COMMISSION OF THE EUROPEAN COMMUNITIES 
C0M(93) 531 final 
Brussels. 26.04.1994 
REPORT FROM THE COMMISSION 
Social protection 
in 
Europe 
1993 
Foreword Foreword 
The challenges facing the Member 
States of the Community in re­
spect of social protection he at the 
heart of the debate on competitive­
ness, growth and employment. The 
way in which these challenges are 
tackled will have a decisive impact 
on the future of European society. 
Clearly, the choice of priorities, the 
organisation and the methods of 
funding social protection are matters 
for each individual Member State. As 
the Commission has repeatedly 
stated, there can be no question of 
harmonising social security systems 
which are rooted in the culture, in­
stitutional structures and organisa­
tional procedures of each country. 
However, the Member States are all 
facing similar problems: adverse 
demographic trends — particularly 
the dramatic changes evident in the 
labour market — changes in family 
structures and the phenomena of so­
cial exclusion and poverty which 
they generate. Moreover, differences 
in levels of social protection can 
hamper, or even distort, freedom of 
movement 
It is for this reason that in 1992 the 
Council considered a new approach 
— the convergence of social pro­
tection objectives and policies 
(Council Recommendation 
92/442/EEC of 27 July 1972) with the aim of establishing common ob­
jectives as a guide for national 
policies, while at the same time 
leaving the Member States a com­
pletely free hand to operate and de­
cide how to finance their own 
systems. On this occasion the 
Council stressed the importance of 
exchanging information and the re­
sults of studies so that debate 
could be enhanced and new ideas 
promoted. 
This first report is an initial contribu­
tion to this exchange and to the en­
couragement of further study, with 
the intention of making it easier for 
Member States and social protection 
organisations to obtain the informa­
tion they need to help them define the 
options open to them and the action 
they intend to take. This report 
should, therefore, be seen as suppor­
ting, and closely related to, the an­
nual Employment in Europe report. 
The interaction between these two 
areas is one of the key factors deter­
mining economic and social progress 
in the Community. Furthermore, ar­
ticle 2 of the Treaty on European 
Union states that the Community 
must ensure "...a high level of em­
ployment and social protection...". 
This first report adopts a three-fold 
approach. First, it sets out a concise 
description of the situation as re­
gards social protection in the Community, considering features 
which are in common and aspects 
where there is divergence between 
the Member States. In addition to a 
description of each system and its 
underlying philosophy (Chapter 1) 
the report provides comparative 
data on the rates of benefit payable, 
in particular cases which are re­
garded as especially indicative 
(Chapters 4 and 5). 
Secondly, the report examines the 
changes that have occurred in the 
national systems since the early 
1980s — the trends in expenditure 
on social protection and its funding 
(Chapter 3), a review of the main 
changes in legislation with the aim 
of identifying the direction of pol­
icy in the Member States which es­
sentially face similar constraints 
(Chapter 2). 
Thirdly, the study considers a num­
ber of the most serious problems cur­
rently facing systems of social 
protection. What is the economic im­
pact of social protection (Chapter 6)? 
How can Member States best 
channel their efforts to increase their 
control oyer health expenditure 
(Chapter 7)? What is the effect of a 
second job on the social benefits a 
couple receives and how can social 
protection and economic activity be 
better reconciled (Chapter 8)? How 
have the various systems of social 
-'2 -3-
Foreword 
protection responded to the increas­
ing importance of atypical socio-
demographic cases (career breaks, 
broken families, etc.) (Chapter 9)? 
By so doing, this first Report does not 
intend to be exhaustive. Future issues 
of the Report will need to cover other 
aspects which it was not possible to 
include here (such as the protection 
of non-wage earners or the systems 
to help and encourage receivers of 
minimum income allowance to enter 
the labour market) as well as those 
which need further analysis (ie the 
relationship between social protec­
tion and employment, the manage­
ment of health expenditure, etc.). At 
the same time, the future issues of 
this Report will have to provide the 
most complete information possible 
on the reforms introduced in each 
Member States. 
The Community's action in setting 
common objectives as a guide for 
national policies should clearly boost 
the exchange of information on the 
effectiveness of particular national 
policies, while common assessment 
criteria are implicitly established by 
the Council recommendation. An in­
dication of the potential for each 
Member State to benefit from the 
experience of others will be the main 
contribution which the Community 
can make as regards social protec­
tion. 
4-
Table of contents 
Table of contents 
Foreword 
Summary of main points 
Chapter 1 
Chapter 2 
Chapter 3 
Chapter 4 
Chapter 5 
Chapter 6 
Chapter 7 
Chapter 8 
Chapter 9 Social protection systems in the Community: 
similarities and differences 
Recent reforms in social protection systems 
in the Community 
Social protection expenditure and its financing 
The scale of social protection in Member States 
Measures for social and economic integration 
Social protection: economic considerations 
Systems of health care in the Community 
Social protection and reconciling work 
with family life 
The impact of social and economic change 
on systems of social protection 
Sources and methodology 
Table of contents 
Summary of main points 
Summary of main points 
Differences 
and similarities 
Differences between Member 
States in expenditure on social 
protection have narrowed over the 
past 15 years as, on the one hand, 
spending in the Southern countries of 
the Community has risen substan­
tially and, on the other, spending in 
the most Northern countries (Bel­
gium, Germany, Netherlands and 
Denmark) has stabilised. In 1991 (the 
most recent year for which data are 
available) statistics compiled by Eu-
rostat using the common ESSPROS 
system show that transfers, in cash 
and in kind, effected through the 
channels of social protection ranged 
from just under 20% of GDP in Por­
tugal to just over 32% in the Nether­
lands. The difference in net terms is 
probably smaller since the taxes and 
social contributions levied on the 
benefits themselves are significantly 
higher in countries where benefits 
are also relatively high. 
A comparison of Member States as 
regards both the funds assigned and 
the levels of benefits and the criteria 
governing their availabihty reveals 
marked differences in the various 
areas of social protection. In the case of retirement pensions the 
difference between Member States 
varies considerably depending on 
whether the average amount of 
benefit actually paid to pensioners is 
taken or some theoretical calculation 
of the replacement rates (ie benefit 
levels in relation to former earnings). 
The average retirement pension 
ranges from a little under half of GDP 
per head in Portugal, Ireland and 
Spain to around three-quarters in 
France, the Netherlands, Italy and 
Greece. Calculations based on the 
rates in operation on a given date 
indicate, however, that theoretical re­
tirement pensions, expressed as a 
proportion of the final wage are in 
fact no lower in Spain or Portugal 
than those in France, Italy or the 
Netherlands. The difference in ex­
penditure on retirement pension is 
attributable more to variations be­
tween Member States in the numbers 
of men and women reaching retire­
ment age with incomplete contribu­
tion records — notably because some 
schemes have not yet reached ma­
turity — than to differences in the 
theoretical formulae used to calcu­
late pensions. 
Comparisons are more difficult as 
regards the other main area of social 
protection, namely health care 
(which averages 25% of expenditure 
throughout the Community com­
pared with 37% for retirement pensions), where quantitative indica­
tors of access to treatment of differ­
ent sections of the population are 
difficult to devise. Leaving aside 
Germany and the Netherlands, where 
the wealthiest people can opt out of 
national health insurance schemes, 
all Member States have systems of 
social protection which cover every­
one against the risk of illness as well 
as most, if not all, of the cost of their 
treatment. The (all too few) studies 
carried out on access to health care 
show that although the needs of the 
very poor are generally greater than 
those of the better off, all the systems 
operated in the Member States can be 
said to conform more or less to the 
principle of "equal treatment for 
equal needs". 
For unemployment benefits, the dif­
ferences between Member States are 
more striking. In Denmark, Belgium 
and the Netherlands, the unemployed 
receive benefit amounting on aver­
age to between 70 and 80% of GDP 
per head as compared with only 10% 
in Italy (where, however, dismissed 
workers can receive other forms of 
compensation) and Greece and just 
over 20% in Portugal and the UK. In 
this case, the variations can be ex­
plained not only by the numbers of 
unemployed receiving benefit but 
also by the benefit levels, which are 
significantly lower in Italy, the UK 
and Greece than elsewhere. 
Summary of main points 
Considerable differences are also 
evident as regards the benefits paid 
to wage earners who suffer illness or 
invalidity: a wage earner falhng ill 
continues to receive full wages in 
Belgium, Germany, Greece and Lux­
embourg; someone earning the aver­
age wage in industry would receive 
three-quarters in Denmark, Spain, 
Netherlands and Portugal, approxi­
mately two-thirds in France, half in 
Italy but only one-third in Ireland and 
the UK. Similar differences also exist 
as regards invalidity benefits. 
The widest differences concern fam -
ily allowances. For each young per­
son under 20, the level of allowance 
in 1991 amounted to less than 1% of 
GDP per head in Spain and Greece; 
in Belgium and France it was more 
than 8%, in the UK 9%, in Luxem­
bourg 11% and in Denmark no less 
than 12%. 
Social minima 
There are also differences, of va­
rying importance, as regards 
minimum social allowances — in 
other words the minimum benefits 
paid to those who have no income 
and who are not entitled to contribu­
tory benefits. A single person reach­
ing retirement age who has no 
income can obtain a non-contribu­
tory retirement pension in every 
Member State, though it is relatively 
modest in Greece (10% of GDP per 
head), Italy (16%), and Portugal 
(21%). In other Member States, le­
vels are similar when expressed in 
terms of national wealth — around 
30% of GDP per head in Belgium, 
Spain, France and the UK, 35% in Denmark, Luxembourg and Ireland 
and 40% in the Netherlands. 
Similarly, an adult unable to work 
(total invalidity) is also entitled to 
receive a non-contributory allow­
ance in all Member States. Again its 
level is modest in Greece (16% of 
GDP per head) and Portugal (21%); 
however, it is around 30% of GDP 
per head in Germany, Spain, France 
and the UK, 40% in Ireland and the 
Netherlands, 50% in Italy and Lux­
embourg, 55% in Denmark and 65% 
in Belgium. 
An adult able to work but without any 
income is not entitled to any mini­
mum income allowance in Greece, 
Portugal, Spain or Italy, though in the 
latter two countries, when living in 
certain regions, they may receive so­
cial assistance which is a sort of mini­
mum income. Provided the person is 
available for work they can receive 
benefit of this kind in the other Mem­
ber States, though it is relatively 
modest (a little over 20% of GDP per 
head) in France and the UK, slightly 
higher in Belgium and Germany 
(around 30%), higher still in Luxem­
bourg and Ireland (more than 35%) 
and highest of all in Denmark and the 
Netherlands (40%). 
Common 
constraints 
The policies followed by Member 
States over the past 15 years 
have been subject to two major con­
straints: persistently high levels of 
unemployment despite substantial 
job creation between 1985 and 1990 and the need to keep down public 
deficits or even, in a number of cases, 
to reduce them. In addition to these 
general constraints, there are two 
specific challenges facing social pro­
tection: coping with demographic 
imbalance from the beginning of the 
next century, which threatens the 
funding of pension schemes, and 
containing the explosion of costs of 
health care while, at the same time, 
maintaining the quality of care and 
providing access to everyone. 
All Member States have sought new 
sources of income by raising con­
tribution rates. Two countries, Bel­
gium and France, have also raised the 
ceiling on contributions and estab­
lished new types of contribution in 
order to enlarge the income base for 
social protection. However, the con­
straint on increasing charges on busi-
nesses so as not to jeopardise 
competitiveness and promote em­
ployment has led a number of Mem­
ber States to cut, and in some cases 
even to abolish, certain contributions 
and to make up for the loss from the 
national budget (notably, Germany 
and the Netherlands). 
The other approach was to try to cut 
expenditure. Despite the problems 
created by reassessment of estab­
lished rights, cuts in benefits have 
been imposed, either directly by ad­
justing levels downwards or indi­
rectly by tightening the conditions 
for obtaining benefit. The rules for 
indexing benefits have also been 
made less favourable, either by aban­
doning index-linking to wages or by 
temporary suspension of indexing in 
line with retail prices (Belgium, Ger­
many, Denmark, Greece, Luxem­
bourg and the Netherlands). 
-8-
Summary of main points 
In the case of unemployment 
benefits, the persistence of high rates 
of unemployment has led Member 
States to modify their systems signi­
ficantly, either by lowering replace­
ment rates or by imposing tougher 
conditions for entitlement to benefit, 
by, for example, extending training 
periods (Germany, UK) or by in­
creasing the period over which 
contributions have to be paid, par­
ticularly for older workers (Belgium, 
Denmark, Germany, Spain and 
France). Early retirement schemes 
introduced at the end of the 1970s 
and the beginning of the 1980s, de­
signed to free jobs for the young, 
have proved to be very costly and 
some Member States (Denmark, for 
example) sought to reduce their im­
portance at the end of the decade. 
On the other hand, entitlement to un­
employment benefit was extended to 
young people entering the labour 
market for the first time and special 
measures were introduced for this 
group (Belgium, Denmark, France, 
Netherlands and Portugal). More 
generally, action was taken in all 
Member States to combat unemploy­
ment — the unemployed, especially 
the young, were obliged to accept 
temporary jobs in the public sector 
(Denmark, France), part-time work­
ing (Belgium, France), geographical 
mobility (Italy) and the creation of 
new firms (Belgium, Denmark, Ire­
land, Italy) were encouraged and 
measures were taken to provide in­
come support for the lower paid 
(UK) and to help the long-term un­
employed to find work (Belgium, 
France, UK). 
Persistently high levels of unemploy­
ment have not made it easier to adapt retirement pension schemes to the 
demographic changes. Besides the 
reforms introduced as a result of the 
Community Directive on the equal 
treatment of men and women as re­
gards social security (79/7/EEQ, the 
main topic for debate has been the 
age of retirement. A significant 
change has occurred over the past 10 
years in this respect: initially early 
retirement from the labour market 
was encouraged, but then, once the 
threat to the financial stability of pen­
sion schemes became clear, most 
Member States have sought, on the 
contrary, to put back the effective age 
of retirement, either by progressively 
increasing the legal age or by increas­
ing the number of years of contribu­
tions necessary to qualify for a full 
pension. 
At the same time, in a number of 
Member States the method of calcu­
lating pensions has been adjusted to 
enable, in particular, more flexible 
retirement arrangements to be de­
veloped (Belgium), and, progress­
ively, part-time working to be 
combined with a partial pension 
(Denmark, Germany) in line with thé 
Council recommendation of 10 De­
cember 1982 (82/857/EEC), as well 
as to allow periods of inactivity when 
bringing up small children in the cal­
culation of pension entitlement 
(Germany, France, Luxembourg). 
The concern about the prospective 
ageing of the population in European 
countries early in the next century 
has, however, not led many Member 
States to implement policies aimed at 
increasing the birth rate. Family 
allowances have hardly been con­
sidered a priority and their share of 
expenditure on social benefits has fallen in the Community as a whole 
by more than 30%. By contrast, 
maternity benefits have improved 
(Denmark, Spain, France, Ireland, 
the Netherlands and Portugal) and 
benefits designed to allow parents to 
take time off work during the first 
few years after their children are born 
have been introduced (Germany and 
France), with the aim of better recon­
ciling working careers with family 
life for parents of young children. 
In the case of health care, the past 
decade has been marked by two 
major phenomena. The first was the 
introduction in the countries in the 
South of the Community of national 
health systems enabling everyone 
to receive free treatment. At the 
same time, however, often drastic 
measures were taken and/or ex­
tended in all Member States to limit 
the cost of health care, patients being 
asked to contribute to the cost of 
treatment, drugs and medical equip­
ment; far-reaching reforms were also 
adopted in a few Member States to 
introduce market forces in health ser­
vice management to a greater degree 
(Netherlands, UK). 
A number of Member States have, 
moreover, been concerned by the 
strong rise in the numbers receiving 
invalidity pensions and by the fact 
that this type of benefit tends to be 
used as a means of retiring from the 
labour market by those not entitled to 
unemployment benefit or not able to 
obtain an early retirement pension 
The reform introduced in the Nether­
lands to remedy the problem was to 
make employers bear more of the 
cost of allowances paid to those un­
able to work for reasons of illness or 
invalidity and to give them a finân-
-9-
Summary of main points 
cial incentive to employ disabled 
people. The UK, for its part, intro­
duced an allowance specifically to 
enable the disabled to meet the addi­
tional cost of working. 
The overall effect of the measures 
taken by Member States has been to 
contain expenditure on social protec­
tion. Contrary perhaps to popular be­
lief, social spending in 1991 in the 
Community as a whole was little dif­
ferent in relation to GDP than it had 
been ten years earlier. Indeed in five 
of the Member States — Belgium, 
Denmark, Germany, Ireland and 
Luxembourg — expenditure relative 
to GDP was lower in 1991 than it had 
been in 1981. In other Northern 
countries, moreover, the increase 
was relatively small and mainly 
linked to higher levels of unemploy­
ment in the later year. It was, there­
fore, only really in the South of the 
Community where social protection 
systems were still being developed 
that any substantial growth in 
spending relative to GDP occurred. 
Selectivity 
and targeting 
During periods of recession 
when resources are scarce and 
needs many, there is a great tempta­
tion to concentrate benefits more on 
the most needy. The tendency to cut 
insurance benefits and replace them 
with benefits which are means-tested 
has been a major feature of the 
policies followed in the UK over the 
past 10 years. The same is also true 
of other Member States, mainly for 
family allowances and housing benefits. In the Netherlands, a special 
system has been set up to pay benefits 
to the sick, the invalided, the unem­
ployed or the elderly with income 
less than the social minimum level— 
a level which is relatively high com­
pared with other Member States. 
In general terms, besides the fact that 
means-testing is often difficult to ad­
minister, this targeting of benefits 
seems to have proved difficult to 
operate in countries with Bismarc-
kian-based systems, where the link 
between contributions paid and entit­
lement to benefits is deeply rooted. 
Labour market conditions have 
nevertheless prompted most Mem­
ber States to direct benefits at guar­
anteeing minimum income to the 
neediest and, in particular, the unem­
ployed: following Germany (1961), 
the Netherlands (1963), Belgium 
(1974), Denmark (1974) and Ireland 
(1975) — where such system were 
already in operation — Luxembourg 
(1986) and France (1988) all intro­
duced a guaranteed minimum in­
come level while the UK radically 
reformed its system (1988). 
At the same time, non-contributory 
minimum allowances have been es­
tablished or developed, especially for 
the elderly and single-parent 
families. Spain, Greece, Italy and 
Portugal, which have no general sys­
tem for guaranteeing income, have 
introduced non-contributory, means-
tested retirement pensions. Spain and 
Portugal have also set up social as­
sistance benefits for the unemployed 
who have exhausted their entitlement 
to insurance benefits. In addition, 
Germany, France and Luxembourg 
have introduced means-tested benefits specifically for single-par­
ent families. 
Privatisation 
— few actual 
examples 
The past 10 years have also been 
characterised by intense debate 
on the future of social protection and, 
in particular, on the scope for, at least 
partial, privatisation in certain areas. 
The UK has shown the way, first by 
making it easier to opt out of national 
supplementary pension schemes in 
favour of company pension schemes 
(1976) and then by encouraging per­
sonal saving schemes (1986). How­
ever, there have been only a few real 
reforms in the direction of privatisa­
tion in other Member States: in Bel­
gium, for example, industrial 
accident insurance has been trans­
ferred to the private sector but is still 
strongly regulated (1988); very re-
cendy, Italy seems to have gone in 
the same direction, at least so far as 
health care is concerned. In addition, 
a number of Member States (Bel­
gium, France) have introduced in­
centives for personal saving, through 
tax relief for old-age pensions, but 
have stopped short of allowing 
people to opt out of paying contribu­
tions to national insurance schemes. 
Overall it cannot be said that national 
social protection schemes have been 
slimmed down in any major way in 
recent years, a fact also confirmed by 
Eurostat statistics. On the contrary, 
there is even evidence of social 
- 10-
Summary of main points 
protection being extended to cover 
new categories (in Germany, Greece, 
Spain and Portugal). 
Convergence 
of objectives 
and policies 
The role of social protection in the 
operation of developed indus­
trial societies is sometimes mis­
understood because attention is 
riveted on financial problems. Social 
protection is, however, an effective 
means of ensuring the necessary soli­
darity between those who receive an 
income from work and those who are 
prevented from working because of 
their age, their state of health or be­
cause they are unable to find a job. In 
an economic context in which the 
combination of rapid technological 
progress and fierce international 
competition can be a cause of social 
exclusion and poverty, social protec­
tion is a powerful force for social 
cohesion and it is well known how 
much social cohesion — contributes 
to a country's competitiveness. 
The impact of social protection on 
competitiveness and job creation is a 
cause of much discussion and debate, 
particularly in periods of slow 
growth when it is often necessary to 
increase social contributions in order 
to contain financial deficits. Al­
though, on the basis of the statistics 
available, no discernible association 
can be identified between either the 
level or the growth of social spending 
in Member States, on the one hand, and their trade performance, employ­
ment or unemployment, on the other, 
it should be acknowledged that tax­
ing the use of labour in the produc­
tion process might be detrimental to 
achieving an adequate labour content 
of growth. 
The importance of social protection 
has, moreover, been explicitly 
recognised by the Community since 
the Treaty of Rome. The Treaty of 
Maastricht, stipulates in Article 2 that 
the "Community shall have as its task, 
by establishing a common market and 
an economic and monetary union and 
by implementing the common policies 
or activities referred to in Articles 3 
and 3a, to promote throughout 
the Community a harmonious and bal­
anced development of economic 
activities, sustainable and non-infla­
tionary growth respecting the environ­
ment, the high degree of convergence 
of economic performance, a high level 
of employment and of social protec­
tion, the raising of the standard of liv­
ing and quality of life, and economic 
and social cohesion and solidarity 
among Member States." 
By its adoption on 27 July 1992 of a 
recommendation to Member States 
on the convergence of social protec-
tion objectives and policies 
(92/442/EEC), the Council of the 
European Communities has clearly 
set out Community policy in this 
area: to promote the convergence of 
policies in Member States around 
common objectives whilst fully re­
specting the independence and diver­
sity of systems in operation in each 
Community country. 
These common objectives are 
defined in the text of the recommen­dation in terms of three essential 
tasks of social protection: 
• to guarantee to anyone legally re­
siding in a Member State a level 
of income in keeping with human 
dignity and to give them access to 
the system of health care existing 
in the Member State; 
• to help further the social integra­
tion of everyone legally resident 
within the territory of the Mem­
ber State and the integration into 
the labour market of those who 
are in a position to exercise a 
gainful activity; 
• to provide wage earners when 
they stop working at the end of 
their careers or if they are forced 
to interrupt them because of 
sickness, accident, maternity, in­
validity or unemployment, with 
a replacement income which will 
maintain their standard of living 
in a reasonable manner in ac­
cordance with their participation 
in appropriate social security 
schemes. 
These basic tasks of social protection 
serve to some extent to reconcile the 
two main traditions around which the 
social security schemes in the Mem­
ber States of the Community have 
been constructed: 
• that, on one hand, which has its 
origin in the enterprise and 
which confers on employees, in 
exchange for the payment of 
contributions, the right to receive 
a replacement income, calcu­
lated in relation to their former 
salary, when they stop working 
-11 
Summary of main pointa 
either permanently or tempo­
rarily; 
• that, on the other, based on the 
notion of national solidarity, 
which assures any needy inhabi­
tant of a country a flat-rate 
benefit funded either by national 
social security schemes or di­
rectly by the state budget. 
This synthesis of the two traditional 
models — the "Bismarck" and the 
"Beveridge" — can also serve to 
define the outline of a European 
model of social protection, a model 
which would include the guarantee 
of a minimum income to all of its 
citizens, ensure their integration into 
society and the economy and provide 
them with the means of maintaining 
their income at a reasonable level in 
relation to their earnings when they 
are unable to work. 
Social protection 
and integration 
At the same time as it adopted its 
recommendation on conver­
gence, the Council also adopted a 
recommendation "on common crite­
ria concerning sufficient resources 
and assistance in social protection 
systems" (92/441/EEC), which sets 
out certain principles with regard to 
the recognition of this right and its 
implementation. These principles in­
clude the recommendation that 
"every person who does not have ac­
cess individually or within the house­
hold in which he or she lives to 
sufficient resources is to have access 
to such right subject to active availa­bihty for work or for vocational train­
ing with a view to obtaining work in 
the case of those persons whose age, 
health and family situation permits 
such active availabihty or, where ap­
propriate, subject to economic and 
social integration measures in the 
case of other persons". 
The importance of including these 
social protection mechanisms in a 
general policy aimed at preventing 
exclusion has been recognised by all 
Member States in the Community as 
a major, even priority, element of 
their policies in this area. At the same 
time, views about the way in which 
they should be included has changed 
little. For many years, emphasis was 
placed on the need to prevent social 
protection having disincentive ef­
fects. The aim was — and still is — 
to avoid the receipt of unemployment 
or invalidity benefits, or more gener­
ally, means-tested benefits, dimin­
ishing the interest and, therefore, the 
efforts of recipients to regain finan­
cial independence through gainful 
employment. 
Today, account is being increasingly 
taken of the fact that simply looking 
for a job does not necessarily ensure 
finding one and that the system of 
social protection must itself adapt to 
this new situation of job scarcity. It 
is, therefore, more important to link 
the payment of social benefits to ac­
tive policies to prevent exclusion: the 
social exclusion of the invalided or 
disabled, the economic exclusion — 
which in turn leads to social exclu­
sion — of the long-term unemployed 
and of anyone else unable to be inte­
grated into the labour market. A three-way 
adaptation 
This adaptation of systems of so­
cial protection is taking place in 
a difficult context where the con­
straints imposed are not just econ­
omic but also political. On the one 
hand, the systems themselves are 
being called into question by some 
who doubt their effectiveness and 
even legitimacy, because of the ex­
cessive cost they impose on national 
economies. On the other hand, the 
depressed state of the economy in the 
early 1990s and the need for budge­
tary consolidation directed at achiev­
ing sustainable public deficits and 
debt positions — which are also re­
quired in the run-up to economic and 
monetary union — force all Member 
States to find a new balance, both in 
the short and medium-term, between 
revenue and expenditure on social 
protection. 
The extent to which Europeans are 
attached to their national systems of 
social protection is, however, strik­
ing. Responding to the question 
posed as part of a Eurobarometer sur­
vey in Spring 1992 on whether the 
State should continue to offer every­
one a wide range of social security 
benefits even if it meant increasing 
taxes and contributions, 66% of the 
Community population replied "yes" 
and only 27% "no". When asked 
whether they agreed that social se­
curity was too expensive for society, 
and that therefore benefits should be 
reduced and contributions lowered, 
55% (as against 36%) replied that 
they did not. It is also clear that the 
great majority in most Member 
12-
Summary of main points 
States consider that the unemployed, 
the elderly, the sick or invalid and the 
poorest are inadequately protected 
by society. 
In adopting its two recommendations 
in 1992, the Council stated its ambi­
tion to retain, adapt and if necessary 
extend social protection in Member 
States. This adaptation can probably 
be achieved in the following three 
ways. 
The first imperative is for each sys­
tem to take greater account of the 
changes affecting European society, 
in the form of: 
• the age structure of the popula­
tion, which will force pension 
systems to adapt; 
• increased life expectancy, which 
will lead to new claims on social 
protection by the elderly; 
• the instability of the labour mar­
ket, which will cause increas­
ingly frequent interruptions to 
working careers; 
• the persistently high level of un­
employment, which will call for 
improved coordination between 
financial support for the unem­
ployed and active measures to 
help them find employment; 
• the emergence of new forms of 
poverty and exclusion, which 
will necessitate the implementa­
tion of the basic right of every­
one to have enough income to 
live in a way compatible with 
human dignity; • changes in the structure of 
families, which make it necess­
ary to question the justification 
for derived entitlements; 
• equality between men and 
women as regards social se­
curity. 
The second imperative, as mentioned 
in the recommendation on conver­
gence, is that social protection sys­
tems should be managed with 
maximum efficiency, having regard 
to the rights, needs and circum­
stances of those concerned, and with 
maximum effectiveness in terms of 
organisation and operation. On the 
one hand, it appears more than ever 
necessary to eliminate the obstacles 
to employment, which might be 
caused by the way in which social 
protection is funded. This must, how­
ever, take account of the fact that the 
structure of finance cannot be con­
sidered independently of the struc­
ture of benefits and that a balance, 
specific to each Member State, must 
be retained between contributory and 
non-contributory benefits so that the 
people who in one way or another are 
called on to finance the costs of social 
protection remain involved. On the 
other hand, the costs of operating so­
cial protection systems must be con­
trolled in the knowledge that strong 
management is essential to maintain 
the confidence of people involved. 
The third imperative relates to what 
might conveniently be called the 
paradox of social protection, namely 
the fact that social security systems 
cannot alone assure the social se­
curity of the people they cover and 
that they can only ever strive to re­
duce their insecurity. Accordingly, a country which allocates a large 
proportion of its GDP to social 
protection does not necessarily have 
a good social protection policy as a 
result. High expenditure might be 
due, for example, to short-comings in 
the procedures for paying unemploy­
ment benefit or health care expendi­
ture being out of control. An optimal 
policy in this area would be one 
where the fewest people had to rely 
on social transfers and where others 
in need could obtain replacement 
income on a sufficient scale, 
accompanied, where possible, by in­
centives and help to find a job. 
One of the aims of social protection 
is to transfer income to those recog­
nised by society as having the right 
not to work, either because of their 
state of health or simply because of 
their age. However, social protection 
must also be aimed at supporting 
those willing to work but unable to 
do so either because they cannot find 
employment or because of family ob­
ligations. This gives rise to the idea 
that social protection systems must 
increasingly include ways of mana­
ging without it, such as prevention, 
combating exclusion and active em­
ployment policy. 
This is probably the greatest chal­
lenge facing Member States in this 
area in the next few years. It is the 
aim of the Community, and of this 
report on Social protection in Eu­
rope in particular, to support and ex­
tend action taken by Member States 
to confront this challenge. 
13 
Summary of main points 
-14-
Chapter 1 - Social protection systems In the Community: similarities and differences 
Chapter 1 Social protection 
systems in the Community: 
similarities and differences 
Social protection in the sense of 
the State assuming ultimate re­
sponsibility for the health and wel­
fare of its citizens is very much a 
European invention. The systems of 
protection which now operate in all 
Member States began to evolve in the 
latter part of the 19th Century in a 
number of European countries, as a 
response to the new, and large-scale, 
social problems created by the rapid 
process of industrialisation, com­
bined with the increasing concentra­
tion of people in towns and cities. 
Beginning in Germany in the 1870s, 
governments throughout Europe, ac­
cepting the principle — and indeed 
necessity — of state intervention to 
tackle these problems, gradually took 
action to alleviate the poverty and 
hardship caused when workers, de­
prived of access to the land, became 
incapable of working and earning a 
wage. 
The initial focus of social pohcy was, 
therefore, on providing relief in cases 
of sickness, industrial injury, inva­
lidity and old-age, generally through 
the introduction of legislation com­
pelling employers and employees to 
insure against these eventualities. It 
took some time after this, however, 
for the principle of universal support for all members of society, irrespec­
tive of whether or not they were — 
or had been — in employment, to be 
accepted. It was not until the inter-
war years in some countries and the 
early post-war years in others that 
measures were introduced to provide 
health and welfare assistance to all 
their citizens and to try to ensure that 
everyone had access to at least a 
minimum level of subsistence. 
In the Northern countries of Europe, 
such a universal system of income 
maintenance and the provision of 
health care had been established by 
the 1960s and subsequent efforts 
have been directed at rationalisation 
and consolidation of the disparate as­
pects of support, which had often 
developed in a chaotic and piecemeal 
way. In the less developed and poorer 
Southern parts of the Community, 
systems with more or less complete 
coverage are still in their infancy. 
Although the social protection sys­
tems which now exist in Member 
States differ in detail, in the way they 
are financed and in the scale of sup­
port provided, their main features are 
very similar. This is partly a result of 
their common ancestry. It also, how­
ever, reflects the fact that they are attempting to tackle the same kinds 
of problem and have to contend with 
similar social and economic develop­
ments, a fact which has been rein­
forced by the process of closer 
integration. 
All Member States provide their 
citizens with income support during 
old-age, sickness, invalidity, mater­
nity and unemployment, as well as 
when caring for children, and pro­
vide access to free, or highly subsi­
dised, health care. 
Apart from the scale of support, the 
main differences, which partly re­
flect differences in the way national 
systems have evolved and variations 
in the political and institutional struc­
tures of the different countries, relate 
to: 
• the extent to which support is 
earnings-related as opposed to 
flat rate; 
• the prevalence of means-testing 
to determine entitlement to sup­
port and the amount to be paid; 
• the extent to which there is a 
right to a guaranteed minimum 
level of income; 
15-
Chapter 1 - Social protection systems In the Community: similarities and differences 
• the extent to which benefits in 
kind (eg health care) are avail­
able to all at the time and the 
place they are needed; 
• the form in which revenue to fin­
ance the system is raised and, in 
particular, the importance of 
contributions from employers 
and employees as against 
general taxation; 
• the role of employer and em­
ployee representatives in mana­
ging the system in relation to the 
role of the State; 
• the role of private sector institu­
tions in providing support and 
services as compared with the 
public sector. 
In broad terms, Member States can 
be divided into four main groups so 
far as the basic characteristics of so­
cial protection systems are con­
cerned: those where insurance 
principles predominate and benefits 
are closely related to contributions; 
those where the insurance principle 
is less firmly entrenched, where 
benefits are more related to needs and 
finance comes more from general 
taxation; those which occupy an in­
termediate position; and those where 
the system is still in its infancy. 
In practice, however, this division is 
somewhat arbitrary since in all Mem­
ber States insurance principles apply 
to some extent and in each case part 
of the system is directed at ensuring 
basic needs are met The dividing 
lines between the groups are, there­
fore, extremely blurred and are tend­
ing to become more so over time as 
the same pressures for change push governments to modify systems in 
similar ways. Nevertheless for sum­
mary purposes the division is of some 
use. 
The first group includes Germany, 
France, Belgium and Luxembourg 
— and might also include the Nether­
lands and Italy which are included in 
the third group below — all of which 
have systems based predominantly 
on conventional insurance prin­
ciples, focused largely on those in 
employment and aimed principally at 
maintaining levels of income when a 
person is no longer able to work or 
when they retire. Those in work — 
both employees and self-employed 
— pay a proportion of their earnings 
into an insurance fund and these con­
tributions entitle them to receive 
benefits, both in cash and in kind, 
when they are in need. At the same 
time, the payments employees make 
into the fund are supplemented by 
contributions made on their behalf by 
employers. 
In most cases what people are en­
titled to receive is related to their 
earnings when in work—health care 
and family allowances being the 
principal exceptions — and, there­
fore, related to the amount con­
tributed either by themselves or by 
their employers. Accordingly, the 
system operates both to maintain in­
come levels when a person falls ill, 
becomes incapacitated, loses their 
job or retires and to link benefits to 
contributions. In large measure, 
therefore, the systems serve to redis­
tribute the income of individuals over 
their lifetimes so that fluctuations in 
what they have to spend are reduced 
and periods of potential hardship are 
avoided. Though there are differences in the 
way that schemes are administered, 
in the role in their management 
played by the private institutions and 
the two sides of industry — the social 
partners — and in the division of 
contributions between employers 
and employees, the systems in these 
countries are essentially similar. 
In all four cases, while contribu­
tions are the main source of revenue, 
this is supplemented from general 
taxation. 
In all four cases also, the insurance-
based scheme is complemented by 
social assistance available to those in 
need who, because they have not 
contributed sufficiently, or at all, to 
the insurance fund, are not eligible 
for benefit or who have exhausted 
their entitlement by drawing all the 
benefits they are eligible to receive. 
In all of these countries, the state 
takes responsibility for ensuring that 
no-one's income falls below a mini­
mum guaranteed level irrespective of 
the employment status of the person 
concerned and of the contributions 
made in the past. 
This assistance is financed from 
general taxation in all of the countries 
and its payment is subject to means-
testing, in the sense that the income 
available to a household — or its 
means of support — is assessed in 
order to determine the level of 
support which needs to be provided. 
The provision of health care in these 
countries is also based on insurance 
principles, with services being 
financed from contributions in the 
same way as cash benefits, though in 
this case, with everyone having ac­
cess to services irrespective of the 
-16-
Chapter 1 ~ Social protection systems In the Community: similarities and differences 
contributions paid. Services are 
mainly supplied by the private sector 
with charges being reimbursed by the 
State. 
The second group of countries in­
cludes those, such as the UK, Den­
mark and Ireland, where the 
insurance principle is less firmly en­
trenched. In all these countries, 
general taxation is a more important 
source of finance than for the first 
group of countries and benefits tend 
to be less closely linked to contribu­
tions. Nevertheless, the systems 
which prevail in these three countries 
are less similar than for the first 
group of countries. 
In particular, the UK and Ireland rely 
much more on employers' and em­
ployees' contributions for financing 
social protection than Denmark, 
where contributions account for a 
very minor part of funding and where 
most revenue is raised from general 
taxation, especially from taxes on in­
come. On the other hand, in Denmark 
social benefits are very much related 
to earnings when in work, as in the 
first group of countries, whereas in 
the UK and Ireland, they tend to be 
predominantly flat rate (reflecting 
the influence of Beveridge whose 
ideas about universal entitlement to a 
subsistence level of income — at 
least for those who were or who had 
been in employment — were the 
basis for the British welfare state de­
veloped immediately after the War). 
In Denmark, therefore, the system 
aims at maintaining levels of income 
when a person is not working and 
since taxes paid tend to be related to 
income, there is an effective link 
between payments into the social protection system and benefits re­
ceivable. In the UK and Ireland, on 
the other hand, the system aims at 
providing a minimum level of sup­
port. Only in the case of earnings-re­
lated pensions, most of which are 
administered by private pension 
funds, is there any link between the 
amount of contributions paid and the 
amount of benefit received in the 
UK, whereas in Ireland, unemploy­
ment benefit also includes a limited 
earnings-related element. Neverthe­
less in both countries, entitlement to 
benefit still depends on the contribu­
tions record of the person concerned. 
In cases where there is no entitlement 
to benefit, where it is insufficient for 
the needs of individuals or family 
units, or where entitlement has been 
exhausted, people have to fall back 
on social assistance, eligibility for 
which in the UK and Ireland depends 
on being out of work for a legitimate 
reason — because of being ill, dis­
abled, injured, having a baby or being 
unable to find employment — and 
having income, and accumulated 
savings, below a specified level. In 
both the UK and Ireland, social as­
sistance is paid at rates which are 
normally lower than social benefit 
rates — though in the UK, the dif­
ference is marginal — and, in prac­
tice, the main difference between 
benefits and assistance in the two 
countries is that the former is paid 
automatically, while the latter is 
means-tested. 
In the UK, Family Credit is available 
for those in low paid or part-time 
work with children. In Denmark, the 
system attempts to ensure that every­
one is guaranteed a minimum level of 
income. As in the first group of countries, 
health care in Denmark and the UK 
is part of the social protection system 
and is available to everyone free of 
charge (except for drugs) irrespec­
tive of their contributions record. In 
both cases, however, the service is 
supplied mainly by the pubhc sector 
rather than by the private sector as in 
the first group of countries. In Ire­
land, on the other hand, free health 
care, apart from treatment in hospital 
which is provided free of charge to 
most people, is only available to 
those on low incomes. 
The third group of countries includes 
those with social protection systems 
somewhere between the first two 
groups, namely, the Netherlands and 
Italy. This division, as noted above, 
is largely a matter of degree and in 
their main features, the Netherlands 
and Italy are not so different from the 
first two groups of countries. 
In the case of Italy, in particular, con­
tributions, especially those paid by 
employers, are just as important a 
source of finance as in France or Bel­
gium, and benefits, apart from family 
allowances, are very much related to 
income. The unemployment benefit 
system, however, is much less de­
veloped than in most other Member 
States, with only low rates of benefit 
being payable as of right. As a result 
a great deal of reliance is placed on 
the Cassa Integrazione Guadagni 
(fund for the integration of earnings) 
which is essentially a scheme in­
tended to cover partial or temporary 
unemployment 
Moreover in Italy, unlike in the first 
two groups of countries, the system 
of social assistance for those not 
17 
Chapter 1 - Social protection systems In the Community: similarities and différences 
eligible for benefits is not designed to 
ensure that everyone is guaranteed a 
minimum level of income. It is oper­
ated by local government, along with 
social services and health care, and 
varies somewhat across the country. 
In the Netherlands, by contrast, the 
social — or "general" — assistance 
system is extremely well developed 
and is intended to cover everyone 
with an inadequate level of income 
irrespective of their status, including 
those receiving social benefits if 
these are insufficient to raise their 
income to what is defined as the sub­
sistence level — or "social mini­
mum". This system complements the 
social insurance scheme under 
which, as in other countries, both 
contributions and benefits are related 
to income. 
The fourth group of countries con­
sists of Spain, Portugal and Greece 
where the systems are similar in kind 
to those in other Member States but 
less well developed. All three rely 
relatively heavily on contributions 
from employers to finance social 
benefits, though health care in Spain 
and Portugal, in particular, is largely 
financed from taxation. In all three 
cases, the standard types of benefit 
are earnings-related as are contribu­
tions. 
A relatively high proportion of 
people, however, are not eligible for 
benefit and rely on social assistance, 
in the form of a minimum level 
of pension or flat-rate invalidity 
allowance, for example, but at 
comparatively low rates. In neither 
Spain, Portugal nor Greece is assist­
ance designed to guarantee a 
minimum level of income. In summary, all Member States have 
some form of social insurance 
scheme under which the amounts 
paid and received are to a greater or 
lesser extent related to income. In the 
UK and Ireland exceptionally most 
benefits are flat rate, reflecting the 
philosophy that they should be based 
on need rather than income. In other 
countries, only child or family allow­
ances tend to be flat rate, though in a 
number of cases they vary with the 
number and even the age of the child­
ren (in Belgium, France, Luxem­
bourg and the Netherlands). 
In all countries, all those in work 
whose income is above a minimum 
level, as well as employers, contrib­
ute to the funding of social benefits, 
partly in order to engender a feeling 
of solidarity, though what is received 
in most cases bears some relationship 
to what has been contributed. Al­
though the self-employed are in­
cluded in the contributory schemes 
throughout the Community, only in 
Denmark and Luxembourg are they 
eligible for unemployment benefit. 
In all Member States also, social in­
surance is supplemented by social 
assistance to cover those who do not 
qualify through their employment — 
and contributions — record for 
benefits. This is designed in most 
countries to bring income up to a 
specified minimum level and is, 
therefore, subject to means-testing to 
determine the amount of assistance. 
In a number of countries, however, 
especially in the South of the 
Community, social assistance is still 
discretionary and, as a result, does 
not necessarily ensure that no-one 
falls below a subsistence level of 
income. A minimum level of health care 
throughout the Community is avail­
able to virtually everyone, irrespec­
tive of income or contributions and in 
most countries, the majority of ser­
vices are supplied either free of 
charge or at a highly subsidised rate. 
More detailed information about the 
social protection systems operating 
in each of the Community countries 
is set out below. 
Germany 
The German social protection 
system is based on social insur­
ance principles for those in employ­
ment and earning more than around 
250 ECU a month. In addition, social 
assistance provides minimum 
benefits for those in need. 
Social insurance 
The pension insurance scheme is 
mandatory for employees and a 
number of other groups, like certain 
of the self-employed. Anyone not in­
sured compulsorily can apply for 
voluntary coverage. The scheme pro­
vides cash benefits in cases of retire­
ment and death, the amount of 
benefit depending on the number of 
years of insurance and average 
income in relation to the average in­
come of all those in employment, the 
level being adjusted each year in line 
with the current average net wage. 
Occupational pension schemes are 
also important, covering around 65% 
of those in employment and giving an 
-18-
Chapter 1 - Social protection systems In the Community: similarities and differences 
average benefit of some 200 ECU a 
month. 
In the event of invalidity, people may 
be eligible for earnings-related 
benefits from either the pension in­
surance scheme or the industrial ac­
cident insurance scheme, depending 
on the cause. 
All employees with earnings below a 
specified amount (around 30 thou­
sand ECU a year) have to belong to 
the health Insurance scheme which 
also covers pensioners, students and 
certain other groups in need of pro­
tection, as well as many of the self-
employed. The scheme provides both 
health care and cash benefits if a per­
son is unable to work (80% of earn­
ings up to a maximum amount), 
though the first six weeks of incapac­
ity are covered by the employer. It 
also provides maternity care and cash 
benefits for a specified period during 
pregnancy and after childbirth. 
The organisation of the scheme is 
complicated, with around 1 200 self-
governing funds, each of which 
determines its own rate of contribu­
tion (which varies between 8% and 
15%), half being paid by the em­
ployer, half by the employee. The 
public scheme covers 92% of the 
population, the other 8% being 
covered by private health insurance 
schemes. 
Membership of the industrial acci­
dent insurance scheme is also 
mandatory for employees and certain 
self-employed It is administered by 
the Employers' Liability Insurance 
Associations — pubhc self-govern­
ing institutions in each branch of in­
dustry or trade. The scheme provides services in cases of industrial acci­
dent or occupational illness as well as 
invalidity benefits and widows' pen­
sions, the rate varying according to 
the perceived scale of risk. 
The unemployment insurance 
scheme, administered by the Federal 
Employment Agency, provides 
benefits amounting to 63% of net 
wages (68% for those with children) 
for a period of between 6 months and 
around 2 years depending on the 
length of employment and the age of 
person concerned. The scheme also 
provides a variety of measures to pre­
vent job losses happening or to help 
people back to work. As with health 
insurance half the rate of contribution 
is paid by employers. 
