-.; i COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 23.04.98 
COM( 1998) 243 final 
I REPORT FROM THE COMMISSION 
TO THE COUNCIL, THE EUROPEAN PARLIAMENT, 
THE ECONOMIC AND SOCIAL COMMITTEE 
AND THE COMMITTEE OF THE REGIONS 
Social Protection in Europe 1997 
— Executive summary 
*< '^i * % 
A;'"I 

Social Protection in Europe 1997 —Executive summary 
Social Protection in Europe 1997 
— Executive summary 
The political context 
This is the third report on Social Protection in Europe. 
It sets out to monitor the progress achieved in relation 
to the objectives contained in the Council's Recommen­
dation on the convergence of social protection objectives 
and policies of July 1992 (92/442/EEC) and to update the 
analysis of the 1993 and 1995 reports. 
The Report is also intended to contribute to the debate on 
the future of social protection in the Union, launched by 
the Commission in 1995 with its Communication Frame­
work for Debate on the Future of Social Protection. In 
March 1997, the Commission published a further Com­
munication, Modernising and Improving Social Protec­
tion, which reflected the main points made in the debate 
and drew attention to the major implications for policy. 
The report should also be seen in the context both of 
Member States' efforts to consolidate public finances — 
as pointed out in the 1997 Broad Economic Guidelines 
and the two Resolutions on macro-economic stability, 
growth and employment, adopted at the European Council 
in Amsterdam — and of the European Employment 
Strategy. At the Luxembourg Jobs Summit in November 
1997, Member States broadly endorsed the Commission's 
proposals for employment guidelines.. They agreed that 
benefit as well as training systems should, where necess­
ary, be reviewed and adapted to ensure that they actively 
support employability. Social protection also has an im­
portant role to play in helping to achieve other aims 
emphasised in the 1998 Employment Guidelines which 
were subsequently adopted — developing entrepreneur-
ship, encouraging adaptability of businesses and their 
employees and strengthening the policies for equal oppor­
tunities. A clear link has, therefore, been established at the highest level between social protection systems and the 
European Employment Strategy. 
The main quantitative findings 
The main points to emerge from the analysis of the 
revised ESSPROS database on social protection and 
the new European Community Household Panel are: 
The scale of social expenditure: expenditure on social 
protection in the Union amounted to 2872% of GDP in 
1995. This figure, however, ranged from 20% of GDP in 
Ireland and 21-22% in Greece, Spain and Portugal to over 
30% in France, the Netherlands and the three Nordic 
countries, with Sweden having the highest level at almost 
36%. 
The pattern of social expenditure: old-age pensions are by 
some way the largest item of social protection expenditure 
in the Union, accounting for 42'/:% of the total in 1995, 
equivalent to 12% of GDP, followed by health care. 
amounting to around 227c of the total in the Union, as well 
as in all Member States, except for Denmark (only 14%), 
and to some 6% of GDP. Transfers to the unemployed 
accounted for only 8% of total expenditure in the Union 
Gust under 272% of GDP). 
The growth of social expenditure: in most Member States, 
the increase in social protection expenditure has slowed 
down in recent years. Although social expenditure across 
the Union increased in relation to GDP between 1990 and 
1995 (by just over 2 percentage points), this partly reflects 
the slowdown in GDP growth during the recession years. 
Between 1993 and 1995, spending grew no faster than 
GDP and in most countries rose by less. 
1 -
Social Protection in Europe 1997 — Executive summary 
Sources of finance: around 65% of the funding for social 
protection in the Union comes from social charges levied 
on employers and the people protected, most of the rest 
from general taxation. Employers' contributions alone 
accounted for some 40% of total finance in 1995. 
Levels of unemployment benefit: a significant proportion 
of people unemployed in a number of Member States, 
according to the ECHP, received no unemployment 
benefit at all in 1993, even when out of work for three 
months or more. For those receiving benefit, the monthly 
amount averaged just over half of their net earnings for 
the months when they were working, though it ranged 
from 60-65% in Denmark, France and Ireland to only 
25% in Greece and the UK. 
The relief of poverty: social transfers (including private 
pensions, but excluding benefits in kind, such as health 
care) accounted for around 30% of net household income 
in the Union in 1993. For some 35% of households, they 
were the main source of income and without them just 
under 40% of households would have had a level of 
income of under half the national average (the conven­
tional measure of poverty). After transfers, around 17% 
of households in the Union had a level of income below 
this. ened and the contribution record required for eligibility 
has been lengthened. 
Strengthening incentives to work: in several countries, 
measures have been introduced to try to ensure that in­
come from work is always higher than from benefits 
through tax concessions for low-paid workers and in-work 
benefits as well as by reducing benefit rates. 
Shifting towards more active policies: there is general 
recognition that providing income support alone is not 
sufficient to tackle problems of unemployment and social 
exclusion. In the 1998 Employment Guidelines agreed by 
the Council, Member States have committed themselves 
to bringing about a shift from passive to active measures 
aimed at increasing the employability of those out of work 
and helping them find a job. 
Extending job creation schemes: in a number of Member 
States, job creation has been encouraged by selective 
reductions in social contributions as well as by direct 
subsidies. Member States, moreover, have agreed in the 
Employment Guidelines to investigate possible means of 
developing local employment opportunities in the social 
economy and new activities where needs are not being met 
bv the market. 
Recent changes in policy 
The economic and social context in which European 
social protection systems operate has changed con­
siderably over the past decade or two (as analysed in the 
Commission Communication Modernising and Improv­
ing Social Protection). Over the 1990s, low economic 
growth has increased both the difficulties of funding so­
cial protection across the Union and, in combination with 
demographic and social trends, the number of people 
being supported. While income maintenance and preven­
tion of social exclusion continue to be fundamental objec­
tives of social protection systems, the aim of policy is to 
strengthen incentives to work and to improve the em­
ployability and adaptability of the work force. The major 
policy developments are: 
Tightening of eligibility for benefit: in many Member 
States, qualifying conditions for benefit have been tight-Reducing dependency and social exclusion: throughout 
the Union, social assistance guarantees a minimum level 
of income. The general tendency within Member States' 
social assistance schemes is to address underlying causes 
of poverty and social exclusion, to reduce reliance on 
benefits and to encourage all those able to work to find 
employment. 
Helping people with disabilities: efforts have been made 
in many Member States to improve the employment op­
portunities of those with disabilities, through deterring 
discrimination and removing obstacles to them working, 
while at the same tightening eligibility for benefit. 
Reversing the trend towards early retirement: there has 
been a long-term trend towards early retirement across the 
Union, pushing up social expenditure and depriving the 
economy prematurely of the skills which the people con­
cerned have to offer. For women, this trend has been offset 
by a more powerful tendency for increased participation 
in employment, but for men, it has led to around half of 
Social Protection in Europe 1997—Executive summary 
men aged between 55 and 64 (ie below the official retire­
ment age in most countries) no longer being in work. In a 
number of Member States, measures have been intro­
duced to discourage early retirement, by tightening the 
conditions for eligibility and/or reducing the amount 
payable. 
Encouraging partial retirement: attempts have been made 
(in Germany, France, Austria and Finland, especially) to 
encourage partial retirement by making it possible for 
people to receive a partial pension if they reduce their 
hours of work. So far, however, except in France, very few 
people have opted to take advantage of the possibility. 
Adapting to population ageing: reform of pension systems 
continues to be the focus of political attention to limit the 
costs implied by an ageing population. In many Member 
States, the official retirement age has been raised, espe­
cially for women, and for both sexes is in most cases being 
standardised at 65, while measures have been introduced 
in a number of countries to reduce the pensions payable. 
A further tendency has been to link the pension receivable 
more closely to the contributions paid over a person's 
lifetime, so reinforcing the insurance aspect of the system. 
So far, there has been no general tendency to shift away 
from pay-as-you-go to funded schemes (from contribu­
tions covering current pensions to covering future lia­
bilities), though there is widespread growth in 
occupational and private pensions. Providing long-term care: there is widespread debate on 
how caring needs should be met — whether through 
transfers or through the direct provision of services and 
how far the State should be involved. In the three Nordic 
EU countries, in particular, social services are well de­
veloped, though they have been increasingly subject to 
budget constraints. Elsewhere, adequate arrangements for 
helping to cover the costs of care as part of the social 
protection system exist in few Member States, the most 
notable examples being the schemes introduced in Austria 
in 1993 and in Germany in 1995, the former funded by 
general taxation, the latter by social contributions. 
Targeting expenditure: Targeting resources on those most 
in need is of growing political concern throughout the 
Union. This is reflected in both the extension of means-
testing — though so far in most cases this remains very 
limited in scale — and the imposition of taxes and/or 
social charges on benefit recipients, which can serve to 
spread the cost of funding social protection more equit­
ably, given the increasing prosperity of many pensioners. 
