COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 12.03.1997 
COM(97) 102 final 
COMMUNICATION FROM THE COMMISSION 
MODERNISING AND IMPROVING SOCIAL PROTECTION 
IN THE EUROPEAN UNION 

TABLE OF CONTENTS 
EXECUTIVE SUMMARY Ml 
1. A EUROPEAN DEBATE ABOUT THE FUTURE OF SOCIAL PROTECTION 1 
1.1 The contributions to the debate 1 
1.2 The challenge: The need to modernise and improve European social protection systems 2 
1.2.1 The changing nature of work 2 
1.2.2 The ageing of the population in Europe 3 
1.2.3 The new gender balance 3 
1.2.4 The need to reform the co-ordination of national social security schemes 4 
2. THE KEY ISSUES FOR MODERNISATION 5 
2.1 Social protection as a productive factor 5 
2.2 Making social protection more employment-friendly 5 
2.2.1 Making tax and social benefit systems more employment-friendly 5 
2.2.2 Turning unemployment insurance into an employability insurance 6 
2.2.3 The funding arrangements for social protection need to be thought afresh 7 
2.2.4 Implementing flexible systems for managing the transition from work to retirement 8 
2.2.5 Social protection to promote inclusion 9 
2.3 Adapting social protection to the demographic ageing of European societies 10 
2.3.1 Making public pension schemes sustainable 10 
2.3.2 Providing a secure environment for supplementary pension schemes 12 
2.3.3 Meeting new care needs for older people 13 
2.3.4 Improving health services 13 
2.4 Adapting social protection to the change in the gender balance: 
towards an individualisation of rights 15 
2.5 Improving social protection for people moving within the Union 16 
3. SUPPORTING THE ADAPTATION PROCESS THROUGH ACTION AT EUROPEAN LEVEL 18 
Appendix 19 
M 
EXECUTIVE SUMMARY 
Publicly funded social protection systems provide the bulk of expenditure on social support, health 
care and pensions in the Member States of the European Union. They have played a fundamental 
role in ensuring income redistribution and cohesion, and in maintaining political stability and eco­
nomic progress over the life of the Union. 
These systems now account for 28 per cent of total EU GDP, although that proportion varies between 
Member States - from 16 to 35 per cent - depending on differences in levels of provision and diffe­
rences in the balance of public and private funding. 
The objectives and the financial and operational structures of most systems were established decades 
ago. While the basic needs to which they respond remain, the economic and social conditions under 
which they operate have changed, and will continue to do so. In order to ensure their continued 
effectiveness, and in order to meet evolving needs, there is an urgent need for modernisation. In 
particular, social protection systems need to be adapted to: 
• the changing nature of work, where a new interplay is called for between policies designed to 
improve flexibility and those designed to provide security; 
• change in the gender balance in working life, where equal opportunities bring new issues and 
requirements in terms of social protection; 
• the ageing of the population in Europe, where the rapid growth of the dependent population is 
creating new needs as well as forcing the pace of pension reform; 
• the need to reform the co-ordination of national social security schemes for people moving 
within the EU. 
To support the Member States in meeting these challenges, the Commission presented, at the end of 
1995, a 'Framework for a European Debate on the Future of Social Protection' that triggered a lively 
and interactive discussion. It is now time to take stock. This Communication has a dual purpose: 
• to indicate the routes along which modernisation can be pursued 
• to present some specific proposals for European level support. 
This approach is built on the common understanding that 
• Each Member State is responsible for the organisation and financing of its own social protection system. 
• The EU is responsible for the co-ordination of national social security schemes in cases where citi­
zens exercise their rights of free movement within the Union. 
• The EU also serves as a forum for promoting better mutual understanding of long-term perspec­
tives, and for identifying common challenges facing Member States. 
In the light of this, the Commission proposes the following agenda of issues for further analysis, 
debate and action: 
1. Social protection as a productive factor: Building on the discussions which took place at the Dutch 
Presidency Conference on «Social Policy and Economic Performance» held in January 1997, the 
Commission will study during 1997 the overall costs and benefits of social protection systems - in par­
ticular, their impact on social cohesion, political stability and economic progress. 
2. More employment-friendly social protection systems: As mandated by the Dublin 
European Council, the Commission will, in its contribution to the 1997 Joint Employment Report, 
focus on how social protection reforms and taxation can be developed as an integral part of an 
active employment policy. This will be based on the examination of best practices in the field of 
active policies. 
The Commission will examine how reactive unemployment insurance can be turned into a pro­
active employability insurance. 
I 
wi 
The Commission will deepen the analysis of measures taken to reduce non-wage biour costs as 
a contribution to the interim report to be presented at the Amsterdam European Council in June 
1997 and to the Joint Employment Report to be prepared for the Luxembourg European Council 
in December 1997. The effect of taxation on employment will also be an important part of the 
discussion in the new Taxation Policy Group as endorsed by the Dublin European Council. 
The Commission will present the potential and problems of a gradual transition to retirement 
in the Employment in Europe report, to be published in September 1997 and will consider appro­
priate follow-up. 
In the first half of 1997, the Commission will present a Communication on the promotion of 
social inclusion and, in the second half of 1997, a report assessing the mechanisms of guaranteed 
minimum income schemes in the social protection systems of the Member States. 
3. Adapting social protection to the demographic ageing of European societies: The ageing 
of the population in the Member States is putting pension systems under considerable 
pressure. The Commission will develop methods for forecasting pension expenditure, and assess 
the elements of reform which seem to be most adapted to ensuring the sustainability of public 
pension schemes while preserving their core aspects of solidarity. 
In the first half of 1997, the Commission will also issue a Green Paper on supplementary pensions, 
aimed at identifying the main elements of a framework at European level in order to provide a 
secure environment for supplementary pension schemes. 
In order to meet the long term needs of dependent older people, Member States are underta­
king a number of reforms. The Commission will study ongoing reforms and provide the Member 
States with an overview. 