Family allowances vary with the 
number of children and may be re­
duced if the income of parents ex­
ceeds certain limits. Parents are 
entitled to take "education leave" of 
up to three years for each child and 
to receive an allowance of some 
300 ECU per month for a maximum 
of 18 months. 
Social assistance 
Social assistance provides a mini­
mum level of income for any­
body not covered by social insurance 
schemes — or who has exhausted 
their entitlement — who is in need 
and who is unable to earn a living. 
Besides receiving basic allowances, 
recipients are also eligible for health 
care and other social services. France 
The social security system in 
France consists of a number of 
so-called "legal schemes" (régimes 
légaux) and various supplementary 
forms of action. 
The legal schemes 
The legal schemes are the basis of 
the system. There are many of 
them and each has its own system of 
finance and allocation of benefits, in 
each case related to the earnings or 
contribution record of members, 
though none of them include protec­
tion against unemployment. They 
can be divided into four categories: 
• the "general scheme" (le régime 
général) for employees in indus­
try and services who are not 
members of special schemes 
covers old-age, sickness, mater­
nity, invalidity, death, industrial 
accidents and occupational dis­
eases and family allowances. It 
also provides insurance for those 
not included in any compulsory 
scheme for health care. Fund­
ing comes essentially from 
employers' and employees' 
contributions (only the former 
for industrial accidents, occu­
pational diseases and family 
allowances). 
• the "agricultural scheme" (le 
régime agricole) covers farmers 
and agricultural workers. Con­
tributions finance only 20% of 
benefits, other funds coming 
from special taxes (on cereals, 
19 
Chapter 1 - Social protection systems In the Community: similarities and differences 
tobaccos and so on, as well from 
VAT), and state subsidies; 
"special schemes for em­
ployees", in the case of a few oc­
cupations (professional soldiers, 
miners, railway workers, for 
example), cover their members 
against all risks, but in most 
cases provide only partial cover­
age and leave other risks to be 
covered by the general scheme 
(as in the case of civil servants 
and electricity and gas workers). 
A number of special schemes 
are managed directly by em­
ployers (eg SNCF or Electricité 
de France); 
"independent schemes for the 
self-employed" include only 
pensions and sickness and 
maternity benefits; 
Supplementary 
schemes 
Supplementary programmes aim 
at either filling the gaps left by 
the legal schemes or paying sup­
plementary benefits: 
• supplementary pension schemes 
(les régimes complémentaires 
de retraites) are compulsory 
for all those in the general 
and agricultural schemes. They 
are regulated by collective 
agreements and are administered 
by employer and employee rep­
resentatives. Everyone insured is 
entitled to a supplementary pen­
sion in addition to that received 
under the general scheme. Al­
though there is a large number of 
different schemes, they are grouped into two large organisa­
tions: the Association générale 
des institutions de retraites de 
cadres ( AGIRC) and the Associ­
ation des régimes de retraites 
complémentaires (ARRCO); 
unemployment protection is ex­
cluded from the social security 
system in the French sense and 
was initially limited to assistance 
benefits. It is now compulsory 
for all employers and em­
ployees, is regulated by collec­
tive agreements and funded by 
employers' and employees' con­
tributions. There are two parts, 
both administered jointly by em­
ployers' and employees' repre­
sentatives: the insurance scheme, 
financed by contributions, and a 
solidarity scheme, funded by the 
State, which provides benefits to 
the unemployed not entitled to 
insurance benefits; 
• social aid is provided by the 
state and is funded by central 
and local government In 1988 
the revenu minimum d'insertion 
was established to guarantee a 
minimum level of income to the 
poorest and to help them back 
into work and society; 
the mutual insurance companies 
(mutuelles) are private non­
profit making organisations, ad­
ministered by their members and 
funded by their contributions, to 
provide supplementary benefits 
in case of sickness, maternity, 
old age, invalidity or death. Belgium 
The Belgian security system is 
divided into four schemes, one 
for civil servants and pubhc service 
personnel, one for wage earners, one 
for self-employed and a residual 
scheme for all those not economi­
cally active who require assistance. 
The largest scheme, covering around 
2 million workers, is that for wage 
earners, though the 800 thousand or 
so pubhc sector workers enjoy the 
highest benefits. 
Wage earners 
Under the scheme for wage 
earners, created at the end of 
World War 2, contributions are cal­
culated as a percentage of earnings 
up to a maximum level and the rate 
of benefit is set typically at around 
60% of wages up to this maximum. 
In 1982, the maximum level was 
abolished for contributions, but 
maintained for benefits. At the same 
time a guaranteed minimum level of 
benefit was established. Industrial in­
juries and occupational illness are 
covered by private insurance com­
panies. 
The system is managed by a com­
bination of private and public 
institutions, with the latter being re­
sponsible for administration and the 
collection of contributions and the 
former for the payment of benefits 
(except pensions). The public institu­
tions involved are independent of 
government and are managed by a 
committee of trade unions and em­
ployers' representatives. 
20-
Chapter 1 - Social protection systems in the Community: similarities and differences 
A distinguishing feature of the Bel­
gian system is that invalidity is 
treated as a prolongation of sickness, 
rather than in the same way as retire­
ment, and benefits become payable 
after one year of incapacity for work 
(at a rate of 60% of the previous 
wage) regardless of the contributions 
record. 
A second feature is that the unem­
ployment compensation system is 
part way between an insurance and 
an assistance scheme giving com­
paratively low benefits (much lower 
than for sickness or invalidity) with­
out limitation on duration of receipt 
(except when unemployment is ab­
normally long and the beneficiary 
has other sources of income). 
Thirdly, family allowances are con­
sidered part of social insurance and 
are financed partly by employers' 
contributions. Belgium was the first 
country to introduce compulsory 
family allowances and still has one of 
the highest rates in the world. 
Self-employed 
The scheme for the self-employed 
was created later than that for 
wage earners, in 1967, with a similar 
system of management and organisa­
tion. The scheme, however, is in­
tended to provide only a basic level 
of protection against old age, sick­
ness and invalidity, partly because 
contributions are lower. 
In the case of health care, only 
serious illnesses (essentially those 
requiring hospital treatment) are 
covered, though subsidised volun­
tary insurance is available for cases of less serious illness. In the case of 
family allowances, the rate of benefit 
for the first child is substantially less 
than for wage earners, but it is the 
same for other children. 
Sickness and invalidity benefit is 
flat-rate and actually lower than the 
means-tested minimum level of as­
sistance. Before 1984, pensions for 
the self-employed were also flat-rate, 
but since then they have been related 
to earnings in the same way as for 
wage earners. 
The contributions paid by the self-
employed are proportional to in­
come, though based on earnings 
three years previously rather than 
current earnings. 
Public sector 
Social benefits for public service 
employees largely come directly 
from the state and contributions are 
paid only for health care and pen­
sions. Benefits have been historically 
higher than for wage earners, 
though health care benefits, family 
allowances and the rules governing 
entitlement to pension are now much 
the same (except that pensions are 
based on earnings at retirement 
instead of over the contributions 
JXMUKI as a whole). 
Social assistance 
The residual scheme for the non-
economically active was de­
veloped in a piecemeal way and is 
administered by a variety of institu­
tions, including local as well as cen­
tral government. It began with a minimum pension for the elderly in 
1967, was extended to include inva­
lidity allowances for the disabled and 
family allowances and was com­
pleted in 1974 with a minimum in­
come allowance for everyone. All of 
the payments are means- tested and 
financed from general taxation. 
Luxembourg 
The social protection system is 
insurance-based as in neigh­
bouring countries. 
Social insurance 
Under the pension insurance 
scheme, pensions, like con­
tributions, are related to earnings 
when in work and, to a lesser extent, 
to the time spent in work. For private 
sector employees, the same rate of 
benefit and contribution applies to 
everyone, while for pubhc sector em­
ployees there is a non-contributory 
scheme which provides a more 
generous level of benefits. 
The normal retirement age is 65, but 
early retirement with payment of 
pensions is possible from 60 onwards 
or in certain circumstances from 57. 
Pensions arc increased automatically 
in line with inflation whenever it ex­
ceeds 2.5% and are adjusted regu­
larly in line with salaries. 
Sickness benefits in the event of in­
capacity for work are payable at a 
rate of 100% of earnings, while in the 
case of health care, the cost of treat­
ment is reimbursed by sickness funds 
(each of which operates the same 
21 
Chapter 1 - Social protection systems In the Community: similarities and differences 
level of benefits and contributions) 
or, when the costs are high, paid for 
directly. 
In the case of maternity, women are 
entitled to 8 weeks' leave before 
childbirth and 8 weeks after and to 
receive benefit equal to their salary, 
up to a maximum of 5 times the social 
minimum wage. Women who are not 
in work receive a lump sum. 
Benefits in the event of industrial 
injury vary according to the degree of 
incapacity for work as well as earn­
ings in the year preceding the acci­
dent (up to a maximum of 86%). 
Entitlement to unemployment 
benefit is conditional on having 
worked for at least 26 weeks during 
the preceding year. Benefit is linked 
to the wage when in work (80% of 
gross wages up to a maximum 
amount, 85% for those with families) 
and is payable for one year, with a 
possible extension in the case of 
those who have particular difficulty 
in finding employment and older 
workers. Special schemes exist to 
help the self-employed and young 
people unable to find a first job. 
Family allowances are paid to those 
looking after children, the amount 
varying with the number of children 
and their age. A special benefit is also 
paid annually to cover the costs of 
starting a new school year. In addi­
tion, parents who educate young 
children can claim an education 
benefit. Social assistance 
Ameans-tested system of social 
assistance aims to guarantee a 
minimum level of income to every 
household, on condition that the head 
of the household has been resident in 
Luxembourg for 10 years, is over 30 
years old, is available for work and is 
willing to participate in programmes 
of social reintegration. Conditions 
are less stringent, however, for those 
incapable of working, people with 
children, the elderly and other disad­
vantaged groups. 
Denmark 
Under the reforms introduced in 
the 1970s, all social benefits are 
managed and distributed by special 
social services (sociale udvalg) in 
local authorities (Kommune). Protec­
tion against industrial injuries, how­
ever, is still under the control of 
private insurance companies, while 
unemployment insurance funds are 
administered by the trade unions 
(though independent of them). 
Benefits 
The Danish system of pensions is 
typically Scandinavian, tax-fin­
anced, flat rate basic pensions being 
supplemented by contributory pen­
sions. Pensionable age is 67. If fam­
ily income is below a certain level, or 
if special circumstances apply, a sup­
plement is payable. Between 67 and 
70, 60% of earnings are deducted 
from the pension if the person is still 
working. The amount of additional contributory pension depends on the 
number of years for which contribu­
tions have been paid and the profits 
earned by the pension fund. 
In addition, there is also a "partial 
pension" scheme, under which a flat-
rate benefit is paid for each hour by 
which working time is reduced, so 
long as the reduction is more than 
25%. 
Invalidity is treated as a case of early 
retirement and is payable to anyone 
whose earnings are reduced by 50% 
or more, it can also be given for "so­
cial" reasons, such as in the case of a 
widow with children or to someone 
who has difficulty in finding a job. 
The amount receivable is calculated 
in the same way as for old-age pen­
sion. 
Sickness benefit is paid to both em­
ployees and self-employed at a rate 
of 90% of earnings in the previous 
year up to a maximum level, for a 
period up to one year. Benefits are 
also payable for up to 5 days a year 
to employees whohave to take care of 
a sick child. Maternity benefits are 
payable for 6 weeks before and 
8 weeks after childbirth at the same 
rate, any difference between this 
amount and net wages being paid by 
the employer. When entitlement to 
maternity benefits ends, benefi­
ciaries can claim daily benefit for 
another 16 weeks. 
Workers wishing to receive unem­
ployment benefit have to enrol with 
an insurance fund. This is voluntary. 
Benefits are payable at a rate of 90% 
of previous earnings (subject to a 
ceiling), the exact amount and the 
rate of contributions being deter-
22 
Chapter 1 - Social protection systems In the Community: similarities and differences 
mined by each fund individually, for 
a period of up to 2 years (according 
to the contributions record and age). 
Those over 60 can receive a pre-re­
tirement benefit up to the age of re­
tirement (67), equal to the normal 
unemployment benefit for the first 
2 years and 80% thereafter. During 
this period, beneficiaries can con­
tinue working on a part-time basis. 
The self-employed can enrol under 
the same terms and conditions as em­
ployees. 
A large part of expenditure goes on 
active labour market policies, with 
each member being guaranteed an 
offer of employment after being out 
of work for six months. 
Family allowances are tax-free and 
are paid to the mother at a flat rate for 
each child, with a higher rate 
for children over 7 and for single par­
ents. 
Health Care 
Health care is provided by a na­
tional health service and 
is largely free of charge in the case 
of both general practitioners and hos­
pitals. In the case of dental care, half 
the cost is charged to the patient, 
while half the cost of drugs is also 
paid by the recipient. 
Financing 
More than 80% of the cost of the 
social protection system, so­
cial insurance plus social assistance, 
is financed from general taxation. Around half the expenditure on so­
cial assistance is financed by central 
government, half by local auth­
orities. 
For pension insurance and short-term 
benefits (sickness and maternity) 
25% of the finance comes from local 
authorities and 75% from a national 
fund, financed to a small extent by 
employees' and employers' con­
tributions and to a much larger extent 
by central government. 
In the case of unemployment insur­
ance, funding comes partly from 
members (who pay a flat-rate con­
tribution) and partly from employers 
(whose contributions are based on 
the value-added of the enterprise), 
but mostly from the state. 
The UK 
Social Insurance 
Employed and self-employed 
are covered by the UK social in­
surance scheme. Part-time em­
ployees earning below a specified 
lower earnings limit are excluded. 
Contributions are paid on an earn­
ings-related basis by both the em­
ployee and employer, with an upper 
limit for employees but not em­
ployers. The self-employed, who are 
covered for all benefits except unem­
ployment and earnings-related pen­
sions, pay on a flat-rate basis below 
a certain income level and on an 
earnings-related basis above this. 
Those who belong to private occupa­
tional or personal pension schemes — to which both employers and em­
ployees typically contribute — can 
"contract out" of paying contribu­
tions for an earnings-related state 
pension. 
Entitlement to social insurance 
benefits, as elsewhere, depends on a 
person's contributions record. 
Short-term benefits, for sickness or 
unemployment, are paid at a flat rate, 
while in the case of retirement, inva­
lidity and widows' pensions, an earn­
ings-related supplement is payable 
on top of flat-rate benefits if the per­
son concerned has not contracted out. 
Additional allowances are normally 
paid for adult dependants in the case 
of all social insurance benefits and 
for child dependants in the case of 
long-term benefits. 
Non-contributory 
benefits 
There are a number of benefits 
which are neither dependent on 
previous contributions nor subject to 
a means-test. These have been ex­
panded considerably in recent years 
and cover occupational injuries, 
child benefits, disability payments 
and statutory sick and maternity pay 
(which employers are responsible for 
administering). 
Means-tested 
payments 
The main means-tested payment 
is income support which is 
payable to everyone whose income 
and savings are below prescribed 
23-
Chapter 1 - Social protection systems In the Community: similarities and differences 
levels, except those working 16 
hours a week or more, or education. 
Payments are flat rate with increases 
for dependents and for certain con­
tingencies (such as disability, single 
parenthood or old age). 
Those in low-paid employment with 
families can also claim support to 
supplement their income (and so give 
a financial incentive to work). Simi-
lar support has recently been ex­
tended to the disabled. In addition, 
there is a Social Fund which provides 
limited discretionary grants and 
loans. 
Finally, there is a means-tested hous­
ing benefit to cover part of the cost of 
accommodation. 
Funding 
The social insurance system is 
funded by employers' and em­
ployees' contributions, while non-
contributory and means-tested 
schemes are largely financed from 
general taxation, with contributions 
from employers in the case of the 
statutory sickness and maternity pay 
schemes. 
Health Care 
Every UK resident is entitled to 
free health care (including 
general practitioner and hospital 
treatment) through the National 
Health Service, although some pay­
ments are required in the case of 
prescribed drugs. Ireland 
Social Insurance 
The social insurance scheme 
covers all employees and self-
employed and has recently been ex­
tended to include part-timers earning 
above a minimum amount. 
Entitlement to benefits depends on 
having a satisfactory contributions 
record, except in the case of occupa­
tional injuries, for which contribu­
tions are paid by employers only. 
Benefits are normally flat rate 
with increases for adult and child 
dependents, though a limited earn­
ings-related element applies to un­
employment benefits (which has 
been reduced in recent years) and 
maternity allowances. 
Social Assistance 
Social assistance is designed to 
bring the income of the old, the 
incapacitated or the unemployed up 
to a subsistence level (though there is 
no independent calculation of this 
level). 
Payment is means-tested and, in re­
cent years, has been extended to 
those unable to work because of hav­
ing to care for children (single par­
ents) or disabled relatives. Payments 
are flat rate with increases for de­
pendents as in the case of insurance 
benefits, though they are normally 
set at lower levels than these. In addition, a supplementary welfare 
allowance is payable to anyone (ex­
cept those in full-time work, those 
involved in a trade dispute and stu­
dents) whose means are insufficient 
to meet their needs. 
Flat-rate child benefits are also 
payable at a modest level to everyone 
with dependent children. 
Funding 
The social insurance scheme is 
funded by contributions from 
employers (64% of the total in 1990), 
employees (26%) and the self-em­
ployed (4%) as well as by the State 
(6%). As in other countries, the occu­
pational injuries scheme is financed 
entirely by employers and social as­
sistance (38% of overall spending on 
welfare) and child benefits (9% of 
total spending) entirely by the State. 
In total, 53% of social welfare expen­
diture was financed from general tax-
ation in 1991 and 32% from 
employers' contributions. 
Health Care 
Health care in Ireland is separate 
from the social insurance sys­
tem and entitlement to services is 
means-tested. Free access to medical 
care, with the exception of hospital 
treatment, is mainly restricted to 
those on low income (35% of the 
population). Hospital treatment is 
free for around 85% of the population 
while hmited charges apply to others. 
Expenditure is financed mostly from 
general taxation and only to a small 
extent by employers' contributions. 
24 
Chapter 1 - Social protection systems In the Community: similarities and differences 
The Netherlands 
The Dutch social security system 
is divided into four main 
schemes: an employee and a general 
insurance scheme, a scheme spe­
cially for civil servants and sup­
plementary social services. 
Employee 
insurance schemes 
The employee insurance scheme 
covers unemployment, tempor­
ary and permanent incapacity for 
work and medical care (in the case of 
serious illness). The scheme is com­
pulsory for everyone in employment, 
except those earning above a certain 
level of income who can elect to join 
a voluntary scheme so far as health 
care is concerned. Unemployment, 
sickness and disability insurance 
benefits are paid at a rate of 70% of 
previous earnings. While entitlement 
to unemployment and sickness 
benefit is of limited duration, dis­
ability benefits are payable until re­
tirement age. Contributions are 
related to earnings up to a certain 
limit. 
General social 
insurance 
The general insurance scheme, 
introduced in the late 1950s, 
covers old age, death, invalidity, 
family allowances and medical care. 
In principle, it covers everyone 
resident in the Netherlands. As in 
the case of the employee scheme, contributions are compulsory and re­
lated to earnings up to a certain limit. 
Pensions and invalidity benefits are 
related to the net minimum wage 
( 100% in the case of married couples, 
90% for one parent families and 70% 
for single persons), while child 
benefits are payable for each depend­
ent child at a rate which increases 
with the number and age of the child­
ren. 
Supplementary 
social services 
Supplementary social services are 
financed entirely from general 
taxation and payment of benefits is 
subject to a means-test. As part of 
these services, municipalities have 
an obligation to grant assistance to 
anyone not able to meet the costs of 
subsistence. Under certain circum­
stances, this may extend to foreign 
nationals living in the Netherlands 
and Dutch people living abroad. 
The subsistence level is set at the 
same level as general insurance 
benefits and depends, in the same 
way, on marital status and personal 
circumstances. Italy 
Schemes for 
civil servants 
Civil servants are covered by sep­
arate schemes which are gener­
ally more generous than for other 
people. The Italian system is divided into 
three distinct sectors, social in­
surance (previdenzd), health care 
(sanità) and social assistance plus 
social services (assistenza e servizi 
sociali). 
Social insurance 
Social insurance covers all em­
ployees and provides protection 
against the usual risks. The self-em­
ployed are also covered, though they 
have only limited protection against 
maternity and occupational injuries 
and are not covered at all against 
unemployment or sickness — at least 
not so far as income support is con­
cerned. Insurance schemes are ad­
ministered by a number of separate 
agencies and funds, largely on an 
occupational basis. There are more 
than 50 different pension funds, the 
most important being the INPS (Na­
tional Institute for Social Insurance), 
which is governed by representatives 
of trade unions, employers and the 
self-employed as well as the Ministry 
of Labour, and has more than 17 mil­
lion members. 
Health care which used to be simi 
larly fragmented is now provided by 
the National Health Service, coordi­
nated centrally by the Ministry of 
Health, but with regional and local 
administration of services. The ser­
vice covers the whole of the resideni 
population. 
Since the 1970s, social assistance 
and social services are provided by 
local authorities which have wij-' 
25-
Chapter 1 - Social protection systems In the Community: similarities and differences 
autonomy and which normally coor­
dinate social services with health 
care through the local units of the 
NHS. Coverage is universal and 
need-related. 
Benefits and services 
Benefits are earnings-related and 
generally payable at a rate of 
80% of previous wages for a period 
of 6 months. 
Pensions are calculated as 2% of pre­
vious earnings multiplied by the 
number of years of contribution up to 
a maximum of 80%, with a retire­
ment age of 55 for women and 60 for 
men (which will be progressively 
raised to 60 and 65 by 2002). Public 
employees are entitled to claim a 
pension, regardless of age, after 20 
years of service. Since 1990, the self-
employed also have earnings-related 
pensions, calculated on the same 
basis as for employees. All benefits 
are indexed to the cost of living and 
until 1992 were linked to the mini­
mum contractual wage in the indus­
trial sector. 
Invalidity benefits and widows' pen­
sions are calculated on the same 
basis. 
Family allowances are flat-rate, 
though dependent on income and the 
number of children and payable to all 
employees, those receiving unem­
ployment benefit, pensioners and 
farmers. 
The standard rate of unemployment 
benefit is only 20% of previous earn­
ings, payable for a maximum of 180 
days per year. Higher benefits (80%), however, are available for special 
groups of workers (such as those in 
construction) and or in special cir­
cumstances, while, those partially or 
temporarily unemployed can receive 
support from the Cassa Integrazione 
Guadagni (Fund for earnings inte­
gration), at relatively high rates (80% 
or more). This was used extensively 
in the 1970s and 1980s to compen­
sate for the inadequacy of unemploy­
ment benefits. In 1991, a new benefit 
was introduced, termed "mobility in­
demnity", linked to CIG benefits but 
at a generally lower rate and with a 
maximum duration of 3 years with­
out the guarantee of a job at the end 
Sickness benefits are in principle 
payable for 6 months at a rate of 
two-thirds earnings (50% for the first 
20 days) though, in practice, contrac­
tual regulations foresee automatic 
wage continuation for up to one year 
with no waiting period. 
As well as social insurance benefits, 
discretionary cash support is avail­
able through local government. 
Although there is no minimum guar­
anteed level of income in Italy, the 
support in many regions is effec­
tively universal and a wide range of 
social services and forms of personal 
assistance is available. 
Through the NHS, basic care is pro­
vided free of charge by family prac­
titioners as is hospital treatment, 
though since 1993, those on higher 
income are required to pay an annual 
flat-rate fee for the former, while spe­
cialist treatment by consultants is 
subject to a charge, with concessions 
for certain people. Financing 
Contributions represent the main 
source of finance for social in­
surance benefits and health care, al­
though general taxation in the case of 
health care has become increasingly 
important. Social services and assist­
ance are financed largely from 
general taxation. 
Contributions are paid mainly by em­
ployers, who bear the entire cost of 
unemployment, maternity and indus­
trial injuries insurance as well as of 
family allowances. Employers also 
pay for most of health insurance and 
for two-thirds of pension contribu­
tions. 
The state also contributes to financ­
ing insurance funds, both by making 
ad hoc interventions to reduce labour 
costs in periods of economic re­
cession and by paying ad hoc trans­
fers to cover deficits. Such transfers 
have increased enormously since the 
mid-1970s, particularly in respect of 
pension funds. 
At the same time, the state has in­
creased its rate of contributions to the 
health budget to meet growing finan­
cial strains and has introduced user 
charges and a supplementary tax on 
personal incomes (at a rate of 4—5%) 
to provide additional finance. 
Spain 
Under the Spanish social protec­
tion system, there are three le­
vels of benefit — the contributory 
scheme, the voluntary scheme and 
the assistance scheme — while at the 
26-
Chapter 1 - Social protection systems In the Community: similarities and differences 
same time, there is universal access 
to health care. 
Contributory system 
The social security system covers 
all those engaged in economic 
activity — including seasonal 
workers, domestic servants, students 
and the self-employed — as well as 
their families. Under certain circum­
stances, it also covers Spanish people 
living abroad and foreigners living in 
Spain. 
Though the system is different for 
those working in industry and ser­
vices as opposed to agricultural 
workers and other groups, the dif­
ferences are small and have nar­
rowed over time. The method of 
funding and the benefits, however, 
differ for public sector employees. 
Social assistance 
Part of the social security budget 
goes on assistance to those 
whose income falls below a certain 
level. A minimum pension is payable 
to those in need irrespective of their 
contributions record, while assist­
ance is also provided to the unem­
ployed who have exhausted their 
entitlement to benefit. In addition, 
there is free access to health care for 
those who cannot afford to pay and a 
range of social services covering 
health and safety at work, training, 
retraining of handicapped people and 
assistance for the elderly. 
Outside the social security budget, 
there is a range of allowances for the 
old, the sick and the disabled who are not eligible for contributory benefits. 
Regional authorities have also estab­
lished different systems for guaran­
teeing a minimum level of income or 
for reintegrating people back into 
society. 
Administration 
and finance 
While central government is re­
sponsible for managing the 
social security system, local auth­
orities have responsibility for social 
services and, in some cases, health 
care. 
The funding of the system comes 
from employers' and employees' 
contributions (the rate for the former 
being 5 times that of the latter) and 
general taxation. Contributions are 
proportional to earnings above a 
minimum level and below a maxi­
mum level. In 1990, some 30% of 
expenditure was financed by taxation 
(as compared with only 4% in 1976). 
Since 1986, finance from taxation 
has mainly been directed to health 
care and minimum pensions, which 
are universal, non-contributory 
forms of assistance, leaving con­
tributions to fund social insurance 
benefits. 
Health care 
Health services are provided free 
of charge to virtually everyone, 
although with certain exceptions — 
pensioners, for example — there is a 
charge for drugs. The effort of 
achieving virtual universal coverage 
over the 1980s combined with tight budget constraints led to the emer­
gence of long waiting lists for 
particular kinds of treatment. 
Portugal 
The social security system in Por­
tugal consists of an insurance-
based contributory scheme and a 
means-tested non-contributory 
scheme. In addition, there is a special 
scheme for pubhc service employees 
and for higher income groups. 
Contributory scheme 
The contributory scheme covers 
all employees and the self-em­
ployed against all the usual risks, 
except accident at work and unem­
ployment in the case of the self-em­
ployed. Health care is provided by 
the national health scheme. In the 
case of employees in industry and 
commerce, contributions are calcu­
lated on total earnings (without any 
ceiling), with employers paying over 
twice as much as employees. 
Entitlement to benefit is dependent 
on having paid contributions for a 
minimum period, which differs ac­
cording to the kind of benefit in­
volved. In some cases, the amount 
payable is related to income. 
Pensions depend on contributions 
and are related to previous earnings, 
though with a guaranteed minimum 
amount, while unemployment 
benefits are paid at 65% of the pre­
vious wage (70% to 100% of the 
minimum wage according to the 
27 
Chapter 1 - Social protection systems In the Community: similarities and differences 
number of dependents in the case of 
the social assistance scheme). 
Sickness and maternity benefits are 
also related to previous earnings and 
are subject to a minimum payment 
(a percentage of the guaranteed 
minimum wage). 
Family benefits are paid at a flat rate, 
though a higher allowance is paid for 
the third child and subsequent child­
ren if family income is less than 
IV2 times the minimum guaranteed 
wage. 
The scheme is funded largely by con­
tributions which accounted for two-
thirds of revenue from this source, 
while the state contributes 7% of total 
income. 
Social assistance 
The non-contributory scheme 
covers all nationals resident in 
the country not covered by any insur­
ance scheme and also extends to re­
fugees. Benefits are means-tested 
and flat rate, covering pensioners, in­
valids, orphans, widows and child­
ren. 
The scheme is financed in principle 
from general taxation, though in 
practice it is partly funded from con­
tributions, the revenue from which 
exceeds expenditure on contributory 
benefits. In 1989, non-contributory 
benefits accounted for only 6% of 
total social security expenditure, 
while social services and administra­
tive costs accounted for 10% be­
tween them. The remaining 84% of 
expenditure went on contributory 
benefits. Health care 
The National Health Service, es­
tablished in 1979, is separate 
from the social security system, is 
funded largely by the state and pro­
vides health care free of charge to 
pensioners, children under 12 and the 
unemployed. Other groups pay a fee 
for visiting doctors to cover part of 
the cost of treatment. 
Greece 
In Greece, there are four basic in­
surance schemes — or sickness 
funds: for wage earners in urban 
areas (IKA), farmers in rural areas 
(OGA), the self-employed and civil 
servants. Together they cover around 
90% of the population. In addition, 
there are some 90 supplementary 
schemes, so that the social security 
system as a whole is extremely frag­
mented. 
The financing of the funds varies 
gready. The biggest, IKA, covering 
45% of the population, is funded 
from contributions of employers and 
employees, though these also go to­
wards financing other funds, such as 
OGA, a non-contributory fund 
covering 33% of the population and 
the civil servants' fund (not direcdy 
contributory and one of the weal­
thiest). The largest funds are not 
self-governing, but managed by 
government appointees. 
Deficits of the funds, which at pres­
ent in the case of IKA amounts to 
around 25% of current outlays, are 
financed by Government. Social assistance 
There is no system, at present, in 
Greece for ensuring that in­
comes do not fall below a minimum 
level, although there is a universal 
non-contributory pension for all 
those above 65. 
Types of benefit 
Avariety of rules apply to pay­
ment of retirement pension, 
even within the same insurance fund. 
The most general principle is that 
women retire at 60 and men at 65, but 
many people in the past have retired 
much earlier. Because of demo­
graphic trends, however, restrictions 
have been imposed on early retire­
ment 
Pensions are calculated on the basis 
of previous earnings and, in prin­
ciple, the contributions paid. Be­
cause, however, the largest funds are 
often not self-governing and forced 
to contribute to the financing of the 
government's social policy, pensions 
paid to the insured rarely reflect the 
contributions paid. 
Eligibility for sickness benefits, 
which are paid partly by employers 
as well as by the insurance funds, 
depends on the length of time in em­
ployment. In cases of prolonged ill­
ness an employee insured with IKA 
is entitled to receive benefits for up 
to two years and thereafter disability 
pension, calculated according to the 
extent of invalidity. 
The Greek system is characterised by 
a high importance of invalidity pen­
sions (in the case of IKA around half 
28-
Chapter 1 - Social protection systems In the Community: similarities and differences 
of pensions are for invalidity), re­
flecting the inadequacy of support 
through other means. Since 1992, 
however, severe restrictions have 
been imposed on entitlement. 
For those covered by the insurance 
funds, maternity benefit is payable 
for two months before childbirth and 
two months after. Mothers are also 
entitled to one year's maternity leave 
and to reduced working hours on pre­
vious salary for the first two years of 
child care (four years for civil ser­
vants). entitlement and service and with em­
ployers paying half of the contribu­
tions. Until 1992, access to NHS 
hospitals and health centres was free, 
but since then charges have been in­
troduced for treatment and drugs. 
Those — relatively few in urban 
areas — who are not insured are en-
tided to health care through the social 
welfare system. 
Unlike elsewhere in the Community, 
family allowances are wage related 
(1% of monthly salary for every de­
pendent). Families with four and 
more children receive special assist­
ance (in the form of tax exemptions 
and special privileges). 
The OAED (Manpower and Employ­
ment Organisation) is responsible for 
paying benefit to those who become 
unemployed. Entidement to benefit 
is dependent on the length of time in 
employment, lasts for up to one year 
and is related to previous earnings 
(40-50% of the former wage), with 
an increase of 10% for each depend­
ent (up to a maximum of 70% of 
previous earnings). OAED is also re­
sponsible for finding work for the 
unemployed. Three-year training 
courses are available for those aged 
15 to 18 and vocational training 
schemes for older workers. 
Health care 
Health care is covered by the in­
surance funds, with each pro­
viding a somewhat different level of 
-29-
Chapter ï~ Social protection systems In the Community: similarities and differences 
30-
Chapter 2 - Recent reforms In social protection systems In the Community 
Chapter 2 Recent reforms in social 
protection systems 
in the Community 
The period 1980 to 1992 in the 
Community was characterised, 
in the first half of the 1980s by slow 
economic growth, in the second half, 
by recovery and in 1991 and 1992 by 
the renewed onset of recession. The 
two dominant economic features in 
most Member States were high un­
employment and a persistent tend­
ency towards public sector deficits. 
These made it more difficult to ex­
tend or even maintain systems of so­
cial protection in the Community, as 
did two other common features of 
this period: the ageing of the popula­
tion and the continuous rise in the 
costs of health care. 
These developments affected all 
Member States, though their in­
cidence and the measures taken in 
response varied from country to 
country. In particular, there was a 
clear difference between the more 
advanced countries in the North with 
their well-established and highly de­
veloped social security systems and 
the less advanced countries in the 
South which are still in the process of 
developing and extending their so­
cial protection schemes. There was 
also a difference in the policies fol­
lowed by countries with basic pen­
sion schemes and national health services and those with insurance-
based schemes. Combating the 
effects of economic recession, how­
ever, was a common concern throug­
hout the Community. 
A decade 
of crisis policy 
In the face of problems created by 
high unemployment and fiscal 
deficits, governments generally have 
been uncertain about the most appro­
priate policies to pursue. Since 1975, 
a large number of measures have 
been taken in all Member States to 
combat unemployment and to bring 
down budget deficits. Between 1985 
and 1990, the Community succeeded 
in creating large numbers of jobs 
while budget deficits were reduced. 
Since then, however, efforts have 
been less successful and at the time 
of writing, both the rate of unemploy­
ment and the scale of budget deficits 
over much of the Community are as 
high now as at any time over the past 
15 years. Why is this so? Part of the answer lies 
in the fact that high unemployment 
itself tends to push up budget deficits 
by reducing tax receipts and adding 
to government expenditure, while 
efforts to cut deficits can depress 
economic activity in the short-term, 
whatever the potential longer-term 
benefits of a sustainable budget posi­
tion for growth of output and em­
ployment. 
Similarly, the costs of health care 
have tended to go on rising despite a 
range of efforts to contain them, 
while measures taken in a number of 
countries to counterbalance the 
ageing of the population by raising 
the birth rate have also failed. In­
creased family allowances, parental 
leave, improved child care facilities, 
and so on seem to have done little to 
persuade women to have more child­
ren and average family size has gone 
on shrinking. For policy-makers, a 
dilemma has been whether to encour­
age older people to stay in work 
longer and so contribute to economic 
output or whether, on the contrary, to 
encourage early retirement and so 
relieve the pressure in the labour 
market caused by lack of jobs. 
31 -
Chapter 2 - Recent reforms In social protection systems in the Community 
The indexation of social benefits 
All countries in the Community apart from Ireland have 
established formal procedures for adjusting social benefits to 
increases in the cost of living. In the three Benelux countries 
as well as in Greece, there is a single system of indexation 
for both wages and benefits. In the other countries, the 
indexation of benefits operates separately from that of wages 
(if wages are indexed at all — and different arrangements 
apply to different kinds of benefit). In Ireland there is no 
formal obligation to adjust benefits for inflation, though 
benefits are reviewed once a year and are usually uprated at 
that time. 
In most countries, indexation is based on the official 
consumer or retail price index. In Germany, however, con­
tributory benefits, such as pensions or unemployment com­
pensation are uprated in line with net wages, though social 
assistance is linked to the price index. Similarly, in the 
Netherlands, the minimum wage, to which all social benefits 
are linked, is indexed in terms of the average wage, while in 
Portugal, the value of unemployment benefits is related to the 
minimum wage rather than the price index. 
Systems of double indexation, in terms of both wages and 
prices, have been implemented in a number of countries at 
certain times but have not been operated for very long, largely 
because of the costs involved Only Luxembourg has main­
tained a double indexation system, though with a provision 
for reviewing the costs entailed every five years. 
In most countries, for most contributory benefits, indexation 
is automatic and governments have limited or no discretion 
over the extent of uprating. In Portugal and Spain, however, 
governments can negotiate the scale of the adjustment with 
the trade unions and in the Netherlands, the government can 
reduce or refuse to allow the adjustment because of special 
circumstances. Moreover in several countries, such as Bel­
gium in 1984, 1985 and 1987 and Denmark in 1983 and 1984, 
uprating has been suspended in particular years because of 
financing problems. 
In countries where indexation is based on wages, the refer­
ence period tends to be a year, but not necessarily the current 
year. In Germany, the basis of adjustment is the change over 
the preceding year, while in Luxembourg it is the change over 
the preceding three years or more. In the Netherlands, on the 
other hand, the basis is the current year, with projections 
made at the beginning of the year of the expected increase in 
wages and adjustments made in the middle and at the end to 
align the uprating with the actual increase. All of this has led to a spate of re­
forms to social protection systems, 
with the common aim of attempting 
to contain costs while trying to cope 
with an expanding demand for assist­
ance. This, in turn, has given rise to 
a widespread trend towards in­
creased selectivity, a greater use of 
means-testing and, in some cases, the 
privatisation of services, with the ex­
pressed intention of improving effi­
ciency and cutting the costs of 
provision. 
Increasing 
revenue 
In a number of Member States, ef­
forts have been made over the past 
decade to increase the revenue avail­
able for social expenditure. In Bel­
gium — in 1982 — and in France — 
in 1984 — this was achieved by abol­
ishing the income ceiling on con­
tributions, while in virtually all 
countries, the rate of contribution has 
been raised, especially in respect of 
unemployment protection. At the 
same time, new contributions and 
ear-marked taxes have been intro­
duced in Belgium, France and Den­
mark (for example, the 1% capital 
contribution levied in France in 
1988, the general social contribution 
of 1.1% on taxable income more re­
cently and the so-called "labour mar­
ket contribution", or "social VAT", 
in Denmark also in 1988), while in 
Germany as well as in a number of 
other countries, such as the UK, gov­
ernment subsidies to social insurance 
schemes have been reduced. 
-32 
Chapter 2- Recent reforms In social protection systems in the Community 
On the other hand, from time to time 
there have also been reductions in 
contributions in some countries, such 
as in France, Belgium and Italy, in an 
attempt to reduce labour costs and 
promote employment. In most cases, 
these were accompanied by an in­
crease in direct state funding of social 
spending and some shift from 
employers' contributions to general 
taxation. In Germany, pension sup­
plements for dependents, formerly 
financed out of pension contribu­
tions, were replaced in 1984 by a 
special family benefit financed out of 
general taxation, while in the Nether­
lands, state financing of family 
allowances replaced their funding by 
contributions in 1988. In a number of 
countries also, social contributions 
paid by employers were reduced by 
introducing national health services 
in place of health insurance schemes. 
Reducing 
expenditure 
Efforts made to contain or reduce 
expenditure on social protection 
have been even greater. Although 
there has been some resistance to cut­
ting rates of benefit, as opposed to 
achieving a similar effect on spend­
ing by more indirect means such as 
reducing entidement, cuts have oc­
curred in a number of countries. In 
the Netherlands, between 1983 and 
1987, disability and unemployment 
benefits were systematically reduced 
from 80% of previous earnings to 
70%, while unemployment benefits 
were also cut substantially in Ireland 
in 1983 and in Belgium in 1987. 
Family allowances were reduced in In countries where indexation is based on prices, a 
monthly index is normally used. In Belgium and Lux­
embourg, benefits are uprated whenever the price index 
reaches a certain value. In other countries, uprating 
occurs annually — in January in Spain and (for family 
allowances and unemployment benefit) in Portugal, in 
April in the UK, in July in Germany, in December in 
Portugal for pensions. In the Netherlands, as noted, there 
is a provisional uprating in January and an adjustment 
to this, if necessary, in July. 
In a number of countries, the reference period is the 
preceding year — mostly the year up to the latest month 
for which data are available — rather than the current 
one, which can sometimes moderate the impact of index-
atioa In die UK, the annual uprating in April is based 
on the annual change in the price index up to the preced­
ing September — some 7 months eariier. In Belgium, 
benefits are increased only when the average level of the 
price index for the last four months is more than 2% 
above the level when they were last increased In Portu­
gal, on the other hand—as in the case of the Netherlands 
— pensions are uprated each December in line with the 
projected change in prices over the subsequent year. In 
addition, in Ireland the annual review of benefits tends 
to be based on expected inflation over the coming year 
rather than the rate over the past year. 
Slow growth coupled with high inflation in the 1980s 
caused automatic systems of indexation to be called into 
question. There was a widespread view that indexation 
led to excessive increases in pubhc expenditure, with 
adverse effects on inflation and the budget balance. This 
led to a number of reforms of varying kinds. 
For example, in Greece, in 1982, the basis for indexation 
was changed from the minimum wage to prices, with 
uprating three times a year, at a declining rate the higher 
the level of benefits. In Spain, in 1985, indexation of 
pensions was changed from being discretionary to being 
automatic and in 1989, the possibility of negotiation 
with trade unions was introduced. In the UK, in 1980, 
the indexation of long-term benefits was changed from 
being based on either prices or wages, according to 
whichever was the higher, to being based on prices alone 
and, in 1983, the reference period became the previous 
year instead of the current one. In Germany, in 1992, the 
basis of indexation was changed from gross to net wages 
in order to avoid benefits rising faster than net wages. 
-33 
Recent reforms In social protection systems In the Community 
^•*&*£'?i r^^f0% 
Belgium from 1982 and in Spain in 
1985, while maternity benefits were 
cut in Ireland in 1984. In the UK, the 
state earnings-related pension was 
reduced in 1986 from 25% to 20% of 
earnings (the definition of which also 
became less favourable) and wi­
dows' (or widowers') pension was 
cut from 100% of the employee's 
pension to 50%. 
In the Southern Member States, in 
particular, the emphasis of policy has 
been on restricting entitlement to 
benefit rather than on cutting the rate. 
In Greece, for example, the maxi­
mum age for receiving family benefit 
was reduced in 1983, while the num­
ber of years of contributions required 
to qualify for old-age pension was 
increased in Portugal in 1982, in 
Spain in 1985 and in Greece in 1991. 
In the same years in all three of these 
countries, the definition of invalidity 
was made more restrictive in order to 
curb eligibility for benefit 
However, the tightening of entitle­
ment conditions has by no means 
been confined to the South. In Bel­
gium, for example, the earnings from 
employment which could be com­
bined with receipt of old-age pension 
have been reduced, while in Den­
mark, the period which people need 
to work in order to qualify for old-age 
pension has been increased and in 
France as well as Belgium, limits 
have been imposed on the total in­
come receivable from multiple pen­
sions. 
The indexation of benefits has also 
come under pressure. Introduced in 
most countries during the 1960s and 
1970s to protect the real value of 
benefits in the face of inflation, by the 1980s they had widely come to be 
seen as a threat to budgetary consoli­
dation and a factor perpetuating in­
flation (see Box, pp. 32-33). In 
Belgium, automatic indexation was 
suspended in 1984, 1985 and 1987, 
in Denmark from 1982 to 1985, in 
Greece in 1983 and in Luxembourg 
in 1984. 
In Germany, the automatic index­
ation of pensions due on January 1st, 
1983 was delayed until July and in 
1984, the reference basis for index­
ing pensions (and other long-term 
benefits) to wages was changed in 
order to delay its effects; in 1992, it 
was changed again to allow for the 
much greater effect of taxes and so­
cial contributions on wages than on 
benefits. 
In the Netherlands, the automatic in­
dexation of benefits was suspended 
altogether for most of the 1980s and 
was eventually replaced by a new 
system allowing the Government to 
take account of special circum­
stances. In the UK, the indexation of 
long-term benefits to either prices or 
wages, depending on which was in­
creasing the most, was replaced in 
1980 by simple indexation to prices. 
Despite this, in most parts of the 
Community automatic indexation of 
benefits has survived the pressures of 
the past decade and seems to have 
become entrenched as a basic prin­
ciple of social security. Indeed, in 
Spain and Portugal, where it had not 
existed beforehand, it was introduced 
during the 1980s and, as elsewhere, 
it has since become established. Unemployment 
benefits 
In periods of high unemployment, 
unemployment insurance 
schemes are typically subject to two 
opposing forces: a reduction in entit­
lement to benefit and an increase in 
the period over which benefits need 
to be paid. A number of countries 
have reacted to this by reducing the 
benefit rate while at the same time 
increasing the duration of entitle­
ment. 
This was true of the Netherlands in 
1987, when benefits were cut to 70% 
of previous earnings, but in certain 
circumstances it became possible to 
draw benefit for up to 5 years. In 
Germany, the rate of benefit was cut 
from 68% to 63% of previous earn­
ings in 1984/85, but the maximum 
duration was extended to 1 year and 
in 1987 to 832 days. In Spain, the 
maximum benefit rate was reduced 
from 220% of the minimum wage 
to 170% in 1984 and the duration of 
entitlement was increased from 
18 months to 2 years (in 1992, the 
benefit rate was cut from 80% of 
previous earnings to 70% and from 
70% to 60% after six months). 