Containing health-care costs: a common feature of recent 
policy developments in Member States has been to im­
pose ceilings on expenditure of national health services or 
of health insurance funds. While this, has generally suc­
ceeded in holding down spending relative to GDP, it has 
led to other concerns — about the way in which resources 
are effectively being rationed and the efficiency with 
which they are being used. In many countries, direct 
charges for drugs and certain services have been intro­
duced or extended to make consumers aware of the costs 
involved in their supply and so encourage them to restrain 
their demand. In a number of Member States, govern­
ments have sought to exploit the potentially beneficial 
effects of market mechanisms on efficiency by separating 
purchasers and providers more clearly, by encouraging 
both to adopt more commercial attitudes and by making 
room for managed competition in some areas. 
-3 
Modernising social protection and adapting systems to change 
Modernising social protection 
and adapting systems to change 
Systems of social protection and 
their reform have become a cen­
tral area of policy concern across the 
European Union. The Commission's 
Communication Modernising and 
Improving Social Protection in the 
European Union (COM(97)102) 
pointed out that the financial and 
operational structures of most sys­
tems were established decades ago. 
Since then, the economic and social 
conditions under which they operate 
have changed, and will continue to 
do so. Demands on social protection 
systems have grown and constraints 
on their funding have tightened. This 
concern has been reinforced by the 
ageing of the population and the im­
pending growth in the number of 
people of pensionable age. In the ef­
forts to reform social protection sys­
tems, the common aims are to assure 
their continued effectiveness, to en­
sure that systems strengthen rather 
than obstruct economic growth and 
job creation, to contain the costs of 
providing social support to all those 
who need it and to shift towards a 
more active policy designed to get 
people into employment rather than 
merely transferring income to them 
when they are not working. 
This new emphasis is reflected in 
recent European Council declara­
tions. At Dublin at the end of 1996, 
the need for taxation and social pro­tection systems to become more em­
ployment-friendly and more active in 
the fight against unemployment was 
stressed, while, at the Luxembourg 
Jobs Summit at the end of 1997, the 
Council called for a more active ap­
proach to increase the employability 
of those out of work. The framework 
for such an approach is set out in the 
Commission's Communication 
mentioned above as well as in the 
1998 Employment Guidelines 
agreed by the Council (OJ C 30 of 28 
January 1998). The main lines of ac­
tion identified in the latter—improv-
ing employability, developing 
entrepreneurship, encouraging adap­
tability of businesses and their em­
ployees and strengthening the 
policies for equal opportunities — all 
have significance for the orientation 
of systems of social protection. 
The present Report is very much fo­
cused on the themes which were the 
subject of the Communication and 
the Employment Guidelines, and 
which are a prominent feature of the 
changes being made to systems of 
social protection across the Union. 
Its specific aim is to contribute to the 
process of reform by reviewing and 
analysing these changes and so 
broaden understanding of the 
measures concerned. In part, it up­
dates the analysis contained in the 
two previous Social Protection in Europe Reports, for 1993 and 1995 
and like them is a product of the 
European Council Recommendation 
of July 1992 (92/442/EEC) to moni­
tor the progress achieved in relation 
to the convergence of social protec­
tion aims and policies across the 
Union. (The full report is published 
in English, French and German; the 
present document which summarises 
the main findings is available in all 
11 Community languages.) 
It is based, wherever possible, on 
quantitative information, drawn in 
particular from two new sources of 
comparable data — the revised ES-
SPROS (the European System of In­
tegrated Social Protection Statistics) 
on expenditure on the various ele­
ments of social welfare and their fin-
ancing and the new European 
Community Household Panel 
(ECHP). The latter provides, for the 
first time, a comparable insight into 
income and living conditions in 
Member States, into the distribution 
of benefits between households and 
the level of income support they pro­
vide. (Both sources of data are de­
scribed in the technical annex — 
Notes and sources — at the back of 
the full report and these should be 
consulted before drawing policy con­
clusions from the findings presented 
here.) 
-4 
Modernising social protection and adapting systems to change 
Outline of the Report 
The Report begins by examining 
the changing context in which 
social protection systems in the 
Union are operating, focusing on the 
main demographic, social and econ­
omic developments affecting the 
need for support. Secondly, it ana­
lyses the scale of expenditure on so­
cial protection in Member States, its 
division between different functions 
and the relative importance of 
various sources of finance. Thirdly, 
it considers the weight of social 
transfers in household income and 
their contribution to reducing dis­
parities in income between house­
holds. Fourthly, it reviews the major 
changes which have been made to 
social welfare systems across the 
Union in recent years, focusing on 
the period since 1995. 
Four aspects of particular policy con­
cern are analysed in some detail: 
• the operation of unemployment 
compensation systems which in 
a number of Member States are 
being modified to give a greater 
incentive for people to fmd 
work; 
• policy towards retirement and, in 
particular, towards reversing the 
trend for people to retire before 
reaching official pensionable 
age; 
• action to contain the growing 
cost of health care while safe­
guarding the quality of service; 
• long-term care for those who are 
infirm or too frail to look after 
themselves and who are impos­ing new demands on social wel­
fare systems. 
The changing 
context 
While European economies are 
wealthier than ever before 
and real income, apart from brief in­
terruptions, has continued to grow, 
the demands on systems of social 
protection have risen even more 
rapidly. In recent years, this has oc­
curred, moreover, in a macroecon-
omic context in which, in most parts 
of the Union, Governments have 
given priority to limiting expenditure 
growth and consolidating public fin­
ances. (The analysis in Competitive 
Europe, benchmarking the EU 
against the experience of Ireland and 
New Zealand might help Member 
States decide how best to adapt their 
public finances and social protection 
systems to this new context.) Despite 
the growth in wealth, the scale of 
dependency on social transfers in 
most Union Member States is prob­
ably greater now than at any time 
during the post-war years. This 
seeming paradox is explained by a 
combination of demographic, social 
and economic developments which 
have imposed pressure on social wel­
fare systems they were not designed 
to deal with. 
In the first place, the population 
above the official age of retirement 
(65 in most countries) has increased 
in relation to the number of people of 
working-age and is set to rise even 
more dramatically in the years to 
come. In 1986, for each person aged 
65 or over in the Union (the present 
15 Member States), there were five people aged 15 to 64. By 1996, 
growth in the number of people of 65 
and over meant that for every one 
person in this age group, there were 
only just over 4 people of working 
age. By 2020, on the latest projec­
tions, there will be only just over 3 
people of working age in the Union 
for every one person aged 65 and 
over. 
At the same time, the number of men 
aged between 55 and 64 no longer 
economically active has increased 
markedly, from 43% of those in this 
age group in 1986 to almost 50% in 
1996 (the proportion of women re­
mained much the same), largely be­
cause of the slow rate of economic 
growth and the inadequate rate of net 
job creation. If this upward trend con­
tinues, it will add to the pressure on 
pensions systems in future years as 
the growth in the relative number of 
people of 65 and over accelerates. 
Moreover, the average age of the 
population of 65 and over is already 
increasing at the present time, inten­
sifying the pressure on health care 
and social services (the average cost 
of providing health care alone to 
someone aged 65-74 is estimated to 
be 2-2V2 times higher than for people 
under 65, for someone of 75 or over, 
4-5 times higher). Whereas around 
40% of those of 65 and over in the 
Union were 75 or over in 1996, by 
2010, this is projected to rise to 47%, 
an increase of 3 3 % in numbers in just 
14 years (an average growth of 2% a 
year). Although total population in 
the Union is likely to increase by only 
3% over this period, therefore, the 
'healthcare-adjusted' rise is almost 
10% (ie in terms of the increase in 
demand for health services implied 
by the prospective demographic 
-5 
Modernising social protection and adapting systems to change 
change). Beyond 2010, though total 
population is unlikely to change 
much, the number aged 65 and over 
is projected to continue increasing, 
implying a 'healthcare-adjusted' 
growth in population of around V2% 
a year. 
Secondly, unemployment has in­
creased markedly from the rates ex­
perienced in the earlier post-war 
years. In the Union as a whole, the 
average rate was consistently below 
3 % of the labour force throughout the 
1950s, 1960s and early 1970s, 
whereas it has been persistently 
above 8% since 1982 — except in 
1990, when it was only slightly 
lower. A significant proportion of 
people of working age have, there­
fore, been unable to obtain a job to 
contribute to the generation of in­
come required to support those in 
retirement and have instead added to 
the need for social transfers. 
The average duration of unemploy­
ment has also increased considerably 
since the mid-1970s. By the mid-
1980s, the number in the Union who 
had been out of work for a year or 
more had risen to over 5% of the 
labour force, over half of the total 
unemployed. While it fell slightly be­
tween then and the early 1990s, as a 
result of the high rate of job growth, 
by 1996, the number had risen to 
around 5% of the labour force once 
more. Over 8V2 million people across 
the Union were, therefore, long-term 
unemployed at the last count and of 
these over 60%, almost 572 million, 
had been out of work for two years or 
more. 
In consequence, whereas unemploy­
ment compensation systems were de­
signed to provide income support for temporary spells of joblessness, in 
practice, for the last 10 years and 
more, at least half of those unem­
ployed at any time were in need of 
longer term and, almost certainly 
more extensive, assistance. More­
over, the figures for long-term unem­
ployment do not reveal the full extent 
of the increase in dependency. Up 
until recently, there was also a signi­
ficant rise in a number of Member 
States (in the Netherlands and the 
UK, in particular) in men over 50 
classified as disabled largely because 
of their inability to find a job. 