In order to improve the efficiency and cost effectiveness of health systems, the Commission will, 
in 1997, carry out an assessment of the potential impact of prevention on the reduction of health 
care costs and clarify to what extent and under what conditions, introducing market forces within 
health care systems can help save costs while fostering a better quality of services and ensuring 
access for all to health care. 
4. Adapting social protection to the new gender balance: The changing gender balance 
requires both new arrangements for reconciling working and family life, and new 
initiatives to strengthen individual rights. At the end of 1997, the Commission will present initia­
tives aimed at setting higher standards for the care of children and other dependants. The 1997 
Annual Report on Equal Opportunities will assess the attempts made by the Member States to 
make progress towards individualisation without jeopardising the economic situation of women. 
5. Improving social protection for people moving within the Union: The Commission will 
develop a strategy to reform and simplify the co-ordination of social protection for migrant wor­
kers and to find specific solutions to cope with the cross-border problems in relation to occupa­
tional schemes, including, as a first step, during 1997, a proposal for a directive tackling some of 
these problems. 
The Commission invites all Member States and the European institutions to engage in a conti­
nuing dialogue on strategies for the modernisation of social protection systems, as presented in this 
Communication. The presentation of the Joint Employment Report for the Luxembourg European 
Council in December 1997 will offer an appropriate opportunity to scrutinise this strategy. 
The Commission also invites the social partners, at all appropriate levels, to contribute to this 
work. The Social Dialogue Committee and the Standing Committee for Employment are invited to 
play a leading role. The Commission intends to put social protection reform at the top of the agen­
da for the civil dialogue at the 1998 European Social Policy Forum, which will involve the 
Member States, the social partners, NGOs, as well as the European institutions. 
Finally, the Social Protection in Europe report, to be published at the end of 1997, will bring toge­
ther more evidence and analysis on recent developments in Member States, as a contribution to the 
process of joint reflection. 
AL 
1. A EUROPEAN DEBATE ABOUT 
THE FUTURE OF SOCIAL PROTECTION 
Maintaining a high level of employment and 
social protection is one of the Community's fun­
damental objectives and is explicitly included in 
the tasks listed in Article 2 of the Treaty on 
European Union. Social protection represents a 
fundamental component and a distinguishing 
feature of the European model of society. 
The Council adopted in July 1992 a Recom­
mendation on the convergence of social protec­
tion objectives and policies1 . The aim of this 
convergence strategy was to fix common objec­
tives to guide Member States' policies in order to 
permit the co-existence of different national 
social protection systems and to enable them to 
progress in harmony towards the fundamental 
objectives of the Community. The strategy of 
bringing about a convergence of policies while 
respecting the autonomy of systems is a direct 
application of the principle of subsidiarity. 
Each Member State is responsible for the organi­
sation and financing of its own social protection 
system. However, given the common challenges 
facing Member States in this area, there is consi­
derable value in discussing these issues at 
European level. Throughout the European 
Union, significant reforms of social protection 
systems are now under consideration and, in a 
number of cases, are being introduced in res­
ponse to rapidly changing social and economic 
conditions2. 
In the light of this, the Commission presented at 
the end of 1995 a "Framework for a European 
Debate on the Future of Social Protection3" . The 
Commission proposed that the Community insti­
tutions and the Member States should examine 
jointly the measures to be taken in order to 
make social protection more employment-
friendly and more efficient. The social partners 
and all concerned have been called upon to 
make their contributions. The European Par­
liament and the Economic and Social Committee 
have also been associated in this reflection and 
delivered opinions. The Confidence Pact for 
Employment has highlighted the importance of 
this debate". 1.1 The contributions 
to the debate 
The Framework for Debate5 triggered an extreme­
ly lively and interactive discussion throughout 1996 
in the form of written exchanges, conferences, ad 
hoc meetings with scientific experts and policy­
makers . A summary of the contributions from 
Member States, the European institutions and the 
social partners is being published separately as a 
Commission services working document. There is 
much common ground in these reactions: 
• The European social model is valued and should 
be consolidated. This model is based both on 
common values and the understanding that 
social policy and economic performance are not 
contradictory but mutually reinforcing. Highly 
developed social protection systems are a major 
component of this social model. 
• To preserve social protection implies adapting 
European systems in their various forms, since 
the context in which they were established 
has changed. The challenge is to align social 
protection to the new situation without 
abandoning its core values of solidarity and 
cohesion. 
• This task is complex and the means to achieve 
it are uncertain. Each Member State has to 
find solutions that are adapted to its own par­
ticular system. Member States should continue 
to pursue the convergence strategy as outli­
ned in the 1992 Council Recommendation. 
• The means of adapting social protection sys­
tems have to be in line with the process of 
European integration, and in particular the 
single market, moves towards EMU and pro­
gress towards European citizenship. 
• The ability to learn from each other and 
adapt quickly is a key factor for success. The 
European Union should act as a catalyst to 
enable Member States to learn from one ano­
ther's experience and adapt to changed cir­
cumstances. 
Council Recommendation 92/442/EEC of 27 July 1992 on the convergence of social protection objectives and policies, 
OJ L 245 of 26 August 1992. 
See reports "Social protection in Europe • 1993" (COM(93) 531) and "Social Protection in Europe - 1995" (COM(95) 457). 
Communication from the Commission COM(95) 466 of 31 October 1995 "The Future of Social Protection: A Framework 
for a European Debate". 
Action for Employment in Europe: a Confidence Pact, SEC(96)1093 of 6.5.1996, in particular points 3.11. and 3.16. 
In November 1996, the French delegation submitted to the Council a specific statement in favour of this initiative, as a 
follow-up of the Turin European Council and the French memorandum on the European social model. 
1 
il 
Drawing on the results of this joint reflection 
process, the Commission undertook to take stock 
of the reactions to the debate it had launched 
and to propose appropriate follow-up. The pur­
pose of this communication is twofold: 
- to map out some avenues for improving 
European social protection systems on the 
basis of the contributions to this debate and 
identify key actions in each field; 
- to present some proposals to involve all 
concerned in this adaptation process. 