In a number of Member States, the 
extension of the period of entitlement 
to benefit was applied, in particular, 
to older people. This was the case: 
• in France in 1981, where a spe­
cial benefit was introduced later 
in 1985 for those who have ex­
hausted their right to benefit 
(improved in 1990/91 by the 
addition of a special retraining 
-34 
Chapter 2 - Recent reforms In social protection systems In the Community 
benefit at the end of the period 
of entidement); 
• in Spain, where in 1984, workers 
over the age of 55 became en­
titled to receive benefits up to 
the age of retirement (which 
also applies in Denmark and 
Belgium); 
• in Greece, where in 1990/91 the 
period of benefit entitlement was 
extended for those aged 50 or 
more. 
At the same time, pre-retirement 
benefits have been introduced in 
many European countries with the 
aim of encouraging older workers to 
free up jobs for the younger unem­
ployed. These originated in France 
and Belgium in 1974-75 when un­
employment first began to rise and 
were later adopted by Spain in 1981, 
Ireland in 1985 and Italy and Portu­
gal in 1991, as well as by Germany 
specifically for the self-employed in 
the new Lander in the same year. 
By the early 1990s, however, there 
were signs of a change in attitude 
towards such programmes in many 
parts of the Community and, under 
pressure from demographic trends 
which were tending to push up their 
cost, a number of countries, such as 
Denmark, began to raise the mini­
mum age at which people became 
eligible for pre-retirement benefit. 
While the UK has been the leader in 
imposing stricter conditions on entit­
lement to unemployment benefit, 
particularly during the period 1988 to 
1990, it has by no means been alone 
in pursuing this policy. Most coun­
tries have reduced the numbers eligible for benefit since 1980 by 
lengthening the period over which 
contributions need to be paid in order 
to qualify for benefit (eg Germany in 
1982) or by strengthening controls 
against abuse (eg Belgium in 1992). 
In the less developed Member States, 
however, the concern has been to 
improve benefit systems exposed as 
being inadequate by rising unem­
ployment rather than to tighten them. 
Spain established a contributory un­
employment benefit scheme in 1980 
and extended its scope in 1984, while 
Portugal changed from flat rate to 
earnings-related benefits in 1985. At 
the same time, in some parts of the 
Community — in France, Belgium 
and Portugal, for example — benefit 
entitlement has been extended to 
school-leavers, who were hit dispro­
portionately hard by unemployment 
in the early 1980s and who were seen 
as a particular problem group. 
More generally, in most countries, a 
range of special measures were im­
plemented in the 1980s to reduce un­
employment, targeted especially on 
the young and, often with the support 
of the Community, focused on train­
ing. These measures did not necess­
arily add to expenditure — indeed 
their purpose was partly to reduce 
outlays on social protection — but 
shifted spending from income sup­
port to job creation. Denmark has 
probably gone further than other 
countries in promoting employment, 
guaranteeing all the unemployed 
under 25 a subsidised job within two 
weeks of application for benefit and, 
in 1992, imposing an obligation on 
the unemployed to accept pubhc sec­
tor employment at 30 hours a week for a wage equal to the unemploy­
ment benefit. 
Other measures adopted include en­
couraging the unemployed to set up 
in business for themselves (eg in Ire­
land in 1983, Belgium in 1984, Den­
mark in 1985 and Italy in 1991); 
persuading industry to cooperate in 
training schemes and to offer jobs on 
completion of training (France in 
1987); improving the position of 
part-time workers in order to make 
such employment more attractive to 
the unemployed (in Belgium and 
France); and introducing a special 
mobility allowance to make it easier 
for workers to move from one enter­
prise to another (Italy in 1991/92). 
Long-term unemployment, which in­
creased dramatically during the 
1980s, was another focus of policy 
and, in many parts of the Com­
munity, special programmes were 
developed to assist those who had 
been out of work for a year or more. 
Most recently, in the UK, for 
example, it became compulsory in 
1991 for all long-term unemployed 
to follow "Restart" courses, while in 
Belgium and in France, special guid­
ance programmes were introduced in 
1992 with the aim of reintegrating the 
long-term unemployed into the la­
bour market. 
Family 
allowances 
Concern about falling birth rates 
in parts of the Community has 
led to a series of improvements and 
increases in family benefits. This has 
35 
Chapter 2 - Recent reforms In social protection systems m the Community 
particularly been the case in France 
where policy has been directed at 
encouraging larger families and 
where benefit rates were increased 
in 1981 and again in 1982, when 
for a family of three children they 
amounted to one third of the average 
wage. It was also true of Belgium, 
where further improvements to a 
system already among the most 
generous in Europe were made be­
tween 1987 and 1989. 
At the same time, improvements 
have also been made in family allow­
ances in less developed parts of the 
Community, but more to alleviate the 
problems of large families than to 
encourage people to have more 
children. In Ireland, benefits were in­
creased for the fifth child in 1989 and 
the fourth child in 1991, and in 
Greece, payments were increased for 
the third child in 1990/91. 
Policy has also been directed at im­
proving maternity benefits since 
1980, not only out of a concern for 
demographic trends, but also to im­
prove the position of women and 
make it easier for them to combine a 
working career with raising a family. 
In many Member States, the period 
of payment of maternity benefit has 
been extended (in France in 1980, 
Denmark in 1981 and 1984, Ireland 
in 1981, Portugal in 1984, Spain in 
1989 and the Netherlands in 1990), 
while in Belgium maternity benefit 
was introduced for self-employed 
women in 1990. 
A new development in some coun­
tries has been the introduction of 
parental or "education" benefits. 
These already existed at the begin­
ning of the 1980s in Germany, but were modified in 1985 to apply to 
either the father or mother and have 
been improved further since 1989. In 
France, an allocation parentale 
d'éducation, at a rate of 50% of the 
minimum wage, was introduced in 
1982 for anyone interrupting em­
ployment to take care of a child, 
payable up to the age of three. This 
was improved in 1985 and again in 
1987, when a special allowance was 
introduced to help working mothers 
pay for child care at home (allocation 
de garde d'enfant à domicile). In 
Luxembourg, an education benefit 
was introduced in 1989. 
On the other hand, there has also been 
an opposing tendency in some coun­
tries to rationalise family benefits 
and reduce their scope. In the Nether­
lands, the maximum age for receipt 
of benefit has been reduced to 18. In 
Spain, birth grants and family 
benefits for spouses were abolished 
in 1985, the rate of family benefit was 
frozen and tax allowances were in­
troduced as the main means of assist­
ance. 
Policy towards 
older people 
Concern about growing demo­
graphic imbalance has also led 
to the implementation of a large num­
ber of measures affecting older 
people. The 1980s were charac­
terised by increasing anxiety about 
the future of pension systems, largely 
because of the continuing growth in 
the number of pensioners in all parts 
of the Community. The rising cost of 
meeting pension commitments was aggravated by the high levels of un­
employment, which encouraged 
governments to look to early retire­
ment as a means of freeing up jobs 
for young people. 
In general, the objective of relieving 
pressure for jobs on the labour mar­
ket was accorded priority in the 
1980s, with early retirement schemes 
being introduced over much of the 
Community. More recently, how­
ever, concern has shifted much more 
towards the cost of pensions, and in 
a number of countries the emphasis 
has switched to reducing the number 
of pensioners. 
Thus, for example, in France the age 
for entidement to full pension was 
reduced from 65 to 60 in 1982 for 
workers with a satisfactory contribu­
tions record, while in Germany, Bel­
gium and other countries early 
retirement schemes were introduced 
around the same time. The tendency 
to lower the pensionable age persist­
ed in Belgium and Luxembourg in 
the 1990s, with workers in the former 
being given the option of taking their 
pension at any age between 60 and 65 
and in the latter being allowed to 
retire at 57, as long they had accumu­
lated sufficient years of contribu­
tions. 
However, in Germany, the reform of 
pensions in 1989 means that the pen­
sionable age will gradually increase 
from 60 to 65 in the case of men and 
in Italy, under the reforms of 1992, 
the same will occur over future years. 
Moreover, in Greece various forms 
of early retirement were abolished in 
1990. 
-36-
Chapter 2- Recent reforms In social protection systems in the Community 
At the same time, a partial pension, 
allowing workers to combine part-
time work with a partial benefit and 
so relieve pressure on the labour mar­
ket at lower cost (as well as providing 
for a more gradual transition from 
work into retirement), was intro­
duced in Denmark in 1987, in France 
in 1988 and in Germany in 1989. 
While attempting to contain costs, 
governments have also faced press­
ure to equalise the treatment of men 
and women following the Directive 
of the Council of Ministers in De­
cember 1978. Their response has 
generally been to downgrade entitle­
ments. In 1985, for example, the 
German Rentenreform gave each 
surviving spouse a pension of 60% of 
that of their deceased partner, while 
in the Netherlands, following pen­
sion reform, each surviving spouse 
became entided to receive 50% of the 
pension. (In the Netherlands, there is 
now a proposal to reduce costs fur­
ther by replacing the existing pension 
by a survivor's benefit where need 
can be established, made up of 30% 
of the minimum wage—50% if there 
are children — for the first 6 months 
and then 40% up to 65. The proposal 
is revolutionary in that it applies not 
only to spouses but also registered 
cohabitants of either sex.) 
Survivors' benefits were abolished 
completely in Denmark in 1987 
together with all derived rights in the 
social security system, while in 1982 
in France a pension for widows in 
their own right was introduced in­
stead of their husband's pension 
being transferred to them. 
Other measures taken to contain 
costs include: • the reduction in the earnings-re­
lated pension by 5% in the UK 
in 1986, coupled with a change 
in the earnings basis of calcula­
tion from the best 20 years to the 
average over the whole period of 
contributions and the introduc­
tion of concessions making it ea­
sier for people to opt for private 
instead of state pensions; 
• the switch in 1985 in Spain from 
pensions being calculated on the 
basis of earnings over the last 5 
years to earnings over the last 10 
years, combined with the intro­
duction of a minimum period of 
15 years of contributions to 
qualify for a pension; 
• the lengthening of the minimum 
qualifying period for pension en­
titlement from 5 to 10 years in 
Luxembourg in 1987. 
Health Care 
The upward pressure on the costs 
of health care, which all countries 
have experienced since 1980, has led 
in most cases to restrictions on entide­
ment to treatment and the introduction 
or extension of charges. Examples in­
clude the German health reforms of 
1988/89 which imposed higher 
charges on patients, while attempting 
to contain the costs of drugs, and other 
measures, with similar aims, intro­
duced in 1992; the imposition in 
France of a budget hmit on hospital 
treatment coupled with a flat-rate fee 
for patients for each day spent in hos­
pital; and the effective charging for 
hospital treatment introduced in Lux­
embourg in 1983. These and other at­tempts to contain health care costs 
are examined further in Chapter 7 
below. 
At the same time, in the Southern 
Member States, access to health care 
has been improved and extended 
over this period. In Italy, a national 
health service available to everyone 
had been introduced in 1978 and the 
same course was followed by Greece 
in 1983, Spain in 1986 and Portugal 
by 1988. However, the increased cost 
resulting from this move has led to 
the introduction of extensive charges 
for patients in Italy, especially in 
1989, while in Portugal, there was 
some reprivatisation of services in 
1992/93 and in Greece, charges for 
treatment and drugs were introduced 
between 1991 and 1993 and private 
practices were allowed in NHS 
clinics. 
Selectivity and 
minimum 
protection 
At times when finance is scarce 
and demand for assistance is 
expanding, a natural tendency is for 
governments to turn towards more 
selective policies focused on those 
who are most in need of social pro­
tection. While rates of social insur­
ance benefit have been reduced and 
rules on entitlement have been tight­
ened, basic means-tested benefit 
schemes have been improved and ex­
tended to target priority groups. 
37-
Chapter 2 - Recent reforms in social protection syntemê In the Community *&»j 
As a result, there has been a general 
shift from insurance-based — and 
earnings-related — benefits to 
means-tested payments because of 
deliberate policy action on the part of 
government as well as because of 
increased numbers of people in need 
falling outside the scope of the social 
insurance system. This is most ob­
vious in the case of the UK, where the 
importance of means-tested benefits 
has risen to higher levels than in other 
Member States. Here, moreover, en­
tidement to benefit for low income 
groups has been progressively re­
stricted, with supplements for special 
needs being replaced by discretion­
ary loans from the cash-limited So­
cial Fund. 
A similar trend towards means-
testing is also evident in Italy where 
since 1988 household income has 
become a determinant of the amount 
of family allowance received, 
On the other hand, in most countries 
economic recession has led govern­
ments to improve benefits for the 
least privileged who are affected 
most In Germany, for example, the 
rates of benefit for single-parent 
families and the elderly have been 
increased. The right of everyone to a 
minimum level of income was intro­
duced in Luxembourg in 1986 (fol­
lowing the example of Belgium in 
1974) and in France in 1988. In Den­
mark, public assistance was changed 
in 1987 from a discretionary scheme 
to one based on individual rights, 
with levels of payment being fixed in 
amount instead of being determined 
by individual assessment. 
Even in the less developed parts 
of the Community, protecting the weakest groups has been a common 
aim of policy, as witnessed by the 
increase in minimum pensions in 
Greece in 1982. 
In addition, new programmes, di­
rected at special needs, have been 
developed in a number of countries. 
In the Netherlands, for example, en­
titlement to family allowances for 
those over 18 was abolished in 1986 
and replaced with study grants and 
loans, while in 1991, a scheme was 
introduced giving everyone under 21 
and every school-leaver under 26 a 
right to a temporary job at the mini­
mum wage. Similar measures aimed 
at better integrating young people 
into society, and into the labour mar­
ket, have also been taken in a number 
of other countries. 
The elderly and the handicapped 
have also been targeted in a number 
of countries, a common aim being to 
reduce expenditure on institutional 
care. One response has been to keep 
these people so long as possible in 
their own home by developing spe­
cialised services and awarding them 
grants or tax concessions to employ 
people to assist them. Examples are 
the "maintenance at home" pro­
gramme in France and the Pflegegeld 
(caring benefit) in Germany, which 
enables someone caring for a seri­
ously disabled person to receive a 
benefit in the same way as those un­
able to work. 
Privatisation 
Although the privatisation of so­
cial security has been much dis­
cussed, there have, in practice, been few concrete examples of this kind of 
action. In the UK, for example, pro­
posals for reform of social security 
were published in 1985, the aim 
being to "reinforce personal inde­
pendence, rather than extend the 
power of the State; to widen, not 
restrict people's opportunity to make 
their own choices; to encourage, not 
discourage, earnings and saving" 
(Reform of Social Security, Cmnd. 
7517, HMSO 1985). In the Nether­
lands, reforms were introduced in 
1983 with similar aims of reducing 
pubhc expenditure and adapting the 
social security system to increased 
numbers of unemployed and elderly. 
In France, reforms were proposed 
around the same time in the Livre 
blanc de la protection sociale of June 
1983 and in 1987 an extensive pro­
cess of national consultation took 
place on social security in the form 
of les Etats Généraux de la sécurité 
sociale in 1987. In Ireland, the Com­
mission on Social Welfare report was 
published in 1986. 
A common feature of all these plans 
is a professed commitment to a 
universal system of social protection 
combined with proposals to restrict 
the provision of support. Neverthe­
less, these reports have not generally 
been followed by action. The share 
of social security in GDP has been 
reduced in few countries and in most 
it has risen since 1980 (see Chap­
ter 3). 
The few examples of privatisation of 
social security include, in the UK, the 
possibility of opting out of the state 
system of earnings-related pensions 
and choosing a private pension 
scheme instead (an option which 
was introduced, in fact, by a Labour 
-38-
Chapter 2 - Recent reforms In social protection systems In the Community 
Government in 1976, though it was 
extended significantly in 1986 by the 
Conservative Government). In the 
Netherlands, there was the abolition 
of voluntary social health insurance 
for the self-employed and the elderly 
who, if not eligible for compulsory 
insurance, have now to subscribe to 
a private insurance scheme to cover 
their medical expenses. In Belgium, 
certain benefits payable in the event 
of industrial accidents were trans­
ferred in 1988 from the public Fund 
for Industrial Accidents to private in­
surers. In Italy, it became possible 
from 1993 for those on higher in­
comes to opt out of the national 
health service. These, however, are 
just about the only examples which 
can be cited. 
Nevertheless in almost every Mem­
ber State, reforms have been intro­
duced to reduce the growth of 
government spending on public 
health care or unemployment. In 
many countries too, as noted above, 
the indexation of benefits to the cost 
of living and wages has been weak­
ened. Where such steps have been 
taken — for example, requiring em­
ployers to pay employees who are 
sick for a longer period, as in Den­
mark and the Netherlands, or reduc­
ing benefit rates as in many countries 
— they have tended to be followed 
by an expansion of private insurance 
schemes. This in a sense can be re­
garded as a form of privatisation. 
There are, however, examples of 
shifts in policy in the opposite direc­
tion. In a number of countries, the 
scope of social security has been ex­
tended (to artists in Germany and 
Portugal, for example, and to other 
groups in Greece and Spain) and some benefits have been improved 
(family allowances in Belgium, Italy 
and Ireland, for example, and mini­
mum pensions in Greece, Belgium, 
Italy, Spain, Ireland and Germany). 
Although in every country there are 
tax advantages in respect of private 
insurance, these already existed long 
before 1980 and have not generally 
been extended since then. On the 
contrary, there has been some tend­
ency to reduce tax concessions on 
insurance premiums. An exception to 
this, however, was the campaign for 
"pension saving" launched by the 
French and Belgian Governments in 
1988 to encourage people to take out 
their own private pensions by offer­
ing tax concessions for approved 
plans. This example was followed by 
the Italian Government in 1993. 
The expansion of private insurance 
schemes over recent years is partly 
the result of attempts to control wage 
increases either by law or through 
collective agreements. One response 
of employers who are not allowed to 
pay their workers the wages they 
wish is to choose indirect means of 
payment, such as increasing pensions 
or providing them with private health 
insurance. Such a response can also 
be a means of reducing social con­
tributions and taxes on wages. 
Towards 
convergence? 
There is no clear evidence of con­
vergence of social protection sys­
tems in the Community since 1980. 
While a number of changes have worked in the same direction in spe­
cific areas (such as increases in 
charges for health care and drugs and 
limitations on expenditure), others 
have worked in opposite directions 
(reductions and improvements in 
benefit rates, restricting and extend­
ing entitlement). Even within the 
same country, there are examples of 
conflicting changes —- of, for 
example, governments trying to re­
lieve the imposition on employers, 
while at the same time increasing the 
rate of contribution or introducing 
new charges in an effort to obtain 
more revenue to fund expenditure. In 
certain cases, such as over the pen­
sionable age or means-testing, gov­
ernments have alternated between 
increases and reductions. 
Nevertheless, there has certainly 
been a convergence of the problems 
to be solved, partly because all coun­
tries have had to confront the social 
and financial problems posed by 
slow growth and higher unemploy­
ment, partly because of common 
demographic trends, and partly be­
cause of similar cost pressures. Al­
though the scale of these problems 
may differ, they have affected all 
Member States in some degree and 
have imposed similar pressures for 
changes in social protection arrange­
ments throughout the Community. 
Thus whereas the social protection 
systems themselves may retain then-
own characteristics, reflecting their 
historical development and national 
preoccupations, the social and econ­
omic environment in which they 
function is becoming increasingly 
similar. All Member States face the 
same kinds of challenge. 
39 
Chapter 2 - Recent reforms In social protection systems In the Community 
First, they must adapt their systems 
of social protection to match the 
changing circumstances and exclu­
sion processes arising from long-
term unemployment and the 
increasing difficulties of long-term 
integration into the labour market. 
This adaptation means establishing a 
guaranteed minimum level of re­
sources for all those out of work, but 
also encouraging social and econ­
omic integration. Facing the ageing 
of their populations, Member States 
will also need to find an acceptable 
compromise between the interests 
of the people in employment and 
those of pensioners and a balance 
between statutory and supplemen­
tary schemes. They will have to 
attempt better to manage their expen­
diture on health care. Finally, Mem­
ber States wdl need to adapt their 
systems to the progressive change in 
the composition of families and life­
styles. This not only means changing 
the requirements to qualify for 
benefits, but could also create new 
social protection needs, for the care 
of elderly dependents, in particular. 
In the last fifteen years, Member 
States have implemented a number 
of reforms, in order to adapt their 
systems to crisis constraints. In order 
to encourage convergence, the Coun­
cil Recommendation of 27 July 1992 
has established common objectives 
intended to serve as guidelines for 
national policies and for adjusting 
social protection to meet changing 
needs. As Member States become 
aware of the strong links which exist 
between them and as information 
about what is going on in other coun­
tries is improved, it is reasonable to 
believe that they will seek long-term 
solutions in similar directions. 
40-
Chapter 3 - Social protection expenditure and Its financing 
Chapter 3 Social protection expenditure 
and its financing 
In 1991, expenditure on social pro­
tection amounted to as much as 
26% of Community GDP. This 
means that for each person living in 
the Community, 4000 ECU (3994 to 
be precise) was spent on health care, 
sickness and invalidity benefits, old-
age pensions, maternity benefits, 
family allowances, unemployment 
compensation and housing assist­
ance. In relation to GDP, the differences 
are much smaller (Graphs 1 and 2), 
reflecting the fact that spending on 
social protection varies with the level 
of economic development. Dif­
ferences, however, remain signifi­
cant, expenditure relative to GDP 
being higher in general in those coun­
tries where income per head is also 
relatively high, indicating that as 
economic development takes place proportionately more resources are 
devoted to social protection. 
The system of social protection is 
most extensive in Denmark, the 
Netherlands and, to a lesser degree, 
France which have similar levels 
of income per head. On the other 
hand, in relation to their income per 
head, Italy and the UK spend slighdy 
less than the Community (un­
weighted) average on social protec-
Variations 
between 
Member States 
There are substantial differences 
in expenditure, however, be­
tween Member States. In terms of 
purchasing power standards (PPS), 
average spending per head in 1991 on 
social protection ranged from an es­
timated 1500 ECU in Greece to 
nearly 5800 ECU in Luxembourg, a 
difference of almost four times 
(Graph 1). Nevertheless, for six 
member States — five of the six other 
Northern countries, excluding the 
UK, plus Italy — social expenditure 
per head averaged between 4000 and 
5000 ECU. t Social protection expenditure per head and in relation to 
GDP, 1991 
Social expenditure per head, PPS (1000s) 
6 r 
5 f %GDP 
4 H 1 35 
A 30 
OH P K». E VK El'' 
" OR «t&TWted UK Elî î B OK F O N5- I 25 
20 
15 
10 
41 -
Chapter 3 - Social protection expenditure and Its financing 
Table 1 Current social protection expenditure as % of GDP, 1970-1991 
1970 
1975 
1980 
1983 
1986 
1989 
1991 
1970 
1975 
1980 
1983 
1986 
1989 
1991 B 
18.7 
24.2 
28.0 
30.8 
29.4 
26.7 
26.7 
18.2 
22.7 
25.6 
27.5 
26.5 
24.3 
24.6 DK 
19.6 
25.8 
28.7 
30.1 
26.7 
29.8 
29.8 
19.2 
23.6 
25.7 
26.1 
24.1 
26.7 
26.3 21.5 
29.7 
28.7 
28.2 
28.1 
27.5 
26.6 GR 
na 
na 
12.2 
17.2 
19.4 
20.7 
na E F IRL I 
Total social expenditure 
na 
na 
18.1 
19.5 
19.5 
20.1 
21.4 19.2 
22.9 
25.4 
28.3 
28.5 
27.6 
28.7 13.2 
19.7 
21.6 
24.1 
24.1 
20.2 
21.3 17.4 
22.6 
19.4 
22.9 
22.4 
23.1 
24.4 15.9 
22.4 
26.5 
27.2 
24.8 
25.2 
27.5 NL 
20.8 
26.7 
30.8 
33.2 
30.9 
31.0 
32.4 
Social expenditure excluding unemployment compensation 
21.3 
28.7 
27.9 
27.1 
26.8 
26.3 
25.7 na 
na 
11.9 
16.8 
19.0 
20.4 
na na 
na 
15.4 
16.5 
16.3 
17.1 
17.7 19.0 
22.2 
24.3 
27.0 
27.1 
26.1 
27.0 9.4 
17.8 
20.1 
21.1 
20.9 
17.7 
18.6 17.4 
22.2 
19.0 
21.2 
21.8 
23.1 
24.0 15.9 
22.4 
26.1 
27.3 
24.6 
25.1 
27.2 20.2 
25.2 
28.2 
29.1 
27.7 
28.3 
29.9 na 
na 
14.7 
16.1 
16.3 
16.6 
19.4 
na 
na 
14.3 
15.9 
15.9 
16.3 
19.0 UK EUR12 
15.9 
20.1 
21.5 
23.9 
24.3 
21.9 
24.7 
12.5 
19.1 
19.9 
21.6 
22.3 
21.1 
23.6 na 
na 
24.4 
25.3 
26.0 
25.2 
26.0 
na 
na 
23.1 
24.5 
24.3 
23.8 
24.6 
Source: Eurostat, Sodai protection expenditure and receipts 1980-1991, Luxembourg, 1993 
2 Social protection expenditure and GDP per head, 1991 tion, as do the four less developed 
Member States — Spain, Ireland, 
Portugal and Greece. 
35 
30 
25 
20 
15 
10 Social expenditure {% GDP) 
«NL 
«OK 
•F 
•B •£> 
•UK M 
•GR :;*Rw=:t 
I I I I» ll I III t ll,, , !» ,,„»,, ,1 ll 
5 10 
ORartmctod 15 20 
GOP per head (PPS) wim 
mm 
mm 
mm 
WfiF 
£;X»E»ft 
;25;;-Change 
in expenditure, 
1980 to 1991 
The increase in expenditure on 
social protection relative to 
GDP, which was a major feature of 
the 1970s, continued up until 1982/ 
1983. Since then, spending has 
tended to stabilise. More precisely, 
over the period 1986 to 1989 
(Table 1), when economic condi­
tions were favourable in the sense 
that output was expanding and unem­
ployment falling, social protection 
42 
Chapter 3 ~ Social protection expenditure and Its financing 
expenditure rose by less than GDP in 
most Member States. Between 1989 
and 1991, however, the reverse was 
the case in all Member States except 
Germany, where spending continued 
to fall relative to GDP reflecting the 
continued expansion of the German 
economy, and Belgium and Den­
mark, where it remained constant. 
Differences across the Community in 
expenditure on social protection 
diminished over the 1980s, as spend­
ing rose most rapidly in those coun­
tries where it was relatively low in 
relation to GDP. (The coefficient of 
variation in the ratio of social protec­
tion expenditure to GDP, which 
measures divergence from the aver­
age, was 0.25 in 1980, but only 0.15 
in 1991, indicating a significant con­
vergence in levels.) 
Average social benefits per head in­
creased by most in the Southern 
Community countries between 1980 
and 1991. In terms of constant prices, 
they more than doubled in Portugal, 
and rose by over 70% in Italy, by 
65% in Greece and by almost 60% in 
Spain. On the other hand, the in­
creases in Belgium, Germany, the 
Netherlands and Denmark were 
much smaller, only ranging from 
15% to 25% (Graph 3). 
Expenditure 
by function 
The distribution of expenditure 
by main function, defined 
according to the Eurostat com­
mon system of classification, 
(ESS PROS — European system of integrated social protection statis­
tics), reveals a number of national 
differences (Table 2 and Box p. 44). 
While old-age/survivors' pensions 
are the largest item of expenditure in 
all Member States, their share 
of total spending is almost twice 
as high in Greece (68% of 
total benefits in 1991) and Italy 
(61%), on the one hand, than in the 
Netherlands (37%), Portugal (37%), 
Denmark (36%) and, especially, Ire­
land (31%) on the other. 
There are also substantial differences 
in the importance of sickness-inva­
lidity-occupational injury benefits, 
which account for 45% of total 
spending in Portugal and the Nether­
lands (where invalidity benefits 
alone account for 22% of the total as 
against an average of 9% in the Community as a whole), but for only 
22% in Greece and 28% in Denmark. 
Similarly, the share of spending 
going on maternity/family allow­
ances ranges from 13% in Ireland 
and 12% in Denmark to less than 2% 
in Spain and Greece, while the share 
going to unemployment benefits and 
the placement, vocational guidance 
and resettlement of workers ranges 
from almost 19% in Spain and 16% 
in Denmark and Ireland to less than 
2% in Greece and Italy and under 1 % 
in Luxembourg. On the other hand, 
housing benefits account for much 
the same proportion of expenditure 
in all countries except the UK (6% as 
compared with a Community ave­
rage of 2%). 
3 Growth In social protection expenditure per head, 1980-1991 
1* -r 
6 I-
!si§: % growth per year at constant prices 
B 0 NL IRL DK F 
OR «80*1989 UK GR 
-43 
Chapter 3 - Social protection expenditure and Its financing 
Social protection by function 
The statistics published by Eurostat distinguish between 11 functions: 
Sickness: comprising allowances intended as full or partial compensation for the loss of income resulting from stopping 
work; payments covering all or part of the cost of medical care ; expenditure on public health services, insofar as it relates 
to reimbursement of costs or provision of medical care; other forms of social assistance relating to sickness. 
Invalidity/disability: meaning the inability to engage in any work to a prescribed extent or to lead a normal social life, 
either permanently or for a prolonged period, and covering invalidity and disability pensions; remunaation paid to the 
disabled when they engage in work adapted to their handicap in sheltered workshops; medical care specifically granted 
to invalids or the disabled because of their condition; expenditure on functional, occupational and social rehabilitation; 
other forms of social assistance. 
Occupational accidents and diseases: covering pensions, allowances, compensation payments and other cash benefits 
granted to those affected; specific medical care; expenditure on functional, occupational and social rehabilitation, and 
other forms of social assistance for those affected. 
Old age: covering pensions paid to those who have reached a certain age as well as the cost of accommodation in nursing 
and old-people's homes and early retirement pensions. 
Survivors: the death of a spouse or paient who when alive contributed to the income of the household and covering 
pensions and allowances paid to surviving relatives, pensions reverting to next-of-kin and death grants and funeral 
expenses. 
Maternity: covering all cash benefits paid during pregnancy and on the birth or adoption of a child; allowances to offset 
the loss of earned income, special allowances paid during pregnancy or after childbirth, expenditure on medical care for 
mothers and children, other forms of social assistance given to expectant mothers or mothers of newborn children. 
Family: covering all cash benefits granted for dependent children or, where the legislation provides, for other members 
of the family; benefits in kind in the form of food, clothing, holiday accommodation and household assistance; 
expenditure on family planning and other forms of social assistance for children and the family. 
Unemployment: covering benefits for partial or complete unemployment; wages and salaries paid for occasional and 
temporary work organised by pubhc authorities, insofar as these replace unemployment benefits, and other expenditure 
on social assistance to the unemployed. 
Placement, vocational guidance and resettlement: covering administrative costs incurred by placement or vocational 
guidance offices; removal and installation allowances for the unemployed who have agreed to move house and work in 
another area; payments compensating for loss of earnings due to absence from work because of receiving vocational 
training. 
Housing: covering payments made on behalf of certain categories of household — in particular, those with limited 
income — in order to help pay for accommodation. 
Miscellaneous: benefits which either relate to areas other than those covered by the above functions or cover a number 
of functions simultaneously: assistance for the destitute, expenditure on combating poverty, expenditure directed at 
children and juvenile delinquents (reintegration, etc.), benefits for victims of war or natural disasters, and so on. 
44 
Chapter 3 - Social protection expenditure and Its financing 
Table 2 Division of social benefits by function, 1991 (%) 
Sickness 
Invalidity, disability 
Occupational 
accidents and 
diseases 
Old age 
Survivors 
Maternity 
Family 
Placement, 
vocational, 
guidance, 
resettlement 
Unemployment 
Housing 
Miscellaneous 
Total EUR12 
25.4 
8.9 
2.1 
37.4 
8.3 
1.0 
6.4 
1.3 
5.6 
1.8 
1.8 
100 B 
23.4 
8.7 
2.1 
34.1 
11.5 
0.9 
8.0 
1.7 
8.7 
0.0 
1.1 
100 DK 
18.5 
8.7 
0.8 
36.4 
0.1 
1.8 
10.3 
4.4 
12.0 
2.5 
4.5 
100 D 
30.0 
8.6 
3.2 
29.8 
12.0 
0.8 
6.0 
2.2 
3.7 
0.7 
3.0 
100 GR 
10.3 
11.7 
0.1 
56.9 
11.4 
0.3 
1.4 
0.0 
1.8 
0.9 
5.2 
100 E 
27.0 
7.7 
2.3 
31.2 
9.7 
0.9 
0.6 
0.7 
17.9 
0.7 
1.3 
100 F 
26.2 
5.7 
2.1 
37.4 
7.6 
1.7 
8.2 
0.9 
6.1 
2.7 
1.4 
100 IRL 
28.2 
7.0 
0.6 
24.5 
6.7 
2.2 
10.6 
2.2 
13.5 
2.6 
1.9 
100 I 
24.4 
6.5 
2.3 
50.0 
10.9 
0.4 
3.6 
0.1 
1.8 
0.0 
0.0 
100 L 
24.0 
11.8 
3.1 
32.6 
16.2 
1.5 
9.5 
0.2 
0.6 
0.2 
0.3 
100 NL 
22.3 
22.4 
(i) 
31.5 
5.4 
0.4 
5.5 
0.0 
8.3 
1.1 
3.2 
100 P 
31.1 
11.8 
1.9 
30.1 
6.6 
0.9 
5.4 
2.5 
2.3 
0.0 
7.5 
100 UK 
20.4 
11.6 
0.9 
42.2 
1.0 
0.8 
9.6 
1.9 
4.4 
5.7 
1.5 
100 
NL invalidity/disability also includes occupational accidents and diseases. 
Source: see table 1 
Old-age pensions 
The differences between Member 
States and the trends over time within 
countries can be analysed by distin­
guishing the main factors influencing 
outlays on benefits (Table 3). So far 
as old-age pensions are concerned, it 
is of interest to distinguish between 
demographic factors (old people as a 
proportion of total population), the 
extent of old-age protection (those in 
receipt of an old-age pension) and the 
level of this protection (the average 
value of old-age pensions). Unfortu­
nately, in practice, while there are 
some data on the number of pensions 
received, there are none on the num­
ber of people receiving them. In 
general, those in retirement receive 
several different types of pension, 
and there is a lack of information on 4 Average old-age pension In relation to GDP per head, 1980 
and 1991 
% GDP per head 
80 r 
60 
40 
20 80 
60 
40 
20 
P IRL E D . B E12 UK L DK F NL I GR 
GR 1089, E12 unweighted «venge of each Member State 
-45 
Chapter 3 - Social protection expenditure and Its financing 
Table 3 Factors explaining expenditure on old-age 
pensions 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 Old-age 
pensions 
(% GDP) 
'7-6 
8.6 
9.8 
10.6 
8.0 
7.6 
6.3 
10.6 
5.4 
6.4 
8.5 
10.2 
5.8 
5.0 
8.3 
11.5 
7.8 
8.6 
8.1 
9.8 
4.3 
5.5 
8.4 
10.0 Population 
aged 65 and 
over (% total) 
14.4 
15.0 
14.4 
15.5 
15.6 
14.9 
12.9 
13.6 
10.9 
13.5 
14.1 
14.0 
10.7 
11.4 
13.3 
14.9 
13.4 
13.3 
11.4 
12.8 
10.4 
13.2 
14.8 
15.6 
Source: Eurostat Social protection expenditure and receipts 1980-1991, 
1993; Demographic statistics, Luxembourg 1992. Average 
pension 
(%GDP 
per head) 
52.8 
57.4 
68.4 
68.0 
51.3 
51.2 
48.5 
78.0 
49.6 
47.3 
60.0 
72.8 
54.2 
43.8 
62.1 
77.6 
58.2 
65.0 
70.6 
76.4 
41.3 
42.1 
56.9 
63.9 
Luxembourg 
their aggregate amount and how this 
is changing over time. 
The following decomposition is all 
that is possible, but it is nevertheless 
informative: 
OAP 
GDP POP65+ OAP/POP65+ x POP GDP/POP where OAP = total old-age pensions 
GDP = gross domestic 
product at market prices 
POP 65+ = population of 65 
and over 
POP = total population 
Expenditure on old-age pensions 
relative to GDP is therefore given by 
the proportion of old people in the population multiplied by the average 
pension (defined as total expenditure 
on pensions divided by the popula­
tion of retirement age) in relation to 
GDP per head. 
Old-age pensions relative to GDP in­
creased between 1980 and 1991 in all 
Member States except Ireland and 
Germany where expenditure de­
clined. In 1991, expenditure was 
highest in Italy, where it was 11.5% 
of GDP, and in Denmark and France, 
where it was over 10% of GDP. In 
these three countries, spending was 
around twice as high as in Ireland 
(5% of GDP), Portugal (5.5%) and 
Spain (6.4%), the countries where 
expenditure was lowest 
Demographic factors explain only a 
very small part of these differences. 
Except for Ireland, where the propor­
tion was much less than the average, 
those aged 65 and over varied 
between 13% and 15.5% of total 
population in 1991 in all Member 
States, the proportion increasing 
only modestly over the 1980s (except 
in France, Germany and Luxem­
bourg, where it fell). 
By contrast, the average value of old-
age pension varies widely between 
Member States. In 1991, it amounted 
to over 75% of GDP per head in 
Greece, Italy and the Netherlands, 
and just under 75% in France as com­
pared with less than 45% in Ireland 
and Portugal and under 50% in Spain 
(Graph 4). 
Between 1980 and 1991, the aver­
age pension declined slightly in 
relation to GDP per head in Spain 
and markedly in Ireland. It re­
mained broadly constant in Ger-
46 
Chapter 3 - Social protection expenditure and Its financing 
Table 4 Factors explaining expenditure on unemployment benefits 
Unemployment Population 
benefits 15-64 
(%GDP) (% total) 
Belgium 1980 2.4 65.6 
1991 2.2 66.6 
Denmark 1980 3.0 64.7 
1991 3.5 67.2 
Germany 1980 0.9 66.3 
1991 0.9 67.6 
Greece 1980 0.3 64.0 
1991 0.3 66.6 
Spain 1980 2.7 63.3 
1991 3.7 67.0 
France 1980 1.0 63.7 
1991 1.7 65.4 
Ireland 1980 1.6 58.8 
1991 2.7 61.4 
Italy 1980 0.4 65.8 
1991 0.4 68.9 
Luxembourg 1980 0.1 67.9 
1991 0.2 68.1 
Netherlands 1980 1.7 66.2 
1991 2.6 68.3 
Portugal 1980 0.4 63.0 
1991 0.4 66.0 
UK 1980 1.7 64.1 
1991 1.0 65.1 Activity rate 
(%) 
63.0 
63.1 
80.3 
83.6 
68.5 
70.7 
55.9 
59.4 
57.1 
58.8 
68.2 
65.7 
62.3 
61.5 
60.8 
61.8 
64.1 
64.0 
57.7" 
67.8 
70.5 
79.1 
74.4 
75.4 Unemployment 
rate 
(%) 
7.9 
7.2 
6.5 
8.9 
3.2 
4.4 
2.8 
6.8 
11.1 
15.9 
6.3 
9.4 
7.3 
16.4 
7.5 
9.9 
0.6 
1.6 
6.0 
6.9 
7.7 
4.0 
5.6 
9.3 
Source: Social protection expenditure and receipts 1980-1991, Luxembourg 1993; Demographic statistics, Luxembourg 
Force Survey: results, Luxembourg, 1992 Average 
unemployment 
benefit (% GDP 
per head) 
74.7 
72.6 
89.7 
69.1 
59.8 
45.0 
30.5 
12.2 
67.9 
58.3 
38.1 
41.1 
60.7 
44.2 
13.7 
9.7 
53.8 
23.4 
76.3 
80.2 
10.6 
20.5 
63.3 
22.6 
1992,Labour 
many and Denmark and rose in the 
other Member States, especially in 
Greece, Italy and France. For the 
Community as a whole, the 
(unweighted) average rose from 
56% of GDP per head in 1980 to 
61% in 1991. However, dif­
ferences between Member States 
widened over the same period (the 
coefficient of variation rising from 
0.15 to 0.20). Unemployment 
benefits 
Outlays on unemployment 
benefits (UNB) in relation to 
GDP can be analysed in a similar way 
by distinguishing the following fac­
tors (Table 4): the age structure of the popula­
tion: the proportion of total cf 
working age (15-64 years) 
(POP15-64/POP); 
the activity rate: active popula­
tion as a proportion of the 
population of working age 
(POPACT/POP15-64) (the ac­
tivity rate is affected by both 
cultural, particularly in the case 
47-
Chapter 3 ~ Social protection expenditure and Its financing 
of women, and economic factors 
— the rate tending to increase as 
economic conditions improve); 
• the unemployment rate: the 
number of unemployed as a pro­
portion of active population 
(UN/POPACT); 
• the average level of protection 
for the unemployed: the average 
benefit received by each person 
unemployed in relation to GDP 
per head. 
These in combination give the 
following identity: 
POP15-64 POPACT 
POP XpOP15-64 
UNB/UN UNB 
GDP = 
UN 
POPACT "GDP/POP Total unemployment benefits in.rela-
tion to GDP vary widely between 
Member States. In 1991, they 
amounted to less than 0.5% of GDP 
in Greece, Italy, Luxembourg and 
Portugal, around 1 % in Germany and 
the UK, 1.5% in France, over 2% in 
Belgium, Ireland and the Nether­
lands and as much as 3.5% in Den­
mark and Spain. 
In some cases, the low level of ex­
penditure is due to a low rate of un-
employment (Germany and 
Luxembourg), while countries with 
the highest expenditure are those 
with high unemployment (Ireland 
and Spain) or, in the case of Den­
mark, a high rate of activity and, 
therefore, relatively large numbers of 
unemployed in relation to popula­
tion. However, expenditure is also 
closely related to the average level of protection for the unemployed, 
which differs widely across the Com­
munity (Graph 5). 
The average level of protection can 
be further decomposed into two fac­
tors — the proportion of the unem­
ployed receiving benefit and the 
average value of the benefit received. 
Unfortunately, given the data avail­
able, these two factors cannot be 
clearly distinguished. Nevertheless, 
countries can be grouped broadly 
into those giving good protection to 
a small number of unemployed 
(Greece, Portugal and Spain), those 
providing benefits for most of the 
unemployed but at lower rate relative 
to former income (Belgium, Den­
mark, Germany and Ireland) and 
those falling somewhere between the 
two. 
Average unemployment benefit In relation to GDP per head, 
1980 and 1991 
100 
80 % GDP per head 
60 f 
40 
20 h n 100 
00 
60 
40 
20 
I GR P UK l F £12 IRL 
GR 1969, Et2 unweighted ovoreg* of each Mambar Stale DK B NL Expenditure on unemployment 
benefits increased relative to GDP in 
most Member States. In Germany, 
Greece, Italy and Portugal, however, 
it remained broadly unchanged, 
while in the UK it declined substan­
tially. The increase in unemployment 
in all Member States except Belgium 
and Portugal was the main reason for 
the increase that occurred, the aver­
age value of unemployment benefits 
falling in all Member States except 
France, the Netherlands and Portugal 
— in some cases (Ireland, Luxem­
bourg and the UK) substantially. 
Over the Community as a whole, the 
(unweighted) average of unemploy­
ment benefit fell from 53% of GDP 
per head in 1980 to 42% in 1991, 
while at the same time the difference 
between Member States widened 
significantly (the coefficient of vari­
ation rising from 0.45 to 0.57). 
-48 
Chapters - Social protection expenditure and Its financing 
Family 
allowances 
Overall expenditure on family 
allowances can be decom­
posed into a demographic factor 
(young people under 20 as a propor­
tion of total population) and the aver­
age amount of family allowances 
received for each person under 20 
(Table 5). 
Spending on family allowances 
varies considerably in relation to 
GDP across the Community. One 
group of countries — Greece, Italy, 
Portugal and Spain — spent less 
than 1% of their GDP on family 
allowances in 1991; a second group 
— Germany and the Netherlands — 
spent between 1.5% and 2% of GDP; 
while in a third group — Bel­
gium, Denmark, France, Ireland, 
Luxembourg and the UK — family 
allowances amounted to over 2% of 
GDP. 
Spending relative to GDP fell be­
tween 1980 and 1991 in most Mem­
ber States and increased only in 
Denmark, Ireland, Luxembourg and 
Portugal. The fall that occurred can 
largely be explained by the decline in 
the number of young people under 20 
in proportion to total population, 
which was some 10-20% over the 
1980s. 
In 1991, the average family allow­
ance per person under 20 amounted 
to over 12% of GDP per head in 
Denmark, but to under 0.5% of 
GDP in Spain (Graph 6) — a 
difference of 30 to 1. The ratio of 
average family allowances to GDP Table 5 Factors explaining expenditure on family 
allowances 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 
1980 
1991 Family 
allowances 
(% GDP) 
2.8 
2.0 
2.8 
3.0 
2.5 . 