The other major feature of economic 
developments which is relevant has 
been the substantial and ongoing in­
crease in the proportion of women 
pursuing working careers. This trend 
spread first across much of Northern 
Europe in the 1960s and 1970s and 
then, in the 1980s, to the Southern 
Member States. In 1970, only around 
40% of women aged 25 to 54 in the 
Union were in work or actively look­
ing for work. By the mid-1980s, this 
figure had increased to 60% and by 
1996, had reached almost 70%. In 
Spain and Ireland, the figure has risen 
from under 40% to 57% during the 
last decade alone. The effect of this 
has been to increase the demand not 
only for social support to help take 
care of children and elderly and frail 
parents or grandparents, but also for 
the individualisation of rights under 
the social protection system and for 
due account to be taken of interrup­
tions to paid employment in the cal­
culation of benefit entitlement. 
This increase in demand has been 
reinforced by the changing structure 
of households and, in particular, the 
growth of people living alone and of 
lone parent families, coupled with the decline in the extended family. 
The average household size declined 
by 5% over the 10 years 1986 to 
1996. This decline was common to 
most parts of the Union, though the 
average household size remains sig­
nificantly larger in the Southern 
Member States (2V2 people aged 15 
and over per household) than in the 
Northern ones (under 2 per house­
hold). It is attributable, in particular, 
to the substantial increase in single 
adult households (ie with only one 
person aged 15 or over), which rep­
resented almost a quarter of all 
households in the North of the Union 
in 1996 as opposed to under 20% a 
decade earlier. 
Some 8% of single adult households 
in 1996 had children, though in Bel­
gium, Austria and the UK, the figure 
was over 12%. The great majority of 
the adults concerned were women, 
many of them in parts of the Union 
not in work and dependent on social 
transfers —• in the UK, for example, 
some two-thirds of lone-parent 
families receive income support. 
Moreover, in general, if someone is 
unemployed in the Union, there is a 
much higher probability that they 
live either alone or in a household 
where the other members are out of 
work than in one where someone else 
is in paid employment and, therefore, 
bringing in income. In 1996, 15% of 
households in the Union with a work­
ing-age adult had nobody in work. In 
Belgium, Finland and the UK, the 
figure was 20% or more, much 
higher than the average rate of unem­
ployment. In the UK, where unem­
ployment fell significantly over the 
10 years 1986 to 1996, the proportion 
of households where nobody was in 
work rose, while in Ireland, where 
Modernising social protection and adapting systems to change 
unemployment fell by even more, the 
proportion remained unchanged. 
The main 
quantitative findings 
The scale of 
social expenditure 
Any assessment of the scale of social 
protection in European countries, 
and the associated cost in terms of the 
transfers involved, can only satisfac­
torily be made by considering the 
revenue side of the public sector ac­
counts as well as expenditure. This is, 
first, because social transfers are in­
creasingly subject to tax or social 
charges in a number of Member 
States and, accordingly, part of the 
expenditure incurred by government 
returns as tax or other receipts. Sec­
ondly, effective transfers can, in prin-
ciple, be made through tax 
concessions or allowances as well as 
through benefit payments and, in this 
case, will show up as lower receipts 
rather than as expenditure. Estimat­ing the scale of such so-called tax 
expenditures and the revenue gener­
ated by taxes on benefits is, however, 
fraught with difficulty. 
So far as expenditure is concerned, 
social protection (as defined under 
the new ESSPROS to include social 
transfers, either in cash or in kind for 
welfare purposes, and health care) 
amounted to 28'/2% of Union GDP in 
1995. This figure, however, varied 
markedly between Member States, 
ranging from 20% of GDP in Ireland, 
21 % in Greece and Portugal and 22% 
in Spain, to 30% or more in France, 
the Netherlands and the three Nordic 
Member States, with Sweden show­
ing the highest figure at just under 
36% of GDP (Graph 1). For the rest, 
in Belgium, Germany and Austria, 
expenditure was just under 30% of 
GDP, while in the UK, it was around 
2772% and in Italy 24V2%. (Because 
of the newness of the system of 
classification, these figures are pro­
visional and liable to change as better 
information becomes available — 
see Notes and sources in the main 
report.) The variation in these figures be­
tween Member States are broadly in 
line with relative levels of prosperity, 
as measured by GDP per head, and, 
therefore, reflect the ability of coun­
tries to support the expenditure con­
cerned. Nevertheless, it is evident 
that there are differences between 
countries with similar levels of pros­
perity in the implicit priority ac­
corded to social protection. This, in 
turn, partly reflects differences in so­
cial characteristics (in the tendency 
for women to pursue working 
careers, for example, which is high in 
the Nordic countries and low in 
Italy), in the age structure of the 
population and in the degree of re­
liance on private provision (private 
pensions are included to varying ex­
tents in the ESSPROS data depend­
ing on the degree of social solidarity 
involved). 
In a number of the countries, how­
ever, especially in those where social 
spending is high in relation to GDP, 
benefits are subject to tax and/or so­
cial charges, so that part of the money 
paid out by government comes back 
as receipts on the revenue side of the 
Total expenditure on social protection by broad 
function in Member States, 1995 
%GDP 
IRL P GR E I L UK E14 D A B F NL FIN DK S 
GR provisional data, nc breakdown available 2 Growth of social expenditure in real terms in 
Member States, 1990-93 and 1993-95 
Annual average % change 
(expenditure deflated by GDP deflator) 
B 1990-93 
• 1993-95 
L ial •(••lino 1111 
E NL S I DK FIN E13 F UK P D GR B A L IRL 
DK 1990-94 and 1994-95, GR & S no data Defore 1993 
Modernising social protection and adapting systems to change 
accounts. This part, moreover, has 
tended to increase in recent years as 
governments have sought both to tar­
get protection more effectively on 
those most in need of support and to 
distribute the costs more evenly. 
According to a recent study ('Net 
public social expenditure', OECD, 
Labour Market and Social Policy 
Occasional Papers, No. 19), direct 
taxes and social contributions levied 
on benefits amounted to almost 6% 
of GDP in the Netherlands, over 5% 
in Sweden, 4% in Denmark and 272% 
in Germany, whereas in the UK, the 
figure was virtually zero. Taking ac­
count also of the revenue from indi­
rect taxes as beneficiaries spend their 
transfers — which is more similar 
between countries — reduces expen­
diture on social protection in net 
terms to around 27% of GDP in 
Sweden and to between 23% and 
2572% of GDP in the other four. This 
is much less of a difference than 
shown by the gross spending figures 
noted above. Moreover, in net terms, 
the UK is estimated to have slightly 
higher expenditure relative to GDP 
than Germany and the Netherlands. 
These estimates relate to only five 
Member States for a single year (Eu-
rostat plans to develop special mo­
dules on the effects of taxes as part of 
ESSPROS) and are somewhat tenta­
tive. A further insight into the relative 
weight of social transfers can be 
gained from the ECHP data on net 
benefits received by households. 
Benefits in this case are confined to 
cash transfers and exclude benefits in 
kind, such as health care, though they 
include all private pensions. Accord­
ing to these data, social transfers 
amounted, on average, to just over 
30% of net household income in the Union in 1993 (the Union here ex­
cludes Austria, Finland and Sweden 
which were not covered by the first 
wave of the ECHP). 
The pattern of variation between 
Member States differs from that 
shown by the figures for gross expen­
diture relative to GDP. Social trans­
fers were highest in Belgium and 
France, at over 36% of net household 
income (though the figure for France 
is slightly overstated because trans­
fers are measured gross of the rela­
tively small amount of tax payable on 
them), and next highest in Italy, 
which is well below the Union aver­
age in terms of the expenditure 
figures, at just under 33 %. They were 
similar to the average in Denmark 
and the Netherlands, as they were in 
Spain, where, like Italy, the ratio of 
expenditure to GDP is relatively low, 
below average in Germany, Ireland, 
Luxembourg and the UK (at around 
27% of net income) and lowest, in 
Greece and Portugal (25% and 22%, 
respectively), in line with the expen­
diture figures. 
So far no reliable estimates are avail­
able for the overall value of tax-ex­
penditures and their exclusion is 
liable to distort the comparative pic­
ture which emerges from the ES­
SPROS and ECHP data, though the 
amounts involved seem in most cases 
to be relatively small (though there 
are exceptions, such as the UK where 
tax relief on private pension con­
tributions is important). 
The pattern of 
social expenditure 
Old-age pensions are by some way 
the largest item of social protection expenditure in the Union, accounting 
for 4272% of the total in 1995, equi­
valent to 12% of GDP. The figure, 
however, varies from over 60% in 
Italy (1572% of GDP) — far more 
than in any other Member State (but 
include some transfers allocated to 
other items in other countries) — to 
32% in Finland (1072% of GDP) and 
only 25% in Ireland (5% of GDP). In 
the latter, this partly reflects the small 
proportion of the population above 
retirement age, just as the high figure 
in Italy reflects the opposite, though 
here the large numbers retiring early 
reinforces the unfavourable age 
structure. 
