long-standing traditions 
and specific institutional structures 
developed over the years with exten­
sive vested interests. 
The developments over the past few 
years described above can be broadly 
interpreted as moves in similar direc­
tions, insofar as there is a common 
tendency to place increased reliance 
on contracts between the main parties 
involved, to introduce elements of 
114-
Chapter 5 - Reforms in health care 
the market and to increase competi­
tion both between providers of care 
and those responsible for managing 
the finance. The detailed measures 
taken, however, differ a good deal 
between countries reflecting the 
diversity of institutional arrange­
ments. In this regard, substantial dif­
ferences remain between Member 
States and are likely to do so for many 
years to come. 
115-
Chapter 5 - Reforms in health care 
- 116 
Chapter 6 - Social protection and the self-employed 
Chapter 6 Social protection 
and the self-employed 
The self-employed 
labour force 
In 1994, there were around 22 mil­
lion people who were self-
employed in the European Union, 
including the three new Member 
States. Many governments in the 
Union have a policy of encouraging 
self-employment, in part to boost job 
creation, in part to offer people a 
route out of unemployment. The con­
cern of this chapter is with the social 
protection arrangements for the self-
employed across the Union. (This 
is based on results of studies spon­
sored by the European Commission 
in 1989 and 1991, updated and supplemented by information from 
independent experts from each ofthe 
Member States.) 
The scale of self-employment in the 
Union in 1994 ranged from around 
8% of the total number of employed 
in Denmark and 9% in Germany to 
25% in Portugal and 34% in Greece 
(Graph 66). In most Member States, 
the proportion of self-employed in 
the work force has remained fairly 
constant over time, though it has fal­
len somewhat in the less developed 
countries as a result of the decline in 
employment in agriculture where a 
high proportion of self-employed 
work (Graph 67). The great majority of the self-
employed work full-time. In 1994, 
only 10% in the Union as a whole 
worked part-time as opposed to 16% 
in the case of employees and only 
in three Member States, the 
Netherlands (35%), the UK (18%) 
and Portugal (17%), was the propor­
tion significantly more than 10%. 
As in the case of waged employment, 
part-time working is much more pre­
valent among women than men in all 
Member States, with 70% of self-
employed women working part-time 
in .the Netherlands in 1994 and 
almost 50% in the UK, though in the 
rest of the Union, only in Germany 
66 Self-employment in Member States, 1994 
35 % total employment 67 Self-employed by sector of activity in the 
Member States, 1994 
g0 % total self-employed 
• Agriculture 
DK D L S NL F UK A E15 B SF IRL E I P GR 
0 Include» new Lander; A and S 1983 8 DK D GR E F IRL I L NL A P UK SF S E15 
0 include* new Lander; A, SF and S Include tamfly workers; A and S 1993 
117-
Chapter 6 - Social protection and the self-employed 
did the figure exceed 25% (Graph 
68). 
Only around a quarter of the self-
employed in the Union in 1994, how­
ever, were women and only in 
Finland, Sweden and Portugal (just 
over 40% in each case) was the pro­
portion much higher than this— in 
Greece, it was below 20% and in 
Ireland, just under 15%. 
From the viewpoint of social protec­
tion, three groups of self-employed 
can be distinguished: 
• people whose principal earnings 
come from self-employment — 
the main focus of this chapter; 
• part-time self-employed who 
work mainly as an employee and 
who come under the social 
protection arrangements for 
employees or have combined 
employee/self-employed cover; 
• unpaid family workers who to­
talled around 3V2 million in 1994 
and who in most Member States are outside the social protection 
arrangements except to the ex­
tent that as wives they have 
derived rights or pay contribu­
tions voluntarily. 
It should be emphasised at the outset 
that the concern here is with the po­
sition ofthe self-employed in relation 
to the social protection available to 
employees in different parts of the 
Union rather than with evaluating the 
overall level of protection provided 
in the Member States as such (which 
has been discussed in earlier chap­
ters). 
A further point to note is that the 
sectoral groups which are used to 
classify the self-employed for social 
protection purposes are not the same 
as those normally used in labour mar­
ket analysis. For example, the occu­
pations grouped in labour market 
data under 'services' are spread 
across more than one classification in 
the social protection arrangements, 
where these are occupationally 
based. Though groupings vary 
between countries, four categories can be distinguished for present 
purposes: 
• those working in agriculture in­
cluding both owners or tenant 
farmers and those with self-
employed status (in the sense 
that they are not employees); 
• those working in industry and 
commerce including 'traders', 
and as such both those manufac­
turing goods and those in retail­
ing (ie shopkeepers); 
• craftsmen or artisans and those 
with particular skills, including 
construction workers; 
• those in the liberal professions, 
such as doctors and lawyers. 
The incomes of 
the self-employed 
Reliable information on the in­
come of the self-employed and 
on disparities in its distribution is 
68 Part-time self-employed women in the Member 
States, 1994 
70 Jt women self-employed 
& DK D GR E F IRL I L NL A P UK SF E14 
D Includes new Under, E14 excludes S (no data available); A, SF Include family workers; A 69 Self-employed without any employees in Member 
States, 1994 
lOO'V5'total self-employed 100 
0 Liam_a™_^am-^a»_^«_BM_s™_iM_a»m_ia»m_i»_a»«»La»«mj o 
D DK I L F E12 NL IRL UK P E GR B 
0 Includes new Lander, DK, IRL and L 1993; A, SF and S no data 
- 118-
Chapter 6 - Social protection and the self-employed 
virtually non-existent, largely be­
cause of the difficulties of obtaining 
such details. The limited data which 
do exist, such as those based on fin­
ancial accounts or tax returns are 
known to give misleading indicators 
ofthe standard of living of those con­
cerned. There is some indication, 
however, from household expendi­
ture surveys, for example, that self-
employed income is less equally 
distributed than that of wage and sa­
lary earners. 
Moreover, a marked characteristic of 
the self-employed is the high propor­
tion operating one-person busi­
nesses, often assisted only by unpaid 
family members (Graph 69). Though 
this does not necessarily indicate low 
levels of income, it does illustrate the 
generally small scale of the busi­
nesses concerned. In agriculture, in 
particular, especially in the less de­
veloped parts of the Union, such as 
Greece or Portugal,.small size and 
low incomes are hkely to go together, 
as they might in the service sector, 
where in Southern Member States a 
significant proportion ofthe self-em­
ployed outside retailing are engaged 
in irregular or seasonal work. 
More detailed data from the UK 
show that, in 1991, whereas average 
earnings of the self-employed was 
higher than for employees, the dis­
persion of their income was much 
wider, so that the self-employed were 
over represented in both the top and 
the bottom 10% of the distribution 
(see Table 10). While the self-
employed represented 9% of the 
total, they accounted for 12'/2% of 
those in the bottom 10% and 15% of 
those in the top 10%, the pattern 
being much the same for both men Table 10 — Distribution of usual net monthly earnings 
in the UK 
All 
Employees 
Self-employed 
Full-time 
Employees 
Self-employed 
Part-time 
Employees 
Self-employed Lowest Decile 
(£<186) 
87.8 
12.2 
61.3 
38.7 
91.5 
8.5 Highest Decile 
(£>1297) 
84.4 
15.2 
85.6 
14.4 
72.1 
27.9 Mean 
91.2 
8.8 
91.2 
8.8 
91.5 
8.5 
Source: BPHS 1991 (weighted data) in Meager, N et al, Self-employment and the 
distribution of income, IRF, York 1994 
and women. Full-time self-employed 
were significantly overrepresented 
both in the top 10% and, most espe­
cially, in the bottom 10%, part-time 
self-employed particularly in the top 
10%, reflecting perhaps a capacity in 
many cases to command high fees for 
short hours. 
More information about the income 
of the self-employed is important for 
the development of an effective sys­
tem of social protection in this area. 
Nevertheless, a few points can al­
ready be made: 
• sole operators are inherently vul­
nerable, whatever their level of 
income, insofar as they are re­
liant on their own labour for the 
support of themselves and 
dependants. In this respect they 
are little different from em­
ployees and are likely to have 
much the same need for access 
to social protection; the self-employed almost cer­
tainly vary greatly in terms of in­
come, and include people with 
very low earnings as well as 
very high ones. In a number of 
Member States, however, 
policies are based on the as­
sumption that all the self-
employed have sufficient 
resources to provide their own 
protection to a significant extent 
through savings or private insur­
ance; 
access to social protection for 
the self-employed in a number of 
cases differs by occupation 
which does not necessarily relate 
to income. The liberal pro­
fessions, for example, which 
probably generate relatively high 
incomes, tend to be well or­
ganised and articulate, and so 
have often succeeded in securing 
better State provision, at an ear­
lier date, than others in greater 
119 
Chapter 6 - Social protection and the self-employed 
Table 11.— Social Insurance cover for the self-employed in the European Union 
Pension Widow's Invalidity Health Sickness Industrial Maternity Unem- Children's 
care Benefit injury ployment Allowance 
Belgium 
Denmark 
Germany Yes for 
the 
majority, 
but some 
voluntary 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Austria 
Portugal 
Finland 
Sweden + 
UK + 
+ Cover provided + 
+ 
No 
+ 
+ 
+ 
+ Large 
risks only No 
+ Minority 
only 
Yes, but Yes if in Farmers 
some public craftsmen 
voluntary health rest 
insurance voluntary 
Large 
risks only Only 
those in 
IKA 
+ 
No 
No 
No 
+ 
No No 
Farmers 
Farmers 
No 
Manual 
workers 
Yes all 
No 
Voluntary Yes all 
only 
+ Occ 
illness 
only 
+ Farmers 
rest 
voluntary 
+ Yes all 
+ No + 
+ 
No 
+ 
+ 
Voluntary 
+ No 
No 
No 
No 
No 
No 
No 
+ 
No 
No 
No 
No, but 
flat-rate 
scheme 
+ 
No Lower for 
1st child 
No 
+ 
+ 
+ 
Farmers 
+ 
+ 
+ 
120-
Chapter 6 - Social protection and the self-employed 
need. In some countries, how­
ever, specific steps have been 
taken to protect the most econ­
omically vulnerable by, for 
example, including them in em­
ployee schemes, while leaving 
others of the self-employed to 
organise their own protection. 
The structure of 
provision 
Social protection arrangements 
for the self-employed differ in a 
number of ways between the 15 
Member States. At one extreme are 
systems — in Denmark, Sweden, 
Ireland, Luxembourg and the UK — 
in which the self-employed belong to 
the same social insurance scheme(s) 
as employees, at the other are those 
with separate provision for the self-
employed through a number of occu­
pational schemes — as in Austria, 
France, Italy, Spain and Greece. In 
between are systems in which all or 
most of the self-employed are in the 
same schemes as employees — as in 
Finland, Germany and Portugal — 
but where there are separate schemes 
for some occupational groups (the 
liberal professions, in particular) and 
others in which there is either a sep­
arate scheme for the self-employed 
(as in Belgium) or a common scheme 
with the self-employed excluded 
from certain provisions (as in the 
Netherlands). 
There are three further complications 
to note. First, in a number of coun­
tries where for the most part there is 
separate provision for the self-
employed, certain groups among 
them are included in the general Supplementary pensions and the self-employed 
Sweden: employees can add a further 10% to their pensions through 
employer based supplementary schemes, but this does not extend to the 
self-employed. 
Denmark: in 1994, around 75% of employees over 22 years old were 
covered by a supplementary scheme, financed by employer/employee 
contributions. Those becoming self-employed, so long as they meet certain 
criteria and pay the whole contribution, can opt to remain in the scheme. 
In 1990, there were only 2,000 taking advantage of this provision, possibly 
because of the high contribution in relation to the modest pension. 
The Netherlands: employees are obliged to participate in a company 
supplementary pension scheme. Compulsory membership of supplemen­
tary pension schemes also applies to some self-employed in construction 
and related industries and there are a number of schemes for the liberal 
professions. A sizeable proportion ofthe self-employed, however, do not 
have access to a supplementary pension. 
UK: employees are obliged either to belong to the State earnings-related 
pension scheme or a company scheme or to contribute to a personal pension 
scheme. The self-employed have access to neither the State nor a company 
scheme, though they are encouraged, but not compelled, to make their own 
arrangements to acquire a personal pension. In 1992,62% of men and 35% 
of women self-employed had a personal pension scheme. 
employee scheme (as in Austria, 
Greece and Germany). Second, even 
where there are separate schemes, 
some provisions may be common to 
employees and the self-employed or 
to all residents — such as a national 
health service, child allowances or 
social assistance scheme arrange­
ments (except in the Netherlands 
which has special schemes for the 
self-employed). Third, systems can 
change over time — as in 
Luxembourg, where provision used 
to be on an occupational basis. 
Apart from these structural dif­
ferences, provision for the self-
employed may be different, and often 
less favourable, than for employees 
(see Table 11): only in Luxembourg (since 
1994) are the self-employed 
covered against all the same 
risks as employees; 
while social insurance for em­
ployees is almost always com­
pulsory, it may be voluntary for 
the self-employed and, therefore, 
far from complete for certain 
risks; 
while provision may appear 
similar, benefits for the self-
employed may be only flat-rate 
rather than earnings-related and, 
therefore, lower on average, 
qualifying criteria more stringent 
and waiting periods longer; 
121 -
Chapter 6 - Social protection and the self-employed 
Providing basic pensions for the self-employed 
Spain: most of the self-employed were brought into the compulsory 
pension scheme in 1970 and those in agriculture were added in 1975. 
Entitlement to a full pension requires 35 years of contributions, 60% ofthe 
full entitiement being acquired after 15 years and an additional 2% for each 
year of contributions above this. The self-employed can choose to pay a 
lower or higher rate of contribution with a corresponding reduction in the 
pension, though it is possible to switch from a lower to a higher rate before 
the age of 50. 
Portugal: pension provision for the self-employed became compulsory in 
1977. A minimum of 10 years of contributions is required to qualify for 
any pension at all, but for a full pension 40 years are needed. The self-
employed, therefore, were entitied to a pension from 1987 on, but initially 
to a low one (of a minimum of 30% of earnings and a maximum of 80%) 
A minimum pension was introduced for those who had paid contributions 
for a specified number of years. 
Ireland: a compulsory Pay Related Social Insurance scheme was estab­
lished for employees in 1981 but the self-employed were not admitted until 
1988. Ten years' membership of the scheme and a minimum number of 
contributions are required to qualify for a flat-rate pension, payable at the 
age of 66, so that the self-employed will not become eligible until 1998. 
Those on low incomes must rely on means tested assistance. 
Belgium: compulsory pension provision was extended to the self-
employed as early as 1956, but they were entitied only to a relatively low, 
flat-rate benefit while employees' pensions were earnings-related. In 1984, 
the method of calculating pensions for employees and self-employed was 
harmonised, but only in respect of insurance years from 1985 on. Ix>w 
self-employed contributions, however, mean that the basis for calculating 
pensions is also low. Contributions are being gradually increased and this 
will raise pension entitlements over time, but it is estimated that they are 
still significantly below those for employees with the same earnings. In 
1994, the minimum was set at the level of the social assistance guarantee 
for the elderly. though even here, almost all are 
covered. Nevertheless, the level of 
pensions for the self-employed is 
often lower than for employees. 
'While in many Member States steps 
have been taken to change this, these 
will inevitably take time to have a 
significant effect. 
In five Member States, there is a 
basic, flat-rate pension for both em­
ployees and the self-employed, 
which is financed by taxes in 
Denmark, Finland and Sweden, and 
by contributions in the Netherlands 
and the UK and is usually relatively 
low. In addition, in both Finland and 
Sweden there are parallel earnings 
-related schemes with the same 
method of calculating pensions for 
both employees and self-employed. 
The efforts which have been made to 
improve retirement income by de­
veloping supplementary pension 
schemes, however, do not always ex­
tend to the self-employed (see Box). 
Moreover, the development of these 
raises the possibility that the basic 
pension will be regarded as of lesser 
importance and so not be upgraded, 
which will tend to disadvantage the 
self-employed who are more reliant 
on this. 