1.5 
0.4 
0.3 
0.5 
0.1 
2.6 
2.2 
1.6 
2.2 
1.2 
0.8 
2.2 
2.5 
2.6 
1.7 
0.9 
1.0 
2.4 
2.3 Population 
under 20 
(% total) 
28.4 
24.5 
28.7 
24.1 
26.8 
20.9 
30.3 
26.3 
34.4 
27.8 
30.2 
27.3 
40.0 
36.6 
30.6 
23.8 
26.7 
22.9 
31.3 
25.0 
36.9 
29.3 
29.4 
25.9 
Source: Eurostat, Social protection expenditure and receipts 1980-1991, 
1993; Demographic statistics, Luxembourg 1992 Average 
allowance 
(% GDP per 
head) 
10.0 
8.2 
9.7 
12.4 
9.3 
7.4 
1.4 
1.0 
1.4 
0.4 
8.5 
8.2 
4.1 
5.9 
4.0 
3.5 
8.3 
11.0 
8.2 
6.8 
2.4 
3.4 
8.0 
8.8 
Luxembourg 
per head fell between 1980 and 
1991 in seven Member States — Bel­
gium, France, Germany, Greece, 
Italy, the Netherlands and Spain — 
and increased in five, the overall dif­
ference between Member States 
widening (the coefficient of variation 
rising from 0.51 in 1980 to 0.57 in 
1991). Financing: 
the beginnings 
of convergence 
'he means of financing social 
protection differ widely be-
49-
Chapter 3 - Social protection expenditure and Its financing 
6 Average family allowance In relation to GDP per head, 1980 
and 1991 
15 r 
12 
9 r % GDP per head 
mm*:. 
12 
3 r 
E QR P ' I IRL E12 NL D B F UK L DK 
GR 1989, E12 unweighted average of each Member Stats 
7 Structure of social protection receipts, 1980 and 1991 
M Employers M Protected EH Taxes and other 
persons % total 
100 
80 
60 
40 
20 100 
Ihsoi 
4 60 
40 
20 
E12 B DK D GR E F IRL I 
Left bar 1080. right bar 1991 L NL P UK tween Member States, especially as 
regards the importance of contribu­
tions from government, whether cen­
tral or local, which come from 
taxation. The latter are small in 
France and Greece (20% or less of 
total receipts in 1991), as well as in 
the Netherlands, Belgium and Ger­
many (25% or less) and large in Ire­
land (60%) and Denmark (81 %). 
There is, however, some sign of con­
vergence (Graph 7). Between 1980 
and 1991 in all Member States, ex­
cept Belgium, there was a downward 
trend in the proportion of social pro­
tection expenditure financed by em­
ployers' contributions, amounting in 
the Community as a whole to 4 per­
centage points (45% to 41%). This 
was offset by an increase in the im­
portance of contributions either from 
employees and others receiving pro­
tection (in France, Germany and Ire­
land) or from government (in Greece, 
Italy, Luxembourg and Spain) or 
from both (in the Netherlands and 
Portugal). 
As a result of these differential 
trends, the distribution of total social 
contributions as between employers 
on the one hand, and those protected 
(wage-earners, self-employed and 
others) on the other, have become 
more similar across the Community, 
the proportion of contributions 
paid by employers ranging between 
57% and 67% of the total in nine of 
the 12 Member States. In Spain and 
in Italy, however, employers were 
responsible for paying 76-77% of 
contributions, while in the Nether­
lands, they paid only 33% with those 
receiving protection, in contrast to all 
other Community countries, contri­
buting the largest share. 
50 
Chapter3 -Socialprotection expenditure and its financing 
Gross or net benefits? 
The distorting effect on comparisons of taxes on benefits 
Any rigorous comparison of social protection expenditure should take account of the fact that in some Member States 
benefits are subject to income tax and/or deductions for social contributions. Since the situation varies from one country 
to another, this affects comparisons at any given point in time. Equally, changes made in individual Member States on 
taxing benefits or deducting social contributions can distort trends over time. 
To correct for this, benefits should ideally be calculated in net terms, after deduction of tax or social security 
contributions. Unfortunately, the information needed to do this is not at present available in most Member States, so 
more summary information must suffice. 
Table 6 indicates the tax treatment of social security benefits in Member States as at 1 July 1992. Overall, it appears 
that long-term benefits (old-age or invalidity pensions) tend to be regarded as taxable income more than short-term 
benefits. However, in practice, the existence of specific tax rules (in Belgium) or tax exemptions Cm Germany, Greece, 
Portugal and Spain) means that this distinction is not clear-cut 
Table 7 indicates that the practice of deducting social contributions from benefits is much less widespread. In some 
Member States — Denmark, Ireland, Italy, Portugal and the UK—no contributions arc deducted from benefits. In the 
others, some benefits arc subject to health insurance contributions — which again are more often long-term (old-age 
and invalidity pensions) than short-term benefits (sickness and unemployment). 
How important are these taxes on benefits? According to estimates produced by the Netherlands Statistical Office, total 
direct taxes and social contributions amounted to over 20% of the social benefits received by households each year — 
or to around 5% of GDP. The total net expenditure on social protection in the Netherlands, therefore, represented not 
32% of GDP in 1991, as shown in the ESSPROS statistics (Graph 1), but 27%. 
This is probably an extreme case. In the Netherlands all social benefits, except family allowances, are subject to income 
tax and recipients of old-age, invalidity and survivors' pensions and of social assistance arc liable for national insurance 
contributions. Similarly, those receiving benefits under the occupational insurance scheme — because of sickness, 
unemployment or invalidity — are treated as wage-earners and must pay contributions to the national insurance and 
occupational insurance schemes. 
The difference between total gross and net benefits is probably smaller in the other Member States. It may, however, 
be significant in some countries (perhaps 1-2% of GDP), particularly in Belgium, France and Luxembourg. More 
investigation of this point is required to improve comparability between Member States. 
It is interesting to note that the majority of Member States have made reforms over the past ten years, which have had 
the effect of increasing deductions from benefits. In 1984, Belgium made unemployment and invalidity benefits taxable 
and since 1980 has required old-age pensioners to pay health contributions. In Germany, health insurance contributions 
have been payable on pensions since 1983 at the same rate as on earnings. A similar reform was introduced in France 
in 1980 and in Italy in 1991. In France, in 1982 health insurance contributions became payable by those receiving 
unemployment benefit, and since 1991 the new "general social security contribution" has been payable on all incomes, 
including social security benefits (with exemptions for the lowest old-age pensions and unemployment benefits). In the 
UK, unemployment benefits were made taxable in 1982. 
51 -
Chapter 3 - Social protection expenditure and Its financing 
Table 6 Tax treatment of social benefits in the European Community (July, 1992) 
B(1) DK D GR E F IRL I L NL P UK 
Sickness + + - +(3) + + - + + + -(9) 
Unemployment Insurance + + -- - + - - + + - + 
Basic old-age pension + + +(2) +(3) + + + + + + +(8) + 
Supplementary old-age pension + + + +(3) + + na + + + +(8) + 
Means-tested old-age pension + na + na +(8) 
Occupational accident or disease + + na + -(6) +/-(7) + na 
Family - - + (3) + 
Maternity + +.-+/-(4) + + + ,. + - -(10) 
invalidity + + +(2) +(3) + + + + + +(8) 
Survivors + na +(2) +(3) - + + + + + +(8) + 
Social assistance + + - - +(5) .... + - -(ll) 
+ Benefit treated as taxable income - Benefit not treated as taxable income na not applicable (benefit does not exist) 
( I) In Belgium, all benefits (except family benefits) are treated as taxable income but in a different way from other sources. 
(2) In Germany, the basic old-age pension is taxable in theory but not in practice. If a person retires at the age of 65, only 24% of their benefit will be treated as taxable 
income wich is generally loo small to be taxable. This also applies to survivors' and invalidity pensions. 
(3) In Greece, as part of the new tax law of October 1992, all income below I million Drachmas per year is exempt from tax and anything above this, up to a ceiling 
of 2.5 million Drachmas per year, only at a rate of 5%. Above this, the tax rate is 30%. 
(4) In Greece, the ad hoc maternity allowance covering hospital costs is exempt from tax, whereas regular maternity benefits are taxable. 
(5) In Spain, social assistance is taxable in theory, but in fact, as this is means-tested recipients are always below the tax threshold 
(6) While no taxis payable on the main occupational injury benefit in Ireland in some cases long-term benefits are liable to tax. 
(7) In Italy, temporary occupational injury benefits are subject to tax, whereas permanent benefits are not. 
(8) In principle, pensions (old-age, invalidity and survivors ') are taxable in Portugal However, amounts up to 1.25 million Escudos (married couple) or I million (single) 
are exempt from tax. In practice, this means that the minimum pension (General Scheme), social pension (Non-Contributory Scheme) and other flat-rate pensions 
are tax-free. This exemption covers all pensioners not in receipt of other income. If they receive other income, a specific deduction rule is applied 
(9) Although sickness benefit in the UK is not taxable, people temporarily off work due to illness receiving Statutory Sick Pay are taxed 
(10) Maternity benefit in the UK is not taxed, but those receiving Statutory Maternity Pay are taxed 
(11) None of the means-tested social assistance benefits in the UK are taxable except, in the case of Income Support, if the claimant is unemployed or on strike. In these 
cases the benefit is paid in full, since the income level of the means-test is almost always below the weekly tax threshold However, benefits paid are included in the 
claimant's annual income and may be taxed if this rises above the annual tax threshold Additions for children are not taxed 
Table 7 Contributions payable on social benefits in the Community (July, 1992) 
B(1) DK D GR E F IRL I L NL P UK 
Sickness -.. + + . + + .(3) 
Unemployment insurance . ... . + -- + + - -
Basic old-age pension + + + - + + + +(2) 
Supplementary old-age pension + + - + + + +(2) -
Means-tested old-age pension + + na 
Occupational accident or disease + na + + na 
Family .-. + + ...-.--
Maternity -.-. + - + + -(3) 
Invalidity +- + + --- + + + --
Survivors + + + - + + + + -
Sociai assistance ........ + + .-
+ Contributions payable on benefit - No contributions payable on benefit na not applicable (benefit does cot exist) 
(1) In Belgium, contributions on benefits are only payable if the benefits are above a certain level 
(2) In the Netherlands, pensioners are exempt from paying contributions to the General Scheme for old-age, death and invalidity. 
(3) In the UK, those receiving Statutory Sick or Maternity Pay pay social contributions. 
52 
Chapter 4 - The scale of social protection In Member States 
Chapter 4 The scale of social protection 
in Member States 
The Community's policy on so­
cial protection, endorsed by all 
Member States, was set out in the 
Council Recommendation of 27 July 
1992. This makes clear that the aim 
of the Community is to promote the 
convergence of policies in Member 
States in pursuit of a common set of 
objectives whilst respecting the inde­
pendence and diversity of systems in 
operation in each country. 
These common objectives are 
defined in the Recommendation in 
terms of three key aims: 
• to guarantee to everyone legally 
resident within the territory of a 
Member State a level of re­
sources in keeping with human 
dignity; 
• to give them, regardless of their 
resources, the chance to benefit 
from the system for the protec­
tion of human health existing in 
the Member State; 
• to help them to be properly inte­
grated into society and to try to 
ensure that all who are able to 
work have reasonable access to 
the labour market; 
• to provide to everyone who 
either wishes to stop working because of their age or is forced 
to do so because of ill-health, in­
validity, pregnancy or unem­
ployment with a level of income 
which will, to a reasonable ex­
tent, maintain their standard of 
living in accordance with the 
contributions they have paid into 
social security schemes; 
• to examine the possibility of in-
triducing and/or developing ap­
propriate social protection for 
the self-employed. 
The concern here is to assess how far 
these objectives are currently being 
achieved by examining the benefits 
which are payable in each Member 
State in the event of someone retir­
ing, falling ill, becoming unem­
ployed and so on. In the first part of 
the chapter, after considering health 
care, estimates are made of the level 
of benefit which a typical worker is 
entitled to receive under the national 
systems in operation and this is re­
lated to average earnings in the 
country in question. In the second 
part, an attempt is made to assess the 
actual effect of social protection sys­
tems on the income of households 
which are in need of support. 
This second exercise is a far more 
difficult task since the amount of assistance.which is provided in prac­
tice depends on the often complex 
system of regulations governing en­
titlement and can only really be esti­
mated on the basis of surveys of 
household income. It is liable to give 
very different answers from the first 
exercise which only considers stand­
ard cases, which in reality may not 
necessarily be typical of those re­
lying on social security. 
In the following chapter, examples of 
policies to help people into work are 
examined in respect of four Member 
States to see what kind of measures 
are being taken to meet the objective 
of social and economic integration. 
Health care 
What is not examined here in 
any detail is access to health 
care, which is a particularly difficult 
issue to evaluate. While all systems 
of health care now in operation in 
Member States provide treatment to 
virtually everyone in need, irrespec­
tive of their income or record on con­
tributions, what remains to be 
verified is how far the objectives 
stated in the Council Recommenda­
tion on Convergence of Social Pro­
tection as regards high quahty of 
53-
Chapter 4 - The scale of social protection In Member States 
Table 8 Benefits received at retirement as a % of 
average net earnings of manual workers 
in manufacturing 
Belgium 
Danmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 
EC Average Contributory 
pension 
Personal 
rate 
73 
60 
77 
107 
97 
88 
42 
89 
78 
49 
94 
44 
75 Minimum benefit 
With adult Personal 
dependent rate 
% average net earnings 
80 47 
77 52 
69 39 
114 8 
98 32 
83 46 
62 35 
89 19 
77 46 
67 49 
98 30 
59 31 
81 36 
service and of equality of access to 
treatment are being met. 
Preliminary estimates suggest that 
death rates vary significantly across 
the Community, in terms of both the 
total and from particular causes. (The 
overall death rate between the ages of 
5 and 64 was 129% of the Com­
munity average in Scotland over the 
period 1980 to 1984, but only 79% of 
the average in Greece, while, for 
example, the perinatal mortality rate 
was only 69% of the Community 
average in Denmark, but 169% of the 
average in Portugal.) The difficulty 
is that these differences, of course, cannot wholly, or even mainly, be 
ascribed to differences in the stand­
ard of health care. Diet and lifestyles 
are almost certainly more important, 
especially with regard to the overall 
death rate. 
Very provisional research on 
equality of access to treatment indi­
cates, first, as is well known, that the 
poor have greater need for health care 
than wealthier members of society 
insofar as they are more prone to 
ill-health (because of the environ­
ment — in the broadest sense — in 
which they are forced to live). Sec­
ondly, it tends to show that the provision of health care is related 
much more to need than to income, 
in that proportionately more expen­
diture is devoted to poorer groups 
than richer ones throughout the Com­
munity. At the same time, it reveals 
little difference between Member 
States in the extent to which the dif­
ferent health care systems in oper­
ation meet the equity objective. 
Differences in the methods of de­
livering health care, on the one hand, 
or of financing it, on the other, do not, 
therefore, seem to affect access to 
treatment. 
Benefit levels 
It is possible to gain an indication 
of the level of various forms of 
benefit payable in Member States by 
comparing the amount received by a 
hypothetical person with given char­
acteristics, in the event of their retire­
ment or not being able to work for 
any reason — because of ill-health, 
invalidity, unemployment and so on. 
To simplify the comparison, the typi­
cal case examined is that of someone 
earning the average industrial wage 
in differing family circumstances. In 
all cases, the benefits payable in each 
Member State are calculated at their 
July 1992 levels as a percentage of 
the average earnings of manual 
workers in manufacturing industry 
in the country in question. The latter 
are expressed net of tax and social 
security contributions in order to 
measure benefits in relation to take-
home pay. 
The various kinds of benefits payable 
in the event of particular circum­
stances are examined in turn below. 
-54 
Chapter 4 - The scale of social protection In Member States 
Old-age 
According to the Council Rec­
ommendation, Member States 
should guarantee minimum means of 
subsistence to the elderly and estab­
lish mechanisms to enable those re­
tiring at the end of their working 
careers to receive a reasonable level 
of income in relation to their earnings 
when in employment, and in relation 
to the contributions paid over their 
lifetime. 
The average level of benefit payable 
to a single person who was on the 
average industrial wage when in 
work and who is entitled to a full 
pension on the basis of their contribu­
tions record is around 75% of aver­
age net earnings in Member States 
(the average here is the simple arith­
metic mean of the ratios calculated 
for each country) (Table 8). Perhaps 
surprisingly, the pension received by 
such a person is higher in relation to 
wages when in work in the Southern 
Member States of the Community — 
as much as 107% of average net earn­
ings in Greece, 97% in Spain, 94% in 
Portugal and 89% in Italy — than in 
the North of the Community, while 
in three countries — the UK, the 
Netherlands and Ireland — it is less 
than 50% of net earnings. 
In each of these three countries, as 
well as in Denmark where the 
amount received by a single person 
is also relatively low in relation to net 
earnings, retirement pensions are fin­
anced at least in part from general 
taxation as well as from contribu­
tions. Supplementary pensions 
schemes are also important. Such 
schemes, operated in some cases — 
the UK in particular — by the private sector add variable amounts to the 
levels of benefit calculated here but 
are difficult to take into account be­
cause of a lack of data. 
In all four countries, moreover, the 
pension is significantly higher for a 
married couple than for someone 
without an adult dependent. In each 
case, having a dependent adds an 
amount equivalent to 15 % or more of 
the average net wage to the pension 
received. While in most other Mem­
ber States, the pension received is 
also higher for a married couple than 
for a single person, the extent of the 
difference is much smaller. In three 
countries — Germany, France and 
Luxembourg — a married couple ac-
tually receives less in pension 
relative to earnings than a single per­
son. This is due to taxes being lower 
for a married couple in these coun­
tries than for a single person and, 
therefore, net earnings being higher, 
rather than to the amount of pension 
paid being less. 
For those who retire without any 
meaningful contribution record and 
have negligible independent means 
of support, the picture is very differ­
ent. Although all Member States 
have some system of income support 
for such people, the amounts payable 
vary substantially across the Com­
munity. In this case, the benefit re­
ceived by those living in the Southern 
countries of the Community tends to 
be much lower than in the more pros­
perous Northern Member States. In 
Greece, the basic allowance for a 
single person is as low as 8% of aver­
age net earnings in industry, in Italy 
only 19% and in Spain and Portugal, 
around 30%. Apart from the UK and 
Ireland, the amounts of minimum Table 9 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Lux. 
Neth. 
Portugal 
UK 
EC Average Sickness and 
invalidity 
benefit 
Short- Invalidity 
term after 
illness 1 year 
% average 
net earnings 
100 83-91 
73 
100 
100 
60 
53 
32 
31 
100 
70 
79 
28 
69 73 
100 
40 
74 
67 
36 
46 
100 
74 
76 
33 
67 i 
pension are higher in the North of the 
Community, though only in Den­
mark does the level exceed 50% of 
average net earnings, and then only 
marginally. 
Sickness and 
invalidity 
The Council Recommendation 
states that those who are forced 
to stop working for a time because of 
illness should receive an income, 
whether flat-rate or earnings-related, 
which is sufficient to maintain their 
standard of hving in a reasonable 
manner. 
In the case of temporary ill-health 
lasting for up to a few weeks, in 
four Member States — Belgium, 
55 
Chapter 4 - The scale of social protection In Member States 
Table 10 Disabled — 
long-term 
incapacity 
for work 
Personal With 
rate adult 
depen­
dent 
% average net 
earnings 
Belgium 97 
Denmark 83 
Germany 39 
Greece 36/9 
Spain 32 
France 46 
Ireland 35 
Italy 56 
Lux. 65 
Neth. 49 
Portugal 30 
UK 32 
EC Average 50 113 
84 
60 
36/9* 
32 
46 
57 
56 
80 
69 
30 
50 
60 
Discretionary payments may also be 
available 
Germany, Greece and Luxembourg 
— the level of benefit payable is 
equal to earnings when in work for 
someone with a satisfactory con­
tributions record on the average in­
dustrial wage (Table 9). In the first 
two cases, the cost of benefit pay­
ment falls on employers, while in 
Greece the employer is liable to pay 
50%. In Luxembourg, on the other 
hand, the cost is covered from social 
insurance schemes. In three other 
countries — Denmark, the Nether­
lands and Portugal — sickness benefit amounts to 70% or more of 
the net wage when in work for such 
a person, while in France and Spain, 
it is between 50% and 60%, though 
in the former, it rises to 64% if the 
illness lasts for over four weeks. 
The figures for France and the 
Netherlands, however, tend to under­
state the amount received in many 
cases, since collective agreements 
between employers and trade unions 
often give workers 100% of their for­
mer wage when they fall ill. 
In the three other Member States, on 
the other hand — Ireland, Italy and 
the UK — the level of benefit is only 
around 30% of net earnings when in 
work for someone on the average 
industrial wage. For Italy, this too 
understates the actual amount re­
ceived if the person concerned is a 
salary rather than a wage earner. In 
this case, they are likely to continue 
to be paid the same amount as their 
earnings for a period of up to three 
months. In addition, for someone in 
the UK belonging to one of the many 
occupational schemes the amount re­
ceived could be considerably greater 
than the benefit payable under the 
state scheme. 
It should also be noted that in a num­
ber of countries — France, Ireland, 
Italy and Portugal, for example — 
anyone falhng ill has to wait three 
days before becoming entitled to 
benefit, though in many cases the 
employer is likely to continue paying 
wages for this period. 
If the illness persists and the person 
concerned is unable to work for a 
prolonged period, then the situation 
changes, but the relative level of benefits received as between Mem­
ber States does not alter greatly in 
most cases. In Germany and Luxem­
bourg, a person with a satisfactory 
contributions record on the average 
industrial wage continues to receive 
the equivalent of their earnings when 
they were in work, while in Belgium, 
the benefit level falls only slightly, to 
83% of net earnings if the person is 
single and to 91% if they have a 
dependent spouse. In Greece, how­
ever, the level declines to 50% of net 
earnings after two weeks illness and 
to 40% after six months. 
For the other countries, the benefit 
levels payable after one year's inca­
pacity for work are similar to those 
payable after a few days. Where they 
differ, they tend to increase rather 
than decline. Thus in France, the 
benefit rises to 64% (from 53%) after 
four weeks and to 67% after one year; 
in Italy, for wage earners, it goes up 
from 31% to 53% after three weeks, 
though it falls to 46% after a further 
40 days; and in the Netherlands and 
the UK, a temporary disability allow­
ance is payable which adds around 
5% of net earnings to the amount 
received. 
In addition, in four countries — 
Greece, Ireland, Luxembourg and 
the Netherlands — someone unable 
to work because of ill-health is en­
titled to receive an extra allowance 
for a dependent spouse, adding be­
tween 6% of net earnings (in the lat­
ter two countries) and 21% (in 
Ireland) to the amount received. 
56 
Chapter 4 - The scale of social protection In Member States 
Disability 
The situation is different from 
that described above for some­
one who is disabled and unable to 
work and who, therefore, has not ac­
cumulated sufficient contributions to 
be entitled to insurance benefit. (The 
same applies to someone who has 
exhausted their entitlement to 
benefit.) Although social security 
systems in all Member States provide 
income support for people falhng 
into this category, the amount varies 
significantly between them. 
Only in Belgium and Denmark is the 
allowance payable to a single person 
anywhere close to the average indus­
trial wage, at 97% and 83%, respec­
tively (Table 10). In half the Member 
States, the amount payable is only 
between 30 and 40% of net average 
earnings, while in another two — 
France and the Netherlands — it is 
less than 50%. 
Additional amounts, however, are 
payable in a number of countries if 
the person concerned has a depend­
ent spouse, the increase to the per­
sonal allowance being around 15% 
of net earnings in Belgium and Lux­
embourg and around 20% in Ger­
many, Ireland, the Netherlands and 
the UK. The effect of this is to raise 
the level of benefit paid to 50% or 
more of the average net industrial 
wage in all Member States except 
Spain, Portugal and Greece (and to as 
much as 113% in Belgium). Table 11 Unemployment benefits 
1st period Duration 
% earnings (months) 
Belgium 79 12 
Denmark 73 30 
Germany 63 12 
Greece 28 12 
Spain 80 6 
France 80 12 
Ireland 41 12 
Italy 26 6 
Luxembourg 85 12 
Netherlands 74 24 
Portugal 81 21 
UK 23 12 
EC Average 61 14 
Note: (a) August 1992: 67% for 4 months, then 46%for 4 months, 
(b) 32% for 3 months, then 35% 2nd period 
% earnings 
55 
63 
56 
0 
70 
67-33 (a) 
32-35 (b) 
0 
46 
49 
44 
23 
42 
38% for another 4 months and 33% thereafter Duration 
(months) 
Indefinite 
Indefinite 
Indefinite 
na 
18 
Indefinite 
Indefinite 
na 
Indefinite 
Indefinite 
21 
Indefinite 
Unemployment 
In the case of people who become 
unemployed, the Council Recom­
mendation states that Member States 
should not only maintain income le­
vels but also help them back into 
employment. This latter objective is 
considered in Chapter 5 below. The 
focus here is on the levels of benefit 
payable to the unemployed in various 
circumstances and at various times 
during a given spell of unemploy­
ment. 
In all Member States, the unemploy­
ment benefit received depends on 
the previous employment record 
and the period of time over which 
contributions have been paid. In most countries, the benefit paid is initially 
at a reasonably high level in relation 
to earnings when in work, but the 
length of time for which this is 
payable is limited, the aim being to 
give an incentive to return to work 
before the benefit expires. There­
after, benefits become means-tested 
and the objective changes from that 
of maintaining the previous level of 
income of the person concerned to 
that of providing a minimum stand­
ard of living. Only in Belgium and 
Denmark is there no time limit on the 
payment of (non-means-tested) un­
employment benefits, while in 
Greece, Italy, Spain and Portugal, en­
titlement to any benefit at all — other 
than discretionary social allowances 
— expires after a period. 
57 
Chapter 4 - The scale of social protection In Member States 
Table 12 Benefits 
payable to an 
18 year-old 
unemployed 
person 
Living Living 
alone with 
cohabitee 
% average earnings 
Belgium 47 0 
Denmark 35 35 
Germany 39 (See note) 
Greece 0 0 
Spain 0 0 
France 0 0 
Ireland 32 16 
Italy 0 0 
Lux 45 45 
Neth. 34 0 
Portugal 44 44 
UK 18 0 
EC Average 25 12 
Note: Amount payable depends on the 
individual case 
The differences between Member 
States in levels of benefit and in their 
duration can be illustrated by con­
sidering a 40-year old industrial 
worker who has been in regular em­
ployment earning the average wage 
since the age of 20 and then becomes 
unemployed. For 7 of the 12 Com­
munity countries, the initial benefit 
received amounts to between 73% 
and 80% of such a person's former 
wage, expressed in net terms and 
for another country, Germany, it 
amounts to 63% (Table 11). In Ireland, however, the amount paid is 
only just over 40% of net earnings 
when in work, while in Greece, Italy 
and the UK, it is under 30% — in the 
UK as low as 23%. 
In half the Member States, entitle­
ment to this initial level of benefit is 
limited to 12 months. Only in Spain 
and Italy is the period less than this 
at six months. In Portugal, however, 
this initial period extends to 21 
months, in the Netherlands to 24 and 
in Denmark to as much as 30. 
After the end of this initial period, the 
level of benefit is reduced in all coun­
tries, with the exception of the UK 
where income support provides a 
continuance of benefit at virtually the 
same rate indefinitely. In two coun­
tries, Greece and Italy, benefit ceases 
to be payable at all as of right (though 
in Italy, discretionary local and re­
gional support is available), while in 
a number of cases, the reduction is 
substantial — in each of the Benelux 
countries, around 25% of former net 
earnings or more and in Portugal, 
more than 35%. 
After the initial period, therefore, 
benefit becomes in most cases a form 
of social assistance and the aim is one 
of providing a subsistence level of 
income. The level of payment in the 
long-term to the unemployed, after 
their entitlement to unemployment 
benefit has been exhausted, is, in 
fact, in all countries apart from Bel­
gium and Spain, what someone with­
out a satisfactory contributions 
record would receive immediately 
after they lost theirjob, if they had no 
independent means of support In 
Belgium, the amount would be less 
in this case — at 47% of net average earnings — while in Spain, the per­
son concerned would be forced to 
rely on discretionary payments from 
local or regional authorities. 
Once the unemployed have ex­
hausted their entidement to benefit, 
the amount payable, therefore, 
becomes relatively small. In only 
three Member States — Denmark, 
Germany and Belgium — does it ex­
ceed 50% of net average earnings in 
industry, and in the latter three cases, 
for those who do not have a satisfac­
tory contributions record, the amount 
payable, as elsewhere in the Com­
munity, is less than 50%. 
Additional allowances, however, are 
payable in respect of dependent 
spouses in a number of countries, as 
described for invalidity benefits 
above. These serve to raise the level 
of benefit to above 50% of the aver­
age net industrial wage in all coun­
tries apart from the UK, where it 
remains low at 36%, and Italy, Spain 
and Greece, where no formal scheme 
for guaranteeing a minimum level of 
income exists. Supplementary pay­
ments also apply to dependent child­
ren in some countries, including 
Spain, where someone unemployed 
with two children can receive benefit 
equal to 64% of the average net wage. 
Just as the contributions record 
makes a marked difference to the 
benefit payable when someone 
becomes unemployed, so too does 
age. In the case of a person of 18 who 
has not previously worked, who has 
no significant source of income and 
who hves alone, there is no formal 
entitlement to income support in 
Spain, Greece, France and Italy 
(Table 12). In most other countries, 
-58 
Chapter 4 - The scale of social protection In Member States 
the benefits payable are less than for 
someone older, the amount varying 
from only 18% in the UK to 44% in 
Portugal (though this only lasts for 10 
months). Only in Belgium and 
Luxembourg is benefit paid at much 
the same rate as to a 40-year old man. 
In general, the income of the person's 
parents does not affect entitlement. 
In Germany, however, parents may 
be required to provide support inso­
far as they are able to do so, while in 
Luxembourg, parental income is 
only taken into account if the person 
concerned applies for social assist­
ance, as opposed to unemployment 
benefit. In Belgium, the amount paid 
to the person may be recovered from 
their parents. 
Where the same person hves with 
someone else earning a wage, this 
affects the amount payable in all 
countries apart from Denmark and 
Portugal. The person would lose their 
entitlement to any benefit at all ex­
cept in Denmark, Portugal and Ire­
land, while in Germany, the amount 
paid would depend on their individ­
ual needs. In Luxembourg, their do­
mestic circumstances are only taken 
into account if they claim social as­
sistance rather than unemployment 
benefit 
In general, unemployment assistance 
on a national basis is not widely 
available in Southern Member 
States, but in these countries discre­
tionary regional and local support 
plays an important role. In Italy, for 
example, an unemployed worker 
may, in certain circumstances, be en­
titled to a mobility benefit, which 
typically amounts to 71 % of net aver­
age earnings. In addition, although the Italian system does not provide 
for payments on a national basis after 
the 6-month period of benefit entitle­
ment ends, various discretionary 
benefits may be available depending 
on where the person concerned hves. 
A similar situation exists in Spain. 
Maternity 
The Council Recommendation 
seeks to ensure that women who 
stop work to have babies enjoy ap­
propriate social protection and the 
Council Directive 92/85/EEC which 
comes into force in 1994 has defined 
minimum standards. For a women 
who has been in employment for 
more than a specified period of time 
and who is on the average wage, the 
maternity benefit payable is either 
equal to or greater than average net 
earnings in 7 Member States (Table 
13). In Belgium, France, Luxem­
bourg and Portugal, because benefits 
are not taxable, they are more than 
earnings when in work, while in Ger­
many, Greece and the Netherlands, 
they are at the same level For most 
other countries, the level of benefit is 
also relatively high, though in the 
UK, where the scheme is the least 
generous in the Community, the 
benefit after the first six weeks is as 
low as 25% of former net earnings. 
The period for which benefits are 
paid varies from 13 weeks (formally 
90 days) in Portugal to 28 weeks in 
Denmark (which partly compensates 
for its relatively low rate of benefit 
— 73% of former net earnings). For 
9 countries, however, the normal 
period is between 14 and 18 weeks, 
with only Italy (5 months) in addition Table 13 Maternity 
benefits 
% Duration 
earnings 
Belgium 110/117 15 weeks 
Denmark 73 28 weeks 
Germany 100 14 weeks 
Greece 100 15 weeks 
Spain 75 16 weeks 
France 113 16/26 
weeks 
Ireland 93 14 weeks 
Italy 86 5 months 
Lux. Ill 16 weeks 
Neth. 100 16 weeks 
Portugal 124 13 weeks 
UK 25/91 18 weeks 
EC 
Average 96 
Notes: In Belgium, benefit of II7% 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 the UK, benefit of 91% is 
paid for the first 6 weeks and 25% 
thereafter. 
to Denmark having a longer period 
(in France, the duration is 16 weeks 
for the first two children, 26 weeks 
for subsequent ones). 
For a parent who wants to take a 
longer period off work, only very 
limited assistance is available 
under the social protection systems. 
In three countries — Germany, Bel­
gium and Italy — special allowances 
exist for parents who stay at home 
with children, though at compara-
59-
Chapter 4 - The scale of social protection In Member States 
Table 14 Benefit 
payable 
to single 
parent 
with no 
contributions 
record 
% average net 
earnings 
Belgium 59 
Denmark 60 
Germany 55 
Greece 32 
Spain 3 
France 50 
Ireland 44 
Italy 16 
Lux. 54 
Neth. 63 
Portugal 0 
UK 38 
EC Average 40 
Note: In Greece, the benefit is only payable 
to single mothers Lone parent families Widows' benefits 
tively low levels and for limited 
periods of time (22% of average net 
earnings until the child reaches the 
age of two in Germany, 20-25% for 
one year in Belgium and 34% for 
9 months in Italy). In other countries, 
such a person would have to rely on 
means-tested social assistance, to the 
extent that it exists, though in France, 
there is a special scheme for single 
parents which pays 59% of average 
net earnings until the child reaches 
the age of three. Protection for single parents — or 
more accurately those living 
alone — varies considerably be­
tween Member States, especially in 
respect of people without a satis­
factory record of contributions 
(Table 14). In Greece, benefit is 
payable only to lone mothers and not 
to single fathers, while in Spain and 
Portugal single parents have to rely 
on the discretionary support from re­
gional and local authorities, which is 
also true in Italy where the level of 
benefit is only 16% of the average net 
wage. Of the other countries, the 
benefit is 50% or less of the average 
wage in France (after the child has 
reached the age of three), Ireland and 
the UK, where it is only 38%. Only 
in Denmark and the Netherlands is 
the figure 60% or more. 
Care of an elderly 
or disabled relative 
In most Member States, there are 
no special schemes to aid those 
caring for an elderly or disabled 
relative and so they must generally 
rely on social assistance. In Ireland 
and the UK, however, special pay­
ments exist in the form of a carer's 
allowance, which are means-tested in 
Ireland and which amount, in the 
most favourable circumstances, to 
33% of net average earnings in Ire­
land and 29% in the UK. For women left as widows by their 
husbands' deaths, there is again 
marked variation in the benefits 
payable in different parts of the Com­
munity. Much depends on the per­
sonal circumstances of the woman 
involved — how old they are (there 
is a minimum age requirement of 
35 in Portugal, 40 in the Netherlands, 
Table 15 Widows' 
benefits 
Woman Woman 
aged 30 aged 50 
with 2 without 
children children 
% average net 
earnings 
Belgium 
Denmark 
Germany 
Greece 
Spain 89 
67 
51 
59 
82 89 
67 
37 
54-66 
49 
France (See note) (See note) 
Ireland 58 36 
Italy 47 56 
LUX. 77 69 
Neth. 69 49 
Portugal 48 64 
UK 53 31 
EC Average 
(excl. 
France) 64 55 
Note: In France, for a widow aged 30, the 
benefits comprise the last salary for 
3 months, followed by 73% for 1 to 3 
years and 33% thereafter. For a 
widow aged 50, the benefits are 
means-tested. 
-60 
Chapter 4 - The scale of social protection In Member States 
45 in Belgium and the UK and 55 in 
France); how long they have been 
married (a minimum period of six 
months is stipulated in Greece, one 
year in Belgium, Luxembourg and 
Portugal and two years in France); 
whether they have dependent child­
ren and how much income of their 
own they have (benefits are reduced 
on this account in Belgium, Germany 
and France). 
In general, the benefits payable are, 
therefore, related in some degree to 
need, which means that the amount 
received tends to vary from person to 
person. Accordingly, any example 
can only be illustrative of the dif­
ferences which exist. 
Taking the case of a woman with 2 
young children, whose husband died 
at the age of 40 having earned the 
average industrial wage since the 
age of 20 and therefore with a satis­
factory record of contributions, the 
level of benefit provided varies from 
almost 90% of the average net wage 
in Belgium and over 80% in Spain to 
under 50% in Portugal and Italy, with 
Germany and the UK only slightly 
above (Table 15). In Denmark, no 
widow's benefit is payable as such, 
though the woman would be entided 
to social assistance if she had no in­
come. 
For an older woman with no depend­
ents whose husband died after 40 
years in employment, the variation is 
similar, with the level of benefit 
being lower in each country apart 
from Italy and Portugal where it is 
higher (because of the longer con­
tributions record) and Belgium 
where it is the same. Family allowances 
The Recommendation calls for 
the development of benefits for 
families with the greatest child-re­
lated costs as well as for those which 
are the most disadvantaged. In the 
case of a family on average earnings, 
the rate of allowance paid (either di­
rectly or indirectly through tax 
exemption) for the first child in all 
countries apart from Luxembourg, 
where it represents as much as 22% 
of net earnings, adds much less than 
10% to the net wage (Table 16). In 
Spain and Ireland, family allowances 
only amount to 2% of the net wage, 
while in France, the figure is only 
1%. 
In all countries, the total amount 
payable increases with the number of 
children, though only in Ireland, the 
Netherlands, Portugal and the UK, is 
the rise proportional for the second 
and third child. In Belgium, Ger­
many, Italy and, above all, in France, 
the allowance payable per child goes 
up with the number of children. In 
Denmark, the rate paid per child de­
creases with the number of children. 
Main features 
The conclusions which can be 
drawn from the above are ob­
viously limited by the nature of the 
exercise, which does not take into 
account either the coverage of the 
various benefits in relation to those in 
need or their rate of take-up. Given 
these limitations, the general points 
to emerge are, in terms of social in­
surance (or contributory) benefits: Table 16 Family 
allowances 
One 2 3 
child chil- chil­
dren dren 
% net average earnings 
Belgium 7 20 38 
Denmark 6 11 15 
Germany 6 12 21 
Greece 4 8 12 
Spain 2 3 5 
France 1 22 50 
Ireland 2 4 6 
Italy 3 6 ll 
LUX. 22 28 40 
Neth. 4 10 16 
Portugal 4 9 14 
UK 5 9 13 
EC 
Average 12 20 
the level of income maintained by 
contributory benefits is relatively 
high in most Member States and 
in those where it is not additional 
amounts are usually payable for 
dependents and private sup­
plementary schemes tend to be of 
importance; 
• in the case of unemployment, in 
particular, however, the period 
over which such benefits can be 
drawn is limited in most cases 
and the level of support declines 
significantly once this period 
comes to an end. 
61 
Chapter 4 - The scale of social protection In Member States 
Table 17 Social minima (July 1992) 
Old-age (1) Invalidity (2) Unemployed (3) 
ECU/ %GDP ECU/ %GDP ECU/ % GDP 
month per head month per head month per head 
Belgium 
Denmark 
Germany 
Greece 
Spain 
France 
Ireland 
Italy 
Luxembourg 
Netherlands 
Portugal 
UK 442.7 
599.7 
506.7 
49.1 
272.8 
447.5 
329.3 
230.5 
607.8 
552.3 
122.8 
363.2 32 
34 
29 
10 
28 
30 
38 
16 
36 
41 
21 
30 924.4 
967.4 
506.7 
79.3 
272.8 
447.5 
329.3 
695.4 
863.9 
552.3 
122.8 
376.3 67 
55 
29 
16 
28 
30 
38 
49 
51 
41 
21 
31 442.7 
699.7 
506.7 
0 
0 
322.1 
329.3 
0 
607.8 
552.3 
0 
263.4 32 
40 
29 
0 
0 
22 
38 
0 
36 
41 
0 
22 
(1 ) A single person who has reached the age of retirement with no entitlement to contributory pension and no 
other source of income 
(2) A single person aged 40 with no entitlement to contributory pension, no other source of income and who is 
unable to work 
(3) A single person aged 40 with no entitlement to contributory pension, no other source of income and who is 
available for work 
Note: In Italy and Spain, there is no formal minimum level of income support, but in a number of regions, 
people can receive social assistance from regional and local authorities. The effect of 
social protection 
on household 
income 
The limitations of the above exer­
cise can only be overcome by 
examining the effect of social 
benefits on the income of households 
in need of support. The problem is, 
however, that data on social protec­
tion comes mainly from administra­
tive sources and is not aimed at 
measuring its impact on hving stand­
ards of the people it is intended to 
assist. Relevant information on this 
issue is, therefore, scarce. Although 
surveys of household income are car­
ried out in most countries on a regular 
basis, these do not necessarily focus 
on this particular question. More­
over, because they are nationally 
based, it tends to be difficult to com­
pare results as between countries. 
In terms of minimum allowances the 
level of support for the most needy 
varies markedly across the Com­
munity. Belgium, Denmark, Luxem­
bourg and the Netherlands provide 
the highest levels of minimum in­
come, at around 50% or more of net 
average earnings in the vast majority 
of typical cases. At the other extreme, 
Spain, Greece and Italy have no for­
mal comprehensive systems of sup­
port in a number of areas of need but 
rely on discretionary local and re­
gional payments (Table 17). 
In terms of convergence, the situ­
ation is most similar in respect of old-age pensions and disability 
benefits, where schemes exist in all 
Member States and where the level 
of payment, in the case of the former, 
for 10 countries is between 32% and 
52% of the average net wage and, in 
the case of the latter, between 30% 
and 49% for 8 countries. Lack of 
convergence is most marked in re­
spect of unemployment benefits, par­
ticularly in relation to the young and 
the long-term unemployed, for which 
in several countries there is no spe­
cific system of support and for which 
levels of assistance vary substan­
tially. Nevertheless, since 1978, the situ­
ation has improved slighdy with the 
comparative studies carried out as 
part of successive Community pro­
grammes aimed at combating pov­
erty. The results of these studies form 
the basis of this section of the chap­
ter. They cover five Member States 
— Belgium, Greece, Ireland, Lux­
embourg and the Netherlands — and 
one region in the Community — 
Catalonia in Spain (see Box). These 
data have been supplemented by 
figures from the Luxembourg In­
come Study on Germany, France, 
Italy and the UK as well as the US, 
to give coverage of most parts of the 
62-
Chapter 4 - The scale of social protection In Member States 
Community, plus the major country 
outside to serve as a point of com­
parison. 
Although the data for these countries 
and the one region are unavoidably 
for different years between 1984 and 
1988 and are not as comparable as 
they ought to be in every case, they 
nevertheless give an indication of the 
position around the mid-1980s and 
are certainly better than nothing. It is 
hoped that the analysis presented 
here, whatever its limitations, will 
stimulate the authorities concerned 
in the management of social protec­
tion as well as in the collection of 
statistics to try to improve and en­
large the data available. After all, 
without reliable information on the 
effect of social protection on the 
people it is attempting to assist, it is 
difficult if not impossible to improve 
the implementation of policy. 
In order to assess the effectiveness of 
systems of social protection in allevi­
ating poverty and deprivation, it is 
not sufficient merely to know the 
number of households falling below 
the poverty line, however defined, 
but also the extent to which they do 
so. In other words, the important 
question for social protection con­
cerns the scale of transfers which 
would be necessary to bring the in­
come of all households above the 
poverty line. The effectiveness of 
any given system can, therefore, be 
judged in terms of the difference it 
makes to the income of the house­
holds concerned in relation to the 
poverty level. This means comparing 
the income of such households in­
cluding social benefits with what it 
would be if the social protection sys­
tem did not exist. Data sources and definition of poverty 
Europass (European research on poverty and social security) is a rxogramme, 
financed by the European Community, which covers five countries and two 
regions (Belgium, Greece, Ireland, Luxembourg, Netherlands, Lorraine (F) 
and Catalonia (E). In each case, a research centre has been established and 
work is centrally coordinated with the aim of laying the basis for a com­
parative approach to poverty between the Member States of the Community. 
The central theme of the programme has been the compilation and compari­
son of poverty indicators and thresholds as well as gearing the various social 
security systems to the fight against poverty. 
The LIS (Luxembourg Income Study) is a database of microeconomic and 
social data which at the moment comprises 35 sets of data, provided by the 
Member States which make up the OS, It is available to all researchers and 
analysts and is used about ten to twenty times daily by more than two 
hundred experts in several continents. 
It allows comparative analyses to be conducted on socio-economic policy, 
on, for example, the various kinds of programmes dealing with poverty, 
income adjustment, pensionable age and the distribution of economic 
welfare generally. 
In the Europass programme, data are standardized before collection, as a 
result of continuous discussion between the research centres involved. In 
the LIS programme the data are harmonized after they have been collected. 
The analysis in the text is based op the most common definition of poverty 
—ie households with income below 50% of the average disposable income 
in the country in question, after adjustment using equivalence scales for 
each household type (a household being a group of persons, between whom 
there may or may not be family ties, who live under the same roof and who 
generally have meals together), according to the following rules: 
• first adult in the household: 1.0 
• each additional adult: 0.7 
• each dependent child: 0.5 
The number of equivalent adults (EA) in a household is therefore given by 
the formula: EA = 1 + 0.7 (A-l) + 0.5 C 
where A is the number of adults and C is the number of children aged less 
than 17 plus older children still in education. Disposable income is defined 
as the total income of the household (income from economic activity, 
property and transfers) net of tax and social contributions excluding income 
and benefits in kind (such as health care, education, owner-occupied 
accommodation, use of a company car, etc). An income indicator is at­
tributed in this way to each individual, obtained by dividing the disposable 
income of the household to which the individual belongs by the number of 
equivalent adults making up that household. 