While, in general, high unemploy­
ment is often regarded as a primary 
cause of high levels of social spend­
ing, in reality, transfers to the unem­
ployed accounted for only 8% of total 
expenditure in the Union in 1995 
(just under 272% of GDP) — less 
than spending on disability benefits 
and only a little higher than that on 
family allowances. Only in Belgium, 
Denmark, Finland and Sweden, was 
expenditure on unemployment 
benefits significantly above 3% of 
GDP (4-5% in each case). 
At the same time, such expenditure is 
only a very partial indicator of the 
costs of unemployment for systems 
of social protection. Not only does it 
reduce the finance available from 
taxes and contributions, but it also 
adds to spending in other areas. Part 
of spending under disability benefits, 
housing allowances and social exclu­
sion is also, in practice, related to 
unemployment — or, more gener­
ally, to job shortages — as is a large 
part of spending on early retirement 
pensions (which are included as part 
of old-age pensions in about half the 
-8 
Modernising social protection and adapting systems to change 
Member States rather than unem­
ployment compensation, as required 
under the ESSPROS classification). 
In the Netherlands and the UK, ex­
penditure on disability benefits was 
much higher than on unemployment 
benefits in 1995 (472% of GDP and 
3%, respectively), while spending on 
housing and social exclusion 
amounted to another 1% of GDP 
across the Union (over 2% of GDP in 
Denmark, Sweden and the UK). 
Health care is the second largest item 
of expenditure, amounting to around 
22% of the total in the Union, as well 
as in all Member States, except for 
Denmark (only 14%), and to some 
6% of GDP, though varying from 
under 5% in Denmark and Italy to 
772% in France, well above the figure 
in any other Member State. 
The growth of 
social expenditure 
Total spending on social protection 
increased from just under 26% of 
GDP to 2872% over the five years 
1990 to 1995 as compared with a rise 
of around 1 % of GDP over the 1980s 
(on the previous ESSPROS defini­
tion). The increase was common to 
all Member States with the sole ex­
ception of the Netherlands, where 
there was a small fall. (Unfortu­
nately, no estimates are available for 
the change in net terms, which is 
likely to have been less.) 
The rise, however, reflects in large 
measure the slowdown in GDP 
growth itself during the 1990s — to 
under l72% a year as against almost 
272% in the 1980s. Moreover, the rise 
was confined to the period 1990 to 
1993, the years of recession when there was very little growth at all in 
GDP. In the two years 1993 to 1995, 
social spending in the Union declined 
on average relative to GDP, rising 
only in Belgium, Germany and Aus­
tria and falling elsewhere. While this 
was partly due to some recovery in 
GDP, it was also the result of a 
marked slowdown after 1993 in the 
growth of social protection itself, to 
some extent reflecting the stabilisa­
tion of unemployment after the large 
rise which occurred during the re­
cession years. 
In real terms (adjusting for general 
inflation), social spending grew by 
an average of around 472% a year in 
the Union in the three years 1990 to 
1993, when GDP hardly increased at 
all. In the two years, 1993 to 1995, it 
went up by l72% a year (Graph 2). 
Only in Belgium and in Ireland 
(where GDP rose by over 9% a year) 
was there no reduction in the rate of 
real growth over the latter period. 
Even after excluding unemployment 
benefits, which declined in real terms 
between 1993 and 1995, average ex­
penditure growth after 1993 was half 
the rate in the three years before. 
The largest rise in social expenditure 
over the five years 1990 to 1995 (6-
7% of GDP) occurred in Portugal, 
where efforts were being made to 
raise protection to the standards in 
the North of the Union, and Finland, 
where unemployment rose more 
steeply than anywhere else. By con­
trast, in the Netherlands, expenditure 
fell slightly relative to GDP, while in 
Ireland and Italy, the rise was well 
below average (under 1% of GDP), 
in the former, GDP and social spend­
ing growing strongly, in the latter, 
both growing slowly. Apart from unemployment benefits, 
old age pensions and health care 
showed the largest rise over the 
period (up by 1 % of Union GDP and 
72% respectively), in part reflecting 
the ageing of the population. Be­
tween 1993 and 1995, however, 
spending on health care fell relative 
to GDP in a number of countries, 
while that on old-age pensions rose 
in line with, or less than, the growth 
in GDP in most Member States. 
Sources of finance 
The funding of social protection con­
tinues to be the focus of much policy 
attention. The emphasis throughout 
the Union, as part of the attempt to 
increase job creation, has been on 
reducing non-wage labour costs. 
This objective, proposed by the 
Commission in its White Paper on 
Growth, Competitiveness and Em­
ployment in 1993, was confirmed by 
several European Councils, espe­
cially in Dublin at the end of 1996, as 
well as in the Employment Gui­
delines adopted at the end of 1997. 
However, so far there is little sign 
that the level of charges levied on 
labour (taxes and social contribution-
s) has decreased. In fact, the implicit 
tax rate is estimated to have increased 
from 35% in 1981 to 42% in 1995. 
(Improvements in the coordination of 
taxation policies across the Union to 
address this issue are currently being 
discussed by the Taxation Policy 
Group set up be the European Coun­
cil in Dublin at the end of 1996.) 
The funding for social protection in 
all Member States comes partly from 
social contributions, levied mostly 
on income from employment, and 
partly from general taxation, though 
-9 
Modernising social protection and adapting systems to change 
in a few countries (Belgium, France 
and Luxembourg, in particular) 'ear­
marked' taxes have been introduced 
in recent years. On the latest figures 
(for 1995), around 65% of finance in 
the Union still comes from contribu­
tions, some 60% of these paid by 
employers, including voluntary as 
well as statutory contributions (ie 
40% of total funding), and 30% from 
taxation, virtually all of this from 
general taxes. 
The relative weight of the two broad 
sources varies between countries, re­
flecting the historical development of 
the system itself. In Member States 
where the system has its origins in the 
provision of social insurance for 
those in employment (the so-called 
Bismarkian system) — the Benelux 
countries, France, Germany and 
Austria — social contributions still 
account for two-thirds or more of 
funding (as much as 77% in France). 
In the Nordic countries, the UK and 
Ireland, where the system has its 
origins in the provision of social wel­
fare for those in need (the so-called 
Beveridge system), social contribu­
tions account for less than half of 
total finance (40% or less in the UK 
and Ireland and only 2372% in Den­
mark). In the South of the Union, 
two-thirds or more of revenue comes 
from contributions in Greece, Spain 
and Italy, but just under half in Por­
tugal. 
In all countries, except Denmark and 
the Netherlands, a much larger share 
of contributions comes from em­
ployers than from those being pro­
tected. In line with stated policy 
aims, however, there has been some 
shift to other sources during the 
1990s. In the Union as a whole, the 
revenue raised from employers' con­tributions declined from 43% of the 
total to 3972% in the five years 1990 
to 1995, while that raised from those 
protected rose from 2272% to 2372%. 
This shift was common to all Mem­
ber States, except for Denmark and 
the Netherlands, where employers' 
contributions are relatively small, 
and Belgium. It was especially 
marked in Portugal and Finland, 
where revenue from employers' con­
tributions was reduced by some 20% 
in relative terms. 
In relation to labour costs, however, 
the evidence suggests that em­
ployers' contributions increased 
slightly between 1990 and 1995 
across the Union, while they re­
mained virtually unchanged relative 
to GDP, despite their decline as a 
share of total funding for social pro­
tection. Though governments have 
sought to relieve employers of some 
of the costs of financing social pro­
tection, therefore, this aim has gener­
ally been frustrated by the growth of 
expenditure — and funding require­
ments — at a higher rate than GDP 
and, accordingly, than the tax base 
from which revenue has to be raised. 
The increase in employers' contribu­
tions relative to labour costs (or the 
overall wage bill as measured by the 
compensation of employees) was 
common to all Member States for 
which data exist (ie excluding 
Greece, Luxembourg and Sweden), 
except Portugal and Ireland. 
The other main development on the 
funding side, apart from the emer­
gence of earmarked taxes, which is 
limited to a very few countries (in 
France, their share of revenue rose 
from 372% in 1990 to 8% in 1995), is 
the increase in contributions levied 
on old-age pensioners and other benefit recipients. This reflects both 
the growing real income of pen­
sioners and the desire to spread the 
cost of financing more evenly across 
the population. Nevertheless, only in 
the Netherlands (872%) and Ger­
many (4%) are they a significant 
source of funding. 
Levels of 
unemployment benefit 
Data from the ECHP for the first time 
enable the actual level of benefit re­
ceived by those out of work to be 
compared across the Union (whereas 
previously it has been necessary to 
rely on the results of models — see 
Social Protection in Europe, 1995, 
Chapter 4 — which however well 
they capture the features of the 
benefit and tax systems in operation 
provide no indication of how repre­
sentative the results for hypothetical 
cases are in reality). They indicate 
that, in practice, the disincentive to 
look for work associated with the 
benefit system seems to vary mar­
kedly across the Union. In the first 
place, around a quarter of those aged 
25 to 64 in the Union in 1993 who 
were unemployed for at least three 
months received no unemployment 
benefit at all (though they may have 
received other means of support to 
ensure that their income did not fall 
below a minimum level). This pro­
portion, however, varied from 5% or 
less in Belgium, Denmark, Germany 
and the UK and only slightly more in 
Ireland, to around two-thirds in 
Greece, Italy and Portugal (in the 
ECHP no comparable data exist for 
the Netherlands, Austria, Finland 
and Sweden and there are insufficient 
observations for Luxembourg). 