1.2 The challenge: The need to 
modernise and improve 
European social protection 
systems 
Social protection expenditure now accounts for 
28 per cent of the European Union's GDP, with 
national variations that range from 16 to 35 per 
cent. It plays a fundamental role in income redis­
tribution and social cohesion, political stability 
and economic progress. The more working life 
becomes flexible, the more citizens will demand 
security from their social protection systems. 
Good social protection and successful business 
are therefore mutually supporting. 
This view on social protection is underpinned by 
detailed international comparison, suggesting 
that, when account is taken of private as well as 
public spending, total household expenditure on 
social protection, health care and pensions is at 
relatively similar levels across a range of develo­
ped, industrialised countries6. Moreover, Member 
States with a strong safety net often perform bet­
ter in terms of GDP per capita or external balance 
than Member States with a weaker safety net. On 
the other hand, only countries with a sound eco­
nomy are able to maintain a high level of social 
protection. For this reason, the completion and 
reinforcement of the European single market will 
become increasingly important. 
It is important to realise that the reasons for a 
reform of social protection systems is not compe­
tition from third countries. Free trade and glo­
balisation should not be seen as a threat to the 
European social model. 
The reasons for a reform are internal. The real 
threat against the European social model would 
be our inability to cope with the existing pro­blems. First of all, there is an urgent need to 
consolidate public finances in most Member 
States in order to avoid growing deficits and 
heavy debt services in the future, crowding out 
expenditure on social protection. This is not in 
contradiction with a high degree of social pro­
tection nor does it dismantle the principle of soli­
darity. On the contrary, it strengthens solidarity 
between different generations, since it reduces 
the burden on future generations. 
Secondly, the system needs to be reformed in 
order to promote economic and social integra­
tion. One key function of social protection sys­
tems is to provide the categories of people who 
cannot work with some income security. 
However, this has simultaneously tended to 
deter from economic integration. Social protec­
tion systems have been both a success, in terms 
of alleviating poverty, and a failure, in terms of 
promoting full integration within society. 
The magnitude of transfers necessary to pay 
income compensation for people out of work is 
growing fast and leads to higher levies on wor­
kers' income while the people concerned would 
prefer to be offered new opportunities to take 
an active part in economic life. 
These problems - big public deficits and the lack 
of success in social integration - are the real threat 
to the European social model. Their seriousness 
can, to a large extent, be explained by the 
changes in the basic conditions for social protec­
tion. Four dominant factors underpin the reform 
of social protection systems: the changing nature 
of work, the ageing of the European population, 
the new gender balance and the need to reform 
the coordination of national social security 
schemes for people moving within the EU. 
1.2.1 The changing nature of work 
The patterns of working life on which income 
maintenance programmes were built are under­
going fundamental change. New jobs are emer­
ging in the service sector, while jobs in manufac­
turing industry are decreasing. Skill structures 
are also changing: we are moving from simple, 
low-skilled jobs to jobs demanding new, broader 
and higher skills. The nature of employment is 
changing: there are more part-time and tempo­
rary jobs than ever before. Finally, our working 
life has become shorter: we spend more time in 
education and training and start working later, 
but we leave working life earlier and the avera­
ge actual pension age is below 60. 
See for instance G. Esping-Andersen: "The Double Problem of Co-ordination in Contemporary Welfare States", paper 
prepared for the Conference on Social Policy and Economic Performance, Amsterdam, 23-25 January 1997. 
These changes are analysed in the White Paper on Education and Training: «Teaching and Learning: towards a Learning 
Society». COM (95) 590, which developed the concept of life-long learning, which was equally the theme of the 
European Year of 1996. These changes are also highlighted in the Green Paper "Living and Working in the Information 
Society: People First." COM (96)389. Bulletin of the European Union - Supplement 3196. Furthermore, the Commission 
is preparing a Green Paper on "Partnership for a New Organisation of Work" to be published in 1997. 
New forms of work organisation are emerging. 
The 20th century linear career concept will gra­
dually be replaced by a new pattern of varied and 
variable working life. This implies that, at any 
given moment, an individual could have several 
paid activities in progress. Most workers will 
experience non-working spells during their wor­
king life. These will be part of a regular transition 
from one activity to the other, during which they 
will adapt their skills or prepare for a new job7. 
The main lesson from the last 20 years is that inco­
me maintenance programmes will not provide 
adequate security. The huge resources in the 
benefit systems need to be made more employ­
ment oriented. Unemployment benefit schemes 
must become more effective: increasing incentives 
for the unemployed to look for a job (see 2.2.1) by 
giving them opportunities to upgrade their skills, 
so as to create progressively a real employability 
insurance instead of a simple unemployment com­
pensation (see 2.2.2). As far as possible, the finan­
cing structures of social protection systems should 
be reformed to allow for efficient reductions of 
non-wage labour costs, especially with respect to 
low wages (see 2.2.3). A gradual and flexible tran­
sition to retirement needs to be fostered in order 
to maintain opportunities for older workers to 
stay in the labour market (see 2.2.4). At the same 
time, the role of social protection in promoting 
social cohesion must be maintained, and Member 
States are also looking at ways of integrating eve­
ryone fully into society, including those categories 
threatened by exclusion (see 2.2.5). 
1.2.2 The ageing of the population 
in Europe 
Social protection is also confronted with the chal­
lenge of ageing European societies. Between 1995 
and 2025, the number of people aged 60 and over, 
which amounted to 77 million in 1995, will increa­
se by at least 29 million and at most, 44 million. 