• the often extensive benefits pro­
vided by employers do not, of 
course, apply to the self-
employed. 
Changes, however, have taken place 
in many Member States in recent 
years to the benefit of the self-
employed. These are described in the 
following sections which will 
examine the position in each main 
area of social protection. Retirement pensions 
In almost all Member States, insur­
ance for old-age and survivors pen-
sions is compulsory for all 
self-employed who earn enough to 
pay contributions or who are covered 
along with others under a universal 
pension scheme financed by taxes. 
Only in Germany is there a voluntary 
element for the self-employed, In four other countries — Spain, 
Portugal, Ireland and Belgium — 
where pensions are insurance based 
and, except in Ireland, earnings-
related, the development of State sup­
plementary pensions is not considered 
necessary. There are problems, how­
ever, arising from the relatively late 
dates at which the self-employed 
schemes were developed or reformed 
and various steps have been taken to 
try to ensure a minimum pension in­
come for the self-employed (see Box). 
122 
Chapter $ -Social protection and the self-employed 
Unlike elsewhere, however, direct 
State subsidies have not been used to 
boost the level of pensions in the short-
term. In the longer term these problems 
will resolve themselves, but until then, 
the self-employed will tend to receive 
relatively low pensions. 
In the other Member States, 
earnings-related pensions were es­
tablished on an occupational basis, 
though in Luxembourg there has 
been a shift to a more unitary scheme. 
This approach has also given rise to 
problems and a number of attempted 
solutions. 
In France, financial problems and 
low pensions in the different self-
employed schemes - - except the one 
for liberal professions — led to the 
schemes for craftsmen and com­
merce and industry being aligned 
with the main employee scheme to 
give equal (earnings-related) pen­
sions for equal contributions, while 
the farmers' scheme was also im­
proved, but still lags behind the 
others. These changes were achieved 
in part through solidarity measures 
— a State subsidy for a period of 
years plus the transfer of resources 
from the main employee scheme — 
and in part through increased con­
tributions from the self-employed. In 
France, in addition, there are well 
developed supplementary pension 
schemes for the self-employed as 
well as employees, which are mostly 
compulsory. 
In Italy, the compulsory pension 
schemes for the self-employed were 
also established on an occupational 
basis. In 1995, the organisations 
managing the schemes for liberal 
professions were privatised, though they remain under the control of the 
Ministry of Labour. As a result, they 
became solely responsible for ensur­
ing that funds match pension lia­
bilities and the State no longer has an 
obligation to cover deficits. A reform 
under active consideration will bring 
into compulsory insurance self-
employed outside the traditional oc­
cupations who are not covered — 
such as freelance workers or consult­
ants. It also envisage the possibility 
of establishing supplementary 
schemes for the self-employed. In 
1988, pensions received by those 
who were formerly self-employed 
were on average only 55-60% of 
those who had been employees. In 
1990, reforms designed to end this 
disparity introduced earnings-related 
pensions for the self-employed as 
well as new contribution arrange­
ments, but inevitably these will take 
a number of years to take full effect. 
Supplementary pensions are not a 
feature of the Italian system. 
In Greece, all workers in agricul­
ture, whether employees or self-
employed, are in the same scheme 
(OGA), while the self-employed in 
urban areas who are regarded as 
economically vulnerable (no fixed 
work base, lone operators working 
for only one enterprise) are covered 
by the other major employee scheme 
(IKA). The other self-employed oc­
cupational groups have their own 
schemes providing pensions of dif­
fering levels. Whereas supplemen­
tary pensions are compulsory in the 
schemes for employees, in those for 
the self-employed, they are voluntary 
or non-existent in many cases. Provi­
sion for the self-employed has his­
torically been inferior to that for 
employees in many respects, but in 1992, legislation was introduced to 
rationalise and improve arrange­
ments for both employees and self-
employed (excluding rural workers 
and seamen). Though separate self-
employed schemes remain, for those 
entering the labour market from 
1993, there are common arrange­
ments for contributions and the cal­
culation of benefits, aligned with the 
general scheme (IKA). The impact 
on pensions will not be felt for 15 
years (the minimum period to acquire 
pension rights), but should be benefi­
cial to the self-employed in the long-
term. For existing scheme members 
there will be a staged process of ra­
tionalisation which should ultimately 
raise the level of pensions. 
In Germany there is compulsory pen­
sion insurance for all employees but 
not for all self-employed, though 
supplementary pensions are not com­
pulsory for either group. The liberal 
professions largely organise their 
own scheme which usually provides 
a higher level of pension than the 
State schemes, while for farmers, 
there is a compulsory scheme, subsi­
dised by the State, which pays 
flat-rate pensions only. Some self-
employed groups — artists, journal­
ists and craftsmen—are, on the other 
hand, integrated into the employees' 
scheme and receive an equal pension 
for lower contributions (craftsmen, 
including construction workers, are 
compulsory members of the em­
ployees' scheme for 18 years and 
then can retain membership volun­
tarily or apply to leave). Self-
employed in other occupations, as 
well as those who become self-
employed after being employees, can 
apply to join or remain in the compul­
sory insurance scheme and acquire a 
123 
Chapters - Social protection and the self-employed 
Two examples 
of early retirement 
schemes 
Sweden: a partial pension 
scheme exists which after 
the age of 61 allows the 
time spent in a job or self-
employment to be scaled 
down with compensation 
given for 55% of the income 
lost, up to a maximum sum. 
The self-employed are treated 
on the same basis as em­
ployees and encouraged to 
take up this provision, The' 
scheme, however, will be 
phased out by the year 2000, 
when a new pension system 
comes into force 
Finland: farmers between the 
ages of 55 and 64 who perma­
nently stop working -and 
transfer the farm to someone 
younger qualify for an early 
retirement pension under the 
'change of generation' 
scheme. If the farm ceases to 
be worked, a farm closure 
benefit is payable. Both 
schemes also cover wives (or 
husbands). 
pension on an equal basis to other 
members. Any other self-employed 
may join a scheme voluntarily. 
In Austria, apart from certain small 
groups of self-employed integrated 
into the general scheme, there are 
occupationally-based pension 
schemes for the self-employed. Sup­
plementary pensions are of minor im­
portance. 
In Luxembourg, where there were 
originally separate occupational schemes for the self-employed, the 
liberal professions were integrated 
into an employee scheme in 1964 and 
for other groups, a single pension 
scheme for employed and self-
employed was established in 1987. 
Though in Luxembourg supplemen­
tary schemes have not been de­
veloped, in a recent move a pension 
can be deferred until the age of 68 and 
three extra years of contributions 
paid to provide a higher pension. This 
change is particularly useful for the 
self-employed. 
Early retirement 
pensions 
Provisions for early retirement exist 
in 9 Member States, which except in 
Luxembourg, are open to the self-
employed as well as employees on 
much the same basis. 
Survivors 
With certain exceptions (such as 
some schemes for farmers where the 
widow takes over the running of the 
farm), widows (and some widowers) 
of self-employed who were members 
of a pension scheme are treated the 
same as those of employees (even in 
Ireland where the self-employed 
scheme did not start until 1988 since 
only three years of contributions are 
required to qualify for a survivor's 
pension). 
In most Member States, however, 
widows ofthe self-employed are less 
hkely than widows of employees to 
have supplementary pensions. Since 
survivors' pensions are usually fixed 
in relation to the main retirement pension provision, the level received 
will largely depend on the level ofthe 
latter. 
Invalidity benefits 
In all but one Member State, the self-
employed are included in the provi­
sions for invalidity benefits. In 
Ireland, exceptionally, the self-
employed are excluded (the National 
Pensions Board reviewed this pohcy 
in 1994, but recommended no 
change). 
In ten countries, the provision for 
invalidity forms part of, or is linked 
to, pension arrangements. Since the 
various formula for calculating 
benefit are complicated, it is difficult 
to assess the position of the self-
employed relative to employees. In 
most cases, benefits are earnings re­
lated, though in Denmark, they are 
flat-rate amounts based on the retire­
ment pension. 
In four countries — Spain, Belgium, 
the Netherlands and the UK — inva­
lidity benefits are not linked to pen­
sions. In Belgium, they are payable 
for total and permanent incapacity 
only and to the self-employed, in 
contrast to employees, at a flat-rate, 
which, until it was increased to the 
same level in 1994, was below the 
social assistance rate. In Spain, on the 
other hand, benefits are earnings-
related. In the Netherlands, benefits 
for employees are related to normal 
earnings, but for the self-employed to 
the minimum wage, though in both 
cases, the level is related to the de­
gree of incapacity (from 15% up­
wards in the case of employees, from 
25% upwards for the self-employed). 
-124-
Chapter 6 - Social protection and the self-employed 
In the UK, the self-employed are in­
cluded in the new flat-rate Incapacity 
Benefit introduced in April 1995 on 
the same basis as employees. 
In most Member States, benefits are 
paid for total incapacity where the 
self-employed have ceased trading 
and are incapable of any form of 
work. In Austria, a recent change 
(1994) enables an incapacity benefit 
to be paid where someone self-
employed over 50 is incapable of fur­
ther work in their business, provided 
that such work was necessary to 
maintain the business. In the UK, 
Germany and Luxembourg, there is 
no provision for partial incapacity for 
either employees or the self-
employed. In Sweden, Italy, Portugal 
and Belgium, earnings capacity has 
to be reduced to one third or less of 
what it was previously (a common 
definition of total incapacity) to qual­
ify for benefit. 
In France and Spain, provision for 
partial incapacity exists but does not 
extend to the self-employed. In 
Denmark, Finland, Greece, Sweden 
and the Netherlands, on the other 
hand, partial incapacity benefits are 
payable to the self-employed as well 
as employees. 
Occupational 
accidents and illnesses 
In the case of accidents or diseases 
relating to work, the position of the 
self-employed varies greatly across 
the Union. In Austria, Sweden and, 
recently, Luxembourg, there is com­
pulsory insurance against occupa­
tional injury for all, or nearly all 
(Austria), the self-employed as well as employees. At the other extreme, 
in Greece and the Netherlands, there 
is no specific scheme for occupa­
tional injuries which are covered by 
the general invalidity provisions, and 
in cases of short-term incapacity by 
sickness benefits. The latter, how­
ever, do not apply to the self-
employed in the Netherlands and 
only to a minority of the self-
employed in Greece (those included 
in the general (IKA) employee 
scheme, though the scheme for craft­
smen does offer some cover — four 
months — for occupational acci­
dents. In three countries where there 
are occupational injury schemes — 
Ireland, Belgium and the UK — 
these do not cover the self-employed, 
and, in a fourth — Denmark — they 
are covered but only when working 
in the same way as employees. In all 
of these countries, apart from Ireland, 
however, the self-employed are 
eligible for sickness benefits during 
short-term incapacity for work 
(though after a waiting period, as 
noted below). 
In other parts of the Union, a variety 
of arrangements exist. In Italy, provi­
sion is focused on those most hkely 
to be at occupational risk — manual 
workers — and the self-employed 
as well as employees are covered. 
In several other countries, self-
employed in agriculture are included: 
in Spain, Finland and Germany, there 
is compulsory cover for injuries at 
work and in. France, for any health 
costs resulting, but insurance is vol­
untary for cash benefits during inca­
pacity. In Germany, there is also 
compulsory insurance for many 
craftsmen and for a number of those 
in fishing and here as well as in 
Finland, voluntary cover for those not included in other schemes. In 
Portugal, the self-employed have the 
option of paying.a higher contribu­
tion giving entitlement to benefits 
for occupational illness, but not 
accidents. In general, where occupa­
tional injury is covered, it is on the 
same basis as for employees, except 
in France where compulsory insur­
ance for employees covers both the 
costs of health care and cash benefits 
and Portugal where accidents at work 
are excluded, as noted. 
Health care and 
sickness benefits 
It is accepted in most Member States 
that the self-employed need to be 
covered against the costs of health 
care as much as employees. This is 
achieved either through a national 
health service open to all residents or 
through compulsory health insur­
ance. Germany, however, is an ex­
ception in that there is a mix of 
compulsory and voluntary public and 
private health insurance which in 
combination covers almost every­
one. 
In most Member States, cover for 
health costs is available to the self-
employed on the same basis as to 
employees. There are three excep­
tions — the Netherlands, where the 
self-employed are expected to take 
out private health insurance, but 
where exceptional medical costs are 
covered by the universal insurance 
scheme for all residents, and in 
Belgium and France, where small 
risks (typically visits to the doctor) 
are excluded for the self-employed. 
(In Belgium, there is a State subsi­
dised voluntary small risks insurance 
- 125-
Chapter 6 - Social protection and the self-employed 
scheme but it is not used much, 
especially by the younger self-
employed.) A change in policy to 
bring provision for the self-employed 
into line with that for employees is 
under discussion in all three coun­
tries. 
Policy on sickness benefit is subject 
to more variation. In four countries 
— France, Ireland, Italy and the 
Netherlands — the self-employed 
are excluded from the social insur­
ance schemes for this benefit. In 
Greece, only the self-employed 
covered by the general employee 
scheme (IKA) are eligible for sick­
ness benefit, while in Austria, only 
voluntary insurance cover is avail­
able. Elsewhere, the self-employed 
to a large extent are covered for short-
term incapacity by compulsory so­
cial insurance schemes. In Germany, 
farmers who are ill receive an opera­
ting allowance to cover the cost of 
replacement labour, while other self-
employed covered by pubhc health 
insurance are entitled to earnings-
related benefits on the same basis as 
employees. In Spain, Finland and 
Luxembourg, sickness benefits are 
also payable from social health 
insurance and in Denmark, Belgium, 
Portugal, Sweden and the UK, under 
separate schemes (the introduction in 
the UK in 1995 of Incapacity 
Benefits which cover both invalidity 
and sickness does not alter the 
position of the self-employed). In 
Portugal and Spain, the self-
employed may opt out of their right 
to sickness benefit. In Portugal, those 
paying lower rate contributions lose 
entitlement to sickness benefit, while 
in Spain, entitlement may be re­
nounced for three years at a time in 
return for reduced contributions. There are differences, however, in 
the rights of employees and self-
employed —though one has recently 
been removed in Luxembourg by the 
replacement of a low flat-rate benefit 
by one related to income. The most 
important difference concerns wait­
ing time for benefit, which is typi­
cally three days or less for 
employees, but 10 days for the self-
employed in Greece in the IKA 
scheme, 15 days in Spain, 3 weeks in 
Denmark, 60 days in Portugal and 
3 months in Luxembourg and 
Belgium. In Denmark, voluntary 
insurance is available to cover this 
waiting period, but only 20% of the 
self-employed paid the extra amount 
for this in 1991. In the UK and 
Sweden (except in the latter case 
where they have opted for 33 or 99 
days in return for lower contribu­
tions), however, waiting time is the 
same for the self-employed as for 
employees (typically three days in 
the UK, one day in Sweden). In addi­
tion, in Portugal, the maximum 
period of benefit is 365 days for the 
self-employed as against 1095 days 
(three years) for employees. 
Maternity leave 
In all Member States except Ireland, 
where benefit is confined to em­
ployees, self-employed women are 
entitled to maternity benefits, though 
there are a number of marked dif­
ferences as compared with the posi­
tion of employees. 
In Finland, Sweden, Portugal and 
Spain, self-employed women have 
for some time been subject to the 
same qualifying conditions for 
benefit, the same rate and the same period of payment as employees (see 
Chapter 7 for details), while the same 
has applied in Luxembourg since 
1994. 
In four other countries, the period of 
maternity leave for self-employed 
women is the same as for employees, 
but there are differences in other 
regulations. In Denmark, the rate of 
benefit, and the period over which it 
is paid (28 weeks), is the same for 
both, but the qualifying period for 
benefit is twice as long for the self-
employed (6 months) as for em­
ployees (13 weeks). In Germany, 
where maternity benefits are in­
cluded in health insurance for the 
self-employed women who are 
covered, the qualifying conditions 
for benefit are the same as for em­
ployees, as is the leave entitlement. 