10 
Modernising social protection and adapting systems to change 
Secondly, for those receiving benefit, 
the monthly payment averaged just 
over 50% of net earnings for the 
months that they were employed 
(which, it should be emphasised, 
could be in the jobs they moved into 
after they were unemployed as well 
as in the jobs they had before becom­
ing unemployed), but was over 75% 
in Portugal (though only a third of the 
unemployed received anything) and 
around 60-65% in Denmark, France 
and Ireland, but only 25% in Greece 
and the UK (Graph 3). Benefit levels 
in Belgium and Germany were 
around the Union average, in Spain 
just above and Italy below. (It should 
be emphasised that these figures re­
late only to benefits linked with un-
employment and the people 
concerned may also be in receipt of 
other transfers which might affect the 
level of benefit relative to earnings 
— see Chapter 4 of the full report.) 
Thirdly, the proportion of the unem­
ployed receiving benefits of 80% or 
more of their net earnings when in 
work (assuming that their average 
monthly earnings calculated from the 
ECHP data reflect the pay they re­ceive in the jobs they move into after 
being unemployed), was relatively 
small in most of the Member States 
covered (around 20% or less of men 
in 8 of the 10 countries, all except 
Ireland and Portugal and under 6% in 
Greece, Italy, and around 20% or less 
of women in 7 of the countries, 
though around a third in Germany 
and France and half in Denmark). 
These figures need to be interpreted 
with some caution, however, since in 
a number of countries where benefit 
levels are low (the UK especially), 
various benefits in kind not included 
in the ECHP data, such as housing 
allowances, are also payable to those 
unemployed to supplement their in­
come (it is also important to take 
account of the nature of the data, 
which is explained in Chapter 4 and 
Notes and sources in the full report). 
Nevertheless, though significant, 
these additional payments are un­
likely to alter the picture substan­
tially, partly because in many cases 
they are also payable to those in low-
paid jobs, which most of the unem­
ployed tend to go into when they 
return to work (the ECHP indicates that monthly earnings of those unem­
ployed for part of 1993 were in most 
cases substantially below average — 
see Chapter 4 of the full report). 
The relief of poverty 
As constraints on social expenditure 
tighten, the concern in all Member 
States is increasingly to allocate 
revenue in the most effective way. 
Data on household income from the 
ECHP provide an insight into the ex­
tent to which transfers are targeted on 
the poorest in society and, as a result, 
succeed in alleviating relative depri­
vation and narrowing disparities in 
income distribution, though it should 
be stressed that this is only one of the 
aims of systems of social protection 
in the Union. 
According to the ECHP, social trans­
fers (including private pensions) in 
the Union accounted for around 30% 
of net household income in 1993, as 
noted above. For some 37% or so of 
households, they represented the 
main source of income. In their ab­
sence, almost 40% of households 
Average unemployment compensation relative to 
earnings for men and women aged 25-64 in 
Member States, 1993 
Unemployment benefit/earnings (%) 
GR UK I E10 D Scale of social transfers and effect on households 
with net income below 50% of average, 1993 
% Households B Before transfers 
• After transfers 
• Transfers as % net income % net income 
B DK D GR E F IRL I L NL P UK E12 
- 11 -
Modernising social protection and adapting systems to change 
would have had an income level of 
under 50% of the national average (a 
measure conventionally used as an 
indicator of relative poverty and 
agreed as a working definition by the 
Council of Ministers in December 
1984), many none at all. This propor­
tion varied comparatively little be­
tween countries. In Belgium, Ireland 
and the UK, it was around 42%, in 
Denmark, Germany, Greece, Lux­
embourg and the Netherlands, 36-
37% (Graph 4). 
After transfers, and after tax, an aver­
age of around 17% of households in 
the Union had an income level below 
half the national average. In the UK, 
Ireland and Greece, the proportion 
was over 20% and in Portugal, some 
29%, in Spain, France and Italy, it 
was around the Union average (15 to 
19%), in the Benelux countries and 
Germany, 13-14% and in Denmark, 
under 9%. The effect of transfers in 
reducing the share of households 
with income below 50% was greatest 
in Belgium and Denmark, where the 
reduction was around 29 percentage 
points, though Denmark achieved 
this with proportionately smaller 
transfers (30% of net household in­
come) than Belgium (37%). The ef­
fect was also relatively large in 
France and the Netherlands (24-25 
percentage points), though in France, 
the scale of transfers was similar to 
that in Belgium (even allowing for 
the overstatement of transfers in 
France noted above) and in the 
Netherlands, similar to that in Den­
mark. 
By contrast, the reduction in the share 
in Greece was only 14 percentage 
points and in Portugal, only just over 
10 percentage points. In terms of the 
scale of social transfers (25% of net household income in the former, 
22% in the latter), the effect in reliev­
ing poverty in the two was very simi­
lar and in both transfers appear to be 
less targeted on the poorest than in 
other Member States (around 70% of 
transfers going to households with 
under half average income before 
transfers as against 77% in the Union 
as a whole). 
Over the rest of the Union, the reduc­
tion in share was 20-23 percentage 
points, though again the level of 
transfers involved in achieving this 
differs between countries, being 
higher in Italy, for example, than in 
Germany (23 percentage points as 
against 20). 
The comparatively small effect of so­
cial transfers on income distribution 
in Greece and Portugal also reflects 
their uneven allocation between 
households, with some receiving a 
substantial amount, others compara­
tively little. This was particularly so 
in the case of old-age pensions which 
are the major element in transfers, 
though it also applied to other trans­
fers (unemployment benefits, family 
allowances and so on), as it did in 
Italy. In the case of these other trans­
fers, over the Union as a whole, 19% 
went to the 17% of households with 
income below 50% of average after 
transfers and 37% to the 30% with 
income below 65% of average. 
In the case of old-age pensions, on 
the other hand, 19% of transfers went 
to the 15% of households in the 
Union with income of over l72 times 
the average after transfers (28% in 
Greece and Portugal to the 16-17% 
of the households in this category, 
25% in France to the 13% of house­
holds and 29% in the Netherlands to the 15% of households). In four 
countries, however, Belgium, Ire­
land, Luxembourg and, most espe­
cially, Denmark, pensions went 
disproportionately to lower-income 
households. 
Recent changes 
in policy 
The common response of govern­
ments across Europe to the ex­
penditure trends noted above, has 
been to seek ways, on the one hand, 
of containing the growth of spending 
and, on the other, of activating policy 
to reduce the number of people de­
pendent on social transfers. The acti­
vation of policy has been a central 
theme underlying many recent re­
forms, the aim being to shift from a 
passive stance of income support to 
an active one of encouraging those 
out of work to take up paid employ­
ment, by increasing incentives to 
work and helping people to partici­
pate in society and working life. 
Measures have, therefore, been im­
plemented to improve the em-
ployability of those out of work, to 
provide access to training and career 
guidance and to assist them in finding 
ajob. 
This approach has not been confined 
to those registered as unemployed 
but has been extended to other groups 
dependent on long-term state sup­
port, especially to people with dis­
abilities but potentially able and 
wanting to work, lone parents and 
those retiring from work early. The 
aim has been not just to reduce de­
pendency and expenditure, but to 
combat social exclusion by helping 
the people concerned find a more 
12-
Modernising social protection and adapting systems to change 
meaningful place in society and a 
chance to contribute to its well-
being. 
The ageing of the population has 
added further impetus to these effort-
s. It has also served to focus increased 
attention on the growing costs of 
health care, which goes dispropor­
tionately to the elderly, and on the 
need for new ways of catering for 
those requiring long-term care. 
The concern to address this new need 
exemplifies the prevailing attitude 
towards social protection across the 
Union. Although the emphasis is on 
cost containment and reducing ex­
penditure wherever possible, the 
principle of maintaining a universal 
system which provides protection to 
all those in need remains unques­
tioned. Nevertheless, there is increas­
ing debate on how widely social 
welfare systems should extend, what 
risks they should cover and, most 
pertinently, where state responsi­
bility should end and individual re­
sponsibility take over. At the same 
time, there is a growing emphasis on 
the pursuit of active measures and the 
Expenditure on active and passive labour market 
policies in the Union, 1990-96 need to support policies for increas­
ing employment, the main guidelines 
of which were agreed by Member 
States at the Luxembourg Jobs Sum­
mit. 
Tightening eligibility 
for benefit 
In several Member States (the 
Netherlands and Sweden, in particu­
lar), the qualifying conditions for 
benefit have been tightened since 
1993 (the year to which the analysis 
above relates), while in others 
(Spain, Austria and Finland), the 
contributions record required to be 
eligible for benefit has been leng­
thened. Rates of benefit have also 
been reduced, as in Germany and 
Finland — in the latter by their non-
indexation in 1995 and 1996. On the 
other hand, in Sweden, although the 
rate of benefit was reduced from 80% 
to 75% in 1996, after being lowered 
from 90% before that, the rate was 
restored to 80% in 1997. 