63 
Chapter 4 -The scale of social protection In Member States 
8 Households with incomes below the poverty level, before 
and after social security, mid-1980s 
% households 
50 r 
9 Indicators of the effectiveness of social protection systems, 
mid-1980s 
1 100 
80 
60 
40 
20 
B NL L UK 0 F IRL I CAT GR USA Indicator 1 « Reduction In number of households tailing Mow the poverty Ine as a result o( social protection 
Indicator 2 >>% reduction In the poverty gap CAT « Catalonia If the poverty line in any country is 
defined as 50% of average dispos­
able income per consumption unit, 
which is the most frequent measure 
used, the results of the exercise de­
scribed above show that in all Mem­
ber States, even after receiving social 
benefits, a significant proportion of 
households fall below the poverty 
line (see Box for an explanation of 
the methods used to standardise 
household income). This proportion, 
is in general greater for the poorer 
countries than for the more pros­
perous. In Greece in the mid-1980s it 
amounted to 20% and in Italy and 
Ireland, 17-18%, while in the 
Netherlands, the proportion was only 
7% and in Belgium, just under 6% 
(Graph 8). 
Nevertheless, for all the poorer Com­
munity countries, the proportion of 
households falhng below the poverty 
line, after allowing for social trans­
fers, was less than in the US, where 
in 1984, 25% of households had a 
level of disposable income of less 
than 50% of the average. 
It should be emphasised, however, 
that the definition of poverty used 
here is not necessarily one which 
would be agreed by all the countries 
included in the analysis, still less is it 
one which is typically used in the 
administration of social security sys­
tems. In terms of the national objec­
tives set, therefore, the above results 
do not necessarily signify a failure 
on the part of these systems to pre­
vent people living in poverty and 
deprivation. . 
As noted above, however, even in 
terms of the definition of poverty 
chosen, these figures in themselves 
-64 
Chapter 4 - The scale of social protection In Member States 
give only a partial indication of the 
effectiveness of social security in the 
various countries, since they say 
nothing about the scale of the 
problem which is being addressed. In 
other words, it is important in any 
assessment also to consider what the 
levels of income would have been 
without social protection. 
The results of this calculation, some­
what surprisingly, differ markedly 
from the position including the effect 
of social transfers. In the first place, 
the extent of variation between 
Member States in the proportion of 
households falling below the poverty 
Une is much less, varying from 46% 
in France and Ireland to 38-39% in 
Greece and Luxembourg (Graph 8). 
This would seem to indicate, there­
fore, that the initial scale of the prob­
lem which social protection systems 
are trying to alleviate is much the 
same in the different Member States. 
Secondly, the proportion of house­
holds with under 50% of average in­
come is comparatively low in 
the US, at 35%, as against an average 
Community figure of over 40%. 
Thirdly, the effect of social protec­
tion in the US is to reduce the propor­
tion of households below the poverty 
line by only around 10%. This is 
much less than in any Community 
country. Even in Greece, which 
seems to have the least effective sys­
tem, social transfers reduce the pro­
portion by 18%, while in the other 
Member States, apart from Italy, 
where the reduction is 25%, the fig­
ure is around 30% or more, with Bel­
gium seemingly having the most 
effective system in these terms with 
a reduction of 36%. Net deposable income Indicators of the effectiveness 
of social protection systems 
There are two main ways of measuring the effects of systems of social 
protection on poverty. One consists of counting the number of households 
or individuals whose income falls below a specified level before and after 
taking account of social transfers. The other consists of assessing the 
so-called "poverty gap", ie the extent to which the income of poor house­
holds or individuals falls below the level of income so specified before and 
after social transfers. A complete evaluation needs to take account of both 
of these indicators. In other words, the success of any social protection 
system in alleviating poverty needs to be measured in terms of both the 
number of households or individuals whose income it raises above the 
poverty line and the extent to which households or individuals remain 
below the poverty line even after receiving social transfers. 
The difference between 
various methods of evalu­
ation can be described in the 
diagram in which the hor­
izontal axis shows numbers 
of households ranked by the 
level of income, with the 
poorest households on the 
left, and the vertical axis 
shows the net disposable in­
come. 
In the diagram: 
• B+C+D equals the total amount of social transfers; 
• B+C equals the amount of transfers received by households whose income 
is below the poverty line before social transfers; 
• A+B equals the poverty gap before social transfers; and 
• A equals the poverty gap after social transfers. 
The effectiveness of the social protection system in reducing poverty can 
therefore be measured in the following ways: 
• B/(A+B) which equals the extent to which the poverty gap is reduced; 
• B/(B+C+D) which equals the proportion of social transfers which goes 
towards reducing the poverty gap; 
• (B+C)/(B+C+D) which equals the proportion of social transfers paid to 
households whose income before transfers is below the poverty line. 
-65 
Chapter 4 - The scale of social protection In Member States 
Belgium, therefore, through its social 
protection system, succeeded in the 
mid-1980s in reducing the number of 
households falling below the poverty 
line, as defined here, by 86%, while 
for the Netherlands and Luxem­
bourg, the figure was over 80% and 
in the other Community countries, 
apart from Greece, around 60% or 
above (Graph 9). In Greece and Cata­
lonia, on the hand, around 50% of 
households which would have fallen 
below the poverty line without the 
social security system remained 
below it even with the system. 
Nevertheless, the performance in 
these two parts of the Community 
was still much better than in the US 
where the social protection system 
only succeeded in raising the income 
of 29% of poor households above the 
poverty line. 
The comparison of the number of 
households with income below the 
poverty line with and without social 
protection systems is one measure of 
their effectiveness. However, as 
noted above, this leaves out of ac­
count the extent to which house­
holds, even after benefiting from 
social transfers fall below the pov­
erty line. A further indicator of effec­
tiveness is, therefore, given by the 
actual amount spent under the social 
protection system to bring house­
holds up to the poverty line in rela­
tion to the sum which would need to 
be spent in order to ensure that no 
household fell below the line — ie 
the extent to which the poverty gap is 
reduced (see Box - indicator 2 in 
graph 9 is a measure of B/(A+B)). the results of the previous exercise. 
Thus Belgium in the mid-1980s 
spent 96% of the amount which 
would have been required to elimi­
nate household poverty as defined 
here, while the Netherlands and Lux­
embourg spent over 90%. On the 
other hand, expenditure in Germany 
was also close to 90% of the amount 
necessary and in France and Ireland 
it was over 80%, even though in these 
cases, a much smaller proportion of 
households were raised above the 
poverty line — 70% in Germany, 
67% in France, 63% in Ireland. This 
indicates that the households which 
remained below the poverty Une after 
social expenditure in these countries 
had on average higher levels of in­
come — ie were less below the line 
— than in the Benelux countries. 
For all Community countries for 
which data are available, the value of 
this indicator of effectiveness was 
greater than for the US, where the 
actual budget on social protection 
was only around half of that which 
seems to have been required to elimi­
nate household poverty on this de­
finition. Apart from Greece, where 
the figure was 64%, all Member 
States spent 75% or more of the re­
quired amount. 
The results of this calculation are 
similar but by no means identical to 
-66-
Chapter 5 - Measures for social and economic Integration 
Chapter 5 Measures for social and 
economic integration 
Despite relatively high rates of 
economic growth in most parts 
of the Community in the second half 
of the 1980s, unemployment remained 
at unacceptably high levels in most 
regions and since the onset of recession 
in 1991 has increased even further. At 
the same time, largely as a result of 
this, there are indications of growing 
poverty and deprivation. Both individ­
ual Member States and the European 
Commission have taken a number of 
initiatives to combat unemployment 
and poverty and have sought to ensure 
that they do not lead to social and 
economic exclusion. 
The Council Recommendation in July 
1992 was explicit in stating that Mem­
ber States need to combine effective 
pohcies of integration, both into so­
ciety and into the labour market, with 
effective measures of income support. 
The first part of this chapter reviews 
expenditure on active labour market 
pohcies in Member States, which are 
aimed at reintegrating the unemployed 
or inactive back into employment, and 
relates this to spending on so-called 
passive measures of income support. 
In the second part of the chapter, the 
experiences of four Member States — 
Germany, France, Denmark and Por­
tugal — are examined in order to illus­trate the variety of current initiatives 
on social and economic integration 
which are taking place. The countries 
have been chosen to be repre­
sentative, to some extent, of the 
Community as a whole. Denmark 
and Portugal are both small countries 
and in some respects they also repre­
sent the extremes of the Communi­
ty's periphery: the post-industrial 
North and the rural South. Germany 
and France are large countries cen­
trally located in continental Europe 
and represent in some degree the Eu­
ropean mainstream as regards labour 
market structure and welfare 
policies. 
In analysing the policies implemented 
by the four, the aim is to focus on the 
outcomes of the various programmes 
rather than on describing the measures 
taken in any detail. Following this, 
some typical cases of integration 
across the Community are discussed. 
Active labour 
market policies 
Within the Community, the 
main emphasis of labour mar­
ket pohcies in recent years has been 
on providing means of income sup­port for those unable to find employ­
ment. These so-called passive 
measures, in the form of unemploy­
ment benefit and social assistance, 
have in most Member States swal­
lowed up the major part of budgets 
allocated to helping the unemployed. 
Expenditure on active labour market 
pohcies, such as training and job cre­
ation, aimed at helping the unem­
ployed back into work — or into 
first-time jobs for those who have not 
worked before — has tended, by con­
trast, to be relatively small. 
According to the latest information 
available, only three countries in the 
Community — Germany, Portugal 
and Italy — devoted significantly 
more than a third of total labour mar­
ket expenditure to active measures in 
1991-92 (and in the case of Italy, the 
proportion is overstated because 
much of the income support for the 
unemployed is not included in the 
figures for unemployment benefit). 
In five countries — Belgium, Den­
mark, Spain, Luxembourg and the 
UK — the proportion was only 
around a quarter or less (Graph 10 — 
where for the countries listed in the 
note, the data are for 1991, the last 
year available, rather than for 1992). 
67-
Chapter S - Measures for social and economic Integration 
10 Expenditure on active and passive labour market policies in 
relation to GDP, 1992 
%GDP 
7 r 
6 r 
3 r-
2 n 7 
0 u^«-^«-^«-^™-^»-^™-^™-^™-^»-^™-^»-^» 0 
I GR f P UK F NL D E B IRL DK 
11088; B, F, IRL. U NC 1991: UK 1992/93 
11 Active labour market expenditure in relation to total labour 
market expenditure and the unemployment rate, 1992 
% total labour market expenditure 
60 r 
50 H 
40 «f» 
«o 
•NtfQR 
•B Mm. 
•F 
•OK •UK 30 
20 
10 
11MB, B, F, IRL UM. t«91; UK19GZ/B3 
Q I I I I I I I I I I 1 t . In I •E 60 
mm 
A 40 
30 
i 20 
10 
' . »• • 
5 10 15 
Unemployment rate (% labour force) 20 In only five Member States, more­
over, did active labour market spend­
ing amount to more than 1 % of GDP 
(Table 18). Significantly, with the 
exception of Ireland which receives 
substantial assistance from the Com­
munity for training and measures to 
help the young unemployed, all of 
these countries are among the most 
prosperous in the Community — 
Germany, Denmark, Belgium and 
the Netherlands. 
A major reason for the relatively low 
expenditure on active policies of 
economic integration is the high level 
of unemployment. Although govern­
ments in the Community have gen­
erally tended to emphasise the 
importance of active measures in 
providing effective assistance to the 
unemployed in the long-term, most 
have, in practice, found it difficult if 
not impossible to shift the balance of 
expenditure away from passive 
measures. As unemployment has in­
creased, the sums required to provide 
income support to growing numbers 
of people have put pressure on other 
spending and have often led to ex­
penditure on active pohcies being 
squeezed 
It is not by chance, therefore, that the 
countries which in 1992 (or 1991 in 
some cases) devoted the highest pro­
portion of labour market spending to 
active measures tended to be those — 
such as Portugal and Germany — 
where unemployment was relatively 
low (Graph 11). Similarly, the coun­
tries which spent relatively little on 
active policies — such as Spain and 
the UK — had relatively high rates 
of unemployment. There are excep­
tions, however—such as Ireland and 
Luxembourg — which do not 
-68-
Chapter 5 - Measures for social and economic Integration 
Table 18 Expenditure on Labour Market policies, 1992 (% GDP) 
Actives measures 
B DK D GR E F IRL I L 
Public employment services 
and administration 0.19 O.ll 0.24 0.07 0.11 0.13 0.14 na 0.04 
Labour market training 0.14 0.40 0.59 0.18 0.08 0.35 0.49 na 0.02 
Youth measures na 0.26 0.06 0.03 0.06 0.23 0.44 na 0.11 
Subsidised employment 0.55 0.39 0.52 0.09 0.32 0.11 0.29 na 0.02 
Measures for disabled 0.16 0.40 0.24 0.01 na 0.06 0.14 na 0.10 
Total expenditures on active M 56 65 038 QSJ QM 150 080 029 
labour market policies 
Passive measures 
B DK D GR E F IRL I L 
Unemployment compensation 2.07 3.69 1.39 0.79 3.07 1.46 2.89 na 0.25 
1.28 0.49 na na 0.47 0.05 na 0.52 
Total expenditure on active Early retirement for Q 75 
labour market reasons NL 
0.09 
0.21 
0.07 
0.05 
0.63 
NL 
2.17 
na P UK 
0.09 0.17 
0.30 0.18 
0.38 0.18 
0.04 0.02 
0.05 0.03 
1.04 0.86 0.58 
P UK 
0.59 1.69 
0.11 na 
and passive measures 
Note: I im, B, F, IRL, L, NL 1991, UK 1992-1993 
Source: OECD Employment Outlook, July 1993 3.86 6.53 3.46 1.17 3.64 2.81 4.44 0.72 1.06 2.17 1.56 2.27 
conform to this general rule, where 
spending on active measures is either 
higher or lower than would be ex­
pected given the level of unemploy­
ment. In the case of Ireland, this 
perhaps reflects the scale of support 
for active pohcies from the Com­
munity's Structural Funds, while in 
the case of Luxembourg, it might 
reflect the very small numbers of 
people out of work. 
While the form which active labour 
market policies take is similar in 
most Member States, there are never­
theless some marked differences in 
the relative scale of expenditure on 
particular types of measure. Thus in 
the majority of countries, a large part of expenditure goes on training or 
measures to help the young unem­
ployed, which often take the form of 
training (Table 18). In Greece, 
France, Ireland, Portugal and the UK, 
these two together accounted for well 
over half of active expenditure in 
1991-92. 
In the other countries, where training 
is proportionately — though not ab­
solutely — less important, expendi­
ture on subsidies to support 
employment is significant In Bel­
gium and Germany, such expendi­
ture accounted for around 0.5% of 
GDP in 1991-92 and in Denmark 
only slightly less, whereas for most 
other countries — Spain and Ireland being exceptions — job subsidies 
were of negligible importance. 
The same countries, together with the 
Netherlands, also devoted a rela­
tively high proportion of expenditure 
to measures aimed at integrating the 
disabled or handicapped into econ­
omic activity. This was particularly 
true of the Netherlands, where 0.6% 
of GDP went on action of this kind in 
1991, more than twice as much as 
any other Member State apart 
from Denmark. In Greece, the UK, 
Portugal and France, on the other 
hand, less than 0.1% of GDP was 
allocated to such measures. 
69-
Chapter 5 - Measures tor social and economic Integration 
Finally, in all countries, apart from 
Luxembourg, Portugal and Greece 
where spending was relatively low, 
expenditure on employment services 
for helping the unemployed find a 
job, plus administration, was broadly 
similar across the Community, rang­
ing between 0.1 % and 0.24% of GDP 
in 1991-92. In the countries, where 
this was comparatively high, such as 
Germany, private employment 
placement services tend be relatively 
underdeveloped so that a higher pro­
portion of vacancies are channelled 
through the pubhc service. 
Results of active 
labour market 
measures 
Anumber of studies have been 
carried out attempting to evalu­
ate the results of active labour market 
policies in Community countries. 
Such attempts are by no means easy 
since the need is not only to estimate 
the numbers of unemployed who are 
assisted by the measures in question, 
but, most critically, to assess how 
many of these are integrated into em­
ployment as a result of the action 
taken, who would have remained un­
employed in the absence of such ac­
tion. However, even this provides 
only a partial indication of the suc­
cess of these kinds of policy, since it 
leaves out of account the numbers 
who are assisted into jobs at the 
expense of those already in employ­
ment. In other words, one of the 
potential effects of helping one group 
of people — in this case, the unem­ployed — is to disadvantage other 
groups, so that the net gain, if not 
zero, may be significantly less than 
appears at first sight. 
Most systematic studies have tended 
to find that these effects are import­
ant — that a significant number of 
those helped would have found em­
ployment anyway and that many 
have effectively displaced people al­
ready in employment. In general, the 
most successful policies seem to 
have been those targeted on specific 
groups and specific problems, 
whereas more general measures have 
had least effect in increasing job op­
portunities, and future earnings 
potential, for the unemployed. 
This appears to be especially true of 
training programmes, for which 
studies carried out in Germany and 
the Netherlands, for example, sug­
gest that the effect on unemployment 
flows is negligible — though results 
for the UK appear to be more favour­
able. By contrast, studies of schemes 
targeted on disadvantaged groups 
among the unemployed, such as eth­
nic minorities, people with a poor 
educational background or the un­
skilled have concluded that they can 
help significantly in getting such 
people into employment, while re­
ducing the risk of future unemploy­
ment, with comparatively little 
adverse effect on others in the labour 
market. 
Studies also appear to show that in­
tensified efforts to help the unem­
ployed to find jobs, through 
increased counselling, for example 
— such as through the Restart pro­
gramme in the UK or reorientation 
interviews in the Netherlands, which are targeted on those who have been 
unemployed for over three years — 
can cost relatively little but be ex­
tremely effective in integrating 
people back into economic activity. 
Finally, a policy of directly creating 
jobs in the pubhc sector or in non-
profit-making enterprises has come 
to be used particularly in the Benelux 
countries as a means of providing 
work for those unable to find em­
ployment elsewhere. In these coun­
tries, for many people such jobs have 
in practice become permanent rather 
than temporary positions. 
The results of policies in four Com­
munity countries are examined in 
more detail below. 
Policies of 
integration in 
four Member 
States 
The Danish 
system 
As is typical of European welfare 
states, social protection 
schemes in Denmark for those who 
are unemployed or excluded from 
the labour market distinguish 
between "labour market" pohcies 
and "social" pohcies (see Table 19). 
For both types of policy, there are 
three distinct ways of dealing with 
-70-
Chapters* Measures for social and economic Integration 
those sections of the population who 
are in danger of social exclusion. The 
first way is through permanent sup­
port outside the labour market in the 
form of early retirement pensions; 
the second is through temporary sup­
port by means of the payment of un­
employment benefits; the third is 
through active measures designed to 
promote social and economic inte­
gration. 
In Denmark, active measures are pre­
dominantly combined in the Job 
Offer scheme. Under this, assistance 
takes the form of four programmes 
(oudined in Table 20), which consist 
of job offers, training, grants for busi­
ness creation and education allow­
ances. 
Analysis of the results of the Danish 
policy yields the following general 
conclusions: 
• the longer the training or educa­
tion lasts, the better the chances 
of someone who has been unem­
ployed for a long time being re­
integrated into the labour 
market; 
• the less the resources available 
to the target population, the less 
the chances of successful reinte­
gration; 
• better results are obtained 
through private sector placement 
as compared with placement in 
the pubhc sector; 
• although the policies are aimed 
at labour market integration, 
they also help to target social 
assistance more effectively. Table 19 Welfare policies for the excluded In Denmark 
Labour market Social policies 
policies 
Support to VERPS (Voluntary Early Early retirement pension 
permanently excluded Retirement Pension 
Scheme) 
Temporary income 
maintenance 
Inclusion and 
activation Unemployment and 
sickness benefits Social assistance benefits 
Job/training offer Social assistance activation 
Table 20 Components of the Danish Job Offer scherm 
Work related 
activities 
Educational and 
training Job offer of 7 to 9 months 
employment 
Training offer of 22 weeks 
on average Enterprise benefits lasting 
over 2 years for those 
setting up their own 
business 
Education allowance for 
2 years on average 
The French 
system 
Analysis of the French system is 
based on the experience of the 
Revenu Minimum d'Insertion 
(RMI), which has become estab­
lished as a major scheme within 
French social policy. Over the first 
three years of its operation, between 
1989 and 1991, the scheme directly 
assisted almost one million people 
and, if dependents are taken into ac­
count, therefore, influenced the hves 
of around two million people or so. 
In all, assistance was given to about 
2% of the French population, primar­
ily those under 35 and single people. 
The scheme is based on contracts 
being agreed between individuals 
and regional authorities (Départe­
ments). The main conclusions which emerge 
from analysing its operation are as 
follows: 
• only 60% of the target popula­
tion actually had a chance to join 
an integration programme and 
only 40% were successful in ob­
taining a contract, which would 
seem to indicate that funding, 
particularly for the regional 
authorities, has not been suffi­
cient to cope with demand; 
• the rate of drop-out from the 
scheme amounted to 44% of par­
ticipants, the less disadvantaged 
being more successful in obtain­
ing employment (although prior 
levels of education do not appear 
to affect the results); 
• the numbers obtaining secure, 
lasting employment are not high, 
71 
Chapter 5 - Measures for social and economic Integration 
with most participants moving 
into other social programmes 
or back onto the RMI after 
completing the scheme; 
• too much emphasis was placed 
on pre-job rather than on-the-job 
training; 
• local rather than central action 
seemed to be more effective in 
securing the reintegration of 
participants; 
• increasing levels of unemploy­
ment made it more difficult 
for the programme to secure 
successful results. 
The German 
system 
German unification has brought 
the problem of unemployment 
onto the political agenda in a dra­
matic way because of the massive job 
losses suffered in the former East 
Germany. Integration measures in­
itially developed in the former West 
Germany have had to be im­
plemented in the very different econ­
omic and social environment of the 
new East German Lander. The main 
points to emerge from examining 
German policy are as follows: 
• training and retraining pro­
grammes improve employment 
prospects, even if only to a 
limited degree; 
• training and retraining schemes 
have not been able to cope with 
the increased level of demand, 
following unification; • it is estimated that job-creation 
measures have helped to reduce 
the average unemployment rate 
in the former East Germany 
from 38% to around 13%; 
• it is estimated that, within the 
"secondary" labour market, 
about 20% of those on assistance 
will obtain a permanent job, 
while 50% will find some em­
ployment at some stage; 
• although the measures have not 
been hugely successful in help­
ing participants find work, they 
have helped them avoid total so­
cial and economic exclusion; 
• job-creation schemes are seen to 
be in competition, often unfairly, 
with the "primary" labour mar­
ket; 
• some people participating in "ar­
tificial" employment schemes 
have been subjected to harass­
ment from other workers be­
cause they are working for less 
than the full rate of pay. 
The Portuguese 
system 
Portugal stands out as one of the 
few Community Member States 
with a low rate of unemployment — 
under 5%; however, it also has very 
high levels of poverty. The country is 
undergoing a rapid process of mod­
ernisation, something which, in it­
self, would be expected to lead to job 
losses and so increase the risk of mar­
ginalisation. Portuguese labour mar­
ket pohcies are predominantly active in nature, partly because of the 
relative low need to spend on unem­
ployment benefits, and are directed 
towards labour market integration. 
The main features of the policy oper­
ated in recent years are as follows: 
social pohcies are based on tar­
geting, both of the most vulner­
able sections of the population 
and the most deprived regions; 
labour market integration 
policies have been least success­
ful in respect of those industries 
which are undergoing major re­
structuring, the textile industry 
for example, and they have been 
of least help to the most margi­
nalised sections of the popula­
tion; 
• around one million people were 
involved in some kind of train­
ing or reintegration programme 
in the first three years of the 
1990s, which represents a signi­
ficant proportion of the labour 
force and an even higher propor­
tion of those in need; 
people are excluded from par­
ticipation in the labour market 
for many different kinds of rea­
son which points to the need for 
a similarly multidimensional 
approach to labour market 
reintegration. 
-72-
Chapter 5 -* Measures for social and economic Integration 
The systems 
compared 
The measures implemented by 
these four Member States vary 
considerably in certain aspects. 
• The nature of targeting varies 
significantly between Member 
States. All programmes are 
targeted to some extent but some 
are only directed at the poor or 
the long-term unemployed and 
there is no more precise selectiv­
ity beyond this. This is true of 
the French and Danish schemes. 
By contrast, German and Por­
tuguese programmes are targeted 
towards specific groups and/or 
regions. 
• The administration and im­
plementation of the schemes also 
vary between the countries. 
Some schemes are administered 
nationally, some regionally, 
others locally and the implemen­
tation of schemes is similarly 
varied. 
• A distinction can be made be­
tween programmes which help 
to improve access to the "nor­
mal" labour market, as in the 
French and Portuguese cases, 
and those which create "artifi­
cial" employment within an "al­
ternative" labour market, as 
happens in Denmark and Ger­
many. 
The programmes in the four coun­
tries, however, also have a number of 
points in common so far as experi­
ence is concerned. • Job-creation measures generally 
have not been very successful in 
generating a net increase in jobs 
in the economies concerned. The 
unemployed who have obtained 
permanent positions seem to 
have done so in most cases at the 
expense of someone else. In­
stead of giving rise to an overall 
growth of employment, there­
fore, the effect of such measures 
seems largely to have been to 
shuffle around a given number 
of jobs between people. 
• The movement of marginalised 
individuals into and out of em­
ployment through job-creation 
schemes is, however, of benefit 
to them since it enables them to 
avoid total exclusion from so­
ciety. 
• Some measures are not well 
targeted: the main effect of a 
number of programmes, for 
example, is to assist the least dis­
advantaged rather than those 
most in need of help. 
• Although the overall aim of the 
programmes is to help excluded 
groups become more integrated 
into the labour market, the 
measures taken tend, neverthe­
less, to segregate the most mar­
ginalised people in society into 
particular social programmes or 
jobs. 
• In general the more resources in­
vested in any programme, the 
better the results: many of the 
problems identified as regards 
the operation of programmes are 
simply due to insufficient fund­
ing or lack of suitable skills among the people managing 
them or carrying them out. 
Since labour markets are pre­
dominantly local in scale and in 
the way they function, policies 
which reflect this are more likely 
to be successful than ones which 
are applied in a uniform way and 
make no concession to variations 
in local characteristics. 
Programmes should be im­
plemented in a flexible way and 
should not merely focus on skills 
development, work placement or 
general education but should 
adopt an approach which enables 
these and other aims to be pur­
sued simultaneously. 
Programmes should be im­
plemented and operated within a 
framework of cooperation be­
tween the social partners as well 
as between the pubhc and pri­
vate sectors. 
Irrespective of the quantity or 
quahty of the measures, their 
success depends very much on 
the economic conditions prevail­
ing at the time: other things 
being equal, programmes are 
more likely to be successful in 
achieving their aims during 
times of economic prosperity 
than during recession. 
The effective integration of the 
marginalised sections of the 
population into society and the 
labour market requires the close 
coordination of economic and 
social policy. 
-73-
Chapter S - Measures tor social and economic Integration 
Typical cases 
of integration 
across the 
Community 
In most parts of the Community, 
measures are in force to combat 
the most common causes of exclu­
sion from the labour market, though 
the form which they take in many 
cases differs from one country to 
another. 
Illness 
All Member States provide some 
kind of support to those who are 
unable to work because of sickness 
or injury. This is normally through 
social insurance — notably health 
insurance — and social assistance 
programmes. Most Member States 
also provide help through compre­
hensive reintegration programmes; 
however, these are not statutory in 
Ireland, Italy or the UK. 
Mental or 
physical handicap 
All Member States provide the 
means of subsistence for the 
handicapped, though in Germany 
such assistance depends in certain 
cases on the financial position of 
their family. Denmark, France and 
the Netherlands offer sheltered em­
ployment for the handicapped while a number of Member States operate 
some kind of integration programme, 
in the form of retraining or reschool-
ing, for example. The exceptions are 
France, Greece, Ireland, Italy, Lux­
embourg and the UK, where there are 
no statutory schemes of this kind. 
Long-term 
unemployment 
In Greece, some parts of Italy and 
Spain, the problem of long-term 
unemployment is not covered either 
by unemployment insurance or by 
any other scheme of social support 
Vocational training or other 
measures aimed at integration exist 
in almost all Member States. Wage 
subsidies to encourage businesses to 
take on the long-term unemployed 
are in operation in over half of them 
and a few countries — Denmark, 
Greece, Ireland and Portugal — pro­
vide financial incentives for them to 
start up their own business. 
Invalidity 
All Member States provide fin­
ancial support to invalids. Bel­
gium, Luxembourg and France all 
allow partially invalided people to 
receive benefit, at a reduced rate, 
while doing a job of work. Other 
countries, such as Denmark, Ger­
many, Greece, Spain, Portugal and 
the UK, provide training and edu­
cation programmes. Ireland and Italy 
are alone in the Community in hav­
ing no statutory measures of integra­
tion. Workers of 
retirement age 
All Member States, with the ex­
ception of Spain, allow those 
who have reached the age of retire­
ment to combine working with the 
receipt of a pension, though in some 
countries the amount of pension re­
ceived is reduced in this event. This 
is the case in Denmark, France, Ire­
land, Italy, and Portugal. Elsewhere 
being in work does not affect pension 
entitlement, though in a few coun­
tries there is a limit on how much a 
person can earn while still receiving 
a full pension. 
A woman returning 
to work after 
childbirth 
The main factor determining 
whether a woman is able to con­
sider returning to work after child­
birth is the availability of affordable 
child care facilities. The extent of 
provision varies greatly across the 
Community, with Denmark having 
the highest level and most other 
countries having only very h mi ted 
provision. It is commonly accepted 
that the availabihty of child care 
arrangements in the Community 
generally is inadequate. 
In Denmark, Ireland, Italy and the 
UK, a women seeking to return to 
work is not automatically entitled to 
assistance and will only receive help 
if she is a single mother, in which 
case she will be eligible for a range 
of other forms of social assistance. In 
other Community countries, various 
-74 
Chapter S - Measures for social and economic Integration 
training and retraining measures are 
provided. 
The self-employed 
The self-employed who become 
bankrupt are not entitled to any 
benefit in Belgium, Greece, Italy, 
Luxembourg and Portugal. In other 
Member States, they are eligible for 
financial assistance, can participate 
on training courses and can be helped 
to find a job just like anyone else who 
is unemployed, provided they are 
willing to seek work as an employee. 
-75-
Chapter S ~ Measures tor social and economic Integration 
76 
Chapter 6 ~ Social protection: economic considerations 
Chapter 6 Social protection: 
economic considerations 
Nature and 
basis of social 
protection 
The aim of social protection is to 
protect households from the risk 
of not having enough money to buy 
the minimum amount of goods and 
services needed to live decently, to 
provide access to health care and to 
enable them to maintain their stand­
ard of living in the event of losing 
their usual source of income. Loss of 
income is liable to result from old 
age, invalidity, sickness, unemploy­
ment or the costs of bringing up 
children — the "social risks" which 
social security is designed to protect 
against. 
The objective of social protection is, 
therefore, to secure "freedom of man 
from want" — in the famous phrase 
of Sir William Beveridge — when 
these risks occur. This is achieved 
through benefits both in cash and in 
kind. Cash benefits have three differ­
ent functions - to provide: 
• replacement income, if it is to 
compensate for the loss of in­
come from employment, in the 
form of sickness benefits, old-age and invalidity pensions and 
unemployment benefits ; 
• supplementary income, if it is to 
help pay for particular costs, not­
ably accommodation expenses 
or the costs of child care; 
• assistance income, if it provides 
people living in poverty with the 
means of subsistence. 
Benefits in kind include covering the 
costs of medical care and drugs, the 
delivery of meals and various forms 
of help in finding a job. In providing 
these benefits, social protection plays 
a complex role in society, performing 
three basic functions: 
• a traditional insurance function, 
given that it would not necessar­
ily be possible to insure against 
all social risks on a free insur­
ance market; 
• a savings function, enabling pur­
chasing power to be spread over 
the life cycle; 
• an inter-person redistribution 
function, which transfers part 
of the income of richer house­
holds to the poorest house­
holds, so the latter can receive 
benefits without having paid the contributions or taxes 
fund them. which 
These three functions are far more 
difficult to distinguish in practice 
than in theory, and for this reason no 
system of social protection is limited 
purely to covering the risks which the 
private insurance sector cannot 
cover. The way these three functions 
overlap differs from one country to 
another and reflects the historical de­
velopment of the system in question. 
The fact that the three functions are 
mixed together often makes the sys­
tems of social protection appear to be 
in competition, or even in contradic­
tion, with private means of protection 
against social risks. However, it is 
precisely the limitations and inade­
quacies of the other possible forms 
of cover (self-protection through 
personal savings, reliance on the 
family and private insurance) which 
are the rationale for social protection. 
Inadequacies of 
self-protection 
Self-protection means precau­
tionary saving on the part of in­
dividuals, who save part of their 
income so as to guarantee economic 
77 
Chapter € - Social protection: economic considerations 
security and cope with any financial 
difficulties resulting from sickness, 
invalidity, unemployment, retire­
ment or starting and taking care of a 
family. At first glance, this form of 
protection seems to be the most natu­
ral and convenient: it is based on 
personal responsibility with every­
one being responsible for making 
their own arrangements according to 
their own assessment of the risks to 
which they are exposed. However, it 
has major drawbacks which justify 
the existence of a social protection 
system. 
First, self-protection can only apply 
to individuals and households with 
enough income to be able to save; it 
enables them to obtain more effec­
tive protection as their income 
grows. A household with low income 
is able to save little if anything at all, 
but it is precisely such households 
which are likely to be hardest hit if 
anything happens. The fact that there 
is never a perfect correspondence be­
tween needs and income constitutes 
the main justification for social pro­
tection. 
Even those with sufficient means 
cannot necessarily be relied upon to 
provide adequate protection for 
themselves. They cannot fully antici­
pate the risks they will have to face 
in the sometimes distant future and 
often underestimate both the likeli­
hood of them occurring and their im­
portance — how often they are likely 
to be ill and how serious the illness 
will be, the possibility of invalidity 
and its consequences, the chances of 
having a child with a disability, how 
long they will be out of work if they 
become unemployed and so on. In 
particular, many people tend to underestimate their life expectancy 
considerably and, as a result, how 
long they are likely to be retired. 
Moreover, some people have a very 
short-term time horizon and hardly 
bother to make any provision for the 
hazards of life and for their future 
needs. 
Limits of 
family support 
Even though the family unit has 
tended to become much smaller, 
it still generally provides a degree of 
assistance to its members which is far 
from negligible. However, leaving 
aside the fact that this form of support 
does not, by definition, apply to 
single people, the family is too small 
a unit to be able to cope with major 
or prolonged risks (such as serious or 
chronic illness or long-term unem­
ployment) or a combination of risks 
(both husband and wife being unem­
ployed, accidents, the closure of a 
family business and so on). 
Economic development, in addition, 
is making it more difficult to take 
advantage of the traditional forms of 
family-based or local support. Since 
economic development depends on a 
growth of labour mobility, which is 
necessary for the improved alloca­
tion of resources, it requires the es­
tablishment of other forms of 
support: when people move house 
several times during their hves and 
family hnks are strained by distance 
and neighbourly links difficult to es­
tablish, adult sons and daughters can 
no longer take care of their elderly 
parents and neighbours are no longer 
in a position to help the disabled or the unemployed. Changes in the 
structure of families and the increase 
in labour market participation among 
women work in the same direction. 
Shortcomings 
of the private 
insurance market 
In comparison with the kinds of 
protection mentioned above, pri­
vate insurance has the advantage of 
being more broadly based, with the 
costs imposed by some being shared 
among all those insured. However, it 
has major limitations. 
Insurance companies are faced first 
with the problem of an asymmetry of 
information, in the sense that, leav­
ing aside purely random or chance 
occurrences, they have less idea than 
their potential clients about the 
chances of them being in the situation 
they are insured against When they 
take out insurance, people may fail to 
disclose to their insurers the full ex­
tent of the risks to which they are 
exposed and which their behaviour 
can lead them into. This is especially 
true of cover against unemployment 
or against having to take care of a 
family. Insurance mechanisms are 
ill-suited to covering these occur­
rences because if insurance is op­
tional it will primarily attract those at 
particular risk of becoming unem­
ployed or who intend to have child­
ren. On the other hand, those with a 
stable job or those who do not intend 
to have children will hardly be 
tempted to take out cover at all. This 
makes it difficult for companies to fix 
rates since they do not know in 
78 
Chapter 6 - Social protection: economic considerations 
advance the degree of risk faced by 
those applying for cover. 
Naturally, if insurance is compul­
sory, individuals no longer need to 
make calculations of this sort and 
insurance companies can forecast the 
overall level of payments which they 
will have to make. Nevertheless, 
each of them will be tempted to at­
tract the people who seem to be least 
exposed to the risks covered. In the 
case of sickness insurance, for 
example, they will try to insure 
young people in good health (who, 
for them, represent "good risks") 
rather than elderly people or those 
with a medical history (who are con­
sidered to be "bad risks"). 
Of course, in this case too companies 
can be obliged by law to insure 
everyone who asks. In this case, they 
will adjust their rates to the charac­
teristics of the people insured, not 
only to compensate for the dif­
ferences in costs that they anticipate, 
but also to discourage some people. 
The fact that it is impossible for them 
to know in advance the risk associ­
ated with a new applicant will en­
courage them to be prudent and to 
offer high rates to deter those they 
suspect of being "bad risks". In this 
case, the way the market operates 
might produce socially unacceptable 
results, with some people finding 
that, in practice, it is impossible to 
take out insurance against the risks to 
which they are particularly exposed. 
The three characteristics of a system 
of social protection which distin­
guish it from private insurance 
schemes are: that it is compulsory for 
everyone to take out insurance; that 
insurance companies are not allowed to refuse insurance to anyone; and 
that they not permitted to adjust their 
rates to reflect the degree of risk as­
sociated with a particular individual. 
These three features are inseparable, 
since if contributions are not to vary 
with individual risk, it must be com­
pulsory for everyone to belong to the 
scheme; otherwise, "good risks" 
could be tempted not to take out in­
surance and the system would 
become distorted. 
Externalities 
There is another theoretical justi­
fication for social protection 
schemes, namely the existence of ex­
ternalities. These are phenomena 
which are external to the market and 
result from cases of interdependence 
between economic agents for which 
there is no market price. Thus, the 
transmission of contagious diseases 
or acts of delinquency resulting from 
unemployment and poverty are "ex­
ternal diseconomies". Conversely, 
social benefits generate external 
economies, that is to say, not only do 
they produce advantages for their im­
mediate beneficiaries, but they also 
help to improve the state of health of 
the whole population (through free 
medical care), to promote social har­
mony and cohesion and, indirectly, to 
prevent delinquency (through social 
assistance and unemployment 
benefits), to facilitate labour mobility 
(through unemployment benefits and 
active labour market measures) or to 
raise the birth rate (through family 
allowances). 
Social protection is therefore a mech-
anism to provide services which benefit not only the individual but 
also the population as a whole. This 
is the justification for the public auth­
orities to make it compulsory to take 
out insurance and for social protec­
tion to be funded by taxes and social 
security contributions. 
Advantages 
of managing 
risks collectively 
In addition to the reasons men­
tioned above, there are also ad­
vantages to having a system of 
collective management of social 
risks, so enabling economies of scale 
to be realised and the costs of infor­
mation for those covered to be re­
duced. On the one hand, given the 
relatively small number of institu­
tions involved, the systems of social 
protection can be managed at lower 
cost because of the possibility of ra­
tionalising administrative services 
and the absence of marketing costs. 
In 1991, operating costs accounted 
for under 4% of the total benefits paid 
out in the Community as a whole (see 
Graph 12). 
On the other hand, for those covered, 
social protection has the advantage of 
simplicity. The management of sav­
ings over the long-term, as well as the 
choice of an insurance policy suited 
to individual needs, involve far more 
complex decisions than those nor­
mally taken by most households. To 
obtain the necessary expert advice 
would generally be too costly and so 
would reduce the amounts available 
for personal protection. 
79 
Chapter 6 - Social protection: economic considerations 
The economic 
effects of social 
protection 
The intrinsic effectiveness of na­
tional systems of social protec­
tion is rarely much in evidence in 
public debates on social security, 
which concentrate above all on the 
potential effects on the rest of the 
economy. 
The growth in the part played by 
social protection receipts and expen­
diture in the economies of Com­
munity countries is one of the main 
features of their economic develop­
ment in the 20th century. The size of 
the sums involved has prompted reflections, criticisms and proposals 
for reform, which differ considerably 
depending on the social groups or 
political parties from which they 
come. The public authorities have 
been faced with difficult choices on 
the means of containing the automat­
ic tendency (given unchanged legis­
lation) for expenditure to increase 
faster than receipts. It is highly likely 
that these problems will be exacer­
bated by the continuing high levels of 
unemployment, by the increase in 
demand for medical care and in the 
provision and costs of treatment and, 
above all, by the ageing of the popu­
lation, which has major implications 
for expenditure on health and retire­
ment pensions. The interest in the 
economic effects of financing and 
benefits stems from these factors. 
12 Operating costs of social protection systems relative to total 
benefits, 1980 and 1991 
T 12 
•\ 9 
6 
DK B E12 GR NL I UK IRL Financing 
social protection 
Social protection expenditure is 
funded primarily by direct taxes 
and social security contributions, and 
the rate at which it has grown has 
been a primary cause of the increase 
in the tax burden. Moreover, the 
financing of social protection by so­
cial security contributions, which 
provide most of the revenue in 
most countries, has prompted a cer­
tain amount of controversy and 
criticism. 
Increases in taxes 
and social 
contributions 
Among the problems raised 
by the growth in social con­
tributions and taxes, its potential ef­
fects in reducing work effort and 
encouraging fraud and tax evasion 
have received most attention. 
Economic analysis indicates that an 
increase in taxes and social contribu­
tions can have two opposing effects 
on the incentive to work. One is a 
substitution of leisure for work 
which occurs if a reduction in earn­
ings net of taxes and social contribu-
tions leads to a reduction in 
working-time. The other is an income 
effect, which occurs if this leads to an 
increase in the amount of work done 
in order to compensate for the loss of 
net income causée- by higher taxes 
and contributions. 
Attempts to determine the relative 
importance of these two effects have 
-80-
Chapter 6 - Social protection: economic considerations 
Net wages and labour costs in Member States 
Tables 21 and 22 show the breakdown of the total cost to a company of employing a manual worker in manufacturing industry 
in each of the Member States. This breakdown comes from combining two sets of Eurostat statistics: 
• The Labour Cost Survey for 1988, which shows the structure of labour costs and, in particular, the share of social security 
contributions paid by employers and gross wages; 
• Net Earnings statistics, which are the result of theoretical calculations by the national statistical institutes in order to show the 
effects of taxation on the earnings of manual workers by wage level and family circumstances. 
The combination of these two sources makes it possible to provide a full breakdown of the costs of employing a manual worker, 
distinguishing in particular 
• social security contributions paid by the employer, according to whether they are statutory, on the one hand, conventional (based 
on a collective agreement), contractual (based on a company agreement) or voluntary, on the other, 
• social security contributions paid by the employee; 
• income tax calculated on the assumption that the wage is the person's only source of income and that no special circumstances 
justify special tax relief other than family circumstances. When the wage earner is the parent of children, the family allowances 
which they receive are deducted from the tax they pay; 
• other employment-related costs, such as benefits in kind, reimbursement of travel expenses, company expenditure on health and 
social services, expenditure on training and any other taxes on wages less subsidies received; 
• net disposable earnings of the wage earner. 
The situation appears to differ considerably between Member States. Of a total labour cost of 100 for the company, the average 
Belgian, German or Dutch manual worker receives less than 45 in net wages if they are single, die Danish, French, Irish or 
Italian manual worker receives slighdy over 50, the Greek, Luxembourg and Portuguese manual worker receives about 60 
and the Spanish and British manual worker 62. 
In the case of a married manual worker with two children and whose spouse is not working, net earnings are higher 
because of tax allowances and family allowances. Net earnings are lowest in the Netherlands (just under 53% of labour 
costs), Belgium, Germany and Italy (56-58%), are between 61 and 65% in France, Ireland, Portugal and Denmark and 
are highest in Spain (67%) and the UK (70%) and, especially, in Luxembourg (nearly 80%). 
Conventional, contractual or voluntary contributions are particularly important in Ireland, the Netherlands, the UK and 
Germany. France is somewhat unusual, in that the contributions which are formally defined as conventional are in fact 
compulsory for all employees, either in full (in the case of unemployment insurance) or in part (as regards minimum 
rates for supplementary retirement schemes). 
81 
Chapter 6 - Social protection: economic considerations 
Table 21 Taxes and social contributions as % of total labour costs, 1988 
(average wage in manufacturing, unmarried manual worker) 
B 
26.7 
0.8 
9.3 
17.9 
0.9 DK 
2.8 
0.2 18.4 
3.1 
1.7 13.7 
42.8 
0.8 17.6 
2.3 GR 
19.0 
1.0 
11.9 
6.3 
1.0 F<1> ,RL(D , L NL(1) P UK<1) EUR12 
23.6 
1.6 19.2 
8.5 32.3 
1.2 13.8 
0.3 15.8 
7.1 
4.6 11.6 5.9 10.3 20.0 Employers' 
contributions: 
statutory 
collective, 
contractual, 
voluntary 
Employees' 
contributions 
Income tax 
Other costs 
Net 
disposable 
wage 
Total labour 
costs 
Notes Other costs include benefits in kind expenditure on vocational training, other social expenditure and taxes on wages less subsidies 
I estimated by the Commission services 
(,)Labourcasts for manualami non manual workers — net disposable wage for manual workers 
Sources: Community Labour Cost Survey 1988, vol. 1: Main results, Eurostat, series 3C, 1992 Net earnings of manual workers in 
manufacturing in the Community, 1991, Eurostat, series 3C, 1992 7.6 
0.1 4.2 
4.0 8.7 
6.2 
6.3 
25.0 
3.1 12.0 
-2.9 13.6 
1.2 10.6 
3.5 19.1 
2.0 
8.4 
5.7 
5.5 7.3 
4.2 
7.7 
16.4 
2.6 
44.4 51.7 44.9 60.8 62.5 52.5 50.7 51.5 60.8 43.0 59.3 61.8 
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 18.5 
3.8 
10.2 
13.2 
2.0 
52.3 
100.0 
not produced very clear-cut results 
despite the numerous theoretical and 
empirical studies which have been 
carried out. The way different people 
react can vary considerably. The 
most widely accepted hypothesis is 
that, for high-income households, the 
substitution effect is likely to pre­
dominate, especially for women in 
cases where husband and wife are 
taxed on joint income. By contrast, 
for low-income households, any re­
duction in purchasing power as a re-
sult of increases in taxes or 
contributions is more likely to make 
them work more. 