However, whereas benefits for 
women employees are equal to the 
net wage, up to a maximum amount, 
and employers normally make up the 
shortfall if this is less than normal 
pay, self-employed women receive 
80% of previous gross earnings up to 
a maximum of previous net earnings, 
with no employer to make up the 
difference. A small (and unknown) 
proportion of the self-employed are 
not covered by health insurance. In 
Italy, where qualifying conditions 
and length of leave are the same for 
employees and self-employed, the 
rate of benefit for the former is 80% 
of previous earnings, but for most of 
the latter is 80% of the minimum 
contractual wage of blue collar 
workers in their sector of activity, 
though in the liberal professions, it is 
one twelfth of their declared annual 
earnings (averaged over the last two 
years). For some self-employed 
women, freelance workers and some 
-126-
Chapter $ - Social protection and the self-employed 
belonging to newer professions, 
however, there is no provision. In 
Austria, there are separate maternity 
schemes for employees and self-
employed women. While employees 
receive full pay for 16 weeks (the 
costs shared between employers and 
social insurance), the self-employed 
are entitled to replacement labour for 
up to 16 weeks or if such a person 
cannot be provided, a flat-rate benefit 
is paid instead. 
In the UK, the arrangements are com­
plicated and changes were intro­
duced in 1994 to meet Community 
requirements (the Pregnant Workers 
Directive, 92/85/EEC) which apply 
only to employees. The period of 
benefit remains unchanged and is the 
same for both employees and self-
employed earning enough to contrib­
ute to social insurance. After the 
changes, all women employees who 
have worked for the same employer 
for at least six months are entitled 
to six weeks Statutory Maternity 
Pay (SMP) at 90% of earnings and 
12 weeks at a new higher flat-rate. 
Self-employed women and other em­
ployees receive a maternity allow­
ance, provided they satisfy the 
contribution conditions (six months' 
contributions in the past 66 weeks), 
but whereas this is paid out at the 
new, higher SMP flat-rate to em­
ployees, the rate for the self-
employed has remained unchanged 
(at 15% less). While the position of 
all employees has been improved, 
therefore, the gap between these and 
the self-employed has widened. 
In the four remaining countries, a 
variety of schemes are in place. In the 
Netherlands, while the main features 
and entitlements are the same for both employees and the self-
employed, the former are compul-
sorily covered by social insurance, 
while for the latter membership of 
pubhc or private insurance schemes 
is voluntary. A1992 study found that 
only 1% of self-employed women 
and wives working unpaid under 40 
years old had taken out such insur­
ance. The majority were not even 
aware that it existed. In Greece, self-
employed women are entitled to a 
benefit only if they are members of 
the general IKA scheme, with the 
same qualifying conditions as em­
ployees and the same level of benefit 
but without any topping up as in the 
case of employees covered by the 
OAED scheme. Women in other 
schemes for the self-employed may 
receive lump sum payments of va­
rying amounts, but not sufficient to 
meet the costs of maternity leave, and 
in some cases nothing at all. In 
Belgium, where the qualifying 
period for benefit is the same for 
employees and self-employed, while 
women employees are entitled to 
15 weeks leave and to benefits re­
lated to earnings, self-employed 
women receive only a low lump sum 
payment and are expected to stop 
work for just 3 weeks. 
In France, the scheme for self-
employed women has recently been 
reviewed and is, therefore, of special 
interest. Women employees who 
qualify are entitled to 16 weeks leave 
at 84% of wages (up to a maximum 
amount), with extensions in specific 
circumstances. Up to 1995, self-
employed women were entitled to a 
lump sum payment (of one week's 
mimmum wage) as partial compen­
sation for reduced activity. Unlike 
employees, they were not required to The new long-term 
care Insurance 
scheme in Germany 
Long-term care insurance, to 
cover cafe needs arising dur­
ing infirmity or disability, in­
troduced in January 1994, 
became effective in 1995, 
Cover for long-term care is 
compulsory not only for em­
ployees in the State health in­
surance scheme but also for 
the self-employed in private 
schemes. The great majority 
of the self-employed are, 
therefore, included in the new 
provision (see Chapter 7 for 
details of this). 
stop work, though to encourage them 
to do so, an additional payment, at the 
level of the mimmum wage, could be 
made to cover replacement labour for 
up to 28 days, extended in some 
circumstances. Advice from the 
medical profession favoured 
measures to encourage self-
employed women to stop work for a 
longer period than the average of 15 
days actually taken. Under the new 
scheme the lump sum to compensate 
for reduced activity has been 
doubled, and a new weekly benefit is 
also payable, but only on condition 
the woman stops working. This is at 
a flat-rate (rather than earnings-
related as for employees) with the 
aim of favouring low earners and will 
normally only last for 30 days, 
though where there are medical rea­
sons it can last for twice or three 
times as long. Even at its longest, 
however, it is less than the mimmum 
period for employees — 16 weeks. 
127-
Chapter $-social protection end the self-employed 
Child allowances 
and the 
self-employed 
Belgium: there has been a 
gradual move since 1976 
towards equal treatment 
of employees and self-
employed, first by giving 
the self-employed entitle­
ment to allowances, but at a 
lower rate, and then by stages 
increasing this to that ap­
plying to employees. A dif­
ference now exists only in 
respect of the first child, the 
self*employed receiving a 
much lower amount, though 
changes to rectify this are 
now under consideration. 
Italy: the great majority ofthe 
self-employed are excluded 
from the general scheme, 
though allowances are 
payable in some cases to 
farmers and to the self-em­
ployed who have retired. 
Greece: the self-employed 
are not included in the general 
scheme, but under a separate 
scheme can qualify for an 
allowance for a third child 
and for assistance to mothers 
who have four or more child­
ren 
In summary, working women around 
the time of childbirth have three 
needs — sufficient time off to protect 
the health of mother and baby, 
sufficient replacement of lost income 
and the sufficient protection of their 
job. For employees, these needs in 
large measure have been recognised 
and catered for in all Member States, 
for self-employed women this is 
much less the case. Moreover, it would seem that there has been little 
research on the impact of child-
bearing on women who are self-
employed and on their business and 
only limited policy discussion (ex­
cept in France) on the most appropri­
ate way in which the position can be 
improved. 
Unemployment benefits 
In 11 of the 15 Member States, the 
self-employed are not covered by so­
cial insurance against unemployment 
(though in Ireland and the UK there 
are schemes for the few self-
employed fishermen) partly because 
of the perceived difficulties of pro­
viding cover in practice. These relate, 
in particular, to problems of identif­
ying when someone becomes ge­
nuinely unemployed, in the sense of 
the business having failed rather than 
trading having ceased voluntarily or 
if the business continues to exist, 
whether the lack of current contracts 
should be regarded as tantamount to 
unemployment and, if so, for how 
long a period. The latter is especially 
difficult in cases of seasonal work. 
As indicated below, in many coun­
tries where social insurance against 
unemployment is not available to the 
self-employed, these are ehgible for 
social assistance in certain cases. 
In the four Member States in 
which protection is available — 
Luxembourg, Denmark, Sweden and 
Finland — these problems have had 
to be faced and somehow resolved. 
In Luxembourg, the scheme for the 
self-employed was introduced in 
1976 and like the parallel scheme for employees is financed through taxes. 
To qualify, contributions have to 
have been paid to a pension fund 
for at least 5 years (reduced in 
exceptional circumstances to 12 
months). There is no provision for 
temporary unemployment in an 
existing business. The person con­
cerned must have ceased trading be­
cause of economic or financial 
difficulties as well as satisfying all 
the normal rules for receipt of unem­
ployment benefit, the object being to 
ensure that benefit is not paid to those 
who are voluntarily unemployed. 
In Denmark (where the scheme also 
dates from 1976), there were initial 
regulations to counter voluntary un­
employment, but those were with­
drawn to avoid putting pressure on 
claimants to persevere in a business 
which was not economically viable. 
Equally, to avoid propping up un­
economic businesses, a narrow de­
finition of unemployment has been 
adopted where businesses remain in 
existence. 
Provision for unemployment in 
Denmark is through unemployment 
insurance funds, membership of 
which is voluntary, financed in the 
case of the self-employed by their 
contributions with a subsidy from the 
State (as for employees). To receive 
benefit, the person concerned must 
have paid contributions to a fund for 
at least 12 months, in the same way 
as employees, or undergone a period 
of relevant training and must nor­
mally have ceased trading. Since 
1990, temporary interruptions to 
businesses have been covered, such 
as when there has been a fire or flood 
or because of bad weather. Benefit is 
then payable for 13 weeks only, com-
-128 
Chapter 6 - Social protection and the self-employed 
pared with a possible 30 months 
when trading has ceased completely 
(or for an out-of-work employee). A 
more recent reform (1994) also en­
ables someone who is combining 
employment and self-employment to 
qualify for benefit, so filling an awk­
ward gap in the provisions. By 1991, 
around half the self-employed had 
joined an unemployment fund. 
In Sweden, where the scheme was 
established in the 1960s and where 
there are also voluntary unemploy­
ment insurance funds financed as in 
Denmark, some 140,000 self-
employed are members of a fund. To 
qualify for benefit, the person con­
cerned must have paid contributions 
for 24 months (as against 12 months 
for an employee), comply with rules 
on seeking employment and, in most 
cases, to have ceased trading, though 
there is some provision for payment 
of benefit during temporary interrup­
tions to business. 
In Finland, unemployment insurance 
funds are confined to employees, but 
a separate scheme provides flat-rate 
benefits to the self-employed as well 
as new entrants to the labour market. 
The estabhshment of an insurance 
fund for the self-employed which 
would pay earnings-related benefits 
as in the case of employees is under 
active consideration. 
Child allowances 
Child allowances are paid to all or 
nearly all families with dependent 
children in the Union. Though the 
self-employed were initially often 
excluded, in all but three Member 
States they now receive payment in the same way and at the same rate as 
families of employees. In one of 
these three countries — Belgium — 
however, most of the differences 
have been eliminated and a policy for 
full equahty of treatment is under 
consideration. In the other two, 
Greece and Italy (where only farmers 
receive allowances), however, there 
is little pubhc debate on improving 
the position ofthe self-employed (see 
Box). 
Social assistance 
The self-employed whose income 
falls below a basic level have 
recourse to social assistance in most 
Member States, the main exceptions 
being Greece and Portugal where 
there are no national or local provi­
sions for support. Since provision for 
unemployment and short-term inca­
pacity due to illness are the two most 
common gaps in social insurance for 
the self-employed, their access to so­
cial assistance in these two circum­
stances is of special interest. 
Unemployment 
In 11 Member States, self-employed 
people whose businesses fail are 
eligible for social assistance if they 
have insufficient means and if they 
comply with the conditions attached 
to unemployment compensation, 
while in Spain and Italy, they may be 
able to attain income support from 
the regions. 
If the self-employed, however, ex­
perience a temporary interruption to 
earnings from an ongoing business which reduces income below the 
social assistance level or if their 
earnings normally are lower then 
this, there is no certainty that they 
will receive social assistance The po­
sition is even less clear in Spain and 
Italy, where regional schemes have 
their own rules or in Sweden, where 
assistance is locally administered 
(though it appears that the self-
employed would not normally expect 
to receive assistance in these circum­
stances). In Finland, on the other 
hand, where social assistance is ad­
ministered by the municipalities, 
which have considerable discretion, 
support is available for the self-
employed during periods of low 
earnings or interruptions to trade, 
each case being considered on its 
merits, current income being the 
most important criterion (though in­
come in the previous year may be 
also taken into account). Only in the 
recent economic recession has the 
treatment of the self-employed 
emerged as an issue for social assist­
ance. 
In Belgium, Ireland, Luxembourg 
and the Netherlands, assistance for 
short-term unemployment is also 
usually available if current income 
falls below a mimmum level, though 
in Belgium, assistance (Minimex) 
cannot be paid to support a failing 
business and in the Netherlands, as­
sistance in some cases is repayable. 
In Denmark, social assistance will 
not usually be available unless there 
is a clear-cut reason for interruption 
of earnings — such as in the case of 
a fisherman whose boat is being re­
paired. If businesses suffer a short-
term set back or are subject to 
cyclical or structural falls in income, 
-129-
Chapter 6- Social protection and the self-employed 
no benefit will be paid until trading 
has ceased altogether. 
In France, the self-employed are 
eligible for Revenu Minimum 
d'Insertion (RMI) — the principal 
social assistance for the unemployed 
— as long as they do not employ 
people. Assessment is based not on 
current income, but for those in agri­
culture, on the area cultivated and, 
for others, on past business turnover. 
The RMI is, therefore, not designed 
to meet short-term interruptions in 
earnings. 
In the UK, no assistance is provided 
where the interruption to earnings is 
regarded as part ofthe normal pattern 
of trade — where business is seaso­
nal, based on a succession of short-
term contracts or subject to a 
temporary downturn. Those whose 
work is interrupted by external fac­
tors, such as bad weather, could qual­
ify for benefit, though the means test 
will usually be based on earnings for 
the last 12 months, which tends to 
exclude many self-employed from 
receiving benefit assistance to cover 
short-term needs. 
In Austria, social assistance is 
payable only to people without any 
income or assets, so that the self-
employed experiencing short-term 
unemployment in an existing busi­
ness do not qualify for support. 
Short-term incapacity 
for work 
As indicated above, there are many 
gaps in social insurance protection 
against short-term incapacity for 
work, with no provision at all in some Member States and long waiting 
periods in others. There are also vari­
ations between countries in social 
assistance entitlement in these cir­
cumstances. Again the position in 
Italy and Spain where assistance is 
regional, is both different from else­
where and unclear. 
In France, the self-employed are not 
ehgible for social assistance if they 
are unable to work for short periods, 
but are expected to take out private 
insurance to cover this risk. In 
Austria, the position is similar. 
In Belgium, Denmark, Luxembourg, 
Sweden" and the Netherlands, how­
ever, during any waiting period for 
social insurance for incapacity for 
work, social assistance, based on an 
assessment of current income, is 
payable. This is also the case in 
Germany, where not all the self-
employed are entitled to sickness 
benefit. In Finland, if the self-
employed have no income then they 
can claim a mimmum daily sickness 
allowance, supplemented possibly 
by social assistance if, for example, 
there are extra expenses associated 
with the illness. 
In Ireland, there is little information 
on how claims for social assistance 
by the self-employed are treated. Ac­
cording to a 1991 report, this is 
'something of a grey area, with no 
specific cover and no certainty about 
entitlements'. In 1994, The National 
Pensions Board recommended a new 
means-tested allowance for the self-
employed both for short-term inca­
pacity and longer-term invahdity and 
this is at present under government 
consideration. In the UK, the person claiming assist­
ance has to demonstrate not only that 
their current income is below a mini­
mum level, but that there is a break 
in the normal pattern of earnings as a 
result of incapacity, which, in prac­
tise, means that they have worked 
less than 16 hours a week, usually 
averaged over the past year, and that 
the business is no longer a going con­
cern. This effectively excludes the 
self-employed from receiving assist­
ance for short periods of incapacity. 
Unpaid family 
workers 
Unpaid family workers include 
wives, children and other rela­
tives of the self-employed who re­
ceive no pay for their work as such 
but may be supported by the person 
concerned. 
In 1994, there were 3.3 million un­
paid family workers in the Union, 
excluding the new Member States, 
down from 3.7 million in 1990 and 
4.4 million in 1986. Their relative 
numbers, however, are much higher 
in the Southern Member States than 
in the North of the Union. Well over 
half (56%) in 1994 lived in just three 
Member States — Greece, Spain and 
Italy — and 43% worked in agricul­
ture. Some 70% in the Union as a 
whole were women, though in Ire­
land (53%) and most Southern Mem­
ber States (the exception is Greece) 
as proportion was lower (around 
60%). 