The proportion of older people in the total popu­
lation will rise from 21 to approximately 30%. The 
transfers from workers to pensioners through 
state pension schemes are running at such a level 
that they are in danger of becoming unsustai­
nable. A number of Member States have begun to 
initiate reforms of their pension schemes (see 2.3.1 
and 2.3.2). The ever-growing numbers of very old 
persons will lead to a rising demand for health 
care and social services, and Member States will 
find it difficult to finance increasing health care 
expenditure. The search for efficiency in health 
care systems will become a priority (see 2.3.4). At 
the same time, the care needs of dependent older 
people (see 2.3.3) are growing and lead to a new 
kind of demand on social protection systems, the 
satisfaction of which has a great employment 
potential. The challenge is to reconcile the satis­
faction of these new care needs with the imperati­
ve of containing the relevant care costs. Population growth between 1995 and 2015 
for three age groups 
European Union (15) 
People (in millions) 
0-19 
Source: EUROSTAT 20-59 60+ 
1.2.3 The new gender balance 
The move towards equal opportunities for 
women and men has a strong impact on working 
life and on society as a whole. Women's employ­
ment has increased in the Union from 46 to 61 
million over the last 20 years, while men's 
employment has remained remarkably stable (86 
million). The trend of increased female participa­
tion in employment will continue during the 
years to come and will make a valuable contri­
bution to countering an impact of the ageing 
workforce. 
Activity rates of men and women in the Union , 
1970 to 1995 European Union (15) 
% OF POPULATION BY SEX AGED 15-64 
• Men 
Women 
Source: EUROSTAT 
The new gender balance renders the traditional 
concept of social protection, based on a family in 
which the husband is the breadwinner while the 
wife has no paid work, outdated. There is a 
conflict between this new balance and the tradi­
tional family policy that expects women to take 
the whole responsibility for housework and child 
and elder care at home. 
The low and falling birth rates in many Member 
States are strong signals of the need to rethink 
social protection systems. The challenge for 
social protection is not only to achieve equal 
treatment for women and men, but also to find 
ways of individualising rights without penalising 
women who have not taken up paid employ­
ment in order to look after their families, as well 
as new arrangements to facilitate care for chil­
dren and for older people (see 2.4). Co-ordination is a dynamic process reflecting the 
evolution of the national schemes of social pro­
tection and changing requirements. There is now 
a need to simplify and reform the co-ordination 
system to adapt it to new needs derived from 
new forms of social protection and patterns of 
migration. Migration consists increasingly of 
highly skilled workers10, for whom supplementa­
ry schemes of social protection, lacking any co­
ordination at European level, are of particular 
importance (see 2.5). 
Total fertility rate, 1960 -1995 
European Union (15) 
1960 1965 1970 
Source: EUROSTAT 1975 1980 1985 1990 1995 
1.2.4 The need to reform 
the co-ordination of national 
social security schemes 
Since 19598, the Union has had a European sys­
tem for co-ordinating the social security schemes 
of Member States which protects the rights of 
people moving within the Union. This means 
that the social protection of a considerable num­
ber of people depends, wholly or partially, on a 
well functioning co-ordination system9. 
10 Regulations 3 & 4 co-ordinating the social security schemes of the then six Member States, came into force on 1 January 1959. 
These were replaced on 1 October 1972 by Regulations 1408/71 and 574172 which are still in force and have since been amended 
many times. These Regulations have been updated in OJ L28 of 30 January 1997. 
In fact, it determines the social security rights not only for the 2.8 million EU nationals who are at present working in another 
Member State but also for the millions of European citizens who have in the past, during a period of their career, been working 
in more than one Member State, or who will do so in the future. The successive enlargements of the Union have increased these 
numbers considerably and so will any future enlargement (EUROSTAT, Labour Force Survey, 1995). 
"Social Security in Europe - Equality between nationals and non-nationals" First European Conference on social security for 
migrant workers. Oporto, November 1994. 
2 THE KEY ISSUES FOR MODERNISATION 
2.1 Social protection as 
a productive factor 
The capacity to create jobs for an increasing part 
of the working population, thereby reducing the 
dependency ratio, is of fundamental importance 
for the sustainability of the social protection sys­
tems. The creation of jobs and the fight against 
unemployment is the highest priority of the 
European Union, as recently emphasised by the 
Dublin European Council. 
The reforms of social protection systems have to 
be seen in the context of the European employ­
ment strategy. The "Broad Economic Policy 
Guidelines", agreed at the Florence European 
Council, call for a restructuring of public expen­
diture in order to make more room for expendi­
ture that can promote employment, including a 
redistribution from passive to active labour mar­
ket policies and investment in human resources. 
A central question arising from the efforts to 
modernise social protection systems is how to 
combine obligations and opportunities. More 
opportunities for individuals to get into or go 
back to work is a prerequisite for all the mea­
sures that put more responsibility on the indivi­
dual through cuts in social security provisions. 
The links between social policy and economic 
performance have recently been highlighted by 
the Dutch Presidency at a conference in Ams­
terdam'1 . The Commission has gathered infor­
mation and initiated further studies on the links 
between social and economic policies. The 
ongoing work will be brought together in order 
to stimulate the debate on the mutually reinfor­
cing effects of good social and economic policies. 
Objective: Increase awareness of social policy 
as a productive factor. 
Key action: Building on the discussions which 
took place at the Dutch Presidency 
Conference on «Social Policy and 
Economic Performance», the Com­
mission will study during 1997 the 
overall costs and benefits of social 
protection systems - in particular, 
their impact on social cohesion, 
political stability and economic 
progress. 2.2 Making social protection 
more employment-friendly 
Today, employment is the first priority and the 
greatest challenge for the European Union. 
Building on the Confidence Pact for Employment, 
and particularly the plea to speed up the reform 
of employment systems, the 'Dublin Declaration 
on Employment' adopted at the European 
Council on 13-14 December 1996 stressed the 
need for taxation and social protection systems to 
be more employment-friendly. Furthermore, the 
Council Resolution of 2 December 1996 on the 
role of social protection systems in the fight 
against unemployment12 specified the way this 
could be achieved and urged the Commission and 
the Member States, working in partnership, to 
strengthen the exchange of information and 
experience and to deepen the level of joint 
reflection among Member States on techniques 
and policies aimed at making social protection 
more conducive to employment. 
It is becoming increasingly clear that as the natu­
re of work changes, the span of social protection 
systems must provide more stability and security. 
In tomorrow's working world, the balance bet­
ween flexibility and security must offer recogni­
tion and régularisation of new forms of employ­
ment relationships. However, it must also offer 
the security which can result from greater 
influence over one's work and from having the 
scope and opportunity to enhance skills and 
employability. 