The period of entitlement to insur­
ance benefit has also been shortened 
in some Mem­
ber States — in 
the UK, from 
one year to only 
6 months on the 
introduction of 
the Job Seeker's 
Allowance in 
1996 (payment 
being means-
tested after 
that); in Den­
mark, from 9 
years to 7 years 
in 1995 and to 5 
years in 1996, 
though it re­mains among the longest in the 
Union (but for the last 3 years, inten­
sified efforts are made to get the un­
employed into active programmes). 
In Belgium, from 1996, benefits can 
be withdrawn if the person concerned 
has been unemployed for more than 
l72 times the regional average (in­
stead of twice as long as before). 
Strengthening 
incentives to work 
Cuts in benefit and a tightening of 
eligibility criteria provide in them­
selves an increased incentive to 
work. Other measures have also been 
introduced in a number of countries 
to make it more attractive, and in 
some cases more feasible, for people 
to work rather than remain unem­
ployed. In-work benefits, designed to 
increase the take-home pay from 
working, even in low-paid jobs, 
exist, at present, in only the UK (eg 
Family Credit) and Ireland (Family 
Income Supplement). Whereas so far 
they have been paid only to people 
with children, in the UK, a pilot 
scheme was introduced in 1996 for 
low-paid workers without children. 
In both countries, the number of 
people covered by in-work benefits 
has increased in the recent past as 
qualifying income levels have been 
raised. Lone parents have been 
targeted specifically, with a new 
benefit for these being introduced in 
Ireland in 1997. Help with child care 
for low income families, including 
lone parents, was also introduced re­
cently in the UK. In the latter and 
elsewhere, attempts have been made 
to encourage the unemployed to take 
part-time jobs, partly to prepare them 
better for full-time employment — 
through giving them entitiement to 
13 
Modernising social protection and adapting systems to change 
unemployment benefits (in Belgium, 
or enabling them to keep some of 
their benefit in the UK). 
Effects similar to those of in work-
benefits can be also obtained by 
granting specific tax advantages for 
low-wage earners (eg in Finland, 
measures have been introduced to re­
duce the income tax paid by those on 
low pay, a concession which is with­
drawn as earnings increase). 
Shifting towards 
more active policies 
Changes in unemployment compen­
sation systems have generally been 
accompanied by measures aimed at 
increasing the employability of the 
unemployed and helping them find a 
job, including, for example, training 
to improve skill levels in line with 
labour market requirements and ad­
vice on job search and interview 
techniques. Shifting policy from 
passive measures of income support 
to active measures, however, is not so 
easy, especially during periods of 
high unemployment. Given budget 
constraints, it requires a restructuring 
of expenditure and a reform of 
benefit and tax systems to maximise 
the return on existing outlays. Al­
though the need to shift expenditure 
from passive to active labour market 
measures was highlighted by Mem­
ber States at the Essen Summit at the 
end of 1994 and reiterated at suc­
cessive Council meetings since, the 
policy intention has been slow to 
show up in the figures on labour mar­
ket expenditure. Between 1990 and 
1996, there was only a small rise in 
the Union as a whole in spending on 
active in relation to passive 
measures, all of which has occurred since unemployment stabilised in 
1994 (Graph 5). Member States 
have, therefore, reaffirmed their 
commitment to bring about such a 
transition in the Employment Gui­
delines agreed at the Luxembourg 
Jobs Summit. 
In a number of Member States, con­
scious efforts have been made to im­
prove the articulation between the 
provision of income support and get­
ting the unemployed into work. In 
Denmark, as noted above, measures 
were introduced in 1995 to ensure that 
anyone unemployed for two years 
either receives a job offer or goes on a 
training course, which seems to have 
been a key factor in reducing unem­
ployment to under 6% at the last count 
as against over 8% in 1994. At the 
same time, those under 25 with insuf­
ficient education or training have a 
right to education or training for at least 
18 months if they have been unem­
ployed for six months but forfeit the 
right to receive unemployment 
benefits if they do not take up the offer. 
In Sweden, a new programme was 
launched in 1996 to draw up individual 
action plans for job-seekers, who are 
able to take a year off to study while 
effectively receiving unemployment 
benefit. In the UK, a key element of the 
Jobseeker's Allowance, introduced in 
1996, is a requirement for the unem­
ployed to enter into an agreement spec­
ifying the steps they intend to take to 
find work and the services available to 
help them. 
These programmes exemplify the in­
creasing importance attached to pro­
viding job-search assistance to the 
unemployed as well as access to 
training or re-training courses. This 
importance was emphasised at the 
Luxembourg Jobs Summit and is a prominent feature of the Employ­
ment Guidelines agreed by Member 
States, which specified that: 
• every unemployed young person 
should be offered a new start be­
fore reaching six months of un­
employment, in the form of 
training, retraining, work prac­
tice, a job or other employability 
measure; 
• unemployed adults should be of­
fered a fresh start before reach­
ing twelve months of 
unemployment through one of 
the above measures or, more 
generally, through individual vo­
cational guidance. 
Despite the acknowledged import­
ance of training, however, only a 
small minority of the unemployed at 
present receive training in the Union, 
a situation which Member States also 
committed themselves to improving 
in the Employment Guidelines (set­
ting a specific target of increasing the 
proportion to 20%). 
Extending job 
creation schemes 
In several Member States, job cre­
ation schemes are under discussion. 
Any assessment of the cost-effec­
tiveness of these schemes, however, 
has to take account not only of the 
direct effect on jobs of the measures 
introduced but also their substitution 
effects (employers dismissing 
workers and taking on subsidised 
ones in their place) and deadweight 
costs (employers recruiting subsi­
dised workers they would have taken 
on anyway). 
- 14-
Modernising social protection and adapting systems to change 
In a number of Member States, job 
creation has been encouraged 
through selective reductions in the 
social contributions levied on em­
ployers as well as by direct subsidy. 
In Belgium, employers creating jobs 
for young people and long-term un­
employed in socially-useful acti­
vities ('Smets jobs') receive both a 
large subsidy for three years and full 
relief from social contributions. In 
the UK, employers taking on people 
unemployed for two years or more 
are exempt from social contributions 
for a year, while in France, recruit­
ment of the long-term unemployed is 
subsidised both directly and through 
reductions in contributions. The new 
French Government, moreover, is di­
verting the resources at present going 
to a range of job subsidies into plans 
for creating 700 thousand jobs for 
young people at the minimum wage. 
More generally, Member States rec­
ognised at the Luxembourg Jobs 
Summit the potential importance of 
job creation at the local level in the 
social economy and in new activities 
where needs are not being satisfied 
by the market (eg in the environmen­
tal sector). They agreed in the Em­
ployment Guidelines to investigate 
measures to exploit these possi­
bilities and to identify and, where 
possible, remove obstacles to their 
development. 
Reducing dependency 
and social exclusion 
In all Member States, social assist­
ance is available to those unable to 
work for one reason or another, 
though in some countries, in the 
South of the Union, in particular, a 
minimum level of income has not been universally available. In Italy, 
there is a political discussion whether 
to establish a national (in place of a 
regional) means-tested minimum in­
come scheme, with payments related 
to family size, as recommended by 
the Onofri Report. In Portugal, a 
rmnimum-income guarantee scheme 
was introduced in 1997, involving 
not just the provision of income sup­
port but measures to help recipients 
integrate into society. This is a re­
sponse to the experience under 
longer-standing schemes elsewhere, 
where social transfers by themselves 
have not proved sufficient to over­
come the problem of deprivation and 
social exclusion. 
Indeed, a general tendency throug­
hout the Union is to address the 
underlying causes of poverty and so­
cial exclusion and to avoid systems 
of income support becoming the 
means for entrenching a permanent 
division in society between those 
who contribute to its well-being and 
those who do not. The aim, in par­
ticular, is to help those dependent on 
benefits to become more self-suppor­
ting by giving them an opportunity to 
find a job, which means not just pro­
viding access to training and job 
counselling but to accommodation 
and adequate levels of health care 
and social services, such as child care 
facilities. 
In Denmark, from 1998 on, everyone 
receiving social assistance will be 
given the chance to return to educa­
tion or go on to a training scheme. In 
Germany, increased efforts have 
been made to get those on social as­
sistance into active labour market 
programmes, while in the UK, the 
new Government has announced a 
'welfare to work' programme aimed at reducing the number of people re­
liant on benefits. The latter is particu­
larly focused on the young, the 
long-term unemployed, people with 
disabilities and lone parents. From 
October 1998, all lone parent who 
wish to work will have access to per­
sonal advice from the employment 
services as well as receiving assist­
ance with child care. At the same 
time, however, additional benefits 
available to lone parents will be with­
drawn for new claimants and the 
same level of benefifwill be payable 
to all those with children. In the 
Netherlands, in similar vein, more 
stringent procedures for claiming so­
cial assistance have been introduced, 
requiring recipients to be actively 
seeking work and to accept any suit­
able job offer they receive, except if 
they are lone parents with a child 
under 5. In Luxembourg, recipients 
of support are required to have ex­
hausted all other means of improving 
their situation and be actively seek­
ing employment, unless they are 50 
or over or disabled. 