These people are covered by systems 
of social protection, though in a more 
limited way than other workers: 
130 
Chapter 6 - Social protection and the self-employed 
their health care costs are 
covered in countries with a 
national health service — 
Denmark, Finland, Sweden, 
Italy, Spain, Portugal, Ireland 
and the UK, while elsewhere 
wives will be covered through 
their husband's health insurance, 
and possibly other family mem­
bers may similarly be covered; 
they are entitled to pensions, sur­
vivors and invalidity benefit 
(and, in some areas, sickness 
benefits) in countries where 
these cover all residents — 
Denmark, Netherlands, Finland 
and Sweden. Typically payments 
will be at a minimum level, 
though in Finland, they are 
eligible to be members of the 
self-employed schemes; 
in the UK for invalidity there is a 
Severe Disablement Allowance 
which is non-contributory and 
paid at a lower rate than the 
main Incapacity Benefit; 
in Luxembourg and Germany 
they may qualify for occupa­
tional injury benefit (though 
coverage is not always compul­
sory); 
in Luxembourg and Finland, 
they are entitled to maternity 
benefits (which are paid through 
a general community scheme), 
as well as in Denmark and 
France, if they are unpaid work­
ing wives; 
except in Greece and Portugal, 
they are eligible for social assist­
ance in the same way as other 
residents, though in the case of wives, only if the joint income of 
herself and her husband fell 
below a minimum level. 
In other cases, unpaid working wives 
have to rely on derived rights and no 
benefits are available for the other 
unpaid workers (though see Box for 
two recent developments in France 
and Italy). 
The role of 
private insurance 
If the self-employed are not 
covered by State schemes then 
their only recourse is private insur­
ance if they wish to be protected 
against certain risks. Indeed, it is 
sometimes argued that lack of State 
protection is not of great conse­
quence because the self-employed 
can always take out private insur­
ance. Unfortunately, discussion of 
this issue is handicapped by lack of 
data on the numbers insured, the cost 
of premiums, the level of benefits, as 
well as an extent of the tax relief. At 
most, therefore, it is only possible to 
make general comments on the 
issues involved. 
In the first place, not all social security 
risks can be covered by private insur­
ance in practice. This is particularly so 
for unemployment, where even in the 
11 Member States in which there is no 
social insurance cover for the self-em­
ployed and/or where social assistance 
is not always available, few if any pri­
vate insurance schemes have de­
veloped to fill the gap. Similarly, for 
maternity, where again social insur­
ance provision for the self-employed is 
often Umited or non-existent, private Policy 
developments in 
respect of unpaid 
family workers in 
France and Italy 
France: under legislation 
introduced in 1994, the 
conjoint collaborateur of a 
self-employed craftsman or 
worker in commerce, who 
had part-time job with an em­
ployer other than her hus­
band, could make voluntary 
contributions to a retirement 
pension fund in order to top 
up her pension entitlement 
under the Régime général 
(acquired through her part-
time job). 
Italy: in 1995, the Constitu­
tional Court ruled that 'work 
carried out within the family, 
given its social and also econ­
omic value, may be included 
within the scope of Art. 35 of 
the Constitution which guar­
antees protection to work in 
all its forms.' This ruling has 
been acclaimed as a formal 
recognition of housewives as 
workers, so providing a legal 
basis for the claims advanced 
by housewives associations 
for social insurance benefits. 
It may equally be regarded as 
offering the potential for im­
proving the position of unpaid 
working wives. 
insurance has generally not developed 
to provide cover except where it forms 
part of private health and sickness in­
surance, as in Germany and the 
Netherlands. 
In other areas where social protection 
is lacking, however, private insurance 
- 131 
Chapter 6- Social protection and the self-employed 
Self-employment and social contributions 
A common problem in most Member States, since the tax and social 
contribution liabilities are generally less, is identifying those people who 
are genuinely self-employed and distinguishing them from those who in 
effect are employees. The problem tends to be particularly prevalent in 
countries where employers' contributions are relatively high and where 
there is a correspondingly strong incentive to avoid paying these by 
contracting out work to 'independent' workers rather than employing 
(often the same) people in-house. While this is a means effectively of 
reducing labour costs to the employer and increasing take-home pay to the 
worker, at the same time it restricts entitlement to social protection or in 
some cases excludes the people concerned from social insurance benefits 
completely. 
France: a concern of pohcy has been with people who falsely declare 
themselves to be self-employed and who pay lower contributions accord­
ingly when in reahty they are working for a single employer. Legislation 
was introduced in 1994 to tackle this problem. 
Germany: a major issue for policy concerns a new group of self-employed 
who in practice are really employees without a formal contract of employ­
ment. Because self-employed occupations are defined by law and these 
people are not covered by existing definitions, they escape paying social 
contributions entirely. In a number of the Lander, steps are being taken to 
address the problem. 
Italy: measures were introduced in 1994 to deal with the problem of 
self-employed working in fringe activities who avoid paying contributions. 
schemes have been created to cover 
health care costs, loss of earnings due 
to short-term and longer-term incapac­
ity for work, pensions for old-age and 
pensions for survivors. 
What is not known in sufficient 
detail, however,.is: 
the extent of coverage and 
whether private insurance pro­
vides the same degree of protec­
tion as the equivalent State 
schemes; 
the comparative cost of cover in 
relation to the contributions to State schemes which the self-
employed would otherwise pay; 
the effect of tax concessions 
intended to reduce the costs of 
private provision, which are 
available in varying degrees in 
most Member States, and the ex­
tent to which they offset the dis­
advantages of being excluded 
from States schemes (especially 
in the case of low earners who 
pay little tax) and how far they 
are taken up (since to qualify, 
significant sums may have to be 
paid in insurance premiums). For self-employed with high earn­
ings, private insurance may be the 
preferred option since it enables 
protection to be tailored to specific 
individual and/or professional needs. 
It cannot necessarly be assumed, 
however, that private insurance is al­
ways a satisfactory alternative to so­
cial insurance for those with lower or 
fluctuating incomes. 
The level of 
contributions 
In a number of countries — France, 
Belgium, Italy, Portugal and 
Spain, in particular — contributions 
paid by the self-employed have been 
increased over recent years to cover 
deficits in self-employed schemes or 
to provide higher or more extensive 
benefits. In Greece, rates of contribu­
tion were standardised for new em­
ployees and the self-employed in 
1992 and aligned with the general 
scheme for employees, IKA. 
On the other hand, in several Mem­
ber States the self-employed can opt 
to pay lower contributions and re­
ceive lower, later or fewer benefits. 
While some of these arrangements 
are long standing, others have been 
introduced in the past few years. In 
Portugal, opting for the lower con­
tribution rate means forgoing sick­
ness and occupational illness 
benefits and child allowances. Simi­
larly in Spain, the self-employed can 
choose to pay lower contributions 
and forgo sickness benefits for three 
years at a time, as well as lower pen­
sion contributions (and a lower pen­
sion), which is also the case in 
Germany. In Sweden, they can opt to 
132 
Chapter $ - Social protection and the self-employed 
wait 33 or 99 days before receiving 
certain benefits in return for lower 
contributions. In addition, those on 
very low earnings are excluded from 
paying contributions at all, in Ger­
many and Ireland though also from 
entitlement to benefit. This is also the 
case in the UK, though here they can 
pay contributions on a voluntary 
basis and receive entitlement to all 
social insurance benefits except un­
employment. In most Member States, governments 
have sought progressively to improve 
the social protection coverage of the 
self-employed and considerable ad­
vances have been made in the past 
20 years or so. As indicated here, how­
ever, there are still gaps in many parts 
of the Union and a number of issues 
which require more information, more 
detailed examination and further de­
bate. 
The burden of paying contributions 
can also be alleviated, and benefits 
improved in other ways. In Italy and 
France, a number of measures have 
been taken to upgrade schemes for 
the self-employed, with the aid of 
State subsidies and/or the transfer of 
resources from employee schemes. 
In Germany and France, pension 
schemes are subsidised for farmers 
and in Finland for the self-employed 
generally. In Luxembourg, the State 
recently took over the costs of paying 
maternity benefits and extended 
these to the self-employed. 
Information on the effect of these 
various provisions, however, is 
limited. Little is known about which 
groups among the self-employed 
take up social insurance when this is 
voluntary or opt to pay lower con­
tributions and whether, in particular, 
they are typically high earners, who 
prefer to make their own arrange­
ments, or those with low earnings 
who cannot afford alternative private 
insurance and have little savings to 
fall back on. Without such basic in­
formation it is difficult for govern­
ments to formulate effective pohcies 
in this area. 
133 
Chapter 6 - Social protection and the self-employed 
134 
Chapter 7- Social protection and caring responsibilities 
Chapter 7 Social protection 
and caring responsibilities 
Many key social protection 
rights are acquired and main­
tained only through regular paid em­
ployment. Caring for a child or 
someone who is disabled or elderly 
and infirm, usually a relative, may 
well mean that the person concerned 
has either to give up their job for a 
time or work less. Where social pro­
tection schemes are contributory, this 
adversely affects entitlement to 
benefit. Where benefits are earnings-
related, working less or damaging 
career prospects by stopping work 
temporarily will clearly reduce the 
amount receivable. This has tradi­
tionally typically affected women 
more than men and, despite changing 
attitudes and policies, continues to do 
so. 
To generalise about 15 Member 
States with diverse cultural features, 
family characteristics and social pro­
tection arrangements is hazardous. A 
common assumption in most parts of 
the Union in the past was that the 
responsibility for looking after child­
ren and adults in need of special care, 
lay with women and that, for them, 
paid employment had a secondary 
role. The social security system was 
developed on the basis of this as­
sumption. For their social protection 
needs (except where benefits were 
based on residency), women were expected to rely on their husbands for 
financial support during both their 
working and retirement years. 
Should her husband die first, the wife 
had rights to a widow's pension, and 
support for dependent children, 
derived from her husband's 
work/contribution and employment 
record. Where men had to undertake 
caring responsibilities — as lone 
fathers or when caring for disabled or 
infirm wives — social protection was 
often deficient. 
Social change has undermined the 
basis of these typical arrangements: 
• the role of women, in the home, 
in society and in the labour force 
has undergone marked changes 
since European social protection 
systems were established in their 
post-war form, changes which 
have varied in scale but which 
have been universal; 
• the incidence of divorce has in­
creased and the proportion of 
one parent families has grown, 
while cohabitation has become 
more prevalent; 
• the relative number of elderly 
and infirm has grown as more 
people live into old age, so 
bringing the issue of their care into prominence, while there 
is greater emphasis on the right 
of disabled people to non-
institutional care. 
These changes have led to a reassess­
ment of the appropriateness of a num­
ber of features of social protection 
systems, particularly the extensive re­
liance on derived rights. In recent 
years, there has been greater recogni­
tion of the importance of caring, both 
for children and adults, not only to the 
individuals involved but to the nation 
— and economy — as a whole. At the 
same time, there has been a general 
aim of increasing equahty of men and 
women in society, including introduc­
ing means to help reconcile family and 
professional responsibilities. These 
measures include active pohcies to 
safeguard the social protection rights 
of carers. 
In broad terms, there have been two 
main approaches. The first focuses 
on removing obstacles to employ­
ment by providing social support in 
the form of free or subsidised per­
sonal social services such as child 
care facilities and home care for dis­
abled and elderly people. The second 
approach is to provide social benefits 
to family carers and/or to safeguard 
their social protection rights during 
periods when they are not employed 
135-
Chapter 7- Social protection and caring responsibilities 
Table 12 — Maternity benefits (1 January 1995) 
Austria 
Belgium 
Denmark 
Finland 
France 
Germany 
Greece 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
Spain 
Sweden 
UK % earnings 
100 
110/117 
73 
113 
100 
100 
93 
86 
111 
100 
124 
100 
80/90 
25/90 duration 
16 weeks 
15 weeks 
28 weeks 
263 days 
16/26 weeks 
14 weeks 
16 weeks 
14 weeks 
5 months 
16 weeks 
16 weeks 
98 days 
16 weeks 
up to 18 months 
18 weeks 
Notes: In Belgium benefit of117% is paid for the first 30 days and 110% thereafter. 
In France, the duration is 16 weeks in the case of the first two children and 
26 weeks for further children. In Sweden, the maternity period forms part of 
the extended parental leave period (see Box 1). In the UK, benefit of 90% 
may be paid for the first 6 weeks and a flat rate equivalent of around 25% of 
women's average earnings thereafter. In Finland, rates are based on a daily 
allowance equal to sickness insurance. A minimum (64.95 FMK — around 
111/2ECU) 
is paid to those who have no income, while those whose annual income is 
less than 37,930 FMK (around 6,800 ECU) are paid the minimum plus 30% 
of earnings. This addition increases to 68% for annual earnings up to 
114,290 FMK (20,450 ECU), 40% up to 190,480 FMK (34,100 ECU) and 
25% over 190,480. 
or are working less. These two ap­
proaches are, of course, not mutually 
exclusive and, there is increasing em­
phasis on the need to give people a 
real choice between being in paid 
employment or caring for someone 
and on ways of combining the two. 
The concern of this chapter is not 
with the social services which exist in the Member States to provide 
social support, important though 
these are, but with the provisions 
within systems of social protection 
relating to periods off work for car­
ing. In particular, it examines the im­
plications for entitlement to both 
short-term and long-term benefits of 
leaving a job to look after children or 
caring for elderly or disabled people, the difficulties arising from attempts 
to combine caring and part-time 
work and the consequences for the 
pension rights of carers of divorce or 
cohabitation breakdown. 
Social protection 
during periods 
of caring 
Early child care 
Each year there are over 4 million 
live births in the European Union. 
Where the women concerned are in 
work, they will in most cases be en­
titled to maternity benefits in the 
weeks before and after the birth and 
their other social protection rights 
will be preserved. Some women not 
in paid employment will neverthe­
less, receive benefit either because 
they still satisfy the eligibility condi­
tions or because there is a general 
community scheme which covers 
them (see Table 12 for details of en­
titlement for employees). General 
community schemes may pay lower 
benefits and, as noted in Chapter 6, 
benefits for self-employed women 
may be lower and leave shorter. A 
minority of women will receive noth­
ing at all. 
The need for care arrangements for 
small children, however, extends 
well beyond the period of basic 
maternity leave, which, in the past, 
meant that there were only two op­
tions for parents: either one of them, 
usually the mother, would stop work­
ing to care for the child or they would 
find someone else to do this. This 
is still the position in Ireland and 
136-
Chapter 7 - Social protection and caring responsibilities 
Luxembourg (where leave is limited 
to 14 and 16 weeks, respectively, and 
in Ireland even this is not open to 
self-employed women). But in other 
Member States, it may be possible 
under a variety of auspices to take 
extended leave, the aim being to 
allow women more easily to recon­
cile work and family life, to protect 
their working careers and to enable 
men to play a greater role in early 
child care. In most countries, how­
ever, these provisions apply only to 
employees. 
In 8 Member States, extended leave 
with benefits is available, usually 
combined with job protection 
(which, depending on the country, 
may mean a guarantee of reinstate­
ment in the previous job or one of 
equivalent status or merely the 
pledge of a job with the former em­
ployer). This may or may not include 
the safeguarding of seniority rights 
and/or rights in company pension, 
health care and other schemes. In 
some countries, job protection typi­
cally applies only to those who work 
for companies above a certain size, in 
others, it does not cover the entire 
period of possible leave. 
In these Members States, future 
benefit rights are safeguarded and the 
right to leave and benefit are avail­
able to either parent, though in some 
cases the mother is given first choice. 
The great majority of those taking 
advantage of these schemes continue 
to be women. 
In Italy, maternity benefit is payable 
only to the mother for two months 
before the birth and three months 
after at 80% of previous earnings 
(though if she dies, the father can claim the benefits for the post-birth 
period). A further three months leave 
at 30% of earnings can, in addition, 
be taken by either parent. Jobs are 
protected for up to one year after the 
birth of the child. Moreover, either 
parent is able to take paid leave if a 
child under three years fall ill. In 
Denmark, maternity benefit (at a 
flat-rate of 80% of unemployment 
benefit) is paid for 28 weeks, after 
which, since 1994, each parent is 
entitled to six months additional 
leave and a further six months if the 
employer agrees. Jobs are protected 
during this period. This leave can 
also be taken to look after children 
when they are older. Parents also 
have a right to take time off for the 
first day of a child's illness. 