Fraud and tax evasion are, in prac­
tice, more tempting — and more en­
couraged — when the charges to 
evade are high. Every increase in 
taxes or social contributions, there­fore, tends to reinforce these effects. 
Of the various widespread methods 
which directly concern social protec­
tion, "working in the black" enables 
someone to earn income (whether as 
a main or supplementary source) 
which is not declared and, when car­
ried out in place of legitimately paid 
work, allows employers to avoid so­
cial charges. The greater the dif­
ference between the net wage of an 
employee and the total cost of a job 
for the company concerned, the 
greater the incentive for the two sides 
to fail to disclose income and to 
resort to working in the black. 
However, this avoidance of tax and 
social contributions is not without 
consequences for the individuals 
concerned who become unable to 
draw benefits when they stop work­ing (because of sickness, invahdity 
or retirement). The fear of seeing a 
reduction in entitlement to contribu­
tory benefits — the level of which 
depends directly on the contributions 
paid by the employee or their em­
ployer — tends to curb this activity. 
However, this deterrent is not wholly 
effective because of the existence in 
all social protection systems of non-
contributory benefits (financed by 
taxation), which give a minimum 
level of protection to those in need (in 
the form of a guaranteed minimum 
level of income and access to medical 
care). In this context, the balance 
between contributory and non-
contributory benefits is of key im­
portance. 
82 
Chapter € - Social protection: economic considerations 
Table 22 Taxes and social contributions as a % of total labour costs, 1988 
(average wage in manufacturing, married manual worker with two children 
and spouse not working) 
E F(1) IRL(1) I L NL{1) P UK<1) EUR12 
Employers* 
contributions: 
statutory 
collective, 
contractual, 
voluntary 
Employees' 
contributions 
Income tax 
Family 
allowances 
Other costs 
Net disposable 
wage 
Total labour 
costs 
Notes & Sources: see Table 21 B 
26.7 
0.8 
9.3 
13.9 
-8.0 
0.9 
56.4 DK 
2.8 
0.2 
1.7 
34.7 
-5.3 
0.8 
65.1 18.4 
3.1 
13.7 
9.0 
-3.0 
2.3 
56.5 GR 
19.0 
1.0 
11.9 
6.3 
-6.0 
1.0 
66.8 23.6 
1.6 
4.6 
3.7 
-0.6 
0.1 
67.0 19.2 
8.5 
11.6 
0.0 
-5.3 
4.0 
62.0 8.7 
6.2 
6.3 
16.6 
-2.3 
3.1 
61.4 32.3 
1.2 
5.9 
10.0 
-4.1 
-2.9 
57.6 13.8 
0.3 
10.3 
1.7 
-7.2 
1.2 
79.9 15.8 
7.1 
20.0 
5.5 
-4.5 
3.5 
52.6 19.1 
2.0 
8.4 
4.4 
-3.2 
5.5 
63.8 7.3 
4.2 
7.7 
13.6 
-5.8 
2.6 
70.4 18.5 
3.8 
10.2 
8.1 
-4.1 
2.0 
61.5 
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 
Social protection 
and budget deficits 
Social protection is often port­
rayed as being partly responsible 
for the increase in public sector 
deficits which has occurred in sev­
eral Member States since the end of 
the 1970s. While the funding of so­
cial protection clearly has a direct 
effect on the state of public finances 
in countries in which it is integrated 
in the state budget or that of local 
authorities, it also has an indirect ef­
fect in countries in which it is man­
aged by autonomous bodies. This is 
because, on the one hand, public 
authorities might have been led to 
subsidise certain schemes in order to 
reduce their deficit and because, on 
the other, in countries where the rise 
in expenditure on social protection 13 Labour costs and social contributions of manual workers in 
manufacturing, 1988 
ECU per month 
2400 r 
2000 h 
1600 V 
1200 Y 
800 h 
400 n 2400 
2000 
1600 
12O0 
800 
400 
83 
Chapter 6 - Social protection: economic considerations 
14 Average hourly labour costs in manufacturing and social 
protection expenditure per head in the Member States, 1990 
25 
20 \-
15 H 
10 h 
5 h Labour costs (ECU per worker) 
i 25 
•o 
.•E12 •B •NL 
•F 
•U wv 
••E •UK 
•OR 
* •.'*•* ' ' ' ' * ' * ' ' ••''•••' L. 
1000 2000 3000 4000 5000 
Social protection expenditure (Ecu per head) 20 
15 
10 
6000 has led to increases in contributions 
paid to the non-State bodies, 
this might have led the State to bor­
row to cover its own expenditure 
rather than increase taxes in addition 
to the rise in contributions. 
However, this assertion must be 
qualified. There is, in particular, evi­
dence that a number of countries 
where public deficits widened con­
siderably during the 1980s managed 
to contain the growth in expenditure 
on social protection. For example, 
Belgium was the Member State with 
the lowest rate of growth in average 
benefits per head at constant prices 
between 1980 and 1991 (see Chap­
ter 3, Graph 3), but experienced a 
marked rise in its budget deficit. 
Such deficits are just as much — if 
not more — a consequence of the 
slowdown in economic growth and 
the high level of real interest rates. 
15 Change in sociai protection expenditure excluding 
unemployment benefits and export growth, 1980-1991 
„„„ % change in exports 1980-1991 160 
140 
120 
100 
80 V 
60 
40 
20 ":«*RL':; 
!*>! 
•OK 
•an. ••*Nt' 
•F « 
•UK •GR 
OR 1980-1990 160 
140 
120 
100 
80 
60 
40 
20 
-4 -2 0 2 4 6 
Change in sociai protection expenditure (% GDP) 8 10 More generally, the redistributive na­
ture of social protection is becoming 
increasingly clear and workers are 
becoming more and more aware that 
it is financed from their own income. 
For a long time this had been partially 
obscured by the fact that the social 
contributions paid by employers 
were the major source of funding for 
social protection. Even though such 
contributions can be considered as 
pre-empting wage rises, workers 
generally supported this method of 
redistribution and, therefore, tended 
to accept the taxes and contributions 
levied on wages to finance it. The 
need to maintain or improve compe­
titiveness, however, is now promp­
ting a search for additional finance in 
the form of increased employees' 
contributions and state subsidies 
in order to moderate the growth of 
84 
Chapter 6 ~ Social protection: economic considerations 
Relationship between social protection expenditures, 
employment and unemployment 
16 Change In employment and social protection 
expenditure excluding unemployment benefits, 
20 J 980-1991 % clung» to «nploynwnl 
10 •p.; «NL J 
•E ^P •UK •£« 
•DK 
•WL 
001960-1980 
15 20 25 30 
SocW protection axpendttur» (% GOP. average 1980-1991) 17 Change in employment and change In eocial 
protection expenditure excluding unemployment 
benefit*, 1980-1991 % change In employment 
20 r 
^*NL<; 
« 4 10 
32.E HJK •GR 
•e *F 
•OK 
•'••;••'.•• ' •••••-••• 
IRL 20 
15 
-4 -2 0 2 4 « 8 10 12 
Chang» In •ocial protection «xpandHur» (% GDP) 
18 Unemployment and eocial protection expenditure 
excluding unemployment benefits, 1983-1991 
„ Uiwniploymantrato.amrag» 1963-1901 (%) 
:;«::;* 
10 r Wmâ 
•CH + 1S 
1 •£«% «NL 
•O 80 
10 
15 20 25 30 
SocW protection expendture (% GOP. average 1983^991) 19 Change in unemployment and change in eocial 
protection expenditure excluding unemployment 
^ benef ft», 1983-1991 change In unwnpfaymtntatt» (%) a 
•4-3-2-101234 
anim-ifie Chang» to social protection f* GDP) 
85 
Chapter 6 - Social protection: economic considerations 
Social protection, competitiveness, employment and unemployment 
The impact of social protection on competitiveness and job creation is the source of bom discussions and debates, among bom academics 
and politicians, which become particularly intense in periods of recession or slow growth, when the decline in the number of jobs reduces 
state revenue and leads to increased spending (eg on unemployment compensation or early retirement benefits). In addition to the political 
difficulty of making employers and/or employees accept any increase in taxes or social cotributions, it is important to ensure mat the cost 
of financing social protection does not increase production costs excessively, thereby jeopardising competitiveness. In particular, it can be 
argued that since social protection regimes are generally financed by taxing the use of labour, they may lead to an increase in the relative 
price of this factor of production, which ceteris paribus, will tend to reduce the labour content of economic growth 
While theoretical analyses are hard to carry out, because of the difficulty of conceiving and formulating alternatives to social transfers in 
favour of the sick, disabled, unemployed and pensioners as well as to the collective funding of health expenditure, it is nevertheless possible 
to make comparisons between Member States. 
It can be shown that a coherent and balanced development of economic performance and social protection neither endangers the 
competitiveness of a country nor the creation of employment Graph IS illustrates the relationship between social protection and 
competitiveness, the latter being measured by tradeperformarKxmtheformofthegrow^ 
1980 to 1991, the last year for which data on social protection expenditure are available (apart from Greece, for which the data only go up 
to 1990). From this, there is little evidence of any correlation between the two variables arid certamly no m 
small rates or reductions in spending on social protection have enjoyed greater export success than others. It is also the case that export 
growth does not appear to be related to the average level of expenditure over the 1980s. 
The competitiveness of a country is associated in some degree with its ability to create jobs. Graph 16 shows the relationship between the 
rate of employment growth between 1980 and 1991 and the level of social protection over the period. It is clear mat there is little sign of 
social protection having a negative effect on employment creation. The graph shows a wide variety of combinations between employment 
growth and level of social protection in the Community and, in particular, relatively larger increases in employment in countries such as 
Portugal and the Netherlands with very different levels of social protection. The same lack of relationshç is also apparent if the change in 
social expenditure is taken rather than the level (Graph 17). 
Nor is there a clear relationship between the level of social protection and the rate of unemployment Graph 18 compares the average 
expenditure on social protection between 1983 and 1991 with average unemployment over the period. White there is no sign of a negative 
relationship between social protection and unemployment and therefore no evidence that a low level of social protection is associated with 
high unemployment, it is nevertheless striking that there is no country with both a high level of unemployment and a high level of social 
protection. 
These indicators do not, however, address the precise issue of whether a link exists between the cost to companies of social protection 
contributions and thekperfonnarœ 
either direct or indirect, on the ability of companies to ccimr^. Competitiveness cm 
individual elements of the overall cost structure, final pricing levels, ernployee/rnanagement relations, etc The existence of asocial protection 
regime to which companies are required to contribute can have the effect of raising the '•non-wage" element of the labour costs, bat can also 
have the effect of improving productivity rates from "secure" workers, and improving employeeTmanageinent relations in the context of 
dtrategk or other necessary restructuring exercises. 
While no firm conclusions can be drawn on the relationships between social protection, competitiveness, employment and unemployment 
from this brief comparison, it seems that a high level of social protection is not an obstacle to economic development However, if changes 
occur which disturb the balance between social protection and economic strength and which reduce a country's competitiveness, the 
maintenance of employment levels and the restoration of economic performance will require a corresponding reduction in the unit costs of 
production and in the relative price of labour. If a sufficient reduction can be achieved through slower wage growth, as it should, there will 
be no need for any dismantling of the social protection system hi some cases, an alternative way of financing social protection might also 
enable the relative price of labour to be reduced and the labour content of growth to be increased. 
The Commission intends to explore further the question of links between the existence and the financing of social protection (in its broadest 
sense) and industrial competitiveness with a view to identifying those elements which can be determinants of competitive advantage. 
86-
Chapter 6 ~ Social protection: economic considerations 
labour costs (see Chapter 3, Graph 7). 
Accordingly, workers — and people 
in general — are being encouraged, 
more and more explicitly, to devote 
some of their income to providing 
protection for themselves. 
In this context, the emergence of 
deficits in some systems of social 
protection have reflected political 
problems in the countries concerned 
as well as the cyclical effects of a 
slow-down in economic growth. 
When a country uses its system of 
social protection to redistribute in­
come, there has to be general agree­
ment among the people living there 
on the means of achieving this. 
Social contributions 
and labour costs 
Social contributions are at the 
centre of discussions and de­
bates on the economic effects of the 
different ways of financing social 
protection. It is employers' contribu­
tions which are the main focus of 
criticism, especially in the countries 
where these are particularly import­
ant (Belgium, Germany, Spain, 
France, Italy or the Netherlands). 
There tend to be two main issues: the 
impact of social contributions on la­
bour costs and whether they should 
be based only on wages. 
Social contributions are often 
presented as non-wage labour costs 
which can handicap companies fac­
ing international competition. How­
ever, comparisons within the 
Community show only a very weak 
relationship between total labour 
costs in a country and the rate of social contributions, whether em­
ployers' contributions alone or the 
sum of employers' and employees' 
contributions (Graph 13). In Member 
States where social contributions are 
high, direct wages are relatively low 
(Spain, France), whereas in the coun­
tries where companies pay very low 
social contributions, they pay higher 
wages and employees generally pay 
higher taxes on these (Denmark). 
Since employers' contributions, 
however, are a component of labour 
costs, reducing these may reduce la­
bour costs in the first instance, but 
whether labour costs will be lower in 
the longer-term depends on how the 
finance lost by the reduction in con­
tributions is recouped and the re­
sponse of both employees and 
businesses to the reduction. In other 
words, there is no simple, causal re­
lationship between the level of social 
contributions and the total cost of 
labour. 
There is, however, a close relation­
ship between labour costs and the 
level of social protection, measured 
in terms of average expenditure per 
person (Graph 14). The question then 
arises over the direction of causation 
between the two. Is it the case that 
labour costs are high because of ex­
penditure on social protection, 
whether funded by contributions or 
taxes? Or, on the other hand, is it the 
case that expenditure on social pro­
tection is substantial because of the 
high level of economic development, 
which is reflected in the high level 
of wages and salaries and which 
creates greater social protection 
needs? In this case, the correlation 
between the level of social protection 
and labour costs would merely be the manifestation of another more fun­
damental correlation between the 
level of economic development and 
social protection (see Chapter 3, 
Graph 2). 
If social protection is developed in 
line with the economic strength of a 
country it will not endanger its com­
petitiveness. If the development of 
social protection led to an increase in 
labour costs, countries with a high 
level of social protection ought to be 
relatively uncompetitive and have a 
high rate of unemployment. How­
ever, this is not the case in the Com-
munity: there is no obvious 
relationship between social protec­
tion expenditure relative to GDP and 
trade performance, as measured by 
the growth in a country's exports or 
between the former and the rate of 
employment creation or the level of 
unemployment (Graphs 15-19 and 
Box). However, if changes in econ­
omic conditions occur which reduce 
a country's competitiveness, the 
maintenance of employment levels 
and the restoration of economic per­
formance will require a correspond­
ing reduction in unit production 
costs. If a sufficient reduction can be 
achieved through slower wage 
growth as it should, there will be no 
need for any dismantling of the social 
protection system 
Nevertheless trade performance is of 
crucial importance to the rate of 
economic growth a country can sus­
tain and, therefore, the income it can 
generate to fund social benefits. 
There need be no conflict between 
social protection and economic de­
velopment — indeed social protec­
tion may facilitate economic 
progress insofar as it makes it 
87-
Chapter 6 - Social protection: economic considerations 
Rate of social security contribution and 
wages levels in the Member States 
20 Belgium 
60 r— ™ 
60 
30 • Employ»» - -•• Emptoyn* 
2 3 4 5 
Earning» rata*»» to awwag» wag» i 60 
H 60 
40 
» 21 Denmark 
60 
40 
20 
10 Tot* ' dnplbysft ' Ernpioytsi 
50 
» 
10 
12 3 4 5 
Earning» rajata to «wag» wag» 
22 Germany 
% 
60 r 
50 Ëmptoysat 60 
50 
•i 40 
30 
20 
10 
2 3 4 5 
Earnings relatv* to avaraga wag» 23 Greeoe 
% TOM 
60 
80 • 
40 
30 k 
20 * tunployoft *' * wP&OfÊHÊ 
60 
90 
H 40 
30 
-i 20 
10 
0 1 2 3 4 S 
earning» «laflv» to avarag» wags 
88 
Chapter 6 r Social protection: economic considerations 
possible to adapt to the social 
changes which are the price of devel­
opment, namely increased urbanisa­
tion, the reduction in the size of 
families, higher labour mobility and 
the need for continuing training. 
However, it is important for Com­
munity countries to keep under re­
view the level of costs imposed on 
business and the potential implica­
tions for cost competitiveness. 
Financing 
social protection 
and employment 
The are two main questions under 
discussion on how the way so­
cial protection is funded affects em­
ployment through so-called "relative 
price effects". The first concerns the 
level of contributions and taxes le­
vied on wages as compared with 
those on other factors of production. 
For a long time, there has been a 
proposal to "make machines pay" as 
well for the cost of social protection, 
by imposing taxes on investment or 
on company assets or by taxing them 
indirectly through the value-added 
that they help to create. 
The implementation of this kind of 
proposal has been considered and 
studied in various Member States 
(Belgium, Germany, France, Italy 
and the Netherlands, in particular), 
but nothing has ever been introduced, 
primarily because of the fear that it 
would reduce investment and, in 
turn, impede the modernisation of 
companies. Ceteris paribus, the sub­
stitution of capital for labour depends 
on the relative price of labour, and 
any reduction in its price helps to increase the labour content of 
growth. However, the substitution of 
capital for labour depends also on 
technical progress and investment in­
centives (tax deductions and interest 
subsidies, for example). In a context 
of intense international competition, 
investment would appear to be com­
plementary to, rather than a sub­
stitute for, employment. Even though 
investment may in certain cases lead 
to a reduction in employment, it is 
still essential to secure jobs because 
it allows companies to modernise, 
lower their labour costs per unit of 
output and be more competitive. 
Therefore, taxing investment could 
also be detrimental to employment. 
What applies to capital, however, is 
not necessarily true of another factor 
of production, namely energy and, 
more generally, natural resources as 
a whole. This is why debate is now 
focused on the question of whether 
the receipts from a possible tax on 
energy consumption might benefi­
cially be used to reduce labour costs 
in Community countries by lowering 
social contributions or taxes on low 
wages. Indeed, it seems illogical to 
maintain very low prices for natural 
— and scarce — resources while the 
most freely available resource, un­
skilled or semi-skilled labour, is 
made expensive by the social con­
tributions and taxes levied on it. 
The other question under discussion 
concerns the way in which the rates 
of social contribution vary with the 
level of wages. Graphs 20 to 31 show 
the rates of compulsory social con­
tributions paid by employers and em­
ployees in each of the Member 
States. Only Belgium and Portugal 
have contribution rates which do not vary with the level of wages. In 
France, rates are only slightly re­
gressive if contributions to the com­
pulsory retirement scheme for 
managerial staff are included. In the 
other Member States, there is a ceil­
ing on contributions which for both 
employers and employees are zero 
on earnings above 1 to 2 times the 
average wage in all countries apan 
from the UK. Here there is an upper 
limit on employees' contributions 
around 1.5 times the average wage 
but there is no upper limit for em 
ployers' contributions. Here also 
contributions for both employers and 
employees up to the ceiling are pro­
gressive: nothing is payable on earn­
ings below 20% of the average wage 
and the marginal rate rises progress­
ively to reach its peak on earnings oi 
around 70% of the average wage. 
In Member States where there is .i 
ceiling on social contributions and hi 
which rates are therefore higher on 
low and average wages, there can be 
a negative effect on the employmem 
of unskilled workers. This is why JT, 
some countries, notably in France, 
there are moves towards reducing the 
proportion of social protection fin 
anced by contributions and increasing 
funding through taxes. There is, in 
fact, a case for using tax receipts tc 
finance benefits which have nothing 
to do with the loss of earnings (such 
as family allowances, medical care 
and old-age pensions which are no: 
related to the length of their working 
life or the income earned) and u 
reserve contributions for the financ­
ing of insurance-based benefits calcu­
lated on earnings when in wort> 
(old-age pensions, sickness or inv; 
lidity benefits an-i unemplovm^'it 
-89 
Chapter 6 - Social protection: economic considerations 
Rate of social security contribution and 
wages levels in the Member States 
24 Spain 
% Tout firaptoywc Employ— 
60 
50 
90 
20 
"l';i in f ; ;• ni *o.-; 
30 
12 3 4 5 
Earning» talatva to avaraga wag» 2 3 4 5 
Earring» rataffra to average wag» 
26 Ireland 
% 
60 
90 
90 r—"• Gfflp*oywv " GfnptaywM 
1 20 
2 3 4 S 
Earning» raiattve to avacag» wag» 12 3 4 5 
Earning» telafre to wag» wag» 
-90-
Chapter 6 - Social protection: economic considerations 
compensation paid to workers who 
have lost their jobs). 
Economic effects 
of benefits 
Current economic analysis has 
focused primarily on the nega­
tive effects which social benefits 
might have, particularly on incen­
tives to work or save, but has not 
reached any firm conclusions. Litde 
consideration has been given to the 
positive aspects of social benefits, 
either because some writers, con­
vinced that social protection amounts 
to excessive public intervention and 
does away with the free exercise of 
personal responsibility, have deliber­
ately ignored them, or because, given 
that the objectives of social protec­
tion are primarily social in nature, its 
efficiency has been judged in terms 
of the reduction of income differen­
tials, its success in combating pov­
erty, the effect on the standard of 
living of the elderly or on the state of 
people's health. 
The effectiveness of social benefits is 
briefly considered below before ad­
dressing the question of their effect 
on incentives to work and save. 
Effectiveness 
of social benefits 
The cost of benefits in financial 
terms is well known, as is the fact 
that their objective is to help to solve 
the social problems of poverty and in­
security. However, their effectiveness 
is difficult to measure since to do so would mean comparing the present 
situation in a given country with a 
hypothetical one in which there was 
no system of social protection. It is 
virtually impossible to predict, how­
ever, even approximately, how dif­
ferent sections of the population 
would behave in such circumstances 
and how they would try — and poss­
ibly succeed — to protect themselves 
against certain risks. Nevertheless, 
there can be no question that social 
protection has done much to improve 
the health of the population, extend 
the length of education (through fam­
ily allowances), reduce social in­
equality and raise the standard of 
living of the elderly. In an economic 
environment in which the combina­
tion of rapid technical progress and 
particularly intense international 
competition can lead to exclusion 
and poverty, social protection is a 
powerful factor in favour of social 
cohesion. Furthermore, help in find­
ing a job and the various benefits 
designed to encourage training and 
retraining or to promote geographi­
cal and labour mobility help to com­
bat unemployment. 
Social benefits 
and work incentive 
The question of the effect of so­
cial benefits on the incentive to 
work has been the subject of 
numerous theoretical and empirical 
studies, particularly as regards old-
age pensions and unemployment 
compensation. Old-age pensions 
The activity rate of those of 65 
and over has fallen sharply in the 
various Western industrialised coun­
tries over the past 30 years, espe­
cially in the 1970s. This has been 
largely due to the extension of pen­
sion schemes, the improvement in 
the level of benefits provided and the 
various early retirement measures in­
troduced by governments in certain 
countries (Germany, Belgium, Den­
mark, Spain, France and Italy, in par­
ticular) to combat unemployment 
and promote the employment of 
young people. 
Although it is normal for old-age pen­
sions to encourage old people to retire 
from work since their purpose is pre­
cisely to enable people to do this, 
there is nevertheless a contradiction 
between the tendency for life expec­
tancy to increase and the tendency for 
the average length of working lives to 
decline. Not only does this reinforce 
the worsening of the relationship be­
tween those in work and those in re­
tirement, but it also turns people who 
are still capable of working away 
from employment In view of the 
ageing of the population, it might be 
better to follow the example of a num­
ber of countries and encourage people 
to retire later by giving them respon­
sibilities better suited to their abilities 
or by establishing — or in some cases 
developing — phased retirement 
schemes. It is these principles of flex­
ible and phased retirement which are 
the focus of the Council Recommen-
dation of 10 December 1982 
(82/857/EEC ) on the principles of a 
Community policy on the age of re­
tirement 
91 
Chapter € - Social protection: economic considerations 
Rate of social security contribution and 
wages levels in the Member States 
•92-
Chapter 6 - Social protection: economic considerations 
Unemployment 
compensation 
The question of whether or not 
compensation for unemploy­
ment is a cause of unemployment 
('induced unemployment') is also 
the subject of much discussion. This 
dates back a long time, but interest 
has been renewed since the mid-
1970s with the growth in unemploy­
ment and the considerable sums of 
money paid out in benefits. (See Em­
ployment in Europe, 1992, Chapter 7 
for a review of the effects of unem­
ployment benefits on the labour mar­
ket) 
The main arguments used in favour 
of the existence of induced unem­
ployment are based on the theory of 
the reserve wage or on the notion of 
moral risk. 
The expression reserve wage is used 
to denote the wage below which 
someone unemployed will refuse to 
work, taking account of their pre­
vious earnings, their skills and abil­
ities, other sources of income, and 
above all, the level of replacement 
income they receive from unemploy­
ment benefits. The supporters of this 
theory argue that the benefits re­
ceived by the unemployed increase 
the reserve wage and wage levels as 
a whole, because they will not accept 
a job unless they earn more after tax 
and other expenses than they would 
have received from unemployment 
benefits; otherwise, they will feel 
they are working for nothing. As a 
result, wages cannot be lower than 
unemployment benefits, even for the 
least skilled workers. This means that 
the level of unemployment compen­
sation is like a floor which affects the Social benefits and the "poverty trap" 
The term "poverty trap" is used to describe the situation in which unem­
ployment benefits and sodal assistance hdp to maintain and perpetuate 
poverty. For low paid jobs, the payment of taxes and contributions com­
bined with the reduction in benefits might sometimes result in the earnings 
received being hardly any greater than the unemployment benefit or social 
assistance payable when a person is not working at all. 
This is reflected in the implicit marginal rate of tax, defined as all the taxes, 
contributions and other charges a person who was previously unemployed 
has to pay plus the social allowances which are lost in taking up a job. If 
this rate is high, the person in question benefits little from their efforts to 
end their dependence on unemployment benefits or sodal assistance. High 
rates create genuine poverty traps which encourage people on low incomes 
to remain dependent on social programmes and which may even encourage 
people on low wages to stop working at all, since their disposable income 
would be hardly any lower as a result. This serves to increase the burden 
imposed by unemployment benefits and sodal assistance, to reduce the base 
for contributions and income tax and, as a result, to create financial 
difficulties for systems of social protection. 
It is precisely to avoid situations of this kind that systems guaranteeing a 
minimum level of income in Some Member States (Belgium, France, 
Luxembourg or the Netherlands) allow people, albdt to a fairly limited 
extent, to continue to draw minimum levds of benefit, in addition to their 
wages. In the same way, countries like Bdgium, Denmark or Spain allow 
someone who is fully unemployed and receiving benefit who accepts a 
part-time job to receive both the wage for the work performed and a partial 
unemployment benefit. A similar system exists in the UK (in the form of 
family credit) for people who accept low-paid jobs. 
The poverty trap could be completely eliminated by certain radical methods 
which are sometimes proposed. This is particularly true of universal basic 
income (or sodal dividend) schemes under which everyone receives a basic 
amount, irrespective of their means. This would replace all existing benefits 
and could be combined with earnings from work. 
However, considerable sums of money would be needed to finance this new 
benefit, which would have to be fixed at a sufficient level to give a decent 
standard of living to anyone with no other source of income. Its introduction 
would require substantial new levies on income, which those on higher 
levels of income would be unlikdy to accept As emphasised above, in the 
end all systems of sodal protection run up against the following question: 
how much redistribution of income is a sodety willing to accept? 
93-
Chapter 6 - Social protection: economic considerations 
whole hierarchy of wages. Conse­
quently, changes in economic condi­
tions, which would imply a reduction 
in real wages if market forces could 
operate freely, have little effect on 
rates of pay and tend to lead instead 
to unemployment — the benefits re­
ceived by the unemployed are there­
fore an obstacle to wage flexibility. 
As a result, the more generous these 
benefits are, the higher the reserve 
wage and wage levels as a whole. 
Hence an increase in the reserve 
wage reduces the range of jobs ac­
ceptable to anyone who is unem­
ployed and tends to lengthen the time 
spent looking for employment. 
Analyses based on the notion of 
moral risk emphasise that paying 
compensation for unemployment has 
two kinds of effect, which both work 
in the same direction. On the one 
hand, by providing a means of sup­
port it reduces the incentive for 
people to look for work (the income 
effect) and, on the other, it reduces 
the cost of leisure relative to work­
ing, since leisure is paid, and encour­
ages a substitution of leisure for work 
(substitution effect). The higher the 
rates of compensation — that is, the 
smaller the difference between 
wages and benefits — the greater 
these effects will be. More precisely, 
it is argued that compensation for 
unemployment: 
gives an incentive for employees 
to leave their jobs voluntarily, 
especially in order to find a more 
attractive or better paid job, and 
for employers to reduce their 
workforce in order to offset the 
effects of a fall in production; • lengthens the time spent looking 
for a job: by reducing the costs 
of search, it supposedly encour­
ages the unemployed to be in 
less of a hurry and to be more 
demanding as regards the condi­
tions of employment that they 
are prepared to accept; 
• encourages some people to enter 
the labour market merely to ful­
fil the conditions which will 
entitle them to unemployment 
benefits when they quit theirjob, 
or not to leave the labour market 
until they have exhausted their 
entitlement to benefit. 
While these diverse arguments un­
doubtedly contain an element of 
truth, it is one which is hard to quan­
tify, and the various econometric 
studies aimed at measuring the effect 
of unemployment benefits on the rate 
or duration of unemployment have 
produced only weak results. This is 
because they are seeking to isolate a 
phenomenon, whose effect is diffi­
cult to measure among all the various 
possible causes of unemployment. In 
spite of the various studies which 
have been carried out and the various 
comments to which they have given 
rise, it is still hard to say whether 
or not unemployment compensation 
affects the level of unemployment 
and, if so, whether the effect is 
positive or negative. The following 
remarks provide some explanation: 
• Before it is assumed that the 
kinds of behaviour described 
above are actually observed in 
reality, it is important to remem­
ber that to receive unemploy­
ment benefits presupposes a 
genuine availability for work, that is to say, the person must be 
actively seeking work and has an 
obligation to accept a job offer 
from the employment services if 
it accords with their qualifica­
tions. 
• Work is not merely a source of 
income but also a way for people 
to become integrated into so­
ciety, develop relationships and 
express themselves. People 
might, therefore, quite rationally 
prefer a job to being unem­
ployed, even if they receive 
benefits, because of social norms 
and in order to maintain their 
skills which might be diminished 
during periods of inactivity. 
• Unemployment benefits may en­
courage people to spend more 
time looking for a job, but this 
should not be viewed from a 
purely negative angle. By giving 
the unemployed more time to 
find a job better suited to their 
abilities and aspirations, benefits 
might also lead to a better 
matching of skills and jobs. 
Some lengthening of the dura­
tion of unemployment might, 
therefore, benefit both the indi­
vidual and the economy if it 
leads to a better job. In this way, 
unemployment benefits may 
have a positive effect on the 
flexibility of the labour mar­
ket since, by reducing the 
financial risk associated with 
unemployment, they encourage 
workers to accept less certain 
jobs, especially in small firms. 
• Unemployment induced by 
benefits does not appear to have 
been a major factor behind the 
94-
Chapter 6 - Social protection: economic considerations 
increase in unemployment in the 
majority of developed countries 
in the West from the mid-1970s 
on. The long-term fall in world 
economic growth, the rapid in­
crease in active population and 
the effects of technological 
change and industrial restructur­
ing on employment would ap­
pear to bear a far greater and 
more direct responsibility for the 
rise in unemployment. The num­
ber of long-term unemployed, 
who receive little or no compen­
sation, has risen sharply over the 
past 15 years and has been the 
main reason for the spread of 
poverty in many countries. 
Neverheless, the level and duration 
of unemployment benefits might ad­
versely affect incentives to work in 
certain circumstances, and there is, 
therefore, a delicate balance which 
needs to be struck between the aim of 
maintaining incentives and provid­
ing an appropriate level of social pro­
tection. 
Old-age pensions 
and saving 
The question of the relation 
between pensions and savings 
provoked much controversy and 
generated a great deal of literature in 
the 1970s. It was argued, in particu­
lar, that a pay-as-you-go pension 
scheme (ie one where the contribu­
tions of those currently in work pay 
for those in retirement) would in all 
probability lead to a reduction in per­
sonal savings, since people would be 
sure of being able to draw a pension 
financed by levies on people in work when they retired and would, there­
fore, have less need to save for then-
old age. However, this kind of argu­
ment has less validity if other con­
siderations are taken into account. 
It is equally the case that the exist­
ence of old-age pension schemes 
gives an incentive for people to retire 
earlier. They may, therefore, try to 
save more during their working lives 
in order to have a higher standard of 
hving over a longer period of retire­
ment. 
Moreover, insofar as old people who 
have retired would, at least partly, be 
supported by children in work if old 
age pension schemes did not exist, it 
is possible to regard such schemes as 
largely substituting for intergener-
ational transfers within the family. In 
other words, they are likely to have 
the effect of transforming private 
transfers into social transfers leaving 
overall savings much the same. 
The theoretical arguments are, there­
fore, contradictory, and provide no 
clear grounds for concluding that 
pay-as-you-go pension schemes are 
likely to affect the amount of house­
hold savings. The econometric 
studies are no more conclusive. Al­
though a great many have been 
undertaken on time-series data for a 
given country, cross-sectional data 
for a number of countries or cross-
sectional data for an individual 
country, they end up with contradic­
tory results, which vary considerably 
— often with opposite signs — ac­
cording to the data used, the period 
studied, the explanatory variables in­
cluded in the equations and so on. 
The most that can be said is that the 
idea that pay-as-you-go pension schemes have a negative effect on 
savings remains unproven. 
As is well known, in coming years 
those in work will need to finance the 
pensions of a larger number of people 
in retirement. Pay-as-you-go pension 
schemes are often contrasted with 
funded pension schemes (ie ones 
where current contributions are in­
tended to finance the future pensions 
of those paying), which are supposed 
to be more effective in coping with 
this unfavourable demographic 
trend. However, as emphasised by 
the Commission in its Communica­
tion of 22 July 1991 on supplemen­
tary social security schemes 
(SEC 91, 1332 final), it is perhaps an 
illusion to imagine that funded pen­
sion schemes are not liable to be 
affected by these demographic-
changes. 
The implicit effect of any method of 
financing retirement is essentially to 
share the resources available for con­
sumption between those in work and 
those in retirement. A funded pen­
sion scheme cannot solve this prob­
lem of distribution unless it succeeds 
in increasing the volume of resources 
which a given level of funding will 
generate some time in the future. 
This can only be the case if the funds 
put aside for those who will retire in 
the future happen to be invested in 
other countries where returns art-
higher or if it leads to a strengthening 
of productive capacity, which will 
enable future expenditure on retire­
ment to be financed more easily. It is 
open to question whether a funded 
scheme is actually likely to have such 
effects. Funding might in some sense 
strengthen the position of those in 
retirement insofar as they hold assets 
95 
Chapter 6 - Social protection: economic considerations 
to reinforce their rights to available 
resources. However, the real value of 
these assets may be reduced by the 
normal interplay of supply and de­
mand, which will tend to reflect the 
demographic imbalance. 
In any event, the introduction of 
funded pension schemes or the accu­
mulation of substantial reserves 
under present pay-as-you-go 
schemes would almost certainly have 
an effect on the working of the econ­
omy. Greater recourse to funded 
schemes as a means of financing re­
tirement may create a long-term 
source of capital and might, there­
fore, seem to be a way of contributing 
to more rapid growth. 
This, however, is to take a very par­
tial view and to ignore the effects of 
savings on demand. In practice, an 
increase in contractual saving is 
likely to be at the expense of com­
pany profits. As a result, companies, 
as private consumption declines, 
would need to have greater recourse 
to borrowing if investment and, 
therefore, economic growth, is to be 
maintained. In other words, a shift 
from pay-as-you-go to funded pen­
sion schemes is likely to necessitate 
a change in the behaviour of com­
panies. This needs to occur smoothly 
if investable funds are to be recycled 
efficiently. Overall, however, there is 
little reason to expect higher growth 
rates to be achieved, unless greater 
recourse to the capital market leads 
to a more efficient allocation of 
investment funds. 
96-
Chapter 7 ~ Systems of health care In the Community 
Chapter 7 Systems of health care 
in the Community 
In the text of the Recommendation 
on the convergence of social pro­
tection objectives and policies, the 
Council of the European Com­
munities recommends that Member 
States should: "... organise the role of 
social protection in preventing ill­
ness and in treating and rehabilitating 
the persons concerned so as to meet 
the following objectives: 
(a) under conditions determined by 
each Member State, to ensure 
for all persons legally resident 
within the territory of the Mem­
ber State access to necessary 
health care as well as to facilities 
seeking to prevent illness; 
(b) to maintain and, where necess­
ary, develop a high-quality 
health care system geared to the 
evolving needs of the popula­
tion, and especially those arising 
from dependence of the elderly, 
to the development of patho­
logies and therapies and the need 
to step up prevention,...". 
As noted in Chapter 4, there are prob­
lems in assessing how far these ob­
jectives are currently being met 
because of the difficulties in measur­
ing quahty of service in this area. But the Recommendation also 
stresses the fact that "social protec­
tion systems must be administrated 
with maximum efficiency having re­
gard to the rights, needs and situ­
ations of those concerned, and with 
maximum effectiveness in terms of 
organisation and functioning". The 
concern of this chapter is to review 
the measures which countries have 
taken in recent years to contain the growth in costs of health care provi­
sion, which has been a primary aim 
throughout the Community. While 
these measures may themselves have 
some effect on the quahty of care, no 
attempt is made here to consider this 
potential problem which could 
become increasingly important in fu­
ture years as the pressure on services 
grows. 
32 Total and public expenditure on health care in relation to 
national expenditure in the Community, 1970,1980 and 1991 
% national expenditure (GOP less exports plus imports) 
10 r i 10 
M Total expenditure M PubHc expenditure 
8 1-
6 H 
Gft P E.... ...,U UK DK <«- B I NL D F 
PubSc expenditure data GRL.P 1890 Left bar 1970, mMdte bar 1980. right bar 1991 
-97 
Chapter 7 «- Systems of health cam In the Community 
All Member States have found it dif­
ficult to contain health costs. In each 
case, public and private expenditure 
on health accounts for a substantial 
proportion of National Expenditure 
(NE) (Graph 32— which is based on 
OECD Eco-Santé data). 
Costs, moreover, have tended to rise 
over time. Over the 1970s and the 
1980s, health expenditure increased 
significantly in most part of the 
Community in relation to NE, partly 
reflecting the slowdown in the rate of 
economic growth. There were, how­
ever, a few exceptions. In particular, 
whereas in all Member States health 
expenditure increased relative to NE 
in the 1970s, in Luxembourg and Ire­
land it declined in the 1980s and in 
Denmark it rose only marginally. The rise in health spending in the 
1980s in particular partly reflects the 
ageing of the population. Since the 
demands imposed on the health ser­
vice by the elderly are substantially 
greater than for the rest of the popu­
lation — indeed in all countries most 
health expenditure goes to treating 
and taking care of the very old — any 
growth in the proportion of old 
people will inevitably tend to in­
crease the need for expenditure. Be­
tween 1980 and 1991, the number of 
people aged 75 and over — who im­
pose a particularly heavy burden on 
health services — went up signifi­
cantly in all Member States in rela­
tion to total population (Graph 33). 
This was especially true of the South­
ern countries of the Community, 
where in each case the proportion 
increased by around 30% or more, so putting considerable upward press­
ure on health expenditure at the same 
time as services were being extended 
to cover everyone living there. 
In the latter part of the 1980s, health 
expenditure stabilised or even de­
clined in relation to NE in most coun­
tries as growth picked up. Recent 
policy debates and the reforms intro­
duced in a number of Member States, 
however, show that cost containment 
remains a topic of major concern for 
the 1990s, especially in the context of 
the present recession and the budget 
constraints on public expenditure 
growth. The prospect of a continuing 
ageing of the population throughout 
the Community reinforces this con­
cern. 
33 Population aged 75 years and over in the Member States, 
1980 and 1991 
8 r 
6 \-
4 f % total population 
•v,8j 
IRL NL GR B DK UK In all Member States, public expen­
diture represents the main compo­
nent of health spending — around 
75% of the total for the Community 
as a whole (Table 23). In most parts 
of the Community, however, the im­
portance of public expenditure de­
clined over the 1980s and its weight 
in NE increased only slowly or fell. 
Nevertheless, systems of public 
health care vary considerably across 
the Community, a fact which needs 
to be borne in mind when assessing 
performance. 
Some measures to achieve cost con­
tainment are specific to the pecu­
liarities of a particular system, while 
others are general to all systems. 
These need to be distinguished if use­
ful conclusions are to be drawn. 
98-
Chapter 7 - Systems of health care In the Community 
Basic principles 
of health care 
systems 
Financing 
The public health services in a 
number of Member States are 
financed from general taxation, in 
others they are organised and funded 
wholly or partly on an insurance 
basis. Denmark, Ireland, Portugal 
and the UK belong to the first group 
of countries. Italy, Greece and Spain 
have a mixed system under which 
part of finance comes from insurance 
contributions, the rest out of taxation. 
Belgium, France, Germany, the 
Netherlands and Luxembourg have 
wholly insurance-based systems. 
In this third group of countries, ex­
penditure on health care tends to be 
higher than elsewhere, either because 
an insurance-based system in itself 
increases costs or because the stand­
ard of service is higher in these coun­
tries. Moreover, whereas countries 
where expenditure is financed from 
taxes, either wholly or partly, can in 
principle contain spending by limi­
ting the cash available for the health 
budget, this option is not so open to 
those with an insurance-based sys­
tem. 
Coverage Table 23 Public expenditure on health care as 
a % of total expenditure on health care 
1970 
B 87.0 
DK 86.3 
D 69.6 
GR 53.4 
E 65.4 
F 74.7 
IRL 82.2 
I 86.4 
L na 
NL 84.3 
P 59.0 
UK 87.0 
USA 37.2 
Japon 69.8 
• 1990 figures 
Source: OECD Eco-Santé database 1980 
83.4 
85.2 
75.0 
82.2 
79.9 
78.8 
82.2 
81.1 
92.8 
74.7 
72.4 
89.6 
42.0 
70.8 1991 
88.9 
81.5 
71.8 
77.0* 
82.2 
73.9 
75.8 
77.5 
91.4* 
73.1 
61.7* 
83.3 
43.9 
72.0 
H ealth care systems in all Mem­
ber States are available to all the people living there. This is a mat­
ter of principle in the case of coun­
tries where health care is financed 
from the general budget. 
So far as the countries with mixed 
systems are concerned, in Italy the 
whole population is covered. Though 
the system is contributory, those with 
no earnings are exempt from paying. 
In Spain, while the system is mainly 
financed by taxes, it operates on an 
insurance basis, covering 99% of the 
population. 
The coverage of the pubhc health 
insurance systems in Belgium, 
France, Germany, Luxembourg and 
the Netherlands ranges from 100% in the Netherlands (only for serious 
illness) and Luxembourg to 92% in 
Germany, because many civil ser­
vants and most self-employed who 
are covered by private schemes — 
which are important in Germany — 
are excluded. In all these countries, 
people not covered by public or pri­
vate health insurance have ultimate 
recourse to social assistance which 
also provides health care. 
In Greece, the situation is special in 
that everyone is either covered by the 
tax — financed OGA, if they live in 
rural areas, or by the largely con­
tributory IKA system, if they live in 
urban areas, or by one of more than 
200 smaller schemes. 
-99-
Chapter 7 - Systems of health care in the Community 
The objective of the Council Recom­
mendation concerning universal ac­
cess to health care is, therefore, met 
in all Member States and there is no 
evidence of any tendency to exclude 
high-risk people as a way of reducing 
costs. 
Benefits 
and services 
In the Member States with pure 
pubhc health insurance systems 
the method of providing services is 
indirect in the sense that it is based on 
contracts between the insurers and 
the providers, with doctors being 
paid on a fee-for-service basis, apart 
from in the Netherlands where pay­
ment is on a per capita basis. 
In the other Member States, the pro­
viders are, in part at least, employed 
by the public health service itself. In 
Denmark and the UK, this is the case 
for hospital staff while all the other 
people involved work on a contract 
basis. In Ireland and Italy, public hos­
pitals are funded by the national 
health service and specialists are in 
part employed by the service. In 
Spain and Portugal, general practi­
tioners, and in Greece dentists as 
well, are also employed by the public 
health service. As a result, doctors in 
Greece and Portugal are salaried em­
ployees; in Spain, Italy and Ireland, 
they are paid on a per capita basis, 
while in Denmark and the UK, they 
are paid partly according to the num­
ber of people treated, partly accord­
ing to the services supplied (eg 
certain activities for disease preven­
tion in the UK). These different methods of organis­
ing the provision of services have 
different effects on health care ex­
penditure and influence the measures 
which can be taken to contain costs. 