Helping people 
with disabilities 
Attempts have been made across the 
Union to reduce the number receiv­
ing disability benefits by introducing 
more stringent tests for assessing in­
capacity for work. In the UK, a 
tougher medical test, which after 28 
weeks on benefit is designed to 
assess a person's fitness to do any 
kind of work rather than their pre­
vious job, has been introduced, much 
the same as in Germany, where 
benefit entitlement depends on 
people being incapable of working at 
all. In the Netherlands, the financial 
responsibility for disability benefits 
15 
Modernising social protection and adapting systems to change 
has been shifted to employers whose 
contribution rates are now — partly 
— differentiated according to the 
number of their employees claiming 
disability benefits, a measure which 
gives an incentive both to improve 
health and safety at work and to con­
tinue employing those with disabil­
ities. This has been coupled with 
greater stress on helping people with 
disabilities, but able and wanting to 
work, to find jobs through active em­
ployment programmes. In Austria 
and Finland too, the emphasis of pol­
icy has shifted from income support 
to rehabilitation, with entitiement to 
benefit needing to be re-established 
periodically. 
Incentives for people with disabil­
ities to look for work and help for 
them to do so have generally been 
accompanied by legislation to pre­
vent discrimination against them in 
employment and in their access to 
goods, services and facilities of 
various kinds as well as by enabling 
measures, especially in the work 
place, to remove obstacles to them 
working — in 1993, all Member 
States adopted the UN Standard 
6 Men aged 55-64 no longer in the labour force in 
Member States, 1986 and 1996 
% population in the age group 
S IRL UK P DK GR E D E15 Rules of Equality of Opportunity for 
Disabled People. Such measures, 
however, while increasing equality 
of opportunity, will only result in ad­
ditional competition on the job mar­
ket, where those with disabilities will 
always be disadvantaged, unless 
there is, at the same time, sufficient 
growth of employment. 
Reversing the 
trend towards 
early retirement 
The tougher stance on disability 
benefits, which in many cases have 
been paid to those over 50 losing 
their job, is part of a reversal of policy 
towards older workers, towards en­
couraging them to stay in employ­
ment rather than retire early (except 
in agriculture where early retirement 
continues to be promoted under 
Regulation 2079/92) and represents a 
reaction to the fact that in 1996 al­
most half of men aged 55 to 64 in the 
Union were no longer economically 
active (Graph 6). Because of job 
shortages, however, there remains an 
awkward con­
flict between in-
creasing the 
number of older 
people in work 
and reducing 
unemployment 
(though this 
conflict disap­
pears once the 
focus of policy 
is, more satis­
factorily, on the 
employment 
rather than on 
the unemploy­
ment rate, as in 
the Employ­ment Guidelines). 
In addition to the examples noted 
above, those claiming early retire­
ment pensions in Sweden now need 
to demonstrate that they are inca­
pable of working, in effect, transfor­
ming the payment into an invalidity 
benefit, while, at the same time, the 
basic rate has been reduced. Eligi­
bility criteria have also been tight­
ened and the pension effectively 
reduced in Germany and Austria, 
coupled in the latter with an increase 
in the required period of contribu­
tions from 35 years to 3772. In Bel­
gium, the number of years of 
contributions necessary to qualify for 
a pension is being raised gradually 
from 20 to 35 beginning in 1997, 
while social contributions on early 
retirement pensions have been in­
creased. In Spain, voluntary retire­
ment before the age of 65 is now 
penalised, while in Greece, pensions 
payable to those retiring early have 
also been reduced. 
Moreover, in Austria, further encour­
agement to employment of older 
workers has been given by a bonus-
malus scheme, reducing social con­
tributions for employers taking them 
on and imposing a penalty on those 
dismissing them. 
Encouraging 
partial retirement 
One means of diminishing the con­
flict between providing jobs for older 
workers and reducing unemploy­
ment is to encourage people to move 
from full-time to part-time employ­
ment as they approach retirement 
age. This, moreover, can ease the 
transition process for those con-
16 
Modernising sacrai protection and adapting systems to change 
cerned while taking extended ad­
vantage of their experience and 
know-how. Partial pensions to this 
effect have been introduced in a num­
ber of Member States in recent years. 
Elsewhere, however, obstacles exist 
for older workers wishing to work 
part-time (in the UK, for example, 
they cannot continue to work for the 
same employer if they draw an occu­
pational pension). 
In Austria, a partial retirement 
scheme has existed since 1993, enab­
ling people to reduce hours of work 
and receive a proportion of the pen­
sion normally payable, though few 
people have opted for it, seemingly 
because early retirement per se is 
more attractive. In Finland, a similar 
scheme has existed since the end of 
the 1980s, but again the number in­
volved has been small. In Germany, 
partial retirement has been intro­
duced more recentiy for those of 55 
and over, at the same time as their 
eligibility for early retirement was 
restricted. The possibility of combin­
ing a partial pension with a partial 
salary also exists in Luxembourg, 
though relatively few fewer people 
have so far taken up the option. More 
success has been achieved in France, 
where partial retirement has been re­
garded since 1993 as a solution to 
(full) early retirement and where the 
number opting for the latter has fallen 
while those continuing to work part-
time have risen (to 27,000 in 1995). 
Adapting to 
population ageing 
The reform of pension systems, 
aimed at managing the cost of the 
impending growth in population of pensionable age — or, more accur­
ately, the income redistribution en­
tailed — has become a central policy 
aim in all countries. (The pension re­
forms in Italy, Sweden and France in 
particular were described in detail in 
Social Protection in Europe, 1995, 
Chapter 2, while a general economic 
analysis of pension reform and the fu­
ture of the welfare state was recently 
published in European Economy, Re­
ports and Studies, 4/1997.) A common 
response has been to raise the official 
retirement age of women to conform 
with that of men, for both cost and 
equity reasons — as in Germany, 
Greece, Portugal, the UK, and, more 
recently, in Belgium and Austria. In all 
these countries, as in most other parts 
of the Union, the official retirement 
age is being standardised at 65. This, 
however, is being coupled with in­
creased emphasis on the contributions 
record of those retiring, so linking the 
pension received more closely with the 
payments made over a person's work­
ing career and reinforcing the insur­
ance aspect of the system. 
In addition, the effective pension 
payable relative to past earnings has 
been reduced in a number of coun­
tries by altering the calculation for­
mula. In France, Portugal, Austria 
and Finland, the number of years of 
earnings on which the pension is 
based has been increased, while the 
method of revaluing pensions for in­
flation has been made less favour­
able, as has also occurred in Spain, 
Germany (through a shift in the basis 
from gross to net earnings) and 
Sweden (where pensions are not 
being fully indexed so long as the 
budget deficit remains excessive). 
In other countries, the value of pen­
sion has been reduced more direcdy. In Greece, the rate of supplementary 
pension relative to earnings has been 
reduced and limits set on the maxi­
mum payable, resulting in a rise in 
pensioners receiving very low in­
comes and prompting the introduc­
tion in 1996 of a means-tested 
allowance. A similar allowance has 
also been recently introduced in 
Spain, where the number of years 
needed to qualify for a full pension 
has been raised and the coefficient 
applied to earnings reduced. In Ger­
many, the new pension reform to take 
effect from 1999 introduces a 'demo­
graphic factor' into the pension for-
mula to take account of the 
increasing life expectancy of pen­
sioners and accordingly to reduce the 
standard pension (Eckrente) from 
70% of previous net earnings to 64% 
by 2030, in addition to raising the 
pensionable age. 
So far, however, there has been no 
general tendency to shift away from 
pay-as-you-go to funded schemes (ie 
from contributions covering present 
pension liabilities to covering future 
ones), though there is a widespread 
growth in the importance of occupa­
tional and private schemes to supple­
ment basic pensions and relieve the 
State of part of the future funding lia­
bility. As emphasised in the recent 
Commission Green Paper on Sup­
plementary pensions in the single mar­
ket, (COM(97) 283), the growth of 
such supplementary schemes requires 
an appropriate Community-wide 
framework. The Green Paper also 
notes that the sustainability of pay-as-
you-go schemes necessitates further 
reform of pension systems. Although 
reversing the trend towards early re­
tirement can alleviate funding prob­
lems, it is unlikely to solve them 
completely. In this regard, it is relevant 
-17-
Modernising social protection and adapting systems to change 
to note that there is a shift towards 
defined contribution systems, where 
contributions paid over a person's 
working career determine the amount 
received in pension, so reducing some 
of the difference between pay-as-you-
go and funded systems. 
The only two countries in the Union 
where funded pension systems play a 
major role are the Netherlands and 
the UK. In the latter, in particular, 
where the basic state benefit is lower 
than in most other Member States, 
two-thirds of pensioners have an oc­
cupational or private pension. The 
State concentrates on taking care of 
the less well-off, leaving the manage­
ment of pension funds largely to pri­
vate insurance companies. The main 
recent focus of policy has been on 
strengthening the regulations gov­
erning these funds, to prevent their 
fraudulent use and the misleading 
selling of private schemes. 