In Belgium, after 15 weeks of mater­
nity benefit, under the Career Inter­
ruption scheme, parents are entitled 
to an additional 3 to 12 months off 
work, with their jobs being protected, 
though career interruption during a 
person's working life may not exceed 
60 months. There is a flat-rate 
benefit, payable during each period 
of around 300 ECU a month (around 
20% of the average industrial wage 
in 1995), which is paid at a higher 
rate if the interruption is for a second 
or subsequent child. An added 
benefit is paid in the Flemish region 
if the child is under three. 
In Finland maternity benefit is 
payable at the same rate as sickness 
benefit, for 263 days (105 days as a 
maternity allowance, part of which 
can be transferred to the father, fol­
lowed by 158 days parental allow­
ance, which can be taken by either 
parent). After this, a further 26 weeks 
parental leave can be taken (at 68% of earnings), followed by child care 
leave until the child is 3 years old, 
with benefits payable at a low flat-
rate (under 20% of average earnings) 
with supplements where there are 
two or more children under 7 years, 
not being cared for by the pubhc child 
care service, plus an income-related 
addition. Where both parents are em­
ployed, one or the other may stay at 
home on full pay for up to 4 days a 
year to look after a sick child under 
10 years of age, while a special care 
allowance is also payable where care 
is needed by a child under 16 years 
who is seriously ill. 
In Sweden maternity leave is avail­
able for up to 18 months, most of it 
open to either parent, and benefits are 
payable to either parent during the 
first year (at 90% of earnings for one 
month and 80% for the rest of the 
time or at a minimum flat-rate for 
those who do not qualify — though 
from January 1996, these rates will 
be reduced to 85% and 25%, respec­
tively). Leave can also be taken for 
half or quarter time, with benefits 
adjusted accordingly. Benefits are 
also payable for up to 60 days a year 
for the care of a sick child under 12 
years. 
In Germany, after 14 weeks of benefit, 
either parent can take up to three years 
child care leave, with the job being 
protected for the whole period, with a 
flat-rate allowance (of around 300 
ECU a month) for 6 months and for a 
further 18 months, if income is below 
a certain level. Similarly in Austria, 
after 14 weeks of maternity benefit, 
leave is available for either parent for 
a period of 2 years, with a flat-rate 
allowance payable (at some 15 ECU a 
day or 20 ECU for single parents) and 
137-
Chapter 7- Social protection and caring responsibilities 
Countries providing for unpaid leave 
for early child care 
UK: in addition to 14 weeks maternity leave available to all female employees, 
those with at least two years' service with the same employer (five years for 
part-time workers) are entitled to leave of up to 40 weeks in total. Statutory 
Maternity Pay or Maternity Allowance is payable for up to 18 weeks to those 
qualifying. Employers may provide enhanced maternity rights on a voluntary 
contractual basis. 
Portugal: after 98 days of benefit, between 6 and 24 months unpaid leave is allowed 
if employer and employee agree; the job is protected. 
Greece: maternity benefits last for 103 days and social insurance rights are 
protected. Where there is a contract of employment of at least 12 months, unpaid 
leave can be taken for up to 3 months by each parent, 6 months where the parent is 
divorced or widowed. In all cases, the job is protected. 
Spain: after 16 weeks of benefit, there can be up to 3 years unpaid leave to care for 
a newborn child, taken by either the mother or the father, Jobs are protected for the 
first year but not beyond. 
Netherlands: after 16 weeks maternity benefits, a parent (male or female) who has 
worked at least one year with the same employer can take unpaid part-time leave, 
working half time for up to 6 months. Full-time leave for 3 months and one day a 
week for the subsequent 9 months is also possible under collective agreements. 
Some employers pay up to 75% of earnings for days of leave, but this is not a legal 
requirement 
jobs being protected during this period. 
In addition, parents can work part-time 
with benefits reduced pro rata, for an­
other 2 years. It is also possible for both 
parents to take leave together, in which 
case benefits are shared between them. 
In France, unpaid leave can be taken 
after 16 weeks maternity benefit, but 
only if the employer agrees and with 
no guarantee of job protection. The 
main State scheme (APE) entitles the 
parent (usually the mother) so long as 
they have been employed two of the 
previous five years, to a flat-rate 
benefit (of around 450 ECU a month 
for the second child — before July 
1994, the third) until the child is 3 years 
old, payable pro rata if the parent 
works part-time. Jobs, however, are 
not always protected. In five other Member States, there are 
provisions for periods of leave usually 
with job protection but without benefit 
(see Box). In addition, in Greece, 
Portugal and Spain, parents with a dis­
abled child can reduce working hours, 
but without being compensated for lost 
earnings. 
Although unpaid leave is less attractive 
than paid leave, the regulations on job 
protection are important, especially 
where they counter some of the ad­
verse effects on career progression, 
and therefore, on future wages and 
longer term pension entitlement. In 
these five countries, the length of un­
paid leave covered by job protection 
varies from 3-6 months in Greece to 
one year in Spain. In the Netherlands, there is provision 
for a mix of full and part-time unpaid 
leave and social protection rights are 
safeguarded for the full period. In 
Spain and Portugal, on the other 
hand, there are no special safeguards 
and in the UK, rights are protected 
only during the 14 weeks maternity 
leave period (though employers may 
continue to make national insurance 
and pension contributions if em­
ployees are receiving contractual 
maternity pay after the statutory 18 
weeks). In Greece, to retain social 
protection rights, including coverage 
for health insurance, contributions 
(both employers' and employees') 
must be paid during unpaid leave. 
Caring for disabled 
and elderly people 
Although there is little information 
available on the number of people 
looking after a disabled or infirm per­
son for a significant part of their time, 
indications are that it is substantial 
(see Box). 
Studies which have been undertaken 
highlight the predominance of 
women among carers under the age 
of 65, especially those in their 40s 
and 50s. Older carers, on the other 
hand, are frequently men, usually 
caring for disabled or infirm wives. 
In addition, there are many single 
men and women, usually sons or 
daughters ofthe person needing care. 
Much less pohcy attention has been 
focused on this kind of caring respon­
sibility, either in terms of income 
support for carers who have to stop 
working or the protection of social se­
curity rights. Schemes providing 
138-
Chapter 7- Social protection and caring responsibilities 
benefits to carers for extended periods 
exist only in four Member States. The 
longest standing one is in the UK 
where a (non-contributory) Invalid 
Care Allowance (IC A) was introduced 
in 1975, though it was extended to 
married women only in 1986. Eligi­
bility for benefit is dependent on the 
person being cared for receiving an 
allowance for attendance (for care 
needs) and is set at two-thirds of the 
long-term flat-rate Incapacity Benefit 
(formerly Invalidity Benefit). Care 
must be given for at least 35 hours a 
week, but earnings of up to some 
60 ECU a week are permitted without 
loss of benefit and receipt of ICA gives 
the right to credits for the category B 
(lower) rate retirement pension. 
In two other Member States provision 
of benefit is relatively recent In Ire­
land, a means tested carer's allowance 
was introduced in 1990, payable to 
someone over 18 who lives with and 
cares full-time for a person receiving 
specified social security payments and 
who needs full-time care and attention. 
The means-test is a strict one, which 
limits eligibility. Social contributions 
are credited, and the full range of 
benefits payable, only to those who 
were paying contributions, or had 
these credited before. In Germany, 
allowances designed for carers were 
introduced in April 1995 under the 
new Long-Term Nursing Insurance, 
and are payable to both relatives and 
professionals, (in the former case the 
amount varying with the level of need 
for care—from 200 ECU to 650 ECU 
a month). If care is given for at least 
14 hours per week, social protection 
rights are safeguarded, though no sep­
arate arrangements are made for health 
insurance, where it is assumed that that Studies of informal caring 
UK: according to the General Household Survey in 1985 in Great Britain (excluding 
Northern Ireland) there were 2.5 million men and 3.5 million women carers. Of 
these, 1.4 million were providing care for more that 20 hours a week, including 
850 thousand for 50 hours a week or more. The chances of becoming a carer were 
highest among women in their late 40s and early 50s. Single men and single women 
were much more likely to be heavily involved in caring than their married counter­
parts. Once oyer 65 years, men were more likely to be carers man women. 
Ireland: data from a number of studies in die late 1980s suggests that some 
100 thousand people were caring for adult relatives who were elderly, sick or 
disabled. Some 70% of those receiving care were looked after by members of the 
same household and 78% of these carers were women. Two-thirds of carers of 
elderly people were married' and nearly one quarter were single. Hie majority of 
carers were of working age. 
Germany: a study by Infratest in 1992 found 1.1 million people needing regular 
care, including 190,000 needing constant care. Around 77% of-those with regular 
care needs had a main carer, in nearly all cases a close family member. Some 83% 
of carers were female. Male carers usually looked after a disabled wife. 
Italy: in 1991 it was estimated that around 17% of Italian families were affected by 
the need to take care of an invalid, someone with a major disability or a non-self-
sufficient elderly person. 
held by the head of household will, as 
normal, cover all family members. 
In Finland, there was originally a 
strong emphasis on providing home 
care services to elderly and disabled 
people, but from 1989 the existing 
scheme for Home Care Allowances 
paid directly to the carer was ex­
panded. These are paid by local gov­
ernment, but subsidised by the centre, 
and the rate paid varies between areas, 
though always related to the severity of 
need for care. Pension rights of the 
carer are maintained at the same level 
as for local government employees. 
More limited provision is available in 
five other Member States. In Sweden, 
the main emphasis is still on providing 
home care services, but paid leave of 
absence for up to 30 days at the sick­
ness benefit rate can be taken by a 
relative, friend or neighbour caring for someone in need with social protection 
rights being safeguarded. In addition, 
local authorities can pay a home care 
allowance to a carer, though in this 
case, other rights are not protected. In 
Denmark — which places a similar 
emphasis on publicly-provided care— 
someone caring at home for a termi­
nally ill relative can be reimbursed for 
lost earnings at the level of pay of a 
municipal home helper, with their 
rights being protected. In Belgium, a 
career interruption scheme was intro­
duced in 1995 providing leave for up 
to two months to care for someone who 
is terminally ill, together with a flat-
rate benefit (of around 300 ECU a 
month) and protection of social se­
curity rights. Local arrangements for 
, paying benefits to carers also exist, 
though the provision is discretionary 
and the benefit amounts are relatively 
low (25 to 125 ECU a month). 
- 139 
Chapter 7- Social protection and caring responsibilities 
People in employment 
not eligible for social insurance 
Spain: people who work for less than 12 hours a week, or 48 hours a month in all, 
are excluded from some benefits — for occupational accidents or illness, health 
care, cash benefits during maternity leave and the Fond de Garantie Salariale, In 
1994, most people working a small number of hours a week were women. 
Austria: people who earn less than 13 ECU a day, 40 ECU a week, 260 ECU a 
month, are excluded from compulsory insurance, though they are able to pay 
voluntary contributions. 
Ireland: in 1993,12,000 employees were estimated to be outside the scope of social 
insurance, mosdy women. In addition, some 16,500 self-employed were excluded: 
13,000 farmers receiving unemployment assistance as a supplement to poor farm 
earnings, and 3,500 others with incomes below the threshold for self-employed 
contributions — around 3,000 ECU a year. 
Germany: people are excluded from social insurance if they work for less than 
15 hours a week and earn less than around 300 ECU a month in the Western part 
or 250 ECU in the East In addition, those working for less than two months or 50 
working days a year are generally excluded. Figures for 1992 show that almost 
3 million people were excluded by these various rules, of which 68% (2 million) 
were women. 
UK: people who earn less than around 70 ECU a week are excluded. In 1994, it 
was estimated that 2.2 million female and 0.8 million male employees were 
excluded. Figures for the self-employed are not available. 
In Italy, Greece and France, under the 
national schemes in operation, extra 
benefits are paid to those needing 
extensive care, in Italy the amount 
being around double the means-tested 
disability allowance, in Greece, 
around 50% of the invahdity benefit 
for total incapacity, and in France, the 
same as minimum wage. These allow­
ances can be passed on to the carer, but 
need not necessarily be. In France, if 
the carer receives an allowance, they 
are regarded as an insured person with 
normal social protection entitlements, 
but to encourage home care, without 
being liable to pay contributions. In 
other cases, as in Italy and Greece, 
social protection rights are not main­
tained, as is also true of French and 
Italian local schemes paying allow­
ances to carers. In Spain, Luxembourg, Portugal, Netherlands and Austria 
there is no provision at all for either 
leave or benefits for carers. Except in 
Austria, where there is some protection 
of pensions for those caring for dis­
abled children, as discussed below, 
stopping work to provide care for 
someone means loss of both income 
and social protection rights, except as 
regards health care where there is a 
national health service. 
Low earnings and 
social protection 
People returning to the labour 
force or trying to continue work­
ing while caring for someone can 
often find it necessary to accept a job with low pay and/or short hours. In 
such cases, however, they may no 
longer be eligible to belong to a social 
insurance scheme and so not be able 
to accumulate social protection right-
s. This is not the case in Luxembourg, 
Portugal, France, Greece, Italy, 
Netherlands or Sweden, where all 
those in employment are compulsor-
ily insured. The same is also true in 
Denmark, except that membership of 
an unemployment fund requires a 
minimum number of hours work, 
while in Belgium, those excluded are 
only those who do domestic work for 
others for less than 24 hours a week 
or other household work for less than 
8 hours a week. There are, however, 
a number of Member States where a 
significant number is excluded from 
social insurance. 
Figures for the total number ine­
ligible for insured status for these 
reasons (see Box) are not available 
for all countries, but they are substan­
tial in the UK and Germany. By no 
means all of these people are carers, 
but those whose working life is re­
stricted by caring responsibilities are 
particularly at risk of non-ehgibihty. 
These women and men are not en­
titled to benefits during sickness or 
unemployment, and unless there are 
provisions based on residence or spe­
cial measures are taken (described 
below) will not be building entitle­
ments to long-term benefits for 
retirement or invahdity. 
These exclusions are at present under 
debate, with those on the one side 
who want to increase labour market 
flexibility by reducing contributions 
and the cost to employers — as well 
as to encourage more part-time jobs, 
and those on the other, who wish to 
- 140 
Chapter 7 - Social protection and caring responsibilities 
see improved social protection cover 
(as in Spain). At the same time, ex­
clusions are seen as an issue of 
inequahty, given the predominance 
of women among those excluded (in 
the UK and Germany), while poten­
tial impact of contributions on low 
incomes is used as an argument 
against their inclusion (in the UK). 
The low level of contributions which 
they would be able to pay is also an 
issue in that they would build rights 
only to very low earnings-related 
benefits (which, in practice, might 
not be any greater than means-tested 
allowances, assuming that they qual­
ify for these which many married 
women will not) or they would qual­
ify for cover well in excess of their 
payments into the schemes — for 
health insurance, for example (in 
Germany). Equally, if (flat-rate) 
benefits were increased to too high a 
level relative to earnings when in 
work, this could adversely affect in­
centives to be employed. 
Part-time work and 
social protection 
There are also specific issues related 
to part-time employment which is 
widespread in the European Union. 
In the Union as a whole there were 
nearly 21 million people in part-time 
work in 1994, almost 18 million em­
ployees and 3 million self-employed. 
They are predominantly women — 
around 15 million ofthe employees 
and 2 million ofthe self-employed — 
the largest numbers being in the 
UK and Germany (around 5 million 
in each), but the highest proportion 
of the work force being in the 
Netherlands (66%). If the working patterns of women are 
examined, it is evident that in most 
Member States, women with child­
ren are much more likely not to work 
or to work part-time than those with­
out (Graphs 70 to 75). Although there 
are no comparable figures for those 
who care for adults it may well be that 
the pattern is similar because the 
constraints on working full-time are 
much the same. 