In order to make social protection more employ­
ment-friendly, the following issues should be 
addressed: 
2.2.1 Making tax and social benefit 
systems more 
employment-friendly 
Taxation and social protection systems need to 
be made more employment-friendly, by ensuring 
that they provide clear incentives for job-seekers 
to take jobs or participate in other employment 
enhancing activities, while still providing a safe­
ty net for the jobless. Improving the articulation 
between tax and social benefit systems is there­
fore essential. Dependency on social protection 
is likely to grow for as long as the net gain expec­
ted from return to work is small. 
11 Dutch Presidency Conference "Social policy and Economic Performance: employment, activating the welfare state and 
economic competitiveness" - Amsterdam 23-25 January 1997. 
12 Resolution of the Council and of the representatives of the governments of the Member States, meeting within 
the Council of 2 December 1996, on the role of social protection systems in the fight against unemployment, OJ C386 of 
20 December 1996. 
It may occur that an unemployed person gets a 
disposable income from benefits which is higher 
than the one he/she could expect when back in 
work. Although administrative controls and 
social pressures may lead people to look actively 
for a job despite high replacement rates, in the 
long run such a situation is not conducive to 
employment. Financial incentives are necessary 
to reinforce work incentives. 
Those facing the greatest disincentive effects are 
those caught in the unemployment trap: loss of 
benefits, in conjunction with the impact of taxa­
tion, can wipe out any advantage expected from 
bringing an earned income into a family. Benefit 
recipients are then truly caught in a trap, from 
which they have no economic motivation to 
escape. 
In particular, social protection should seek to be 
as neutral as possible in relation to any second 
paid activity within a couple, and even encoura­
ge it. It is becoming rare for social protection 
benefits - especially family benefits - to be gran­
ted on condition that one family member does 
not have an earned income. Nevertheless, in cer­
tain Member States, additional benefits still exist 
- especially additional unemployment benefits -
which are granted only if the unemployed per­
son lives with a partner who has no paid activity. 
The disincentive effect of these measures is clear. 
A further problem is the setting of income cei­
lings to qualify for benefit. All Member States, 
with the exception of Spain, pay family allo­
wances to all families, although Germany, Italy 
and Greece reduce the amount when family 
income exceeds a certain sum. Where other kinds 
of family and housing benefits exist, however, 
they are usually means-tested. It is important in 
this situation to avoid the poverty trap. This dan­
ger can be avoided in two ways: by only partly 
reducing benefits when household income 
increases or by introducing a specific, higher 
income ceiling if two wages are coming into the 
household. In most Member States, no special 
provision has been introduced to deal with this 
problem. 
Making social protection more employment-
friendly could also take the form of indirect, 
non-wage income support. The failure of many 
previous programmes to provide incentives to 
the long-term dependent, especially women 
with care responsibilities, was in part a conse­
quence of a failure to compensate sufficiently 
for the difficulties that the most vulnerable 
often face in combining family responsibilities 
and work. The particular vulnerability of single-parent households or households with only one 
low income is to a considerable extent due to an 
inability to combine work and care. Therefore, 
indirect income support through public or subsi­
dised child care provision can influence labour 
supply significantly. 
Objective: Make social protection more 
employment-friendly by impro­
ving the articulation between tax 
and benefit systems witfc a view to 
increasing employment incentives. 
Key action: The Commission will assess, in line 
with the Conclusions of the Dublin 
European Council whether recent 
changes in policies and systems 
have strengthened incentives for 
Job seekers to take up work and 
wilt identify the obstacles to achie­
ving these objectives* 
2.2.2 Turning unemployment 
insurance into an 
employability insurance 
Incentives to look for employment are necessary. 
However, incentives need to be boosted by offe­
ring better opportunities to find jobs. In the 
Union as a whole, only 7% of the unemployed 
are currently offered the possibility of retraining. 
The vast majority is expected to find a new job in 
a more knowledge-based economy with often 
outdated skills. 
Most unemployment schemes were designed ori­
ginally to provide a replacement income for 
people who found themselves temporarily out of 
work but expected to find work again soon. In 
most cases, this new job would require skills simi­
lar or identical to those needed for the previous 
one. Today, however, with the labour market 
rapidly evolving to respond to changing needs 
and demands and becoming increasingly skills-
based, it has become essential that those seeking 
employment are prepared to acquire new and 
different skills. Life-long learning has become an 
integral part of a full and successful participation 
in the labour market. Some of the unemployed, 
in addition to financial support, now require tai­
lored measures and programmes to help them to 
improve and acquire work skills, training or 
increase their employability if they are to stand a 
realistic chance of finding new employment. 
Furthermore, figures show that the longer those 
out of work remain in unemployment the grea­
ter their difficulty in regaining a foothold in the 
labour market. Financial constraints have led a 
number of Member States to reduce the average 
duration of unemployment insurance benefits by 
linking this duration to previous employment 
records. A growing number of unemployed 
people find themselves caught in a process 
which, as their rights to unemployment insuran­
ce are exhausted, can lead to eventual withdra­
wal from the labour market and an erosion of 
their work skills. The combined effect of unem­
ployment insurance schemes, which pay benefits 
for a limited period, and assistance schemes, 
whether for unemployment or as part of a mini­
mum income guarantee, can be inappropriate to 
current labour market conditions. 
The task, therefore is to provide measures which 
help the unemployed to acquire new skills and 
upgrade existing ones, within a framework of 
social protection that prevents a drift into pover­
ty and exclusion from the labour market and 
society in general. More attention must be given 
to a review of unemployment benefit schemes 
aimed at seeking to assist and guide the unem­
ployed from unemployment through the acquisi­
tion of skills and qualifications to enter and re­
enter the labour market. Social protection 
should support reforms aimed at improving the 
provision of training and general education. A 
number of Member States have undertaken 
reforms in their unemployment benefit schemes, 
with the aim of providing active support to the 
unemployed at an early stage in the unemploy­
ment spell, and to remove disincentives to active 
job search. The balance must be shifted from 
passive to active policies that involve participa­
tion in training and education and assisting in 
the finance of schemes to provide work expe­
rience. 