Approaches to 
cost containment 
There are different ways of con­
taining costs. One way is to re­
duce demand, either through shifting 
some of the cost of service provision 
onto the patient or by excluding cer­
tain treatments or drugs altogether 
from the service. The best way of 
reducing demand from the point of 
view of public health is through 
health promotion, but measures in 
this area and their impact on expen­
diture are difficult to assess. 
Another way is to reduce supply, es­
pecially through budget control, 
mainly in countries with a tax-fin­
anced national health service, though 
also in countries with insurance sys­
tems. This can include measures to 
reduce manpower, either by banning 
recruitment to the national health ser­
vice or by limiting the entry of doc­
tors to insurance-based practices and 
to cut back on supplies through pros­
cribing expensive drugs. 
The third way is to increase the effec­
tiveness of the system by promoting 
alternatives to inpatient care, reduc­
ing the length of stay in hospitals and 
using expensive medical equipment 
more efficiently. This can be 
achieved either by cutting budgets or 
by introducing incentives. A major issue is whether to introduce 
market forces into the system or to 
concentrate on planning measures 
like controlling the prices paid for 
goods and services. A related issue is 
whether or not to encourage particu­
lar groups of people to join private 
health insurance schemes, which 
may reduce public expenditure but 
not necessarily total spending on 
health. 
Examples of all these methods are to 
be found in Member States. Since 
they all have similar problems, it is 
not too surprising that they have 
chosen similar ways of containing 
costs, the common objective being to 
organise the provision of health care 
in such a way that services can be 
assured without excessive increases 
in expenditure. 
Cost containment in 
tax-financed health 
care systems 
Where health care is funded 
through general taxation, 
pubhc authorities usually set a spe­
cific budget for health, which in prin­
ciple should make it easier for them 
to control costs. 
Denmark 
In Denmark, the central govern­
ment fixes the total which local 
communities (counties) can spend on 
health care. This determines employ­
ment and the availability of services. 
Since local authorities have a strong 
incentive to keep within the budget, 
100 
Chapter 7 ~ Systems of health care in the Community 
there is pressure to increase 
efficiency, an example being the pro­
vision of institutional care in nursing 
homes for people who do not need 
hospital treatment. 
Tight budgets have also resulted in 
the more intensive use of hospitals, 
the average length of stay declining 
from 11.5 days in 1983 to 8.6 days 
in 1988, while admissions increased 
from 984 000 to 1 074 000. The 
counterpart is a considerable expan­
sion in outpatient treatment. In addi­
tion, in order to control the cost of 
drugs, generic substitution of pres­
cribed drugs was introduced in 1991. 
Under a fixed budget system, pa­
tients do not necessarily have an in­
centive to behave in ways which save 
costs. Some form of cost-sharing is 
therefore used to influence beha­
viour. Patients are charged a propor­
tion of the cost of prescriptions. For 
spectacles, there is a subsidy of 10% 
while dental care is free of charge for 
children and is subsidised for people 
between 18 and 30, but everyone else 
pays the full cost of treatment. Be­
cause, in general, patients are 
charged a percentage of the cost of 
health care treatment, rather than pa­
ying a fixed amount, their awareness 
of the costs involved is enhanced. 
Ireland 
The system in Ireland is based on 
similar principles to that in Den­
mark. The main difference is that 
there are two different categories of 
eligibility depending mainly on in­
come. For the lowest income group 
(Category I), covering 35% of the population, all standard services are 
provided free of charge. Other people 
are covered by Category II, which 
means that they have to pay certain 
charges. 
As in Denmark, there is tight control 
on the health budget which served to 
reduce pubhc expenditure on health 
from 6.7% of NE in 1980 to 6% in 
1991. This was achieved by the ra­
tionalisation of hospitals, with a 
number being closed, and a reduction 
in the average length of stay from 9 
days in 1984 to 8 days in 1988, 
though also by an increase in waiting 
lists. 
Budget constraints have also led to 
the development of alternatives to 
hospital care, with day care and day 
surgery being encouraged and geria­
tric services being improved, as well 
as to restrictions on the introduction 
of expensive new medical techniques 
and equipment. In 1989, the re­
muneration system for general prac-
titioners was changed from a 
fee-for-service basis, which encour­
aged the recommendation of repeat 
visits, to one based on the numbers of 
people registered with them. 
Health care is provided free of charge 
to people on low income. Other 
people have access to the pubhc fa­
cilities of the national health service 
but are subject to a flat-rate charge 
(of £ 15 a night) for hospital treatment 
and are liable for consultancy and 
additional accommodation fees if 
they make use of private treatment. 
In the case of drugs, to limit costs, 
certain products cannot be obtained 
free of charge. A recommended list 
of drugs is in the process of being introduced and there is an agreement 
with the pharmaceutical industry to 
relate prices in Ireland to those in the 
UK. 
Ireland has succeeded in reducing 
pubhc expenditure on health consid­
erably by tight budget control and by 
concentrating care on the low income 
members of society. By leaving 
health care protection of those on 
higher incomes partly to their own 
initiative, there are incentives for 
cost containment. 
The UK 
In contrast to Ireland, everyone 
resident in the UK is entitled to use 
the National Health Service, which is 
predominantly funded through 
general taxation. 
As in Denmark and Ireland, there is 
tight control over the health budget 
which is fixed by central govern­
ment, which also controls the number 
of medical staff employed. Control 
over the general practitioner service 
is achieved by fixing the level of 
remuneration of doctors who work 
on a self-employed basis. 
Over the years, the government has 
attempted to limit expenditure by 
putting pressure on health authorities 
to increase efficiency. This has pro­
duced significant savings, especially 
through the rationalisation of in-pa­
tient care, but it has also been argued 
that this has partly been achieved at 
the expense of standards of care. 
Budget constraints have forced 
health authorities to reduce the num­
ber of hospitals and available beds, 
-101-
Chapter 7 - Systems of health cam In the Community 
the latter declining from 458 000 in 
1980 to 365 000 in 1989. 
For drugs, prices are not controlled 
directly, but industry profits are sub­
ject to review and restraint. In 1985, 
a list of drugs not to be supplied under 
the NHS was introduced, though 
nearly all of them could be bought 
without a prescription. 
Measures of cost-sharing are limited 
in the UK. Although there is a pres­
cription charge for drugs, this is flat-
rate and, because of exemptions 
(mainly for retired people and child­
ren), applies to only around 16% of 
prescriptions issued. While people 
are charged for dental care, 30% are 
exempt and those who pay have 
about 25% of the costs subsidised. 
For certain operations under the NHS 
there are long waiting lists and in a 
number of cases, the spread of new 
technology has been delayed by cost 
considerations. The government 
faces pressure to improve the system, 
but the principle of a free health ser­
vice open to all is not under chal­
lenge. This leads to increased 
emphasis on improving efficiency, 
though it is doubtful whether im­
provements can be made without in­
creasing expenditure. 
The aim of the reform implemented 
by the government in 1991 was to 
introduce market forces into the Na­
tional Health Service. The responsi­
bility for purchasing was separated 
from the responsibility for providing 
services, so as to increase the incen­
tive to confront demand with the 
costs of supply and to encourage 
more emphasis to be given to pre­
vention rather than cure. There are, however, doubts whether this new 
system is really working as it was 
intended, since the incentives may 
not be attractive enough and since the 
quasi-market created is not the same 
as a real market. 
Because of tight control over expen­
diture, the UK does not have a serious 
problem of containing costs. Never­
theless, like other Member States, the 
UK cannot avoid the costs of health 
care increasing. Here, however, it has 
not led to increases in pubhc expen­
diture, which has remained much the 
same in relation to NE since 1980, 
but to shortages and an increased in­
centive for people to subscribe to pri­
vate health insurance schemes. 
Portugal 
The pubhc health care system in 
Portugal (the National Health 
Service) is based on the same prin­
ciples as those described above. The 
Health Service operates pubhc hos­
pitals and employs full-time salaried 
general practitioners to provide care. 
Drugs are dispensed by private phar­
macies and private laboratories are 
used for diagnoses. 
Employment of health care staff in 
the public sector facilitates the task 
of controlling public expenditure on 
health. For services provided by the 
private sector, this is more difficult 
Nevertheless, a cash limit is applied 
to total National Health Service ex­
penditure: if there are increases in 
private expenditure on drugs or diag­
noses, this leads to reductions in hos­
pital spending during the financial year, which puts pressure on hospi­
tals to achieve savings. 
The government attempts to control 
expenditure on drugs and has suc­
ceeded in achieving the lowest drug 
prices in the Community by requir­
ing prices not to exceed the lowest in 
five other named countries. 
Pubhc expenditure on health was 
kept relatively stable during the 
1980s, but waiting times in the main 
cities increased. 
Over the years, Portugal has exer­
cised different methods of cost-shar­
ing. The system started in 1981 with 
flat-rate charges for home and office 
visits, with exemptions for people 
such as the elderly, chronic sick, 
pregnant women and children under 
the age of one. In 1982, charges were 
extended to outpatient care and acci­
dent and emergency departments. 
Patients, except those on very low 
incomes, were required to pay 10-
50% of hospital bills, depending on 
income, 25% of the cost of drugs 
manufactured in Portugal and 40% of 
the cost of those manufactured 
abroad plus a flat-rate charge. 
As a result of charges, the number of 
services demanded declined consid­
erably. Since the charges were un­
popular most of them were abohshed 
by the incoming government in 1983 
and, despite legislative changes in 
1986 to allow them to be applied, 
they have not been reintroduced 
since. 
In the case of drugs provided by the 
private sector, around 10% are free 
of charge and for the remainder the 
patient has to pay either 20% or 50%, 
102 
Chapter 7 - Systems of health care In the Community 
which, it is claimed, hits the elderly 
and the chronically ill. For dental ser­
vices, patients pay a large part of the 
cost. 
Italy 
The Italian system is financed 
both by taxes (47%) and by so­
cial security contributions (53%). 
However, it has similar features to 
those in the other countries reviewed 
above, since it also covers the whole 
population. Health care expenditure 
has increased steadily over the past 
decade. 
The Ministry of Health determines 
the budget for each region and prov­
ince and the government has the 
power to fix the price of drugs and to 
decide the number of people em­
ployed — or contracted — in the 
health sector as well as their pay. 
Planning of health care at the re­
gional level is subject to central gov­
ernment control. Containing costs, 
however, poses great difficulty partly 
because budgets are set substantially 
below the levels considered necess­
ary by the regions and provinces. 
The result has been not cutbacks in 
services but deficit spending, which 
is legally permitted and which, there­
fore, enables provinces and regions 
to evade the intended cost reductions. 
A ban on recruitment proved to be a 
more cost-effective approach, but 
before long this led to a shortage of 
nurses. In the hospital sector, at­
tempts to contain costs tend to be 
concentrated on reducing the over-
supply of beds and little effort is 
made to encourage alternatives to hospital treatment. Although there is 
a restricted list of drugs available 
from the NHS, this is of limited ef­
fectiveness in containing costs since 
many new and expensive drugs are 
included when they appear on the 
market. 
For nearly all drugs prescribed under 
the NHS — except the so-called life-
saving drugs — patients pay 40% of 
the cost plus a flat-rate charge. Some 
25% of patients, accounting for 
around 65% of the drugs prescribed, 
are, however, exempt from paying. 
In 1989, a charge of 30% (up to a 
maximum of 30 000 Lire) was intro­
duced for certain diagnostic proce­
dures like X-rays, and around the 
same time charges for specialist 
visits and spa treatment were intro­
duced. (However, the imposition of a 
daily charge for stays in hospital met 
resistance and was withdrawn.) 
Although there is a charge for dental 
treatment, it amounts to only 10% of 
the fee for private treatment, while 
for spectacles only a small nominal 
sum is payable. From January, 1993 
higher income earners have to pay a 
fixed additional annual charge (of 
85 000 Lire) for the general practi­
tioner service as well as the full cost 
of drugs (up to 40 000 Lire) and of 
diagnoses (up to 100 000 Lire). 
While the Italian system contains 
a number of interesting ideas for 
containing costs, because of lack of 
control over budgets the measures 
introduced do not work as they 
should. Moreover, experience dem­
onstrates the political difficulty 
of trying to enforce widespread 
charges. A major reform, however, is 
underway aimed at decentralising the health services to give regions more 
power and to improve effectiveness 
of local health authorities. The inten­
tion is for regions to receive a fixed 
budget for providing health services 
and exceeding this means raising 
charges or local taxes. 
At the end of 1992, it was agreed to 
begin an experimental scheme start­
ing in 1995 to introduce market 
forces into the system, in the form, 
first, of patients paying the full cost 
of treatment and then being reim­
bursed at a fixed rate by the NHS and, 
secondly, of the establishment of pri­
vate funds to purchase services from 
the NHS or the private sector. The 
intention is that these will be fin­
anced partly by NHS contributions 
and that they will compete with each 
other for subscribers. 
Spain 
The health care system in Spain is 
similar to that in Italy in that it is 
insurance-based, covers the whole of 
the population and is financed mainly 
by taxes (70% in 1989). It is or­
ganised on a regional basis, with sep­
arate schemes for Catalonia, 
Valencia, Andalusia and the Basque 
Country and a fifth scheme (INSA-
LUD) covering the rest of the 
country. General practitioners and 
specialists are employed by the re­
gional health authorities and usually 
work in clinics, at least in cities 
and larger villages. Two-thirds of 
hospitals are public, while dentists, 
pharmacies and private hospitals 
operate on a contractual basis. 
103 
Chapter 7 - Systems of health cam in the Community 
Although government has control in 
principle over expenditure, this has 
risen steadily over the years, espe­
cially after the system was extended 
to cover everyone in 1986. While in 
the hospital sector, the number of 
acute beds has not increased signifi­
cantly, the average length of stay has 
been reduced, so allowing more pa­
tients to be accommodated, though 
not by enough to prevent increases in 
waiting lists. 
Budget constraints limit the use of 
new equipment and the introduction 
of new forms of treatment in the pub­
hc sector. If required, however, these 
can be contracted from private hos­
pitals, which defeats the objective of 
containing costs. Drug prices are 
controlled by keeping them in line 
with raw material costs, which has 
led to the lowest prices in the Com­
munity, except for Portugal. 
All medical treatment except drugs 
— for which there is a 40% charge, 
but only for those in employment — 
is free of charge. 
The Spanish system shows the typi­
cal disadvantages of one where bud­
get control is centralised, in that there 
are few incentives to take account of 
costs. This has led to similar propo­
sals for reform, in the shape of the 
creation of an internal market, as in 
the UK. It has also been proposed that 
more health services should be 
contracted out to private suppliers, 
alternatives to hospital care should be 
improved and the elderly should be 
charged for drugs (and compensated 
by increased pensions). Greece 
Greece has a pubhc health care 
system which is also partly in­
surance-based, though the service 
provided to the rural population is 
almost totally financed by taxes, 
whereas that for urban areas is in 
principle financed by contributions, 
but in practice by taxes. 
There seems to be no effective bud­
get control, though central govern­
ment controls the prices of drugs, 
decides on the level of contributions 
and the fees to be paid for treatment 
While there is a restricted list of 
available drugs, the pharmacies are 
paid in practice for whatever they 
prescribe. 
The government which came to 
power in 1981 introduced an ambi­
tious plan to improve health care in 
Greece, which resulted in an expan­
sion of hospitals and a large number 
of new rural health centres. Between 
1981 and 1988, the number of doc­
tors in hospitals increased by 60% 
and the number of nurses by 88%, 
while salaries were increased to 
make employment in the public sec­
tor attractive. Since the aim was to 
provide free health care for everyone, 
more than a third of private hospital 
beds were transfered to the public 
sector in 1988, the system of reim­
bursement was made less generous 
and an attempt was made to prevent 
doctors from engaging in private 
practice. The reforms, however, 
were only partially successful. 
For drugs, there is a charge of 25% 
of the cost, though there is no charge 
for drugs for chronic diseases, mental 
illness and AIDS. There is also a small fixed-rate fee for outpatient 
care and admission to hospital. 
Like Spain, Greece has increased 
pubhc spending in order to improve 
the health care system, but has not yet 
succeeded in introducing mechan­
isms which might contain costs. 
Cost containment 
in health 
insurance 
systems 
Five Member States — Belgium, 
France, Germany, Luxembourg 
and the Netherlands — have public 
health care systems which are based 
on insurance principles, in practice as 
well as in theory. In these countries, 
insurers and providers are separated, 
which leads to a different approach 
to cost containment. Means have to 
be found for ensuring that contribu­
tions are sufficient to cover expendi­
ture, even when significant numbers 
of people are not working. 
Belgium 
Around 99% of people in Bel­
gium are covered by health in­
surance. All services are provided on 
a contractual basis and the fees are 
negotiated between the insurers and 
providers. Patients pay for treatment 
and are then reimbursed where a 
charge is payable. Since contribu­
tions are not sufficient to cover ex-
104-
Chapter 7 - Systems of health cam In the Community 
penditure, the government subsidises 
around 40% of costs. 
Central government has both consid­
erable influence over health expendi­
ture and the power to fix rates of 
contribution. Approval has to be ob­
tained for spending on large equip­
ment, for hospital charges and for 
doctors' and dentists' fees. The gov­
ernment also determines the eligi­
bility of hospitals and the services 
provided for payment 
To contain costs, a quota for bed-
days in hospitals was introduced in 
1983 and since 1990 this has been 
calculated on the basis of full utilisa­
tion as regards each area of specialist 
treatment. As a result the number of 
hospital beds has fallen significantly 
and hospitals have been encouraged 
to rationalise their services and trans­
fer beds to long-term care. WTiile this 
has not caused any increase in wait­
ing lists, it seems to have led to most 
hospitals making losses. In the case 
of drugs, there is a recommended hst 
of products and the prescribing of 
generics is encouraged. 
Belgium has a complicated system of 
cost-sharing, which works essen­
tially by not reimbursing patients in 
full for the cost of treatment. Those 
on low incomes are exempt from pa­
ying, or effectively pay a lower rate, 
while the self-employed pay the full 
amount without reimbursal — except 
in the specific (high risk) cases where 
they are covered by pubhc health in­
surance. The charge effectively paid 
by most people is a fixed amount in 
the case of hospital treatment and 
consultation with a general practi­
tioner, and this is increased annually 
in line with the cost of hving. For dental care, patients pay 25% of the 
cost. For drugs, there are six ca­
tegories of charge, ranging from 25% 
of the cost to 100%, while there is a 
flat-rate fee for products made up by 
pharmacists. 
The system of control in Belgium 
has, however, not succeeded in hold­
ing health care expenditure constant 
in relation to NE over the past de­
cade. 
France 
In France, as in Belgium, around 
99% of people are covered by the 
health insurance system. There are 
three main national health insurance 
funds, the largest one (the General 
Scheme) covering 75% of people and 
being mainly for salaried workers, 
the other two being for agricultural 
workers and the self-employed. The 
remaining 10% or so of people are 
covered by around 15 smaller funds. 
Since France spends more on health 
care in relation to NE than any other 
Member State, there is high pressure 
on both the government and the in­
surance funds to contain costs. All 
health care providers work on a con­
tractual basis, doctors, dentists and 
private hospitals (which accounted 
for 35% of beds in 1989) being paid 
fees, negotiated with the insurers, for 
services supplied. Although public 
hospitals are financed by the insur­
ance funds, their budgets have to be 
approved by the Ministry of Health. 
Central government has considerable 
influence over expenditure through 
its control over hospitals by means of a planning exercise called the "health 
care map", which determines the 
number of beds and equipment 
needed at the regional level. Hospital 
charges, pharmacist margins and the 
price of drugs are also controlled, 
while agreements between the insur­
ance funds and health care providers 
have to be ratified by government 
The finance available for public hos­
pitals is limited by a system of global 
budgets introduced in 1983, under 
which targets for total hospital 
spending in France are fixed with the 
aim of increasing efficiency. As a 
result, the average length of stay has 
declined markedly. Waiting lists, 
however, have not increased since 
the gap between demand and supply 
has been filled by private hospitals. 
Because these charge on the basis of 
services provided and days spent in 
hospital, costs have not been con­
tained to any significant extent 
Since 1991, the government has 
fixed at the beginning of each year 
the rate at which private hospital 
spending can increase. Services, 
however, are not controlled under the 
French system and their proliferation 
has caused expenditure to increase 
relative to NE. 
Doctors are free to go into private 
practice anywhere in France and the 
only restrictions applied are to the 
number of students entering medical 
school, which halved between 1975 
and 1989. There are no restrictions 
on the drugs and treatments general 
practitioners and specialists can pres­
cribe and patients are free to choose 
their doctor. Under certain circum­
stances, doctors have the right to 
charge patients an additional charge 
105 
Chapter 7 «• Systems of health cam In the Community 
over and above the fee agreed with 
health insurers and this has pushed up 
prices by 20-30%. 
Like in Belgium, the French system 
works by reimbursing patients for the 
charges they have paid. For drugs, 
patients are either fully reimbursed 
(30% of drugs) or have effectively to 
pay 30% of the cost (45% of drugs) 
or 60% (25%). For hospital care, 
there is a small fixed daily charge, 
while for dental care, the charge is 
20-25% of the cost of treatment 
Germany 
In Germany, some 92% of people 
are covered by the public health 
insurance system, which is operated 
by more than 1200 separate funds, 
organised partly on a regional basis, 
partly on a firm or guild basis and 
partly on a special group basis. All, 
with minor exceptions, provide 
identical benefits and services. All 
services are supplied on a contractual 
basis, so that the funds do not have 
their own hospitals or employ doc­
tors. Doctors' and dentists' fees are 
negotiated by the insurance funds 
with regional medical associations. 
About half the hospitals are pubhc 
and most of the rest are non-profit 
niiiking. Patients have virtually free 
choice over their doctors, who are 
responsible for referring patients to 
hospital — there are no outpatient 
facilities. 
Health care expenditure is relatively 
high and cost containment is of major 
concern, which has led to a number 
of reforms in recent years, in an at­
tempt to limit spending. • Insurance funds are independent of 
government which has no formal 
control over health care expenditure. 
Cost containment is, therefore, up to 
the funds, though health care pro­
viders are also expected to contrib­
ute. The Federal government can 
only influence costs by legislative 
action or by moral persuasion, which 
complicates the matter. 
For hospitals, a Financing Act estab­
lishes certain requirements for 
Federal funding, but does not restrict 
the number of hospitals or beds and 
leaves planning to the Lander which 
are rarely willing to close down hos­
pitals. The number of hospital beds 
has fallen only slightly in the 1980s. 
The fees paid to hospitals by insur­
ance funds are a fixed rate per day 
and charges are also made for the 
treatment provided. The effect is to 
lengthen stays in hospital. Moreover, 
since hospitals are not usually per­
mitted to provide outpatient treat­
ment, stays in hospital which are not 
really necessary often occur only so 
that payment can be received from 
insurance funds. There are also insuf­
ficient incentives to use alternatives 
to hospital care, so that many people 
stay in hospitals when nursing homes 
would be both more appropriate and 
cheaper. Hospital expenditure, for all 
these reasons, has tended to expand 
significantly — by 8% in 1991 and 
10% in the first six months of 1992. 
To control the costs of the general 
practitioner service, a special tariff 
has been introduced relating growth 
of expenditure to growth of average 
earnings. Fees are expressed as 
points relating the value of one ser­
vice to others. The total amount paid 
to medical associations is then dis­tributed according to these points. 
(The relative value of points was 
changed in 1987, for example, to re­
duce payments for diagnoses and to 
encourage medical treatment.) 
There is little control over the num­
ber of doctors — those who can 
prove competence have to be ad­
mitted by medical associations. Doc­
tors can be prevented from entering 
certain areas only if there is obvious 
oversupply (a general restriction to 
admit new doctors only where there 
is clear need was found unconstitu­
tional by the Federal Constitutional 
Court in 1960). Expenditure on the 
general practitioner service rose by 
7% in 1991 and by 10% during the 
first six months of 1992 — consider­
ably more than insurance fund in­
come — partly due to an increase in 
the number of doctors. Dental care is 
organised in a similar way, expendi­
ture rising by 10.5% in 1991 and by 
14.5% in the first six months of 1992. 
There is no direct control over drug 
prices which are among the highest 
in the Community. The 1988/89 
reform introduced a system of 
reference prices, the patient getting 
the drug free if the price is at or below 
the reference price and having to pay 
the extra cost if above. This puts 
pressure on the industry to reduce 
prices, but although it was planned to 
fix reference prices for 80% of drugs, 
so far they apply to only 35%. In 
1991, expenditure on drugs rose by 
10% and in the first six months of 
1992 by 9%. 
Like other Member States, Germany 
also has a system of cost-sharing. 
There is a flat-rate charge for all 
drugs for which as yet there is no 
- 106 
Chapter 7 ~ Systems of health care in the Community 
reference price. For dental treatment, 
patients pay 50% of the cost — some 
more, some less — but can reduce 
this by 15% by going for regular 
check-ups. There is a flat-rate daily 
charge for the first 14 days of hospital 
stay. 
It is planned to introduce a system of 
budget control for the period 1993 to 
1995, when the increase in expendi­
ture will be kept down to the rise in 
income of insurance funds. For hos­
pitals, charges will be differentiated 
according to the kind of treatment, 
and the system of Federal funding is 
to be changed so as to reduce the 
number of beds. 
The system of budget control will 
also be applied to doctors and den­
tists. From 1999, new doctors and 
dentists will only be allowed to enter 
practice if there is need, though 
doubts persist as to whether restrict­
ing access is constitutional. Drug 
prices will be frozen until the end of 
1993, and for the following two years 
all drugs without a reference price 
will be reduced by 5%. Charging, 
graduated according to the price, was 
introduced in 1993, and in 1994 in­
centives will be introduced to en­
courage the supply of smaller 
packages. The daily charge for the 
first 14 days in hospital will also be 
increased. 
Luxembourg 
In Luxembourg, public health in­
surance covers virtually everyone. 
The system is administered by a 
union of nine sickness funds, all ser­
vices being reimbursed on a contrac­tual basis. The fees for general prac­
titioners and specialists are nego­
tiated between the sickness funds and 
the association of doctors. The ma­
jority of hospitals are private. All are 
paid at a negotiated rate per day of 
care, while doctors and dentists are 
paid a fee for the services they pro­
vide. The sickness funds receive a 
grant from the government to cover 
certain types of cases like tubercu­
losis, transplants and neurological 
surgery. The government also covers 
the deficit of pensioners' sickness 
funds. 
Public expenditure on health care 
was relatively high at the beginning 
of the 1980s (6.3% of NE), fell up to 
1986 and then increased in the late 
1980s (back to 6.4% of NE), as a 
result of a series of measures to con­
tain costs. 
Rates of health insurance contribu­
tions are fixed by a grand-ducal regu-
lation. Services which are 
reimbursed or paid for by health in­
surance are defined by regulations 
determined by the union of sickness 
funds and approved by government. 
The government controls hospital 
construction and the installation of 
large equipment, paying between 
50% and 80% of the cost. There is no 
price control on drugs. 
There is a shortage of long-stay beds 
in hospitals and a surplus of short-
stay beds — as in Germany, the sys­
tem of daily rates encouraging long 
stays. To control costs, hospitals are 
required to transfer long-stay pa­
tients to nursing homes but the effec­
tiveness of this system is limited by 
a lack of beds — though the govern­
ment is increasing the number in ge­riatric homes. Increases in doctors' 
and dentists' fees are kept down to 
the rise in the cost of living. 
To influence expenditure on drugs, 
price hsts are issued to doctors con­
taining details of reimbursement Pa­
tients are charged 20% of the price, 
except for drugs for special diseases 
and those administered to patients in 
hospital, which are free of charge. 
There is a charge of 5% for consult­
ation with a general practitioner and 
home visits, and hospital patients pay 
a daily charge similar to that in Ger­
many. The charge for dental treat­
ment is 20%, except where the 
patient has had yearly check-ups in 
the two preceding years. 
Luxembourg has the same kinds of 
problem as most other Member 
States with health insurance systems. 
It is recognised that the system needs 
to adjust to new challenges such as 
the ageing of the population, the need 
to recruit nursing staff and the main­
tenance of a high standard of health 
care, which can only be achieved 
without adding substantially to costs 
by increasing the effectiveness of the 
system. New measures introduced in 
1992 are aimed at rationalising the 
negotiation procedures between the 
sickness funds and health care pro­
viders, establishing a more cen­
tralised structure for the funds and 
reorganising the system of financing. 
The Netherlands 
Major reforms were introduced 
at the beginning of 1992 
which can best be appreciated in 
107-
Chapter 7 - Systems of health cam In the Community 
terms of the problems of the old sys­
tem. 
Under the old system the whole 
population was covered by compul­
sory insurance, under the Excep­
tional Medical Needs Act (AWBZ), 
for serious and long-term disability 
and illness.' In addition, it was com­
pulsory for about 60 % of the popu­
lation — those with lower income — 
to be insured (ZFW). For these, 
general practitioners were paid on a 
per capita basis, while specialists 
and dentists were paid fees for treat­
ment given, the amounts being nego­
tiated between the insurance funds 
and the medical association. Other 
patients (about 40% of the popula­
tion) paid fees for the treatment re­
ceived. Overall health expenditure is 
high at more than 8.5% of NE. 
In the 1980s, a number of measures 
aimed at containing costs were intro­
duced. The budget for hospitals was 
cut for several years and then kept 
unchanged in real terms. This suc­
ceeded in holding down expenditure 
without increasing waiting lists. Al­
ternatives to hospital care, in the 
form of nursing homes, were also 
developed. Limits were successfully 
imposed on the number of dentists 
and physiotherapists for some years, 
but were subsequently removed. 
Holding down costs for specialist 
services also proved difficult, but in 
1989 fees were reduced and then held 
constant in subsequent years. 
A number of attempts have been 
made to stabilise spending on drugs 
but without much success and this 
remains the fastest growing item of 
expenditure. Recendy a scheme was 
introduced to limit reimbursement to the cost of the cheapest drug avail­
able for the treatment in question. 
Before 1992, patients were only ex­
pected to contribute towards the cost 
of dental treatment and spectacles. 
The reform of the Dutch system in 
1992 introduced market forces in the 
form of competition between both 
providers and insurers and the decen­
tralisation of provision. Compulsory 
insurance has been extended to the 
whole population for basic health 
care by integrating the services pro­
vided by ZFW into the AWBZ sys­
tem. This is intended to provide 95% 
of health services. Each individual is 
free to choose which fund to be in­
sured with, while insurers have to 
accept anybody and are not allowed 
to charge a premium for higher risk 
people. 
All contributions are income-related, 
collected centrally and then dis­
tributed to the insurance funds ac­
cording to the number of people 
insured with them and their risk 
status (age, sex, region where they 
hve and status of their health). Con­
tributions are intended to cover 82% 
of costs, the remaining 18% being 
charged directly by the insurer. The 
premium will tend to be lower the 
more the insurer succeeds in contain­
ing costs, so introducing an element 
of competition. 
The prices and terms for health ser­
vices are negotiated with the pro­
viders, the government setting only 
maximum prices. The person insured 
can obtain additional services if they 
pay an extra premium. Under this 
system, individuals, therefore, have some freedom of choice and compe­
tition is encouraged. 
It is too early to determine the effects 
of this reform, but already the full 
implementation of the new insurance 
scheme has been delayed until 
January 1994, as a result of opposi­
tion to providing as much as 95% of 
health services under the compulsory 
scheme. It is also argued that to con­
tain costs the principle of patients 
bearing some of the cost of treatment 
should be extended, individuals 
should have more responsibility for 
determining their level of insurance 
and income-related contributions 
should be reduced and nominal 
premiums increased. 
Conclusions 
In all Member States, health care 
expenditure has increased signifi-
cantley in real terms since 1988 
(though in Luxembourg and Ireland 
it has fallen relative to NE). In most, 
the main issue for policy is how to 
contain costs. The solution in each 
case is somewhat different partly de­
pending on the method of financing 
and organising health care. 
Some Member States, moreover, in 
particular Spain, Greece and Portu­
gal, are still, expanding coverage, 
though in all countries almost every­
one is now covered. 
The natural way of containing costs 
in countries with tax-financed health 
care systems is through tight budge­
tary control, to limit directly the num­
ber of providers and facilities. 
Although this may lead to greater 
-108-
Chapter 7 - Systems of health cam In the Community 
efficiency, it can also result in short­
ages and longer waiting lists, as for 
example, in the UK. On the other 
hand, Denmark shows that local 
authorities with a degree of auton­
omy can achieve increased effi­
ciency, despite expenditure cuts, and 
avoid waiting lists. In general, tight 
control on expenditure can encour­
age the development of alternatives 
to hospital care, as in Denmark and 
Ireland, but it can also lead to deficit 
spending, as in Italy, or to the devel­
opment of ways of evading its in­
tended effects, as in Greece. 
In principle, countries with insur­
ance-based systems do not have the 
option of containing costs by directly 
limiting expenditure. Instead, they 
have tried to influence expenditure 
through planning exercises, as in 
France and Belgium. In such coun­
tries it has also proved difficult to 
hmit the number of health care pro­
viders, because of the politically sen­
sitive nature of the issue, and in 
Germany, because of constitutional 
constraints. 
Controlling drug prices is an issue in 
all Member States. Some, like Italy 
and Belgium, circulate approved lists 
or, like the UK and Ireland, non-ap­
proved lists. Other countries, like 
Portugal and Spain, impose adminis­
trative price controls, while Germany 
and the Netherlands set maximum — 
or reference — prices. In general, 
these attempts have had only limited 
success, in part because of evasive 
action on the part of the drugs indus­
try (introducing new but similar 
products), in part because of admin­
istrative difficulties. A growing issue in a number of 
Member States is whether and to 
what extent to introduce market 
forces. This is especially true of the 
UK and the Netherlands, countries 
with very different financing sys­
tems. In nearly all Member States, 
patients are required to bear some of 
the cost of treatments, mainly for 
drugs but, in some countries, also 
for services. There is a clear trend 
towards charges being levied on a 
percentage basis, which might en­
courage price competition among 
providers if the patient has free 
choice (and sufficient information to 
compare the efficacy of products or 
types of treatment). On the other 
hand, it also might lead to hardship 
for people on low incomes or with 
serious illnesses. In most cases, there 
are exemptions to try to prevent this. 
There is, in summary, therefore, 
some uniformity in the problems 
faced across the Community and 
some similarity in the policies 
adopted to tackle them. In the coun­
tries which have introduced radically 
new measures in recent years, how­
ever, such as the UK and the Nether­
lands, it is as yet too soon properly to 
evaluate their effectiveness. 
-109-
Chapter 7 - Systems of health cam In the Community 
110 
Chapter 8 - Social protection and reconciling work with family Ufe 
Chapter 8 Social protection and 
reconciling work with family life 
The recommendation on the con­
vergence of social protection 
objectives and policies sets out a 
number of common aims which are 
intended to serve as guidelines for the 
policies of Member States. Where 
the family is concerned, Member 
States are recommended to adapt 
and, if necessary, develop their social 
protection systems so as "to help 
remove obstacles to occupational ac­
tivity by parents through measures to 
reconcile family and professional re­
sponsibilities". 
It is becoming increasingly unusual 
for the receipt of family benefits to 
be subject to an exphcit proviso that 
the mother has no permanent em­
ployment, since this is manifestly at 
variance with the requirement that 
social protection should be neutral as 
regards any second gainful activity a 
couple may have. Family benefits are 
being increasingly replaced by 
targeted benefits intended to enable a 
parent who so wishes to stop working 
temporarily to bring up a young 
child. 
However, other, more indirect, disin­
centives may remain where the 
receipt of social benefits is means-
tested. Where the income ceiling 
above which benefits are no longer 
payable at the full rate is set at a level which is reached when both parents 
are working, the net income gain 
from any second activity the couple 
may pursue could be very small, par­
ticularly if account is taken of the 
cost of caring for young children and 
the higher income tax on their joint 
earnings. 
To investigate the potential import­
ance of this, the Commission asked a 
number of researchers to make syste­
matic comparisons between several 
systems of social protection. Six 
Member States were covered (Bel­
gium, Germany, Spain, France, the 
Netherlands and the UK) plus 
Sweden and Switzerland (thanks to 
cooperation with the International 
Social Security Association). The in­
itial results of the research are 
presented here. 
Benefits paid to 
those bringing up 
young children 
All European countries have 
maternity benefit schemes. 
However, the situation varies consid­erably so far as the period following 
maternity leave is concerned. 
Belgium 
In Belgium the pregnant working 
mother receives a maximum of 
15 weeks' paid leave. To qualify for 
this she must have worked for at least 
120 days during the previous six 
months (or a minimum of 400 hours 
of work if she is employed part time). 
The social security benefit amounts 
to 82% of the previous gross wage, 
without any upper limit for the first 
30 days, then 75% of the same wage 
between the 31st day and the end of 
the 15th week (with a ceiling on the 
wage set at around 1 h times the 
average industrial wage). Women in 
employment are protected against 
dismissal for the full duration of their 
maternity leave. 
In the case of parental leave, two 
innovative provisions were intro­
duced in Belgium in 1985. The first 
was the career break, in the form of 
paid leave, which an employee may 
take for various reasons, including 
the education of a child, provided that 
they are replaced in their job by 
someone who is unemployed. In this 
case, the employee onieave (whether 
male or female) receives from the 
111 
Chapter 8 - Social protection and reconciling work with family ttte 
social security system a flat-rate 
benefit amounting to between 20% 
and 25% of the average industrial 
wage, depending on the status of the 
child for whom the career break is 
taken, for a period varying between 
one and five years. A partial career 
break may also be taken for a maxi­
mum of five years, in which case 
those concerned then receive 50% of 
the allowance if aged under 50 or a 
full allowance if aged 50 or over. 
During their career break, employees 
still enjoy social cover (health care 
and unemployment benefit). For the 
first year (or the first three if the 
career break is taken to educate a 
child under six), the social security 
system pays their pension contribu­
tions; after that, contributions may be 
paid on a voluntary basis to maintain 
pension rights. Some 51 000 people 
took a paid career break in 1991,86% 
of them women, which is 3.5% of all 
female employees in Belgium. 
The other provision concerns the un­
employed. The requirement to regis­
ter as a job seeker may be waived on 
social or family grounds for someone 
who is unemployed for a period of 
between six months and a year (re­
newable once). Such a person re­
ceives a flat-rate benefit amounting 
to around 18% of the average indus­
trial wage. This exemption from the 
need to register as a job seeker while 
continuing to receive unemployment 
benefit and the usual social security 
cover normally afforded to the unem­
ployed is tantamount to extending to 
the unemployed the benefits of paid 
parental leave; some 41 000 bene­
fited from the scheme in 1991, 99% 
of them women. Germany 
Maternity leave in Germany is 
for 14 weeks. Women who 
have belonged to a statutory sickness 
insurance scheme for at least 12 
weeks between the 10th and the 4th 
month preceding the birth qualify for 
maternity benefit. This is in two 
parts: the sickness insurance fund 
pays a maximum sum of DM 25 per 
day, but if previous earnings were 
higher, the difference has to be made 
up by the employer (or failing that the 
state). The level of benefit is there­
fore the same as full pay. The con­
tract of employment is maintained 
and the employee must be able to 
return to her post when the period of 
leave comes to an end. 
A law providing for parental leave 
and a parental education allowance 
(Erziehungsgeld) came into force on 
1 January 1986. It introduced a state-
funded benefit payable to either par­
ent giving up work, interrupting their 
working careers or reducing the time 
spent in working (to less than 19 
hours a week) to care for a young 
child. Since 1 January 1993 this 
allowance has been payable up until 
the child is two years old. 
The parental education allowance is 
payable for the first six months after 
a child has been born without any 
means-test From the seventh month, 
the allowance is paid in full only 
where the income of the couple (or 
the lone parent) is below a certain 
ceiling which varies according to the 
number of children (90% of the aver­
age manual wage for one child, 120% 
for three children). The full rate of the 
allowance is DM 600 per month; it is 
not taxable and not subject to social contributions and amounts to around 
22% of the average net industrial 
wage. It is progressively reduced 
where the income of the household 
exceeds the ceiling and is withdrawn 
completely for couples with one 
child when it reaches around 145% 
of the average wage. 
In some Lander, the parental educa­
tion allowance may be extended for 
six months or a year, usually on the 
same conditions (means-tested). 
Anyone receiving the allowance may 
at the same time apply for education 
leave, at the end of which they are 
supposed to return to work. They re­
tain entitlement to sickness insurance 
and are granted three years' pension 
contributions for each child, on a flat-
rate basis equal to 75% of the average 
pay of wage earners, which means 
that education leave does not result in 
any loss of rights. 
In 1991, 790 000 people benefited 
from parental education leave, which 
corresponds to 95% of the births reg­
istered in Germany that year. In 99% 
of cases the allowance was given to 
the mother and the total cost to the 
Federal budget amounted to almost 
DM 6 billion. 
Spain 
In Spain female workers are given 
16 weeks' maternity leave, pro­
vided that they have paid social se­
curity contributions for 180 days 
during the previous year. Where both 
husband and wife work, the last four 
weeks of maternity leave may be 
taken by the father. The benefit 
amounts to 75% of the previous wage 
112 
Chapter 8 - Social protection and reconciling work with family Ufe 
up to a ceiling set at more than double 
the average industrial wage. Con­
tracts of employment are maintained 
during maternity leave. 
Employees who have a permanent 
employment contract may take un­
paid parental leave for up to three 
years. However, only the first year's 
leave is taken into account for the 
purposes of social security contribu­
tions and entitlement to retirement 
and invalidity pensions and unem­
ployment benefit. Either the father or 
the mother may take such leave and 
when it is over they have a guarantee 
of being able to return to theirjob. In 
practice only women make use of this 
option and even then not very many 
— less than 20 000 in 1991. 
France 
Maternity leave in France is 16 
weeks for the first and second 
child and 26 weeks for the third and 
subsequent child. To qualify, the 
mother must have belonged to the 
social security scheme for 10 months 
before the birth of the child and 
have completed a minimum of 
1 200 hours' paid employment dur­
ing the 12 months preceding the 
birth. During maternity leave, the 
mother receives social security 
benefit equivalent to 84% of her pre­
vious wage up to a ceiling around 
20% higher than the average indus­
trial wage. Contracts of employment 
are maintained during maternity 
leave. 
Paid parental leave (allocation 
parentale d'éducation) was intro­
duced in France in 1985, but only for fathers or mothers with at least three 
dependent children, one of whom has 
to be under three. To qualify for the 
benefit, it is necessary to have 
worked and paid social security con­
tributions for at least two years dur­
ing the ten years preceding the birth; 
it is also necessary to cease, or al­
ready to have ceased, working. 
The parental education allowance 
may be paid up until the child reaches 
the age of three, the sum received 
amounting to between 35% and 40% 
of the average net industrial wage. 
From the third year of leave, the 
beneficiary may resume work part-
time and receive 50% of the allow­
ance. Almost 175 000 people 
benefited from this allowance in 
1991,97% of them women. 
Where the beneficiaries are female 
workers in employment at the time of 
the birth, they may also apply to their 
firm for parental leave over the same 
period. However, a firm with less 
than 100 employees can refuse to 
grant the leave where it considers 
such action might be harmful to its 
operations. Parental leave can be 
granted to the father or the mother 
from the first child, provided they 
have been working for at least one 
year in the firm before the birth. 
Those on leave have a guarantee of 
being able to return to their jobs when 
the leave comes to end. In 1991, al­
most 100 000 employees (99% of 
them women) took leave of this kind. 
The Netherlands 
Iregnant women are entitled to 16 
weeks' maternity leave in the Netherlands. There is no requirement 
regarding the length of time spent 
working in their present firm; the 
only condition for payment of benefit 
under the social security system is 
that the woman was not already preg­
nant when she joined the insurance 
scheme. If she was, it becomes the 
employer's responsibility to pay the 
maternity allowance. 
Receipt of the benefit means that full 
pay is assured up to a ceiling set at 
twice the average industrial wage in 
the Netherlands. Contracts of em­
ployment are not suspended and 
entitlement to benefit (unemploy­
ment, invalidity and retirement) is 
not affected by maternity leave. 
There is, on the other hand, no provi­
sion for paid parental leave under.the 
statutory social security system, al­
though such leave may be granted by 
some companies or organisations. 
The minimum income (Sociale 
Bijstand) granted to anyone from so­
cial assistance can be paid to mothers 
whose incomes are below the mini­
mum subsistence level and, in prac­
tice, they are not obliged to seek a job 
when they are bringing up a child 
under 12. This provision exempting 
mothers from the requirement to seek 
employment is, however, increas­
ingly under challenge and a planned 
reform to restrict or discontinue the 
exemption is at the time of writing 
under discussion in Parliament. 
Fathers and mothers who are full-
time employees, and who have 
worked for at least one year in their 
present company, are entitled to take 
partial unpaid leave, ie to apply to 
work only 20 hours a week when they 
are bringing up a child under four. 
113-
Chapter 8 - Social protection and reconciling work with temllyÉ^l ^ <^-
The employer is required to agree to 
this reduction in working hours for a 
period of six months. 
UK 
Maternity leave arrangements 
in the UK are more compli­
cated than in other Member States. 
Pregnant women who have worked 
for more than two years (at least 16 
hours a week) or five years (at least 
eight hours a week) may claim statu­
tory maternity benefit, which entitles 
them to stop work during the 
11 weeks preceding the birth and up 
to 29 weeks after. They receive an 
allowance (from the employer who is 
then reimbursed) for only 18 weeks, 
however; for six weeks the allow­
ance amounts to 90% of the previous 
wage, for the remaining 12 weeks it 
is paid at a flat-rate (some 20% of the 
average industrial wage). 