Decisions about whether and how 
many hours to work are, of course, 
not wholly determined by caring 
responsibilities. A social policy 
which provides high levels of child 
care and home care for the disabled 
or infirm, the availability of family 
and the financial circumstances as 
well as other factors can all be im­
portant. For lone parents, in particu­
lar, financial necessity may dictate 
full-time work in cases where 
benefits are conditional on the 
mother seeking employment once 
the children pass a specified age. It is 
interesting to note, however, that in 
the 1993 Eurobarometer report (The 
Europeans and the Family) around 
55% of respondents considered that 
having children was an obstacle to 
the working life of women, though 
under 10% thought the same as re­
gards men. Nevertheless there are 
men whose employment choices are 
affected by caring responsibilities — 
lone fathers, for instance or those 
looking after disabled adults (see 
Box on studies of informal caring). 
Moreover there may be more men 
looking after children in the future 
as parental leave schemes are 
developed and extended. 
Problems may arise for part-time 
workers under the social protection arrangements, even where they are in 
jobs which entitle them to social 
insurance (though see below for 
measures which may offset these 
problems): 
• while contributions may give en­
titlement to long-term benefits 
for retirement and invalidity the 
earnings-related amounts con­
cerned are likely to be low un­
less there are specific provisions 
to overcome this; 
• taking up part-time work late in 
a working career, because of 
the need to care for an elderly 
parent, for example, can adver­
sely affect pension rights if these 
are calculated on final salary or 
the last few years before retire­
ment age; 
• part-time workers may be ex­
cluded from occupational pen­
sion schemes which provide 
supplements to retirement pen­
sions or long-term ill-health 
benefits. 
Part-time workers may also find that, 
though they are paying contributions, 
they are ineligible to receive unem­
ployment or sickness benefits be­
cause they work too few hours a 
week or too tittle over a specified 
period of time. 
Returning to work 
after caring 
Returning carers may encounter 
other problems in qualifying for 
short-term benefits, in particular if 
sickness or unemployment strikes 
141 
Chapter 7- Social protection and caring responsibilities 
70 Women aged 25-49 working part-time because 
they did not want a full time job, 1993 
10Q % part-time women 25-49 
80 h 
60 
40 
20 t O Single 
O Single wtth chidren 
• Married 
• Married with chidren 
Uru I 100 
80 
60 
40 
20 71 Women aged 25-49 who are inactive because of 
family responsibilities, 1993 
100 % Inactive women 25-49 
O Single 
- a Single with children 
•Married 
I Married with children 100 
B DK D GR E F IRL I L NL P UK E12 
0 exclude» new Under 
72 Single women working full-time and part-time 
by age of youngest child» 1993 
100 r" «Full-time • Part-time 
80 1-
60 Y 
40 Y 
20 Y 100 
B DK 0 OR E F IflL 1 L NL P UK E12 
Left bar no children: middle bar. chid < 5; right bar child '0-18 0 exclude» new Lander 73 Married women working full-time and part-
time by age of youngest child, 1993 
100% • Full-time •Part-time 100 
Left ban ho children; middle bar. child < 5; right bar: chHd 10-15 0 exclude» new Lander 
74 Single women working full-time and part-time, 
1993 
100% • Part-time 
• Full-time 75 Married women working full-time and part-
time, 1993 
100% I Part-time 
Lett bar with no children; right bar with children O exclude» new Lander B DK D GR E F IRL I L NL P UK E12 
Lett bar with no children; right bar with children 0 exclude» new Lander 
- 142 
Chapter 7 ~ Social protection and caring responsibilities 
before they have sufficient time to 
satisfy qualifying conditions. Such 
problems will not apply if the health 
care system is designed to serve the 
whole population or there is no qual­
ifying period for sickness benefits or 
provisions which take into account 
contributions before the period of 
caring began. But where the system 
is less 'open' or where qualifying 
conditions fo: particular benefits are 
more stringent, problems may arise. 
The development of schemes for ex­
tended leave with benefits for taking 
care of young children (in 8 Member 
States) has improved the position of 
those caring for children not only 
while they are not working, but on 
return to work as well. But where, at 
best, unpaid leave is all that is avail­
able, then — with the exception of 
the Netherlands where social protec­
tion rights are safeguarded during 
unpaid leave — the position of re­
turning carers is much weaker. It is 
also the case that where leave provi­
sions are for relatively short periods, 
some parents may feel it necessary to 
spend longer with their children and 
so lose their right to job protection. 
As noted above, in only a minority of 
Member States are social protection 
rights safeguarded for those who care 
for adults for extended periods. 
Health care costs 
In 12 of the 15 Member States caring 
gives no problems so far as access to 
health care is concerned, while in the 
other three, problems are of varying 
severity. In France, two groups retain 
their health insurance rights — those 
with two or more children who have Qualifying for cash sickness benefits 
— returning carers in Ireland and the UK 
Ireland: the benefit has two conditions—at least 39 weekly contributions over the 
entire working life must have been paid and 39 contributions paid or credited in the 
year prior to the illness. To meet the second condition, there have to be at least 13 
paid contributions, but these can have been paid in any of the 3 years prior to the 
claim. Any credits during receipt of the means-tested Carer's Allowance, would be 
beneficial to carers, as would those gained during oie 14 weeks maternity benefit 
UK: the situation is complex. Most employees, provided they had an employment 
contract which lasted at least 3 months and provided they earned enough to to pay 
contributions in the 8 weeks prior to the illness, would get Statutory Sick Pay (SSP). 
Credits do not count for SSP. Employees who do not quality and the self-employed, 
have to meet two qualifying conditions for National Insurance benefit; contributions 
must have been paid on earnings of at least 25 times the lower earnings limit in any 
tax year and contributions paid or credited on earnings of SO times the lower 
earnings limit in the two tax years preceding the claim. Credits given while on the 
18 weeks benefit for maternity absence and while receiving the Invalid Care 
Allowance will assist with the second of these conditions. 
received benefits under the parental 
leave scheme and those caring for 
adults who are paid by the person con­
cerned from their disability benefits 
and so qualify for insured status. 
Everyone else has to have worked at 
least 60 hours or earned 60 times the 
hourly minimum wage over a period 
of a month. In Belgium, those covered 
by a Career Interruption arrangement 
similarly retain their health insurance, 
but others, including those who had to 
continue caring after the period of 
Career Interruption expired, need to 
have worked at least 120 days (for at 
least three hours a day) during a period 
of 6 months. In Greece, those on un­
paid leave to take care of young child­
ren can remain insured as noted above 
only if they pay their own plus the 
employer's contribution, while others 
need to have worked for at least 50 
days (two months) in the year preced­
ing the illness. In all three countries, 
those caring for adults are more hkely 
to be affected adversely than those car­
ing for children. Sickness benefits 
In a number of Member States, there 
is no qualifying period for entitle­
ment to sickness benefit. These are 
Sweden, Austria, Luxembourg, 
Germany, Finland, Italy and the 
Netherlands. In Portugal and Spain, 
carers are treated the same way 
as everyone else, which means in 
Portugal, 6 months in insurance and 
12 days work during the four months 
prior to the illness and, in Spain, 180 
days work in the previous five years. 
In both these countries, many carers 
are, therefore, likely to quahfy for 
benefit, even if they fall ill soon after 
returning to work. In Denmark, em­
ployees must have worked at least 
120 hours in the 13 weeks immedi­
ately preceding the illness. 
In France, Belgium and Greece, the 
rules governing eligibility are the 
same as for health care which are not 
so difficult to fulfil in France, but 
143-
Chapter 7- Social protection and caring responsibilities 
Carers and unemployment benefits 
in Germany and Netherlands 
Germany: the widely available period of extended leave for early child care is 
counted as if it is paid employment and so will give benefit rights when these are 
needed. But carers covered by the new long term care insurance have to meet the 
normal qualifying conditions for unemployment benefit —12 months insured work 
in the past three years for the insurance benefit and ISO days in the last year for the 
assistance benefit. They are, however, eligible for vocational training without a 
qualifying period in employment — a useful provision for someone who had been 
out of the labour force for a long period. 
The Netherlands: for the basic unemployment benefit lasting for 6 months, carers 
have to meet the same rules as anyone else, that is, 6 months work immediately 
preceding the unemployment For the extended benefit which follows (lasting from 
3 months to 4.5 years, depending on age and other factors), the normal requirement 
is that the employee must have received a wage for at least 52 days during at least 
3 of the 5 years immediately preceding the unemployment, though special rules 
apply to those who have been caring for children. In calculating the 3 in 5 rule, all 
the period when caring for a child under 6 and half the period caring for a 6-12 year 
old are counted as employment However, there is no similar rule for carers of adult 
disabled/infirm people. 
present more difficulties in Greece 
and Belgium. 
In Ireland and the UK the regulations 
are both more complicated and so may 
be more difficult to satisfy (see Box). 
In both countries it may be easier for 
those who have cared for adults to 
satisfy the requirements, than those 
caring for children. 
Unemployment benefit 
Qualifying conditions for receipt of 
unemployment benefit of a person 
loses a job soon after returning to work 
tend to present more of a problem. 
This is not the case in Finland, where 
unemployment benefit is paid after 
five days of registered unemployment. 
In Germany and the Netherlands, there 
are special provisions for those return­
ing from caring for children, but these are not available to those caring for 
adults (see Box). 
In Belgium and Greece, some of the 
provisions for leave from work en­
able the carer to remain insured and 
so qualify for unemployment 
benefits where provisions do not 
apply, however, — which is hkely to 
be in most cases for those looking 
after adults — carers must meet the 
normal qualifying conditions — in 
Greece, 300 days of work, in 
Belgium, 312-624 days, depending 
on age. 
In Luxembourg, Sweden, Italy and 
Spain, the normal conditions for 
receipt of benefits have to be met in 
full — ie contributions need to have 
been paid for a minimum period, 
ranging from 6 months to a year or 
more. In Sweden, the person con­
cerned needs also to have worked for 
five months in the previous 12, though there is a minimum unem­
ployment assistance benefit for those 
who are not members of a voluntary 
unemployment fund. 
In Spain, receipt of earnings-related 
benefit requires contributions to have 
been paid for 12 months over the 
preceding 6 years and in Denmark, 
full members of an unemployment 
fund need to have worked for 26 
weeks in the last 3 years. In both 
cases, many carers are hkely to be 
able to meet these conditions. In 
Austria, there is a waiting period of 
20 weeks to establish eligibility for 
benefit, while in Portugal, there must 
have been 540 days of earnings and 
contributions in the 24 months prior 
to unemployment. In Ireland the 
rules are the same as for sickness 
benefit. In the UK, a minimum num­
ber of contributions must have been 
paid, and any additional credits 
needed, must have been acquired, in 
the last two tax years. In both coun­
tries, credits relating to caring for 
children accrue only over the basic 
period of maternity leave (14 and 18 
weeks, respectively), but there is a 
greater opportunity to acquire credits 
for longer periods of caring for 
adults. 
Protecting the 
retirement pension 
Leaving aside pensions based on 
rights as a resident national, ac­
quisition of a full pension in most 
countries requires payment of con­
tributions over the whole of a working 
career. Breaks in employment do not 
usually lead to total loss of pension 
rights, but to a reduction in the amount. 
144 
Chapter 7 - Social protection and caring responsibilities 
Where pensions are earnings-related 
and calculated on a lifetime's earnings, 
the amount receivable will be reduced 
not only if fewer years are worked but 
also perhaps if part-time hours are 
worked. In some countries, there are 
provisions for voluntary contributions 
to be paid to cover career breaks, but if 
these have to be paid during periods of 
non-earning, they may not be affor­
dable. 
There are, however, two features of 
pension provision in Member States 
which moderate the effect of caring on 
pensions. The first is the existence of a 
basic pension receivable by right 
through citizenship. The second is the 
existence of measures aimed at reduc­
ing the disadvantage carers are likely 
to suffer. Improvements of pension rights for carers in Italy 
Starting from January 1994, employees with at least five years of contributions can: 
• gain a pension credit of five months for children bom prior to employment; 
• gain a pension credit, with voluntary contributions, for 6 further months 
(equivalent to the normal additional maternity, leave) for children'bora prior to 
employment; 
• gain a maximum credit of 5 years, with voluntary contributions, for periods of 
care for adult disabled people, including periods outside the labour force. 
From 1995, it will be possible: 
• to claim notional credits towards pensions in respect of absences from work for 
caring for a child of under 6, of 6 months for each child up to a maximum of 
24 months in all; 
• to claim pension credits for up to 28 months, for absence from work for periods 
of care for children over 6, a spouse or an invalid parent living at home; 
• for working mothers to receive a concession on the age of retirement of 4 months 
for each child up to a maximum of 12 months or, alternatively, if she retires at 
the normal age, a higher pension; 
• for housewives to belong to a new voluntary but subsidised pension scheme. 
Pensions paid by right 
In four Member States, Sweden, 
Netherlands, Finland and Denmark, a 
basic pension is payable to all resident 
nationals, irrespective of whether and 
how long they have worked. The pen­
sion, however, is set at a minimum 
level, even if sufficient to meet basic 
needs. In all four countries, sup­
plementary earnings-related pensions 
exist to increase retirement income, 
but missed years of contributions or 
periods of working part-time will re­
duce the amount payable, and provi­
sions to offset these adverse effects are 
limited. 
In Sweden where an earnings-related 
benefit is payable during parental leave 
and for short periods of caring for 
adults, this is counted as pensionable 
income and so helps to increase 
earnings-related amounts. In January 1997, rules are due to come into effect 
under which married couples will be 
able to elect to divide annual pension 
credits between each other. In Finland 
also, leave for early child care does not 
serve to reduce the earnings used to 
calculate pensions and the pension 
rights of those receiving the Home 
Care allowance are protected. A long 
period of absence from work over and 
above the parental leave period can 
however, lead to a break in pension 
insurance for both employees and the 
self-employed (though as noted below 
there are other rules which help those 
who have been caring for children). 
Differences in 
pension calculations 
In some Member States retirement 
pensions of carers may be much less affected than in others by caring, sim­
ply because of the way pension entit­
lement is calculated. In Spain, the 
pension is calculated on earnings 
over the last 8 years of work, which 
is beneficial for those who took time 
off for caring responsibilities early in 
their working life, but detrimental for 
those who were not employed or 
worked part-time, late in their work­
ing careers. In Portugal, pensions are 
calculated on the basis ofthe best 10 
years earnings in the last 15 years of 
work, a rule which by enabling low 
years to be dropped tends to help 
carers who have had to spend some 
time in part-time work, though 
missed contribution years remain a 
problem (see below). 
In Finland, the earnings-related pen­
sions are calculated on the four last 
years of employment and if these in­
clude a year in which maternity, 
145-
Chapter 7- Social protection and caring responsibilities 
Home Responsibilities Protection in the UK 
Home Responsibilities Protection was introduced in 1978 for those not earning or 
earning below the level of liability for National Insurance contributions, provided 
that 
• throughout a full tax year they are the main payee for Child Benefit drawn in 
respect of a child under 16 years, or 
• throughout a full tax year they are receiving Income Support without being 
required to be available for employment because they are caring for a sick or 
disabled person in receipt of the highest or middle rate of the Disability Living 
Allowance care component Attendance Allowance or Constant Attendance 
Allowance, or 
• they are regularly caring for at least 35 hours a week for a person receiving for 
a minimum of 48 weeks in a year the highest or middle rate of the Disability 
Living Allowance care component, the Attendance Allowance or Constant 
Attendance Allowance. 
For each year of HRP, the number of qualifying years for a full basic retirement 
pension are reduced but not below 20 qualifying years. At present the maximum 
number of HRP years for a woman is 19 and for a man 24, but when pension ages 
are equalised at 65, HRP rights will be equalised at 22 years. The years of HRP 
count towards the requirements for .a widow's pension. 
paternity or child care leave has been 
taken, it is dropped from the calcula­
tion. In Italy, the pension calculations 
are based on the number of pension­
able years (with no distinction be­
tween full and part-time work) and 
on average earnings over the last ten 
years of work. These rules, together 
with the fact that pension rights con­
tinue to mature while maternity 
benefits are paid, serve to protect the 
pension of those who have been look­
ing after children, but they are less 
helpful to those who'have had to care 
for adults in later years. For those 
entering the labour force from 
January 1993, however, pensions 
will be calculated on lifetime earn­
ings. A new set of rules, taking effect 
from 1992, strengthens the position 
of carers of both children and adults, 
in part by allowing voluntary con­
tributions which can be paid when 
earning has resumed (see Box). Dropping caring years 
from the pension 
calculation 
In the UK, under the Home Respon­
sibilities Protection (HRP) provi­
sions, and more recently in Ireland, 
carers can drop the years spent look­
ing after someone from the calcula­
tion of pension entitlement and can 
also acquire' contribution credits 
where receiving benefit for caring for 
a disabled or infirm adult (see Box). 