Objective: Make social protection more 
employment-friendly by develo­
ping unemployment compensa­
tion schemes into employabtHty 
insurance, in line with the move 
towards life-long learning. 
Key action: The Commission will examine the 
changes in the existing structure 
and organisation of unemploy­
ment compensation schemes 
necessary to implement the agre­
ed restructuring from passive 
to active policies. 2.2.3 The funding arrangements for 
social protection need to be 
thought afresh 
The fight against unemployment is not just about 
increasing incentives and opportunities for the 
unemployed to get a job. Arrangements for fun­
ding social protection also affect employment -
especially the employment of low-skilled workers 
- through their impact on total labour costs. 
The 1993 White Paper on Growth, Compe­
titiveness and Employment13 recommended a 
reduction in non-wage labour costs, ranging 
from 1 to 2% of GDP for the EU as a whole. This 
recommendation was further emphasised in the 
Essen European Council in 1994, where one of 
the five priorities in fighting against unemploy­
ment was identified as the reduction in non-
wage labour costs, in particular targeted at 
unqualified employees. This reduction has not 
yet been fully achieved. The main reason is the 
difficulty experienced by Member States in fin­
ding suitable and sufficient budgetary compen­
sation to offset the revenue loss. 
The long-term trends in taxation have been 
unfavourable to labour. Between 1980 and 1994, 
the implicit tax rate on employed labour increa­
sed steadily from 34.7% to 40.5% on average in 
the Member States. Over the same period the tax 
rate decreased from 44.1% to 35.2% for other 
factors of production (capital, self-employed 
labour, energy, natural resources). 
Several Member States have introduced various 
measures to reduce non-wage labour costs. 
Some studies have shown that they have not led 
to significant effects on overall employment 
levels because they trigger substitution effects 
between subsidised and non-subsidised labour 
and dead-weight losses14 . At the same time, 
these studies show that the positive effects will 
be greater if measures are carefully designed 
and linked to job creation. Provided these speci­
fic reductions of non-wage labour costs are 
stable enough over time, new job opportunities 
can be offered to those categories which face 
the biggest difficulties in integrating into the 
labour market. In general, a clear signal should 
be given that the long term trend to increasing 
taxes on labour will be reversed. 
The key gap to narrow is that between, on the one 
hand, total salary cost and, on the other, net take-
home pay for low-skilled workers. There has been 
little progress over recent years in this respect. 
There are various reasons for this impasse. It is 
13 "Growth, Competitiveness and Employment: A White Paper", COM(93)700, December 1993. 
14 See for instance "L'allégement des charges sociales sur les bas salaires", rapport au premier ministre, Conseil supérieur 
de l'emploi, des revenus et des coûts, Paris, June 1996 and "Labour cost, Wages, and Employment in the EU", 
note presented to the Economic Policy Committee, September 1996 
often difficult to reconcile changing the funding of 
social protection with preservation of people's 
rights, especially where benefits are in replacement 
of salary. There is, however, some room for 
manoeuvre in certain countries: shifting taxation 
from labour to other production factors can enable 
a restructuring of the non-wage labour costs, in 
order to reduce the burden on low wages. The 
White Paper on "Growth, Competitiveness and 
Employment" has already singled out environmen­
tal and energy taxes as one of the ways in which 
the compensation revenues can be levied so as to 
permit the reduction of taxes on labour. 
To achieve that transformation, closer co-operation 
between Member States would be beneficial, as the 
Commission has stressed in recent communications15. 
Tax co-ordination could contribute not only to elimi­
nating distortions in the single market but also to 
reversing the long-term trend in taxation structures 
so as to make them more employment-friendly. In 
order to counteract tax erosion on the more mobile 
tax bases, Member States have to some extent been 
driven to reduce taxes on capital and compensate by 
overcharging labour. This is turn produces unwanted 
effects on employment and income distribution. 
Objective: Make social protection more 
employment-friendly by narro­
wing the gap between total salary 
costs and net take-home pay for 
low-skill workers. 
Key action: The Commission will deepen the 
analysis of measures taken to 
reduce non-wage labour costs as a 
contribution to the interim report 
to be presented at the Amsterdam 
European Council in June 1997 
and to the Joint Employment 
Report to be prepared for the 
Luxembourg European Council in 
December 1997; the Commission 
will, inter alia, examine how the 
trend of increasing levies on 
labour can be reversed and what 
practical progress in tax co-ordina­
tion between Member States is 
necessary to allow for a reversal of 
that trend. 
In addition, the permanent High 
Level tax policy group set up by 
the Dublin European Council will 
examine, among other issues, 
ways of restructuring fiscal sys­
tems, including social contribu­
tions and taxation on labour. 2.2.4 Implementing flexible systems 
for managing the transition 
from work to retirement 
The situation of older workers has changed dra­
matically over the past twenty years. Firms have 
sought to make employment more flexible, both 
quantitatively and qualitatively. External flexibi­
lity, designed to adjust employment to immedia­
te needs, has been as important as internal flexi­
bility. The result has been, inter alia, a steady 
decline in the employment of older workers. 
In order to reduce unemployment and especially 
to promote opportunities for the young, many 
European countries have attempted to shorten 
the working life of the older workforce. 
Arrangements have been introduced for leaving 
work well in advance of the retirement age 
through invalidity schemes, special benefits for 
older workers, early retirement schemes or by 
granting pensions early in cases of unemploy­
ment. The shortening of working life was the 
subject of a broad implicit consensus involving 
employers, workers and the state. Employment 
rates for over-55s have dropped very significant­
ly in twenty years. The idea of retiring on a fixed 
pre-established date is disappearing fast. 
However, as life expectancy continues to grow 
and as many Member States are introducing 
reforms designed to raise retirement ages in 
order to relieve pressure on public pension 
schemes (see 2.3.1 below), it is essential to rever­
se the trend towards early exit from the labour 
market. The transition to retirement has, para­
doxically, become less flexible. Workers' expecta­
tions have changed with the massive growth in 
early retirement opportunities. Where firms 
have become less willing to invest in training 
their older workers or in promoting them, the 
individuals concerned have become less motiva­
ted and have often come to see early retirement 
as the best - or only - option. 