Whether a funded approach is better 
designed to overcome the transfer 
problem inherent in demographic 
trends remains unclear. Ultimately, 
the ease of securing the transfer of 
income from those in work to those 
in retirement, irrespective of how it is 
achieved, depends largely on the in­
come available to be distributed and, 
therefore, on the economic growth 
sustained in the intervening period. 
Containing 
health-care costs 
The ageing of the population, 
together with constraints on public 
expenditure, has also focused policy 
attention on health care, the demand 
for which in any event tends to rise 
rapidly as real income increases and medical know-how expands. The 
widespread response in Member 
States has been either to limit expen­
diture directly where services are 
managed by the state or to impose 
ceilings on spending growth where 
this is determined by health insur­
ance funds. While this has generally 
succeeded in holding down spending 
relative to GDP in recent years, it has 
given rise to other policy concerns — 
. in particular, how best to allocate 
expenditure to serve the needs of so­
ciety as a whole and how to ensure 
that available resources are used effi­
ciently. 
It has, in addition, raised more fun­
damental questions about the relation­
ship between public and private health 
sectors, about whether the former 
should be limited to basic care — and, 
if so, how this should be defined—and 
about the implications of this for the 
overall pattern of care in relation to 
need (and the possibility of a shift from 
essential to more cosmetic treatment). 
It has also given rise to questions about 
the justifiability of limiting the growth 
of services (andjobs) to below the level 
people seem willing to pay for and, in 
turn, about how far consumers can be 
relied on to make rational choices on 
an issue which is so important but 
about which there is a serious lack of 
information. 
The tendency in most Member States 
has been to seek to exploit the ad­
vantages of the market while retain­
ing control over supply. In particular, 
people have been encouraged to con­
sume less and choose more rationally 
by making them aware of the costs 
involved, through the imposition and 
extension of charges — or co-pay­
ments — for drugs and certain kinds 
of treatment. In Germany, for example, charges have been raised 
significantly in order to avoid in­
creases in social contributions and 
have been explicitly linked to the lat­
ter in an attempt to persuade the in­
surance funds to keep contributions 
down, increase efficiency and nego­
tiate more effectively with service 
providers (GPs and hospitals) over 
terms. 
The success of such a policy, as in­
deed of the introduction of market, or 
pseudo-market, mechanisms in 
countries, depends, in part, on there 
being effective competition between 
insurance funds, in the German case, 
or doctors in countries with national 
health systems, and consumers being 
able to choose between them, other­
wise prices cannot serve their in­
tended purpose. It is also desirable 
for there to be competition between 
service providers to increase the bar­
gaining power of purchasers and to 
stimulate increases in efficiency. In 
practice, there tend to be natural 
limits on competition in both areas, 
because of the localised nature of 
supply and economies of scale, 
which are often reinforced by gov­
ernment to avoid, for example, the 
closure of local treatment centres. 
Accordingly, attempts to introduce 
market mechanisms have not, in 
general, led to the increases in effi­
ciency expected, and governments 
throughout the Union have been re­
luctant to relinquish controls on ex­
penditure and leave this to market 
forces. Nevertheless, in countries 
where an attempt has been made, 
there appear to have been some 
gains, without any noticeable dete­
rioration in service. These have 
arisen from the clearer division be­
tween purchasers and providers, the 
•18-
Modernising social protection and adapting systems to change 
greater weight given to costs in deci­
sion-making, the collection and pro­
vision of more information on costs 
and the drawing up of more detailed 
contracts on service supply. 
In the UK, for example, indicators 
show a small rise in productivity since 
reforms were introduced in 1991. In 
Italy and Spain, the separation of pur­
chasers from providers and, in the for­
mer, the devolution of financial as well 
as organisational responsibility to the 
regions, seems to have led to improve­
ments in management and clearer con­
tractual arrangements between the two 
sides. In the Netherlands, the recent 
introduction of a system of per capita 
payments to insurance funds based on 
a prior assessment of the costs implied 
by their membership structure, in place 
of one where effectively costs were 
covered ex post, has led to competition 
over fees and pressure to contain costs 
and might, in turn, with partial removal 
of controls, lead to increased competi­
tion between providers and efficiency 
improvements in this area. 
At the same time, the innovatory step 
has been taken in the Netherlands to 
confine the public health service to the 
provision of 'curative basic health 
care' (as well as of long-term care), and 
to leave other treatment ('amenity 
care'j to the private sector and individ­
ual arrangements. The criteria used to 
defme the latter—that it should not be 
medically necessary and be affordable 
— has, however, led to problems in 
practical application (not least because 
of the inevitably subjective nature of 
the concepts used) and so far very few 
services are excluded from the public 
sector. Providing 
long-term care 
An estimated 10% of people aged 75 
and over in the Union are in need of 
full-time care while another 25% re­
quire part-time care. The present 
high growth of population in this age 
group is focusing increasing atten­
tion in Member States on how this 
expanding need should be met — 
whether through the social protection 
system, and if so, whether through 
transfers or the direct provision of 
services, either way implying in­
creased taxes and/or social charges, 
or through private arrangements, im­
plying the acceptance of an unequal 
burden falling on different individ­
uals, whether they take out private 
insurance cover or not. 
Debate has been partly prompted by 
the introduction in Germany in 1995 of 
a new social insurance scheme for 
long-term care (Pflegeversicherung), 
funded by social contributions (com­
pensated by the loss of a day's holiday) 
and payable to both those being cared 
for at home and those receiving 
residential care. Allowances for carers 
are of longer-standing in the UK and 
Ireland, though in the former, they are 
payable at a relatively low flat-rate and 
apply only to those providing care vir­
tually full-time, and in the latter, they 
are means-tested. In Austria, attend­
ance allowances (Bundespflegegeld), 
administered by the regions but funded 
from general taxation, have been 
payable since 1993 to people needing 
care for at least 50 hours a month, at 
rates varying according to the amount 
of care medically assessed to be re­
quired. 
Those receiving allowances in Aus­
tria are free to decide how to spend them (most going to informal care 
within the family). Rising unemploy­
ment, however, has led to calls for 
payments to be linked with employ­
ment objectives and used directly to 
create demand for formal social ser­
vices. This is, in essence, the option 
chosen in the Nordic countries, 
where there is little distinction be­
tween healthcare and social services, 
both being freely available to all, and 
where, in relation to working-age 
population, these account for sub­
stantially more jobs than in the rest of 
Europe (over twice as many in Den­
mark and Sweden). Nevertheless, 
budget constraints have led to cut­
backs in expenditure and growing 
concern about the costs of maintain­
ing extensive social services. 
Elsewhere, a draft bill was published 
in Luxembourg in 1996 for the intro­
duction of a compulsory 'depend­
ence insurance' scheme to cover 
assistance required by those unable 
to take care of themselves, the fund­
ing divided evenly between social 
contributions and general taxation. 
Targeting expenditure 
The twin concern of present policy 
on social protection across the 
Union, to contain costs and reduce 
dependency, is being achieved in part 
by increasing the effectiveness of ex­
penditure through the adoption of a 
more active approach and targeting 
resources on those most in need. In 
Southern Member States, this is com­
bined with efforts to rectify gaps in 
the protection provided and to bal­
ance the provision of support more 
equitably. In Northern Member 
States, debate is centred on the scope 
of social protection. While the con-
-19-
Modernising social protection and adapting systems to change 
sensus on maintaining the universal 
nature of social protection accessible 
to all holds firm, this does not rule out 
some shift in responsibility from the 
state to the individual or the private 
sector in certain areas. 
Privatisation, however, in the sense of 
the private, profit-making, sector being 
involved in providing social protection 
has not developed very far in most 
countries and there is little sign, outside 
of the provision of supplementary pen­
sions, of any significant growth in the 
foreseeable future. Nevertheless, there 
is evidence of increased concentration 
of expenditure on those in need, both 
through reducing benefits going to 
those on relatively high incomes, by 
setting a ceiling on the amount payable 
or imposing taxes and/or social 
charges on benefits, and through 
greater recourse to means-testing. The 
former serves not only to redistribute 
the net gain from transfers from the 
more wealthy to those further down the 
income scale but also to spread the cost of financing more widely, an increas­
ingly justifiable aim given the growth 
in wealth of many pensioners. 
Although spending on benefits sub­
ject to means-testing has generally 
increased in the Union (apart from in 
the Netherlands), it still accounted 
for only 11% of the total in 1995 as 
against 10% in 1990, and only in 
Ireland (where it was 34% of the 
total), the UK (23%) and Spain 
(1372%) was it more than 10%. 
Moreover, much of the rise was due 
to changes in underlying circum­
stances — in the growth of long-term 
unemployment, for example, and in 
the number of people not eligible for 
social insurance benefits — rather 
than a change in policy as such. In the 
case of unemployment compensa­
tion, almost 75% of transfers in Ire­
land were means-tested in 1995 
(reflecting high levels of youth and 
long-term unemployment), 50% in 
the UK, 40% in the Netherlands and 
around 25% in Spain and Portugal. 
20-

ISSN 0254-1475 
COM(98) 243 final 
DOCUMENTS 
EN 05 06 17 
Catalogue number : CB-CO-98-264-EN-C 
ISBN 92-78-35264-0 
Office for Official Publications of the European Communities 
L-2985 Luxembourg 
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