In Ireland, since 1994, those of 65 and 
under not in paid work, or in low paid 
work not covered by social insurance, 
are entitled to drop from the calculation 
of the old-age (contributory) pension 
for years after 1994 (up to a maximum 
of 20) complete contribution years 
spent caring either for a child under 6 
(soon to be 12) on a full time basis or 
for an adult requiring full time care and attention, so long as, in both cases, they 
reside with the person in question. 
In addition, in the UK, where as from 
1999, the State supplementary pen­
sion will be calculated on lifetime 
earnings instead of the best 20 years, 
carers will be entitled to exclude 
years of HRP from the calculation, so 
long as 20 years of actual contribu­
tions after 1978 have been made. 
Moreover after 1999, the means-
tested benefits for low earners — 
Family Credit and Disability Living 
Allowance — will be counted as 
earnings in the calculation of pen­
sions which could help low-paid 
part-time workers, especially lone 
parents. 
Maintenance of 
contributions during 
periods of caring 
In a number of Member States, con­
tributions are maintained during 
periods of time off work for caring. 
In Luxembourg, where the basic 
qualification for a pension is 10 years 
of contributions, the State pays con­
tributions on behalf of a parent caring 
for a young child for a period of 
24 months — 48 months where there 
are at least two children or the child 
is handicapped, provided that the 
person concerned has been insured 
for at least 12 of the 36 months before 
the birth. In addition periods during 
which one of the parents was caring 
for one or more children under 
6 years, or under 18 if the child is at 
least 50% disabled, or, in some cases, 
years spent looking after an adult 
who need care can be counted as part 
of the 40 years required for a full 
pension. 
146 
Chapter 7 - Social protection and caring responsibilities 
In Germany, compulsory pension in­
surance is maintained for three years 
for a parent who is caring for a child" 
bom after January 1992 (one year for 
those born earlier) based on earnings 
of 75% of the average of all insured. 
In general, caring for a child of up to 
10 does not significantly affect pen­
sion entitlements. Under the new 
Long Term Care Insurance, people 
caring for disabled persons for at 
least 14 hours a week are covered by 
pension insurance (earnings of be­
tween 35% and 80% of the average 
of all insured, depending on the 
weekly hours spent in caring, being 
used for the calculation of pension). 
In Austria, each year of parental 
leave for which a benefit is paid is 
treated as equivalent to one year of 
pension contributions (see Box). 
Someone caring for a disabled child 
can pay voluntary contributions at a 
reduced rate, but no provision is 
made for those caring for an adult. 
In Belgium also, the period of leave 
— the Career Interruption — is 
counted as a period of contributions 
for pension purposes for up to 
36 months where a child under 
6 years is being cared for, and other­
wise for 12 months. In the case of 
care for terminally ill people, only 
two months are counted. Carers who 
stop work for longer and those on 
unpaid leave outside the scheme can 
pay voluntary contributions, but only 
if they are caring for children under 
6, and contributions have been paid 
for at least 12 months before hand 
and work is later resumed. In France, 
there are a range of provisions, 
mainly for bringing up children (see 
Box). Provisions to protect pensions 
in Austria and France 
Austria: The 48 months after a child's birth are treated as 'substitutional' periods 
in pension insurance. To calculate the pension, a notional income of 446 ECU is 
set as a base and revalued every year. If the parent concerned is earning during any 
of this period, the notional and actual wages are added for the purpose of the pension 
calculation, in order to compensate for the double work-load of child care and paid 
work. If a second child is bom within the 48 months, the original period will end 
and a new period of 48 months will begin. 
France: A parent receiving any ofthe family benefits while remaining at home to 
care for a child under 3 is entitled to pension insurance in the Régime general, based 
- on a notional wage equal to the monthly minimum wage, the contributions for this 
being paid by the Caisse d'allocations familiales. In addition: 
• there is a right to two years free pension insurance for every child cared for 
during 9 years before their 16th birthday; 
• workers who have brought up three children are entitled to a full pension after 
30 years of insurance; 
• the fact of having brought up three children, entitles both parents to a 10% 
increase in their retirement pension. 
In a further provision — to encourage part-time work in this case, but beneficial to 
carers — where a full-time job is converted into a part-time job, then by agreement 
with the employer, pension contributions can continue to be calculated as if they 
were based on me full-time wage for a period of 5 years. 
The use of voluntary 
contributions 
In Italy, carers can pay voluntary 
contributions under new rules as 
noted above. In Portugal, where pro­
visions for those who interrupt work­
ing careers are limited, there is a 
voluntary insurance scheme, im­
plying an assumption that someone 
not in work can afford to contribute 
or can find someone to pay on their 
behalf. However, a supplementary 
social pension is payable where the 
final contributory pension falls 
below a minimum amount. In 
Greece, where provisions for carers 
are limited, retention of insurance 
rights depends on paying voluntarily 
contributions and if these cannot be afforded, pensions will be reduced 
accordingly. (There are, however, 
provisions beneficial to mothers of 
young or disabled children, who can 
retire on a full pension at 55 — or a 
reduced pension at 50 -— if she has 
completed insured employment of 
18 years and 4 months.) In the UK, 
there is also some use of voluntary 
contributions, where earnings in a tax 
year are not enough to qualify for 
pension purposes. In this case, the 
person concerned can make up the 
difference in voluntary contributions 
any time over the following six years, 
which means that they can be paid on 
return to work (in 1993, only 69,000 
people made such contributions, 
59,000 of whom were men). 
147 
Chapter 7- Social protection and caring responsibilities 
Private supplementary 
pensions 
There do not appear to be any 
examples of private pension schemes 
in any Member State, which make 
allowance for periods of caring. 
Indeed, until recently (before the 
European Court judgement, Vroeger 
v NCIV and Fisscher v Voorhuis 
Hengelo, 1994) occupational 
schemes often excluded many 
part-time workers. Where the State 
pension provision relies on sup­
plementary pensions to bring retire­
ment income up to a reasonable 
(rather than minimum) level, people 
who have been involved in caring can 
be significantly disadvantaged. 
Invalidity benefits 
There has been less pohcy con­
cern with protecting entitlement 
to invalidity or disability benefits. 
However, provisions which protect 
retirement pensions will sometimes, 
but not always, also apply to these. 
Where there are few measures to pro­
tect retirement income the same is 
likely to be true in respect of inva­
hdity support. 
In the countries in which there are 
basic provisiorrfor resident nationals 
—Sweden, Denmark and Finland — 
no problems arise in any case. In the 
Netherlands, where access to the 
General Disability Benefit which 
covers both short and long term 
needs is relatively open, there are 
also few problems. Moreover, in 
Luxembourg, Austria and Germany, 
where the State pays contributions 
during years of caring and where these are credited while on other 
benefits, these provisions also apply 
to invalidity benefits (though in 
Austria, they do not cover absence 
from work to look after adults). In 
France, although the normal eligi­
bility requirement for invalidity pen­
sion is 800 hours work or earnings of 
2030 times the hourly minimum 
wage in the last 12 months, there are 
retrospective provisions to assist 
someone entitled to parental leave to 
obtain an invahdity benefit. 
In Portugal and Spain and Greece, 
however, protection of rights to 
invalidity benefits is limited, as it is 
in Ireland, where provisions in re­
spect of pensions do not fully extend 
to invalidity. In these countries, 
much will depend on when invalidity 
occur, in relation to the period of 
caring, since eligibility conditions re­
late to specified periods of insured 
work prior to the onset of incapacity 
— such as two years work in the past 
five. 
In Belgium, the qualifying period for 
insurance is relatively short for pri­
vate sector employees — 120 days 
work during the six months prior to 
the incapacity — which most people 
who stop work because of responsi­
bilities ought to be able to comply 
with. Those who do not satisfy the 
conditions in full receive a lower rate 
of benefit. For pubhc servants, inva­
hdity benefits are part of general pen­
sion arrangements and unpaid leave 
for caring results in a lower benefit. 
In Italy, contributions need to have 
been paid for five years at least and 
three years during the last five. Years 
working part-time count as full years, 
though they affect the level of benefit which is earnings related. The re­
cently introduced rules giving credits 
for early child care will help, though 
these require that contributions have 
been paid for five years. Voluntary 
contributions are required from those 
caring for adults. Despite the latest 
proposals noted above, it is likely 
that for many years carers will con­
tinue to fail to qualify for insurance 
benefits and will be ehgible only for 
lower non-contributory allowances. 
In the UK, eligibility for a long-term 
Incapacity Benefit depends on hav­
ing quahfied for short-term benefit 
for 12 months. Home Responsi­
bilities Protection does not extend to 
benefits for incapacity, though re­
ceipt of Invalid Care Allowance does 
include credits for Incapacity 
Benefit. Those not qualifying for 
Incapacity Benefit may be entitled to 
a lower non-contributory allowance 
of two-thirds the rate of the main 
benefit, where they have become 
80% or more disabled after the age of 
20. 
Divorce and 
marriage breakdown 
It is also relevant here to examine 
what happens to the pension pro­
vision of carers when their marriage 
or cohabitation breaks up. Although 
this is an issue for both men and 
women, in practice, it is still pre­
dominantly the latter whose future 
pension income needs to be pro­
tected. 
So far as divorce is concerned, a 
number of problems may arise for a 
woman who has had an interrupted 
148 
Chapter 7 - Social protection and caring responsibilities 
working career because of caring re­
sponsibilities and particularly as she 
can no longer rely on rights derived 
from her ex-husband: 
• she may not have been able to 
build a full independent basic 
State pension, either because of 
the absence of safeguards or be­
cause many of the provisions de­
scribed above are relatively 
recent and tend not to be retro­
spective, 
• where the main pension is 
earnings-related, her period off 
work or in part-time work and 
lost career opportunities may 
have reduced her pension entitle­
ment; 
• her supplementary pension will 
tend to be less for the same rea­
sons and if she worked part-
time, she may not have been 
eligible at all. 
Unless arrangements are in place to 
overcome these problems or unless 
specific steps were taken at the time 
of the divorce, the wife may be left 
with a pension provision which is 
much less than that of her ex-
husband. This has come to be re­
garded as unjust given that caring 
which is at the root of the problem is 
the responsability of both of them. 
Some of the measures that can be 
applied after divorce are administra­
tive, in the sense they involve incor­
porating appropriate rules into the 
relevant schemes. Others involve in­
troducing legislation so that courts 
can take direct action to divide future 
pension rights (which is additional to 
dividing current assets, which may not be sufficient to provide a suitable 
pension for the wife). Existing 
measures in Member States in some 
cases benefit one spouse without re­
ducing the rights of the other, while 
in others pension rights are shared 
between the divorcing couple. 
Protecting one spouse 
without affecting 
the other 
Divorce does not affect basic State 
pensions if these are paid to all resi­
dent nationals, as in Netherlands, 
Denmark, Finland and Sweden, 
though in the latter, the rate for a 
couple is lower than for two single 
people. If a divorce takes place after 
retirement, pensions are upgraded to 
two single rates six months later. 
In some countries, there are rules in 
respect of widows pensions. In Aus­
tria, a divorced widow is entitled to a 
pension provided the marriage lasted 
10 years and the dead husband paid 
maintenance, though this right ceases 
if she re-marries. In Luxembourg, 
a widow's pension is also payable to 
a divorced woman who has not re­
married, at a rate related to the num­
ber of years the couple lived together 
and the contributions paid. 
In the UK, there is provision for the 
contributions made by the husband 
(or wife) to provide a pension for the 
wife (or husband), to which further 
contributions can be added after the 
divorce so as to build a better pen­
sion. In Ireland, where divorce is not 
legal, past contributions affect the 
Deserted Wives Allowance (see Box 
for details on this and on the UK 
provisions). Dividing the pension 
A second type of provision involves 
splitting the retirement or widows 
pension or reallocating rights from 
one partner to another, either by 
administrative or legal action. In 
France, the divorced wife is entitled 
to a widow's pension on the death of 
her former husband. If he re-married, 
the pension is shared in proportion to 
the duration of each marriage. In 
Italy, there are no administrative 
regulations and the courts do not 
have the power to split pensions at 
the time of divorce. Where a husband 
who has remarried dies, however, the 
courts may rule that the widow's pen­
sion be split between the two wives. 
Provisions for splitting the retirement 
pension exist in several Member 
States (see Box) some of these are 
administrative, others require action 
by the courts. The most prominent 
country in this respect is Germany, in 
which legislation was introduced in 
1977 providing for a systematic re­
allocation of all forms of retirement 
income at the time of divorce. Sub­
stantive provisions also exist in Spain 
and Belgium. 
In general, there are fewer provisions 
relating to the splitting of supplemen­
tary pensions and this can be a 
serious loss to the divorced wife, es­
pecially in countries where the basic 
pension is relatively low. In the UK, 
where this was the case, changes 
have been introduced in 1995 in a 
new Pensions Act which requires the 
courts to take pensions into account 
in divorce settlements. Courts are 
empowered to oblige schemes to 
make payments to a divorced spouse 
when the pension matures. The court 
149-
Chapter 7- Social protection and caring responsibilities 
Two approaches to State pensions 
after divorce/separation 
UK: for the basic National Insurance pension, the divorced person (man or woman) 
can substitute their former spouse's contribution record for their own — either for 
all their working life up to divorce or for the duration of the marriage — if this 
improves the amount receivable. To this can be added contributions made after 
divorce to achieve a full pension at the single flat-rate (but no more). The benefit 
authorities use the most advantageous method for calculation. Remarriage before 
pensionable age (but not cohabitation) removes this right. A woman would then 
have to rely on rights derived from her new husband or on her own accrued 
independent rights, while a man must rely on his own pension rights. Remarriage 
after pensionable leaves both parties with their own single pension rights. 
Ireland: the 'Deserted Wife's Benefit' is payable on the insurance record of either 
the husband or the wife, whichever is most advantageous. To qualify for benefit, 
the woman must show that she has been deserted by her husband and that she has 
made appropriate efforts to obtain maintenance from him. A referendum on divorce 
is planned and proposals for the treatment of pensions and other rights are being 
prepared. 
order, however, ceases to apply as 
soon as one of the parties concerned 
dies, which potentially leaves a di­
vorced widow in much the same 
position as before the Act. Legisla­
tion is also being considered in 
Luxembourg to divide the pension on 
divorce and enable the person divorc­
ing to build up a larger pension when 
they have had to stop work or work 
fewer. In Portugal, there are some 
(implicit) arrangements for sharing 
the widow's pension between the 
present and former wife, while in 
Greece, there are no special provi­
sions, though the rise in the divorce 
rate has led to some debate on this 
issue. 
Cohabitation 
breakdown 
Cohabitation is an important and 
growing feature in most Member 
States, though it is more prevalent in some (such as Sweden and Denmark 
where it rose from the 1960s on­
wards) than others (Greece, Italy, 
Spain, Portugal and Ireland) where it 
is only beginning to emerge in urban 
areas. 
Social protection issues relating to 
cohabitation and its breakdown, 
however, have received relatively 
little pohcy attention. The provisions 
for safeguarding social protection 
rights during periods of early child 
care and caring for adults, as far as 
they go, are usually open to cohabit­
ing women and men on the same 
basis as married couples. On the 
other hand, cohabiting women whose 
partner dies and who have been 
prevented by caring responsibilities 
from building adequate independent 
rights, will not usually have derived 
rights to fall back on. Where the re­
lationship has broken down, similar 
problems of unequal pension rights 
arise as with divorce. There are legal provisions on pen­
sions for cohabitees in a number of 
Member States. In the Netherlands, 
certain categories of unmarried 
couples have equivalent pension 
rights to those who are married. In 
Sweden, marriage and long periods 
of cohabitation have equal status 
under law, the basic principle being 
that joint property is divided equally 
if the cohabitation breaks down. In 
Finland, married and cohabiting 
couples are also treated on a broadly 
equal basis. 