Awareness of the challenges associated with 
early retirement over the coming ten years is 
poor. The changes now taking place in firms, with 
younger workers replacing older ones, are unsus­
tainable over time. There are even indications 
that if current trends continue - i.e. people over 
50 or 55 being considered to be unemployable -
there could be a shortage in labour force in a 
number of regions. If serious dislocations are to 
be avoided and if employment is to be developed 
in Europe, greater efforts must be made to keep 
these older workers in the labour market. 
75 In SEC(96)487 of 20.3.96 "Taxation in the EU" 
report on evolution of tax systems". and in Communication COM(96)546 of 22.10.96 "Taxation in the EU: 
This will, in part, involve much more investment in 
life-long learning for workers than is common 
today'6 . In particular, the Commission is studying 
possible new fiscal means to promote investment 
in human resources. It will also require a major shift 
towards flexible systems for managing the transi­
tion from work to retirement and towards systems 
of part-time employment for older workers. 
Although the Council adopted a Recommendation 
as early as 1982 on this topic17, the arrangements 
for these more flexible systems are still largely 
undefined. A key point is to determine to what 
extent creating incentives for older workers to stay 
longer in working life can be matched by creating 
jobs which are adapted to them. Recent initiatives 
in some Member States should be examined. 
Objective: Make social protection more 
employment-friendly by increa­
sing employment incentives as 
welt as employment opportunities 
for older workers. 
Key action: The Commission will present the 
potential and problems of a gra­
dual transition to retirement in 
the Employment in Europe report 
to be published in September 
1997 at\di will consider appropria­
te follow-up; the Commission will 
also invite the social partners to 
deepen the social dialogue on the 
impact of ageing. 
2.2.5 Social protection to promote inclusion 
The modern design of European social protec­
tion systems was conceived just after World War 
II. They were intended to provide workers with a 
replacement income during periods of work 
interruption, either temporary (sickness or 
unemployment) or definitive (permanent work 
incapacity or retirement). As such, they were 
quite effective in alleviating poverty. However, 
social protection is now confronted with a new 
phenomenon: exclusion. 
Exclusion goes beyond poverty. It is the accumu­
lation and the combination of several types of 
deprivation: lack of education, deteriorating 
health conditions, homelessness, loss of family 
support, non-participation in the regular life of 
society, and lack of job opportunities. Each type 
of deprivation increases the other types. The 
result is a vicious circle, leading from long-term unemployment to the break of family ties, and 
eventually to marginality and delinquency. 
Social protection alone cannot be a remedy for 
every situation of exclusion. However, social pro­
tection has a role to play not oniy in providing 
excluded people with an income enabling them 
to live in keeping with human dignity, but also in 
helping to reintegrate them into society. Both 
unemployment compensation schemes and social 
assistance mechanisms, and particularly the safety 
nets designed to guarantee a minimum level of 
resources to all inhabitants, should become essen­
tia! tools in an active policy to fight exclusion. In 
particular, it is becoming ever clearer that mini­
mum income schemes, as defined in the Council 
Recommendation of 199218, should be fully inte­
grated into a global policy for fighting exclusion. 
At the same time, the role of minimum income 
schemes has changed. As the number of benefi­
ciaries has grown, the schemes run the risk of 
becoming a kind of exclusion compensation that 
confirms social breakdown rapidly, if the 
schemes are not associated with active integra­
tion policies. There is now a growing consensus 
on the necessity of moving from the traditional 
social assistance approach. 
How can people who are currently excluded be 
given a role in society? On the one hand, the 
excluded experience major difficulties in finding 
a job because they are unable to meet firms' 
requirements in terms of skills, productivity and 
flexibility. It is very difficult to require marginali­
sed people to be as productive and flexible on 
the labour market as skilled and fully integrated 
workers. In trying to rebuild their lives, excluded 
people need to be offered integration opportu­
nities with a guaranteed minimum level of stabi­
lity. This minimum stability is not easy to find in 
the private, profit-making sector of the economy. 
On the other hand, there are needs which are 
not currently met in the sector of non-market 
services, run by central Government, local autho­
rities and the NGOs. Several Member States have 
embarked on a new approach, aiming at the 
activation of social assistance expenditure and 
trying to achieve long-lasting integration of 
excluded people through meeting social needs 
which are currently financially out-of-reach. The 
same experiments are made both by the coun­
tries which are most advanced in terms of active 
labour market policies and by the countries 
16 See White Paper on Education and Training: " Teaching and Learning: Towards a Learning Society", COM (95) 590 
17 Council Recommendation 82I857IEEC of 10 December 1982 on the principles of a Community policy concerning the age 
of retirement, OJ L 357 of 18 December 1982. 
18 Council Recommendation 92/441/EEC of 24 June 1992 on common criteria concerning sufficient resources and social 
assistance in social protection systems, OJ L 245 of 26 August 1992. 
which are making efforts to develop the integra­
tion part of their minimum income schemes. 
They need to turn a passive and precarious soli­
darity with excluded people, into a contract that 
offers them real opportunities of both social and 
economic integration, in return for a commit­
ment to make an effort themselves. However, 
this boost for non-market activities must be care­
fully monitored and some links with market acti­
vities must be developed in order to avoid a fur­
ther segmentation of the labour market and 
some people being locked into subsidised jobs. 
Objective: Make social protection more 
employment-friendly by activa­
ting integration policies associa­
ted with social minima benefits. 
Key action: In the first half of 1997, the 
Commission will present a Com­
munication on the promotion of 
social inclusion and, in the second 
half of 1997, a report assessing the 
mechanisms of guaranteed mini­
mum income schemes in the 
social protection systems of the 
Member States. These documents 
wilt examine the details of inte­
gration contracts (duration, condi­
tions of transition towards regular 
jobs, etc.) and how such a policy 
can be made sustainable for public 
budgets. 