Where a mother to be does not satisfy 
the conditions for statutory maternity 
benefit she can claim a maternity 
allowance for 18 weeks provided 
that she has worked for six months 
during the year ending 14 weeks after 
the birth. The amount of this flat-rate 
allowance is somewhat less than 
20% of the average industrial wage. 
In such cases, however, there is no 
formal entitlement for the woman to 
be able to return to her job after the 
maternity leave. 
There are no statutory provisions on 
parental leave (paid or unpaid) in the 
UK. While there are some contrac­
tual arrangements in certain com­
panies, they are not widespread. A 
survey carried out in 1989 among 1800 companies in industry and 
commerce revealed that only 11% 
provided extended maternity leave 
beyond the statutory minimum. 
Sweden 
The arrangements for maternity 
and parental leave in Sweden 
are highly innovative and are interes­
ting to compare with provisions in 
the Community. 
No distinction is made between 
maternity leave and parental leave. 
Parents of a new-bom child are en­
titled to 15 months' paid leave which 
can be taken on a full-time (stopping 
work completely) or part-time (re­
ducing hours of work) basis until the 
child reaches the age of eight and 
which can be shared between the two 
parents. The mother to be (and she 
alone) can start this leave up to two 
months before the birth. 
In addition, parents may take unpaid 
leave with a guarantee of being able 
to return to their jobs up to the time 
the child reaches the age of 18 
months. Accordingly, if the parents 
so wish, they can take first the unpaid 
leave and then the 15 months' paid 
leave, full or part-time. 
For the first 12 months of paid paren­
tal leave, benefit is set at 90% of the 
previous salary. For the remaining 
three months, benefit is paid at a flat-
rate (roughly 15% of the average in­
dustrial wage). All payments are 
funded entirely by the social security 
system. In 1991, around 437 000 par­
ents received at least one day of paid 
parental leave (as compared with 123 400 births in Sweden that year), 
only 74% of them women. Parental 
leave for fathers is, therefore, much 
more extensive in Sweden than in the 
Community. 
Family 
assistance and 
household 
income 
Some financial assistance for 
families is income-dependent, 
being paid only to households with 
an income below a certain ceiling 
and/or being subject to means-test­
ing. It is of interest to examine how 
these ceilings do or do not vary ac­
cording to whether there are one or 
two wage earners in the household. 
Belgium 
In Belgium, the amount of family 
benefits is determined exclusively 
by the number of children and not by 
income. Replacement benefits, on 
the other hand (unemployment 
benefit, invalidity allowances, retire­
ment pensions) are adjusted accord­
ing to the status of the family and the 
composition of the household of the 
person entitled to them. Those with 
direct entitlement receive a higher 
rate if they have an adult dependent 
— retirement pension being calcu­
lated as 60% of the reference wage 
for a single person, but 75% if they 
have a dependent. The difference is 
114 
Chapter 8 - Social protection and reconciling work with family life 
greater for invalidity pensions — 
65% where there are dependents, 
45% for a single person and only 
40% where the person concerned 
hves with a spouse with their own 
source of income. 
Where unemployment benefits are 
concerned, the "head of household" 
is entitled to go on receiving the most 
favourable rate (60% of previous 
earnings) for an unlimited period, 
while a single person receives no 
more than 42% after one year. Where 
another member of the household is 
in gainful employment, the unem­
ployed person receives only 55% the 
first year, 35% for the following six 
months and subsequently a flat-rate. 
Where the couple has a second gain­
ful activity the benefits are, therefore, 
reduced. 
Germany 
Family allowances in Germany, 
which increase with the number of 
children (DM 70 for the first child, DM 
130 for the second, DM 220 for the 
third and DM 240 for each subsequent 
child) are reduced (to DM 70 for the 
second child and DM 140 for each 
subsequent child) where the annual net 
income of husband and wife exceeds a 
ceiling fixed at DM 35 800 for a family 
with two children — which is around 
10% above the average net industrial 
wage in Germany. If a couple has a 
second gainful activity, therefore, fam­
ily benefits are usually reduced. 
In addition, in calculating income tax 
liability, an allowance is deducted 
from gross income for dependent 
children (DM 3024 per child in 1991, DM 4104 in 1993). Where the in­
come is too low for full advantage to 
be taken of the allowance, the family 
receives a supplement for each de­
pendent child up to a maximum of 
DM 575 — which is a kind of nega­
tive income tax. 
As well as social assistance which is 
direcdy dependent on household in­
come, there is also a system of 
means-tested housing benefit How­
ever, where two household members 
work, a fairly generous flat-rate 
allowance for working expenses 
(DM 2004) may be deducted twice 
from the household income, so in 
many cases the adverse effect of the 
second wage on the amount of 
benefits received is reduced signifi­
cantly. 
Spain 
All non-contributory benefits, in­
cluding family allowances, are 
means-tested in Spain. The ceiling on 
income to qualify, however, is rela­
tively low—around 63% of the aver­
age industrial wage for the first child, " 
75% for the second and 86% for the 
third. A family with two children 
with both husband and wife working 
and receiving the minimum wage 
would, therefore, have earnings 
which exceed the ceiling and would 
not quahfy for family allowances. 
France 
Over half of benefits paid to 
families in France are means-
tested. Although family allowances 
proper depend only on the number and the age of dependent children, 
other benefits (such as infant allow­
ance granted from the third month to 
the child's third birthday, family sup­
plement for families with three child­
ren or more and without a child under 
3 and housing benefit) are progress­
ively reduced where the income of 
the household exceeds a certain ceil­
ing. 
The level of this ceiling varies ac­
cording to the number of children. 
For one-income households it is 
roughly 116% of the average indus­
trial wage in France where the family 
has one child, 135% for two children, 
165% for three children, and so on. 
However, it should be noted that the 
ceiling is higher where the couple 
earn two salaries: around 150% of the 
average manual wage for one child, 
around 175% for two children and 
215% for three children. An "aver­
age" household with both husband 
and wife earning may claim means-
tested family benefits when they 
have at least two children. 
Netherlands 
Family benefits in the Netherlands 
are not means-tested. Social as­
sistance (Bijstandswet and Toes-
lagenwet), by contrast, is related 
directly to household income. Under 
the Toeslagenwet, in particular, sup­
plementary assistance is granted to 
those in receipt of social benefit (for 
unemployment, sickness or inva­
lidity) where the income of the 
household is below the minimum 
subsistence level, defined in relation 
to the minimum wage (70% of the 
minimum wage for a single person 
115-
Chapter 8 - Social protection and reconciling work with family life 
and 100% for a couple). The fact that 
the couple may have one or two 
wages is irrelevant Similarly, hous­
ing benefit is not means-tested (the 
ceiling is set at around the average 
industrial wage), no account being 
taken of the number of wage earners 
in the household. 
UK 
As in the Netherlands, allow­
ances payable to famihes take 
no account in the UK of whether a 
couple consists of one or two wage 
earners. Family benefits depend only 
on the number of children. Income 
support for those not in employment 
or working less than 16 hours a week 
is means-tested and depends solely 
on household income. The same ap­
plies to allowances for housing ex­
penses (Housing Benefit and Council 
Tax Benefit). 
A different principle, however, gov­
erns Family Credit, which is payable 
to famihes with at least one depend­
ent child and an income below a 
given ceiling, which varies according 
to the number and age of children 
where one at least of the parents 
works at least 16 hours a week (the 
minimum was 24 hours a week up 
until 1992). The ceiling on income 
below which a family qualifies for 
family credit is around 90% of the 
average industrial wage for a family 
with two children between 8 and 12 
(net income after tax and social con­
tributions); an estimated 495 000 
families received family credit in 
1993. To prevent such famihes from falling 
into a poverty trap, family credit is 
reduced to only 70% of the difference 
where the income exceeds the ceiling 
set for the maximum payment Thus, 
for an increase in income of £10, 
family credit is reduced by £7 and so 
the effect is to raise family income by 
£3. The ceiling is not adjusted, how­
ever, where the couple has a second 
wage. 
Sweden 
The only two cash benefits paid to 
famihes in Sweden are family 
allowances and housing benefit The 
former is linked solely to the number 
of children. The latter depends on the 
total family income, housing costs 
and the number of children; it is paid 
at the full rate to famihes whose in­
come is below around 50% of the 
average industrial wage and is pro­
gressively reduced as the income of 
the household increases. It is not ad­
justed according to whether a couple 
is earning more than one wage. 
The net gain 
resulting from a 
second wage 
The study conducted in the six 
Member States plus Sweden 
sought to measure the effect of a sec­
ond wage on the net disposable in­
come of a married couple, taking into 
account the changes in income tax 
resulting from the second wage, any 
change in social benefits received (family and housing benefits) and 
any cost of caring for young children. 
The calculations refer to 1991 and 
were carried out for different family 
setups. Two cases were examined: a 
household in which the man's earn­
ings are the same as the average in-
dustrial wage in the country 
concerned and the woman has no 
paid employment or works full time 
for the average female industrial 
wage, and a household in which the 
man's earnings are equal to three 
quarters of the average industrial 
wage and the women's earnings, 
where she works full time, reflect the 
difference between male and female 
wages in the bottom quartile of the 
wage distribution. 
The results can be expressed in the 
form of the elasticity of disposable 
income in relation to earnings, as fol­
lows: if the total gross earnings re­
ceived by a household increase by 
100%, how much does net disposable 
income rise? If it increases by only 
50%, the elasticity of disposable in­
come is 0.5; if it increases by 150%, 
the elasticity is 1.5, and so on. 
Disposable income was calculated in 
each case after deduction of housing 
expenses, so as to include in house­
hold income any housing benefit re­
ceived. Households are assumed to 
rent accommodation in a large city 
suited to the size of the family con­
cerned. The fact that housing ex­
penses are the same whether or not 
the woman is in paid employment 
means that, in the case of couples 
without children, the elasticity of dis­
posable income in relation to earn­
ings is equal to or higher than 1 
(Table 24). The elasticity is greater 
116 
Chapter 8 ~ Social protection and reconciling work with family Be 
Table 24 Elasticity of net disposable Income to gross earnings7 
Belgium 
Germany 
Spain 
France 
Netherlands 
UK 
Sweden Couple without 
children 
Low pay 
1.07 
1.07 
1.19 
1.41 
1.10 
1.31 
0.91 Average 
pay 
0.99 
0.99 
1.03 
1.56 
1.05 
1.23 
1.40 Family with two 
children 
of 6 and 8 
Low pay 
0.99 
0.78 
2.12 
0.98 
0.99 
0.60 
0.67 Average 
pay 
0.93 
0.93 
1.40 
1.01 
0.96 
0.69 
0.88 Family with one child 
of 18 months 
Low pay 
0.73 
0.52 
0.50 
0.81 
0.56 
0.54 
0.80 Average 
pay 
0.71 
0.58 
0.93 
0.93 
0.52 
0.64 
1.01 Family with three 
young children 
between 1 and 8 
Low pay 
0.61 
0.49 
0.11 
0.12 
0.53 
-0.14 
0.46 Average 
pay 
0.57 
0.72 
0.64 
0.25 
0.48 
-0.11 
1.58 
Percentage change in net disposable income divided by the percentage change in gross earnings when comparing 
a couple where the wife has no paid activity with one where the wife works full-time. ' 
the lower the tax burden (income tax 
and local taxes) or where taxes arc 
only slightly progressive. 
Where the family includes two 
school-age children (6 and 8) and the 
couple has no costs of child care, the 
elasticity remains close to 1. In some 
instances, it is higher than in the pre­
vious case on account of the greater 
burden of expenditure on housing. 
The main point is, however, that as 
soon as children are old enough to go 
to school, the increased earnings in 
the case of the couple having a sec­
ond paid activity result in an almost 
proportional increase in disposable 
income after payment of social con­
tributions and taxes and receipt of 
social benefits. 
The net gain resulting from a second 
paid activity is lower, however, 
where the family includes a young 
child: on the one hand, because the 
second activity gives rise to expendi­ture on child care (which, it is true, 
may be covered in part by the social 
security system or deductions from 
taxable income) and on the other, 
because in some cases it results in the 
withdrawal of certain benefits (not­
ably, housing benefit). 
The same phenomenon is more 
marked in famihes with three young 
children (Table 24), but this is hardly 
surprising, at least in countries which 
have tried to encourage parental 
leave when children are young. 
Social benefits for famihes should be 
organised in such a way as to recon­
cile two objectives: helping the most 
disadvantaged families and/or those 
where the cost of children is heaviest, 
on the one hand, and removing the 
barriers to the pursuit of a working 
career by both parents, on the other. 
To attain the latter objective, steps 
must be taken, in particular, to avoid 
any long-term subsidies for famihes where one of the couple wishes to 
pursue a paid activity. 
It is for this reason that family 
benefits are increasingly tending to 
compensate for the break in working 
by one of the parents only during the 
first year, or the first two or three 
years, after the child has been born 
— in other words, the period when 
costs of child care are highest and 
children most need their parents. 
Paid parental leave for fathers or 
mothers with young children, as in 
Germany, Sweden and France (for 
families with three children only) 
would seem, from this perspective, to 
be meeting a real need, judging by the 
success it is having. However, it is 
also the case that having a guarantee 
of being able to return to work plays 
a decisive role. Indeed, many prefer 
to retain theirjob, even if it provides 
them temporarily with only a small 
net gain in income, for fear of not 
-117-
Chapter 8 - Social protection and reconciling work with terptty^tm^^^y^:^^'! :U:â^ySfé^^i 
finding employment again after a 
break of a few years. 
A further problem which arises for 
systems of social protection in this 
area is the setting of income ceilings 
to qualify for benefit. All Member 
States, with the exception of Spain, 
pay family allowances to all famihes, 
although Germany and Greece re­
duce the amount where family in­
come exceeds a certain sum. Where 
other kinds of family benefits exist, 
however, they are usually means-
tested. It is important then to avoid 
the poverty trap, where any gain in 
income from a second activity is can­
celled out by a corresponding reduc­
tion in benefits received. This pitfall 
can be avoided in two different ways: 
by only partly reducing benefits 
when household income increases 
(as in the case of family credit in the 
UK) or by introducing a specific, 
higher income ceiling if two wages 
are coming into the household (as in 
the case of means-tested benefits in 
France). In most Member States, 
however, it would seem that no spe­
cial provision has been introduced to 
deal with this problem. 
118 
t^H&l^^lïC^fér^^ The Impact of social and economic change on systems of social protection ' 
Chapter 9 The impact of social 
and economic change on 
systems of social protection 
Demographic and 
occupational 
changes 
Demographic, social and econ­
omic changes pose many chal­
lenges for the social protection 
systems of Member States and 
necessitate a process of common in­
stitutional adaptation. These changes 
are serving to undermine four basic 
premises on which the traditional 
welfare state was based: an equitable 
balance between generations; stable 
marriages and family unity; full-
time, continuous employment; and a 
limited degree of conflict between 
professional and family life. These 
are examined in turn below. (Graphs 
34-41 illustrate the social and econ­
omic changes which are taking 
place.) 
Inter-generational 
balance 
•he first premise is being rapidly 
eroded as the average age of the population increases as a result of 
declining birth rates and longer life 
expectancy. This process has already 
had a significant impact on health 
and pension expenditure in all Mem­
ber States and is projected to have a 
much greater effect on social spend­
ing in the coming decades. It is set to 
place an increasing financial burden 
on the economically active members 
of society who will have to provide 
the additional resources to fund the 
expansion of expenditure. Such a 
prospect is likely to raise new issues 
of intergenerational equity, leading 
not only to financial problems but 
also to possible social and political 
tensions. 
The Community Recommendation 
acknowledges these problems and 
invites Member States to adapt their 
social protection systems, especially 
pension schemes, to the changing 
demographic environment and to 
maintain a reasonable balance be­
tween the interests of those in work 
and those in retirement. A serious 
debate on the potential need to re­
define the basis for a number of 
benefits and the age threshold for 
access to them — pensions, in par­
ticular — is underway in all countries and, in some, changes in this direc­
tion have already been made. 
As well as concerns about finance 
and intergenerational equity, the 
ageing of the population is also rais­
ing other, more traditional questions 
of adequacy and effectiveness. The 
elderly — women especially — are 
already very exposed to risks of so­
cial exclusion because of, for 
example, lack of income, isolation, 
physical impairment and chronic ill­
ness. Existing programmes are often 
unable to provide protection against 
these contingencies, while there are 
declining numbers of women who 
are free to provide voluntary, non­
public forms of care. A balance has 
to be struck between the need for cost 
containment and for financial equity 
between generations, on the one 
hand, and the need to secure the 
living standards and social integra­
tion of a growing number of elderly, 
on the other. 
Family stability 
The steep increase in divorce, 
separation, cohabitation and il­
legitimate births is, in turn, rapidly 
-119 
Chapter 9 - The impact of social and economic change on systems of soclat-ptotection 
Indicators of social and economic change 
120 
Chapter 9 - The Impact of social and economic change on systems of social protection 
eroding the second premise of the 
traditional welfare state — that mar­
riages are generally stable and 
families unified. There are two main 
implications for social protection 
systems. In the first place, a weaken­
ing of the family unit means a greater 
risk of social exclusion, especially as 
regards the elderly, single mothers 
and their children and young unem­
ployed. The number of single-parent 
families has been increasingly very 
rapidly in the Community. 
The second implication concerns the 
thorny question of "individual" as 
opposed to "derived" entidement to 
social protection. As is well known, 
traditional social security schemes 
include a wide range of "derived" 
entitiements, linked to the contribu­
tions record and employment status 
of the spouse (normally the husband) 
or other person on whom the claim­
ant is assumed to be dependent. The 
demise of the traditional family is 
gradually eroding this assumption. 
Cohabitation, separation and di­
vorce, re-marriage, illegitimate 
births, and so on, all present difficult 
problems for the notion of "derived 
entitlements" in the sense that, in the 
case of "atypical" relationships, the 
breakup of long-term ones or the start 
of new ones, it is no longer clear who 
is entitled to what and on what basis. 
It is with regard to these problems 
that the Recommendation stresses 
the fact that "social protection sys­
tems must endeavour to adapt to the 
development of behaviour and of 
family structures where this gives 
rise to the emergence of new social 
protection needs, related in particular 
to changes on the labour market and 
demographic changes". Some Member States have already 
made some first moves in this direc­
tion, modifying the regulations ap­
plying to a number of benefits (eg 
widow and family benefits) or split­
ting entidement to benefits in cases 
of divorce. A more thorough review 
of the whole range of derived entitle­
ments seems necessary, however, in 
order to take account of the new pat­
terns of social relationship. Never­
theless, it is as well to proceed slowly 
in shifting from derived to fully indi­
vidual entitlements in order not to 
avoid worsening the position of 
women. In practice, there remains a 
very unequal distribution between 
men and women of protected, paid 
work, on the one hand, and unpro­
tected, unpaid work, on the other. 
The latter type of work is still carried 
out predominantiy by women, who 
would, therefore, find it difficult to 
gain individual entitlement to 
generous benefits. 
Stability of 
employment 
The third premise of the tradi­
tional welfare state is a stable 
pattern of employment typical of a 
growing industrial economy. The 
slowdown in economic growth and 
the emergence of a post-industrial 
labour market have significantly re­
duced the pool of stable jobs, charac­
terised by the relative continuity of 
employment, and have led to the de­
velopment of more disorderly em­
ployment patterns involving frequent 
changes in job, alternate spells of 
work and unemployment (possibly 
prolonged at times), "atypical" (eg part-time or intermittent) as opposed 
to "typical" work, and so on. 
Existing social protection systems, 
which tend to penalise career inter­
ruptions and, more generally, those 
who work in atypical jobs, have great 
difficulty in coping with these 
changes. A great many people in new 
forms of employment or who are un­
employed, therefore, face the risk of 
not being adequately protected or, 
indeed, joining the ranks of the so-
called "new poor". 
This, then, is another major reason 
for institutional adaptation. The Rec­
ommendation invites all Member 
States to adapt their systems in the 
light of occupational changes and 
specifically mentions the objective 
of modifying the method of acquir­
ing pension rights, so as "to reduce... 
the penalty for those workers who 
have gaps in their careers as a result 
of periods of illness, invalidity or 
long term unemployment and for 
those who gave up work temporarily 
to bring up their children...". Specific 
links will need to be developed be­
tween social protection systems and 
the new forms of employment and 
the greater likelihood of unemploy­
ment, which recognise the difficul­
ties of European labour markets in 
providing stable and uninterrupted 
employment opportunities to an ex­
panding workforce, especially to its 
weaker members. 
121 -
Chapter S - The Impact of social and economic change on systems of social protection 
Indicators of social and economic change 
38 Unemployment rates of men and women aged under 
25 and over 25 in the Member States, 1985 and 
August 1993 
60 r %labourtorce T 50 39 Long-term and very long-term unemployment (>1 year, 
>2 years) In the Member States, 1985 and 1991 
a» % total unemployed 
40 Part-time employment of men and women in the 
Member States, 1983 and 1991 
TO % total employment 
60 F • 1883 
1991 
50 
40 I- P 1988/1991. E 1907/1991 
30 
20 
aaaUUbWHtHflHeRHUaaUH Jjjjl 41 Activity rates of older people (55+) In the Member 
States, 1983 and 1991 
4Q % population ao^d 55+ 
122-
Chapter 9 - The impact of social and economic change on systems of social protection 
Reconciling 
employment 
with family 
responsibilities 
It is women much more than men 
who tend to follow an atypical 
working career. The fourth premise 
underlying the traditional welfare 
state, however, was that women were 
essentially economically inactive 
and primarily involved in unpaid 
family work. This enabled a harmon­
ious relationship to exist between 
production, reproduction and social 
protection, with men in paid employ­
ment earning entidements to social 
protection and women working in the 
home having derived entidements to 
protection. The increasing participa­
tion of women in the labour market 
has disrupted this relationship giving 
rise to growing tensions between the 
professional, family and welfare 
spheres. Institutional maladjustment 
in this respect may have far-reaching 
effects: it not only tends to place a 
heavy burden on women (who are 
expected to work outside the home as 
well as inside) while limiting their 
entidement to welfare benefits, but 
may also reduce their inclination to 
have children, so contributing to the 
decline in fertility and population 
ageing, with all the above-mentioned 
problems. 
Unprotected and unpaid work in the 
home has come to be a new social 
risk in contemporary European so­
cieties, especially for single income 
families, often resulting in situations 
of chronic need. The Recommenda­
tion directly addresses these prob­
lems, by inviting all Member States "to remove obstacles to occupational 
activity by parents through measures 
allowing the reconciliation of family 
and professional responsibilities". 
Once again, adaptation of social pro­
tection systems seems particularly 
urgent in this area. 
Although their welfare systems are 
based on common premises and 
though the challenges faced are 
much the same, Member States are 
responding to problems in different 
ways, reflecting differences in in­
stitutional regulations. The need for 
institutional change offers a unique 
opportunity to reorient social protec­
tion systems so that they develop — 
in the words of the Recommendation 
—. "in harmony with each other and 
in accordance with the overall aims 
of the Community". The starting 
point for this search for new pohcies 
must clearly be a recognition of exist­
ing variations and the reasons why 
such differences exist. 
Institutional 
variations in 
atypical cases: 
pension 
entitlements 
The degree of diversity of the 
various national systems in rela­
tion to new problems can be illustrated 
by considering a number of selected 
cases which are atypical with respect 
to the traditional premises on which 
social protection systems are based but Details of calcula­
tion of benefits for 
atypical cases 
The cases presented in mis 
chapter aim at representing 
situations emerging out of 
new socio-demographic and 
occupational developments. 
These situations are "atypi­
cal" with respect to standard 
social protection patterns and 
are likely to reveal gaps and 
inadequacies in the current in­
stitutional regulations in the 
various countries. Each case is 
defined by particular demo­
graphic, occupational and in­
stitutional characteristics. 
The benefit entitlements ac­
cruing to each "atypical" per­
son are calculated for the 
period July-December 1992 
in net terms (ie after social 
security contributions where 
applicable and income tax less 
allowable deductions). 
The resulting benefits are ex­
pressed as a percentage of the 
net full benefit accruing for 
the same period to a manual 
worker in industry with an un­
broken record of employment 
at average earnings over as 
many years as are required by 
national regulations in order 
to be entided to a full benefit 
For some of the cases, more 
than one outcome is possible, 
depending on the specific 
choices made by the atypical 
person (ie payment of volun­
tary contributions and the 
like). For these cases, a "least 
favourable" and a "most fa­
vourable" position is calcu­
lated. 
-123 
Chapter 9 - The Impact of social and economic change on systems of social protection 
which are becoming increasingly fre­
quent. These cover a necessarily 
limited, but representative, range of 
new problems, in particular, poverty 
among older women; career interrup­
tions because of long-term illness, 
unemployment and the need to care 
for children; marriage breakups and 
single-parent famihes; and part-time 
working. The impact of these cir­
cumstances is examined in terms of 
the effect in each Member State on 
pension entitlements, pensions being 
the main benefit in contemporary 
welfare systems. In each case, the 
pension entitlement is expressed in 
net monthly value terms (the amount 
hypothetically received in the month 
of July 1992), as a percentage of 
net full pension in order to assess the 
loss which results because individual 
circumstances differ from the norm 
42 Case 1 (for precise definitions, see Box 
p. 123). 
Case 1 : 
Poverty among 
older people 
Asingle person aged 70, who has 
never been married, with no de­
pendents, with no significant con­
tributions record, no derived 
entitlement to a widow's pension and 
negligible independent means of sup­
port (ie below whatever income thre­
shold may apply for means-tested 
benefits). 
Although there is some measure of 
protection in all countries for this 
case, either through national pension insurance or through means-tested 
assistance, the degree of protection 
varies considerably. In Denmark, the 
scale of support is high in terms of 
the full pension (93%). In the UK 
and, especially, in Ireland, support is 
also relatively high in terms of the 
full pension (67% and 86%, respec­
tively), but is modest in terms of 
average earnings (31% and 35%, re­
spectively), reflecting the low level 
of basic pension in relation to earn­
ings. 
In the other Northern countries, the 
degree of support is significantly 
lower than the full pension (less than 
60%, except in Germany), but rela­
tively generous in relation to average 
earnings (ranging from 39% in Ger­
many to 49% in the Netherlands). In 
the Southern Member States, the de­
gree of protection is very low (33% 
of the full pension in Spain, 28% in 
Portugal, 23% in Italy and 11% in 
Greece) (Graph 42). 
100 r T 100 Case 2: 
Career interruption 
through illness 
Asingle industrial worker on 
average earnings who has been 
in regular employment for the full 
period required to acquire entitle­
ment to a full pension, except for a 
single 5-year spell of illness in the 
middle of their career. 
Long spells of illness in all but a few 
cases do not affect entitlement to full 
pension benefits. In most countries, 
there is no loss of pension. The only 
countries in which loss is significant, 
and then not in all cases, are Portugal, 
124 
Chapter S^The Impact of social and economic change on systems of social protection 
Italy, Spain and Greece. In Portugal, 
a number of people who fall into this 
category, receive only 70% of the full 
pension, while in Italy, Spain and 
Greece, they receive, in the least fa­
vourable cases, over 90% of the full 
pensions (91 % in Italy, 94% in Spain 
and in Greece, to be precise). 
Case 3: 
Career interruption 
through 
unemployment 
As above, but with a single 
5-year spell of unemployment 
in the middle of their career. 43 Case 3 
:: % full pension Most favourable • least favourable 
li too 
44 ^ 
Long spells of unemployment make 
a slighdy greater difference than long 
spells of illness in a few countries, 
where they are regarded as being less 
"deserving" to be credited towards 
the entitlement to full pension 
benefits. In Luxembourg and the 
Netherlands, the loss of pension en­
titlement amounts to around 10% of 
full pension. They are more signifi­
cant, but only occur in certain cir­
cumstances (least favourable or 
extreme cases) in Greece, Spain and 
Portugal. In Portugal, Greece, Spain 
and Italy, the loss is similar to that 
suffered from a spell of illness. In the 
other countries, a person's entitle­
ment is not affected by a prolonged 
period of unemployment (Graph 43). 120 % full pension 
100 h 
1803 
60 
40 
20 W$MM 
loo 
80 
60 
40 
20 
NL DK I B L F GR E IRL P UK D 
125 
Chapter S - The Impact of social and economic change on systems of social protection 
Case 4: 
Career interruption 
because of child 
care responsibilities 
Afull-time manual industrial 
worker on average earnings, 
married to an average industrial 
wage earner in regular employment, 
who was in regular employment be­
tween 16 and 25, at home caring for 
two children between 26 and 35 and 
in regular employment from 36 to 
retirement age. 
In many Member States, career 
breaks due to bringing up children 
affect entitlement to full pension 
benefits. The loss is greatest in the 
Netherlands (24%), followed closely 
by Denmark and Italy (20-21%). In 
45 Case 5 Belgium, the loss is just over 10%, 
while in Greece (in certain circum­
stances), Luxembourg, France and 
Ireland (without voluntary contribu­
tions being paid), it is between 2% 
and 6%. The loss in each case results 
from the combined effect of un-
credited years during child care 
and/or the failure to satisfy long con­
tributions requirements to gain entit­
lement to a full pension. In most 
countries, it is possible to make vol­
untary contributions when not work­
ing, but these are normally relatively 
high and need to be paid at a time 
when family resources are already 
strained because of children. In the 
UK, Portugal, Spain, Greece and Ire­
land (with voluntary contributions), 
however, spells of inactivity to bring 
up children do not affect pension en­
tidements (Graph 44). 
120 r 
too b % full pension Case 5: 
Career interruption 
due to caring for a 
disabled dependent 
Amanual industrial full-time 
worker on average earnings in 
regular employment between 16 and 
40, at home to care for a disabled 
parent between 41 and 45 and then 
in regular employment from 46 to 
retirement age. 
The loss of benefit is significant in a 
number of countries, most notably in 
Denmark (22%), though also in 
Greece (in certain circumstances), 
the Netherlands, Italy (in certain 
circumstances) and Germany (up to 
January 1992, from which date 
periods of caring for dependents are 
credited towards pension entitle­
ment), where the loss was over 10%, 
and in Belgium where it was only 
slighdy less. In the UK, Ireland and 
France, the loss is negligible, while 
there is no loss at all in Portugal, 
Spain and Luxembourg. In these 
three countries, however, the fact that 
there is no loss is due to the long 
period of contributions paid by the 
person in the example rather than to 
the crediting of periods of care 
(Graph 45). 
Case 6: 
Marriage break-up 
Awoman at retirement age, who 
was at home married to a ma­
nual industrial worker on average 
earnings between 20 and 45, di­
vorced at 45 and then in regular 
-126-
Chapter 9 -The Impact of social and economic change on systems of social protection 
full-time employment in the indus­
trial sector on average earnings to 
retirement age. 
Except for Ireland, where there is no 
loss, and Denmark, where the loss is 
only 2%, there is a significant loss of 
benefit in all countries. The loss is 
due to the fact that contributions are 
not paid or credited during the period 
when the woman was married and 
not working. The loss of benefit is 
highest in Portugal (over 60%) and 
Italy (55%) and lowest in Belgium 
(8%), where women receive a no­
tional pension entidement during the 
years of marriage (Graph 46). 
Case 7: 
A single parent 
Asingle parent at retirement age 
with no dependents, who was in 
full-time manual industrial work at 
75% average earnings between 18 
and 28, at home to bring up a child 
between 29 and 33 and then in full-
time employment at 75% average 
earnings from 34 to retirement age. 
Only in Denmark and Ireland is there 
entidement to full pension — though 
in Ireland, the case specified is very 
untypical since women tend to spend 
much longer periods at home follow­
ing childbirth (often 10 to 15 years) 
and often do not qualify for a pension 
at all. The loss of benefit is relatively 
small (less than 20%) in the UK, 
Germany and Luxembourg (because 
of the credit given for periods of child 
care). In the other countries, the loss 
of benefit is more substantial, espe­
cially in the Netherlands and Portu­
gal (where it is 40-50%). (A large 46 Case 6 
100 % full pension 
• 4^§ICase 7 
100 % full pension 100 
-127-
Chapter 9 - The Impact of social and economic change on systems of social protection 
48 Case 8 
% full pension 
100 r part of the loss in pension in countries 
with an earnings-related scheme, it 
should be noted, stems from the as­
sumption that the person in the 
example is on only 75% of average 
earnings.) (Graph 47) 
Case 8: 
Marriage break-up 
with a disabled child 
Afemale manual industrial 
worker married at 20 to a ma­
nual industrial worker on average 
earnings and employed on 75% 
average earnings between 16 and 
32, divorced at 33 and left with a 
newborn disabled child which she 
cares for full-time. 
49 Case 9 
% full pension • Most favourable H Least favourable 
100 r Once again, only in Ireland and Den­
mark is the loss of benefit negligible. 
The loss is between 30 and 40% in 
the UK, France and Greece, while it 
is around 50% or more in all the other 
countries. Although Germany is the 
only country where it is possible to 
split contributions earned during 
marriage prior to the divorce, this 
does not seem to benefit the woman 
in the example relative to other coun­
tries, largely because of her being in 
work for too short a time (Graph 48). 
Case 9: 
Part-time working 
Amanual industrial worker on 
average earnings in full-time 
regular employment between 16 and 
28, in half-time regular employment 
at half average earnings between 29 
128 
Chapter 9-The Impact of social and economic change on systems of social protection 
and 43 and then in full-time regular 
employment until retirement age. 
In most countries a spell of part-time 
work in the middle of a working 
career does not seem adversely to 
affect pension entitlement other than 
marginally. However, there is a sig­
nificant loss of pension — 10% or 
more — in Belgium, Germany, Italy, 
Luxembourg and the Netherlands, 
due to the fact that in these countries 
the pension entidement is earnings-
related and is, therefore, reduced by 
a period of work on only half average 
earnings (Graph 49). 
Entitlement to 
health care 
Afurther question to be exam­
ined is the effect of atypical 
circumstances on a person's entitle­
ment to health care in the different 
Member States. In fact, for virtually 
all the cases discussed above, health 
care entitlement is not affected by 
individual circumstances. In all 
countries, the means are in place to 
cover this, through health insurance 
schemes, public assistance or a 
universal national health service. The 
only circumstances where this might 
not be the case is when a person is not 
formally employed but works in the 
"black" or "grey" economy and has 
not, therefore, paid social security 
contributions. Even here, however, 
public assistance is likely to be avail­
able in all countries if the person is in 
need of health care. Concluding 
Remarks 
'he main points to emerge from the 
above analysis are as follows: 
• career interruptions due to ill­
ness only marginally affect pen­
sion entitlement; 
• long spells of unemployment 
also have a modest effect in 
most countries, though a bigger 
effect than prolonged illness in a 
few countries; 
• periods of inactivity caring for 
children at home adversely af­
fect pension entitlement in most 
Member States; 
• most social protection systems 
do not seem well equipped to 
deal with divorce, especially 
where there are additional prob­
lems (such as a disabled child) 
and the weaker spouse is often 
left without adequate pension 
protection; 
• spells of part-time work cause 
loss of pension entidement only 
in a minority of countries; 
• there are no significant gaps in 
coverage so far as access to 
health care is concerned. 
There are, however, differences be­
tween Member States both as regards 
the general formula for pensions (in 
some countries, there is just one full 
pension, in others, a basic pension 
plus additional amounts; in some, 
pensions are earnings-related, in others, they are flat-rate; in some, it 
takes longer to accumulate entide­
ment to a full pension, in others, less 
time, and so on) and as regards the 
provisions for splitting entitlement 
between husband and wife, crediting 
contributions for periods of inactiv­
ity and the like. So far as the impact 
of career interruptions and divorce 
on pension entidement is concerned, 
the countries can be divided into four 
groups: 
• the Anglo-Saxon group, consist­
ing of the UK and Ireland, where 
atypical circumstances have only 
a modest effect on final pension, 
but where the level of protection 
is relatively low in relation to 
average earnings (though the 
Irish system is slighdy more 
generous than the British); 
• the Scandinavian group, consist­
ing at present only of Denmark, 
where atypical circumstances 
also have relatively little effect 
(especially in the case of divorce 
and part-time work), but where 
the level of protection is rela­
tively high in relation to average 
earnings; 
• the Northern European group, 
consisting of France, Germany 
and the Benelux countries, to 
which Italy might be added, 
where atypical circumstances af­
fect pension entitlement, because 
of the earnings-related nature of 
the social protection system, but 
where the degree of protection 
remains relatively high in rela­
tion to average earnings; 
• the Iberian group, consisting of 
Spain and Portugal, where atypi-
129 
Chapter S - The Impact of social and economic change on systems of social protection 
cal circumstances make tittle dif­
ference to final pension benefits 
and where the degree of protec­
tion is also relatively high in re­
lation to average earnings. This 
group, therefore, seems to com­
bine the best of both worlds, not 
penalising broken careers gready 
and having generous pensions. 
However, it should be empha­
sised that in these two countries, 
the proportion of the labour 
force which has access to a guar­
anteed, stable job is relatively 
small; the values for pension en­
titlement reported above are, 
therefore, theoretical amounts 
which are difficult to achieve in 
practice because of the limited 
size of the formal labour market. 
Finally, Greece seems to be some­
where between the second and the 
third groups in terms of the charac­
teristics of its system. 
It should be emphasised that the 
analysis here has been confined to 
examining the effect on pension en­
tidement and access to health care 
and has not considered how well so­
cial protection systems across the 
Community deal with spells of inac­
tivity or marriage breakdowns when 
they occur. Nevertheless, it does in­
dicate that these occurrences do have 
a penalising effect, though perhaps 
smaller than might have been ex­
pected. Some changes in institutional 
arrangements seem, therefore, to be 
called for, possibly to bring about a 
greater convergence in the extent of 
protection provided between the four 
groups of countries identified above. 
130-
Acknowledgements 
This report has been prepared with the collaboration of: 
- Eurostat — Statistical Office ofthe European Communities 
- A Commission network of experts made up of Peter Abrahamson, Manuela Arcanjo, Jos Berghman, Ignacio 
Cruz Roche, Alain Euzeby, Maurizio Ferrera, Mariana Fotaki, Pierre Hausman, Carol Propper, Heinz-Dietrich 
Steinmeyer, Jef Van Langendonck and Gerry Whyte. 
- Applica sprl 
- Alphametrics Ltd 
Notes 
Unless where otherwise stated, data for Germany in this report refer to the former Western part of Germany 
PPS: References to PPS relate to Purchasing Power Standards which are a measure of GDP reflecting the real purchasing 
power of a currency within the country concerned. They aim to provide a reliable indication of the volume and structure 
of goods and services intended for a particular final use, and permit comparisons in real terms of GDP and its 
components between Community countries. See Purchasing Power Parities and GDP in real terms, Results 1985, 
Eurostat 1985, and National Accounts ES A, Aggregates, Eurostat annually. 
Chapter 4: Data on mortality rates come from European Community Atlas of Avoidable Deaths, Oxford, OUP 1991. 
Results on access to health care are based on A. Wagstaff and E. Van Doorslaer (1993), Equity in the delivery of health 
care: methods and findings ofthe COM AC — HRS project, in F. Rutten, E. Van Doorslaer and A. Wagstaff (eds), 
International comparisons of equity in the finance and delivery of health care, Oxford, OUP 1993. 
The section on the effect of social protection on household income was inspired by Poverty and adequacy of social 
security in the EC, \\. Dcleeck, K. Van Den Bosch and L. De Lathouwer (eds), Avebury 1992. 
Chapter 7: The section on systems of health care in Member States was inspired by B. Abel-Smith, Cost containment 
and new priorities in health care, Avebury 1992, The reform of health care: a comparative analysis of seven OECD 
Countries, OECD, Paris 1992 and Dépenses de santé: un regard international, Rapport au Premier Ministre presented 
by Y. Moreau, Paris 1992. All data come from Health care systems in OECD countries, facts and trends, 1960-1991, 
Paris 1993. 
Chapter 8: This chapter is based on a study under preparation by a network coordinated by the CERC — Centre d' Etude 
des Revenus et des Coûts (F) and made up of B. Cantillon (B), W. Friedrich, D. Engels and U. Kremer-PreiB (D), 
T. Lopez Lopez (E), M. Van Den Brink, Y. Grift and J. Siegers (NL), J. Ditch (UK), M. Sundstrôm (Sweden) and 
P. Vieille (Switzerland). 
131 -
Graphs 
1 Social protection expenditure per head and in relation to GDP, 1991 41 
2 Social protection expenditure and GDP per head, 1991 42 
3 Growth in social protection expenditure per head, 1980-1991 43 
4 Average old-age pension in relation to GDP per head, 1980 and 1991 45 
5 Average unemployment benefit in relation to GDP per head, 1980 and 1991 48 
6 Average family allowance in relation to GDP per head, 1980 and 1991 50 
7 Structure of social protection receipts, 1980 and 1991 50 
8 Households with incomes below the poverty level, before and after social security, mid-1980s 64 
9 Indicators of the effectiveness of social protection systems, mid-1980s 64 
10 Expenditure on active and passive labour market policies in relation to GDP, 1992 68 
11 Active labour market expenditure in relation to total labour market expenditure and the unemployment 
rate, 1992 68 
12 Operating costs of social protection systems relative to total benefits, 1980 and 1991 80 
13 Labour costs and social contributions of manual workers in manufacturing, 1988 83 
14 Average hourly labour costs in manufacturing and social protection expenditure per head in the Member 
States, 1990 84 
15 Change in social protection expenditure excluding unemployment benefits and export growth, 1980-1991 84 
16 Change in employment and social protection expenditure excluding unemployment benefits, 1980-1991 85 
17 Change in employment and change in social protection expenditure excluding unemployment benefits, 
1980-1991 85 
18 Unemployment and social protection expenditure excluding unemployment benefits, 1983-1991 85 
19 Change in unemployment and change in social protection expenditure excluding unemployment benefits, 
1983-1991 85 
20 Rate of social security contribution and wages levels in the Member States - Belgium 88 
21 Rate of social security contribution and wages levels in the Member States - Denmark 88 
22 Rate of social security contribution and wages levels in the Member States - Germany 88 
23 Rate of social security contribution and wages levels in the Member States - Greece 88 
24 Rate of social security contribution and wages levels in the Member States - Spain 90 
25 Rate of social security contribution and wages levels in the Member States - France 90 
26 Rate of social security contribution and wages levels in the Member States - Ireland 90 
27 Rate of social security contribution and wages levels in the Member States - Italy 90 
28 Rate of social security contribution and wages levels in the Member States - Luxembourg 92 
- 132-
29 Rate of social security contribution and wages levels in the Member States - Netherlands 92 
30 Rate of social security contribution and wages levels in the Member States - Portugal 92 
31 Rate of social security contribution and wages levels in the Member States - United Kingdom 92 
32 Total and pubhc expenditure on health care in relation to national expenditure in the Community, 1970, 
1980 and 1991 97 
33 Population aged 75 years and over in the Member States, 1980 and 1991 98 
34 Actual and projected population in the Community, 1960-2020 120 
35 Births, marriages, divorces per thousand people in the Community, 1960,1970, 1980 and 1991 120 
36 Activity rates of women aged 25-49 in the Member States, 1983 and 1991 120 
37 Single female parents, employed, unemployed and inactive in the Member States, 1987 and 1991 120 
38 Unemployment rates of men and women aged under 25 and over 25 in the Member States, 1985 and 
August 1993 ....122 
39 Long-term and very long-term unemployment ( 1 year, 2 years) in the Member States, 1985 and 1991 122 
40 Part-time employment of men and women in the Member States, 1983 and 1991, 122 
41 Activity rates of older people (55+) in the Member States, 1983 and 1991 123 
42 Case 1 - Poverty among older people 124 
43 Case 3 - Career interruption through unemployment 125 
44 Case 4- Career interruption because of child care responsibilities .? 125 
45 Case 5 - Career interruption due to caring for a disabled dependent 126 
46 Case 6 - Marriage break-up 127 
47 Case 7 - A single parent 127 
48 Case 8 - Marriage break-up with a disabled child 128 
49 Case 9 - Part-time working 128 
Tables 
1 Current social protection expenditure as % of GDP, 1970-1991 42 
2 Division of social benefits by function, 1991 (%) 45 
3 Factors explaining expenditure on old-age pensions 46 
4 Factors explaining expenditure on unemployment benefits 47 
5 Factors explaining expenditure on family allowances 49 
6 Tax treatment of social benefits in the European Community (July 1992) 52 
7 Contributions payable on social benefits in the Community (July 1992) 52 
133 
8 Benefits received at retirement as a % of average net earnings of manual workers in manufacturing 54 
9 Sickness and invahdity benefit 55 
10 Disabled - long-term incapacity for work 56 
11 Unemployment benefits 57 
12 Benefits payable to an 18 year-old unemployed person 58 
13 Maternity benefits 59 
14 Benefit payable to single parent with no contributions record 60 
15 Widow's benefits 60 
16 Family allowances 61 
17 Social minima (July 1992) 62 
18 Expenditure on labour market pohcies, 1992 (% GDP) 69 
19 Welfare policies for the excluded in Denmark 71 
20 Components of the Danish Job Offer scheme 71 
21 Taxes and social contributions as % of total labour costs, 1988 (average wage in manufacturing, 
unmarried manual worker) 82 
22 Taxes and social contributions as % of total labour costs, 1988 (average wage in manufacturing, married 
manual worker with two children and spouse not working) 83 
23 Public expenditure on health care as a % of total expenditure on health care 99 
24 Elasticity of net disposable income to gross earnings 117 
134 
- 135 
ISSN 0254-1475 
COM(93) 531 final 
DOCUMENTS 
EN 05 
Catalogue number : CB-CO-93-570-EN-C 
ISBN 92-77-60260-0 
Office for Official Publications of the European Communities 
L-2985 Luxembourg