In a few other countries, the pension 
implications of cohabitation break­
down are beginning to be recognised 
as an issue, though not yet a major 
one. In Belgium, the courts have, in 
some cases, obliged ex-partners to 
pay compensation to partners with 
caring responsibilities during the co­
habitation. In the UK, the trustees of 
occupational pension schemes in 
some cases, exercise their discretion 
to pay lump sums to cohabitees or to 
divide them between the cohabitee 
and the legal widow, but there is no 
requirement for them to do so. In 
most Member States, however, there 
appears to have been as yet little pub­
hc pohcy debate on this issue. 
Concluding remarks 
The need to safeguard the social 
protection rights of people 
whose working career is interrupted 
because they need to bring up child­
ren or care for disabled or infirm 
adults is now firmly on the pohcy 
agenda of all Member States. 
Throughout the Union, it is increas­
ingly recognised that people need to 
150-
Chapter 7 - Social protection and caring responsibilities 
be given a genuine chance of recon­
ciling caring responsibilities with a 
working career. Support services and 
facilities to assist with child care and 
with the care of the disabled or el­
derly who need looking after remain 
of great importance in order for 
people with caring responsibilities to 
be able to pursue a working career, if 
they so wish, but people also need to 
have the option of giving priority at 
times to personal caring without 
suffering major disadvantages and 
effectively paying a high cost. 
Measures to safeguard the interests 
of those bringing up children are 
generally well advanced, but some 
gaps still remain. Safeguards for 
those caring for disabled/infirm 
adults are beginning to receive more 
attention, but much more remains to 
be done, as indicated in this chapter. 
Because each country's social pro­
tection system is different, the 
measures taken must also differ, at 
least in detail, but it is useful to be 
aware of the range of possibilities 
which are open. 
Although 'fall back' provisions exist 
in most Member States to ensure at 
least a minimum level of income for 
carers. Such provisions are essential 
at the present stage of pohcy devel­
opment, but it is widely accepted, 
given the importance of caring re­
sponsibilities, that these are not 
enough and, in the long-term, further 
improvements need to be made. Dividing pensions 
on divorce 
Germany: all pension rights acquired dur­
ing marriage are added and the marriage 
partner with more rights has to transfer part 
to the other so that both have the same level 
of benefit rights from the period of the mar­
riage. This system is applicable to the social 
insurance pension, occupational pensions, 
the special system for civil servants and life 
insurance. 
Sweden: a recent proposed revision of the 
Marital Code requires the inclusion, in 
whole or in part, of certain forms of pension 
from private insurance in the division of 
assets between husband and wife, if it is 
unreasonable to exclude them in view ofthe 
duration of the marriage and the financial 
situation. If there is no voluntary agreement 
between husband and wife on this, the court 
may make the necessary order. From 
January 1997, married couples (bom in 
1954 or after) will be able to divide annual 
pension credits between each other. 
Spain: courts have power to divide the pen­
sion at the time of the divorce, in favour of 
the partner with less or no pension rights. In 
the case of the widow's pension, where 
there are two survivors (a divorced and a 
current wife) there is provision to share the 
pension between them proportionally to the 
time each" lived with the deceased husband. 
Belgium: after divorce, pension entitle­
ments built up during the marriage are 
shared for periods for which the other per­
son concerned had no personal pension 
entitlement so as to provide a 'divorce pen­
sion' payable when retirement age is 
reached, so becoming the personal right of 
the partner (usually the wife) who was not 
working during part of the marriage. How­
ever, it is not paid if they remarry. These 
rules do not apply to the public service 
scheme, where a survivor's pension is 
payable on the death of the ex-husband (or 
wife) except in cases of remarriage, though 
a court can decide that a retired public 
servant should share his pension with his 
ex-wife. 
151 
Chapter 7- Social protection and caring responsibilities 
152 
Notes and Sources 
Notes and Sources 
This report has been prepared with the collaboration of Eurostat (Statistical Office of the European Communities). 
The data on social protection expenditure and receipts presented and analysed in this report (in Chapter 3, in particular) 
are classified according to the European System of Integrated Social Protection Statistics (ESSPROS), which breaks 
down expenditure into three main categories: social benefits, administration costs and other current expenditure. 
Social benefits consist of transfers, in cash or in kind, to households and individuals to relieve them of the burden of a 
number of distinct risks or needs, specifically: old age, survivors, disability, occupational accidents and diseases, family, 
maternity, sickness, unemployment, placement and vocational guidance, housing and miscellaneous. 
'Old age' covers the provision of social protection against the risks linked to old age, such as the loss of an adequate 
income, the loss of independence in carrying out daily tasks, reduced participation on social life, and so on. Benefits 
covered are all pensions and allowances paid after retirement or on account of old age, early retirement benefits paid 
to older workers, goods and services specifically required by the personal or social circumstances of the elderly. 
Survivors benefits are normally granted on the basis of a derived right, ie one derived from another person whose death 
is a condition for granting the benefit. In some social protection systems however, this right is a direct one, with no 
connection between the benefit received and any benefit that the deceased would have been able to claim. All pensions, 
allowances and cash payments paid out to survivors, as well as the reimbursement of funeral expenses are covered. 
'Disability' covers: 
• pensions, allowances and other cash benefits granted to disabled persons whose ability to work and earn is 
impaired beyond a minimum level laid down by legislation; 
• allowances paid to the disabled when they undertake work adapted to their condition, normally in a sheltered 
workshop, or undergo vocational training; 
• specific medical care granted to disabled persons as a result of their condition; 
• functional, occupational and social rehabilitation; 
• other forms of assistance, such as home help. 
Occupational accidents and professional diseases cover benefits paid to those injured or contracting illnesses at work 
and are excluded from disabihty benefits to the extent that they can be distinguished or are separately treated in social 
protection systems. 
153 
Notes and Sources 
'Family' covers benefits which: 
• provide financial support to households for bringing up children, such as family allowances; 
• financial assistance to people who support relatives other than children, notably spouses; 
• social services specifically designed to assist and protect the family, such as the provision of accommodation and 
family planning services. All supplements to cash benefits paid for other reasons (disabihty, old age and so on) 
are also included. 
'Maternity' covers maternity allowances, childbirth allowances and health care associated with maternity. 
'Sickness' covers: 
• medical care of either a preventative or therapeutic nature, prevention encompassing medical check-ups, 
vaccination campaigns, health education and so on. 
• benefits that compensate wholly or partially for the loss of earnings during temporary inability to work due to 
sickness or injury. Medical care given to a disabled person or a victim of an occupational accident or disease is 
excluded and included as part of expenditure under these heads. 
'Unemployment' covers all forms of cash benefits paid to the unemployed, including, in addition to unemployment 
benefits and assistance, redundancy payments and special assistance to various groups of workers in cases of 
interruption or temporary reduction in business activity. 
'Placement, vocational guidance and resettlement' covers vocational training allowances, removal grants, job-creation 
allowances and so on. 
'Housing' covers payments made by general government to certain categories of household — especially those with 
limited means — to help them meet the costs of accommodation. 
'Miscellaneous' covers all benefits that can not be classified under other functions, in particular, benefits paid because 
of a lack of resources. Guaranteed minimum income schemes therefore come under this heading. 
EUROSTAT has recently carried out a revision of ESSPROS and has redefined the functional structure, by creating a 
new health care function to include all medical services and by combining occupational accidents and diseases with 
'disability' and 'maternity' with 'family'. In addition, placement, vocational guidance and resettlement will be renamed 
'promotion of employment' and will be excluded from the core part of ESSPROS and developed as a separate, but 
parallel, set of statistics. 
For Germany, it is indicated on each graph whether data relate to the whole of Germany (including the new Lander) 
or to the former West Germany; in most cases, when the figures refer to 1993 or 1994, they relate to the former, when 
they show changes over time or comparisons between years, they refer to the latter. 
PPS: relates to Purchasing Power Standard which is a measure of GDP reflecting the real purchasing power of a currency 
within the country concerned, providing a better indication than the exchange rate ofthe volume and structure of goods 
-154-
Notes and Sources 
and services and the relative level of GDP as compared with other Community countries. See Purchasing power Parities 
and GDP in real terms, Results 1985, Eurostat 1985, and National Accounts ESA, Aggregates, Eurostat annually. 
Chapters 1,2,6 and 7: The analysis in these chapters is based on information collected from a network of correspondents 
in the 15 Member States. 
Chapter 4: This chapter is based on Replacement rates, A transatlantic view, Central Planning Bureau, the Netherlands. 
Chapter 5: The data come from OECD, Health Data, Version #3.6 (1995). The analysis is based partly on OECD, The 
Reform of Health Care Systems - A Review of Seventeen OECD Countries, Health Policy Studies No. 5, Paris 1994, 
OECD, Internal Market in the Making - Health Systems in Canada, Iceland and the United Kingdom, Health Policy 
Studies No. 6, Paris 1995 and A.Letourmy/M. Berthod-Wurmser, Effectiveness and regulation of health protection, in 
van Ginneken (éd.), Social Protection in Europe: financing and coverage, Geneva (ILO). 
Graph sources 
1 OECD, New Orientations for Social Pohcy, Paris, 1994, pp. 59-61 
2-3 International Social Survey Program, 1990 and 1992 
4 National sources 
5-6 Eurostat, Demographic statistics and latest forecasts of population 
7-8 Eurostat, Community Labour Force Survey; ILO, Yearbook of Labour Statistics 
9 Eurostat, comparable unemployment statistics (employment = active population minus unemployment) 
10 Eurostat, Community Labour Force Survey 
11-12 Eurostat, ESSPROS database, National Accounts 
13-15 Eurostat, ESSPROS database, National Accounts; national sources for Austria, Finland and Sweden 
16-17 Eurostat, Community Labour Force Survey 
18 Eurostat, ESSPROS database, Demographic statistics and Community Labour Force Survey 
19-20, 23, 25,27 Eurostat, Digest of statistics on social protection in Europe 
21-22, 26, 28 Eurostat, ESSPROS database and Demographic statistics 
24 Eurostat, ESSPROS database, Community Labour Force Survey, SOCI database and National Accounts 
(see Table 6 for more details) 
29-30 Eurostat, ESSPROS database, National Accounts. 
31-35 Eurostat, Community Labour Force Survey 
36-63 Central Planning Bureau, the Netherlands 
64-65 OECD, Health Data and Eurostat, National Accounts 
66-68 Eurostat, Labour Force Survey; national sources for Austria, Finland and Sweden 
69-75 Eurostat, Community Labour Force Survey 
-155-
Notes and Sources 
Graph List 
1 Social protection expenditure in relation to GDP, 1990 23 
2 Attitudes on the social role of government: basic income, 1992 24 
3 Attitudes on the social role of government: care for the sick, the elderly and the unemployed, 1990 24 
4 Retirement ages and number of years of contributions required for full pension by sex in Member States, 
January 1995 '. 39 
5 Population 65+ as a ratio of population 15-64 in the Union, 1970-2025 (average projections) 40 
6 Population 65+ as a ratio of population 15-64 in Member States, 1995,2015 and 2025 (average projections).. 40 
7 Active population 15-24 as a ratio of total population 15-24 in Member States, 1980 and 1994 41 
8 Active population 50-64 as a ratio of total population 50-64 in Member States, 1980 and 1994 41 
9 Employment as a ratio of active population in Member States, 1980 and 1994 42 
10 Disabled people aged 45-54 and 55-64 in Member States, 1987 and 1994 54 
11 Social protection expenditure per head and in relation to GDP, 1993 57 
12 Social protection expenditure and GDP per head, 1993 58 
13 Growth in expenditure on social protection benefits per head, 1980-93 63 
14 Growth of social expenditure per head and growth of GDP per head, 1980-93 63 
15 Growth in expenditure on social protection benefits per head, 1980-85,1985-90 and 1990-93 64 
18 Expenditure on old-age pensions per person above retirement age in relation to GDP per head, 1980,1990 
and 1993 , ...... : '. 66 
19 Old-age pensions: the extent of means-testirifof basic pensions (first pillar), 1980,1988 and 1993 67 
20 Old-age pensions: importance and structure of supplementary pensions, 1980,1988 and 1993 67 
16 Inactive and retired men aged 55-59 as a proportion of the male population aged 55-59 in the Member 
States, 1985 and 1994 69 
17 Inactive and retired men aged 60-64 as a proportion of male population aged 60-64 in the Member States, 
1985 and 1994 ., '. 69 
21 Expenditure on sickness per resident in relation to GDP per head, 1980,1990 and 1993 71 
22 Expenditure on invalidity benefit per person aged 15-64 in relation to GDP per head, 1980,1990 and 1993.... 71 
23 Invahdity: structure of benefits, 1980 and 1990 73 
24 Expendimre on unemployment per registered unemployed in relation to GDP per head, 1980, 1990 and 
1993 73 
25 Unemployment: structure of benefits, 1980 and 1992 75 
26 Expenditure on family benefit per child in relation to GDP per head, 1980,1990 and 1993 77 
27 Family: structure of benefits, 1980 and 1990 77 
28 Expenditure on maternity benefit per live birth in relation to GDP per head, 1980,1990 and 1993 78 
-156 
Notes and Sources 
29 Financing of social protection expenditure by source, 1980,1990,1993 78 
30 Employers' and protected person's contributions in relation to labour costs, 1980, 1990 and 1993 80 
31 Proportion of men and women unemployed in Member States, 1994 84 
32 Share of people under 25 and under 35 in total unemployment in Member States, 1994 85 
33 Proportion of unemployed out of work for 1 year or more, 1994 86 
34 Proportion of unemployed in receipt of unemployment benefit or assistance, 1994 86 
35 Proportion of unemployed and employed with various levels of educational attainment in Member States, 
1994 87 
36 Replacement rate at average earnings for a single person* 88 
37 Replacement rate at average earnings for a couple with 2 children* 89 
38-49 Replacement rates at varying lengths of time unemployed.in Member States 92-93 
50-61 Replacement rates at varying levels of earnings in Member States 96-97 
62 Replacement rate for 24 year old single person at 50% of average wage* 98 
63 Replacement rate for 24 year old married person with 2 children at 50% of average wage* '. 98 
64 Total and pubhc expenditure on health in relation to GDP, 1980,1990 and 1993 107 
65 Growth in health expenditure per head, 1980-85,1985-90 and 1990-93 107 
66 Self-employment in Member States, 1994 117 
67 Self-employed by sector of activity in Member States, 1994 117 
68 Part-time self-employed women in the Member States, 1994 118 
69 Self-employed without any employees in Member States, 1994 : 118 
70 Women aged 25-49 working part-time because they did not want a full time job, 1993 142 
71 Women aged 25-49 who are inactive because of family responsibilities, 1993 142 
72 Single women working full-time and part-time by age of youngest child, 1993 142 
73 Married women working full-time and part-time by age of youngest child, 1993 142 
74 Single women working full-time and part-time, 1993 142 
75 Married women working full-time and part-time, 1993 142 
Tables 
1 Current social protection expenditure, 1970-1993 60 
2 Growth of expenditure on social benefits at constant prices by function, 1980-85, 1985-90 and 1990-93 
(annual % change) 62 
3 Division of social protection expenditure by function, 1993 65 
157 
Notes and Sources 
4 Decomposition of expenditure on old-age pensions 70 
5 Decomposition of expenditure on invalidity, disabihty, occupational accidents and diseases 72 
6 Decomposition of expenditure on unemployment benefits 74 
7 Decomposition of expenditure on family allowances 76 
8 Decomposition of expenditure on maternity benefits 80 
9 Effect of housing costs at different rent levels on replacement rates 100 
10 Distribution of usual net monthly earnings in the UK 119 
11 Social insurance cover for the self-employed in the European Union 120 
12 Maternity benefits (1 January 1995) 136 
158 



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