2.3 Adapting social protection 
to the demographic ageing 
of European societies 
2.3.1 Making public pension 
schemes sustainable 
The demographic structure of European countries 
is changing considerably19. The old-age dependen­
cy ratio (i.e. the ratio of older people to working 
age population) is increasing in most countries and 
reaching historically unprecedented levels. 
Although the long-term effects of the ageing pro­
cess on public budgets are rather uncertain and 
depend on the way the economy will adapt to the 
process, a significant pressure towards higher public 
expenditure is very likely to occur in the coming 
decades. Public pension schemes will bear much of 
the pressure since their expenditure is highly depen­
dent on the age structure of the population. A recent study has examined national projections 
of pension expenditure for the EU-15 for the per­
iod 1995-203020 . Projections are based on 
unchanged policy scenarios but take into account 
the major reforms that have been introduced in 
Member States since the mid-eighties. Over the 
period 1995-2030, the increase in the EU average 
ratio of pension expenditure to GDP is likely to 
reach 3 or 4 percentage points (from 12% to 15 
or 16%). By the year 2030, in several countries 
(Belgium, Finland, France, Germany, Italy and the 
Netherlands), the ratio of pension expenditure to 
GDP might be in the range of 15 to 20%. 
Expenditure would be lower in Denmark, Spain, 
Sweden (in the 10 to 15% range), and in Ireland 
and the United Kingdom (below 10%). 
Amount of annual gain in labour productivity needed 
to compensate the effect of ageing 
European Union (15) 
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o)o>o>aio>5)0)<»d)o>ooooooooooooo 
r-rrrr-rrrr,-NNNNNNNWMNNN« 
The ageing of the population in Europe has trig­
gered a debate on the viability of our current 
public pension systems and on alternative ways 
of making pension systems stable. In principle, 
there are two ways of funding a pension system. 
One is to agree on a mechanism which sets out 
how workers will get transfers when they are 
retired, in exchange for the contributions they 
give today to pensioners. This is the pay-as-you-
go system (PAYG). Pension benefits are calcula­
ted on the basis of a formula fixed in advance 
and are usually dependent on years of service 
and average or final salary. They are financed 
through contributions from employees and 
employers and budget transfers. The operation 
of such systems depends on the contributor's 
willingness to pay. This in turn is conditioned by 
their expectations that adequate transfers will 
continue in the future. 
19 The report on "The democraphic situation in the European Union", 1996, addressed in detail the medium and long-term 
demographic perspectives in EU Member States". The charts annexed to this communication show the population 
growth between 1995 and 2015 for three age groups in the different EU Member States. 
20 D. Franco and T. Munzi, "Public Pension Expenditure Prospects in the European Union: A Survey of National 
Projections", European Economy, Reports and Studies N" 3, 1996. 
10 
The other funding method is to base the transfer 
of income, not on the promise that it will conti­
nue in the future, but on property or financial 
assets (funded schemes). Such schemes are, as a 
rule, funded through regular contributions and 
provide benefits dependent only on the return 
on assets invested. Consequently, pension inco­
me is subject to inflation and investment risk. 
The debate and research on alternative ways to 
fund pension schemes has led to some important 
conclusions. First of all, there is no escaping the 
fact that current GDP is shared every year bet­
ween those who receive income directly from 
their participation in economic life and those 
who do not. That goes for the PAYG as well as 
the funded schemes. 
Secondly, a radical transformation of the public 
schemes from PAYG to funded schemes is not 
realistic because of the huge transition costs. In 
the case of a sudden shift, all members of the 
pension schemes and their liabilities would be 
transfered to the funded schemes at once. In this 
case, all liabilities of the current schemes would 
become explicit, i.e. the stock of government 
debt would increase at once. In terms of cash 
flow, expenditure would continue, but without 
any incoming contributions. If the outgoing pen­
sions are financed in full by an increase in 
government borrowing, the burden of the tran­
sition would be distributed over all future gene­
rations. If it is only partly financed through 
increased government borrowing and partly 
through increased taxation, the burden of fiscal 
consolidation would fall on the current genera­
tion which would pay twice, while future gene­
rations would benefit. A gradual transition, i.e. 
only new entrants in the labour market partici­
pating in the funded schemes, would create 
constant pressure on primary balances throu­
ghout the transition period. Both would be pro­
blematic in the current fiscal environment. 
Given that a wholesale switch to funded schemes 
appears to be an unrealistic solution, most 
Member States are focusing on ensuring sustaina-
bility of the public PAYG schemes. This will requi­
re the implementation of significant reforms. The 
most important one is to find mechanisms to 
allow people to work instead of taking early reti­
rement, that is to say to increase the actual pen­
sion age, now below 60 and falling, while main­
taining the formal pension age, generally 65. This 
will both increase contributions and reduce pay­
ments. If this is not possible, the options available 
include, in theory, raising contribution rates, 
increasing budgetary transfers, reducing benefits 
or a combination of the above. increases into indexation on prices. More funda­
mental reforms carried out in recent years by 
some Member States (Belgium, Finland, France, 
Germany, Italy, Sweden) show certain common 
features. The timing of retirement is no longer 
determined simply by a statutory retirement age 
but, equally important, by the number of contri­
bution years necessary to have a full pension. A 
few Member States have adopted the principle 
of flexible retirement within a given time span. 
In terms of equity, these are positive develop­
ments. The charge has occasionally been levelled 
at European systems that they are in effect anti-
redistributive (i.e. benefiting the rich at the 
expense of the poor) in the sense that life expec­
tancy correlates positively with income. The scale 
of this anti-redistribution is diminished by 
moving to flexible retirement arrangements, in 
so far as the age of joining the labour market is 
itself positively correlated with income. 
Another common trend is the closer link being 
forged between pension levels and total contri­
butions made during working life. This concen­
tration on the contributory side of pension sys­
tems makes sense at a time when boosting the 
incentive to work is a priority. It does, however, 
call for the solidarity element in each pension 
system to be made explicit: by how much should 
the pension be reduced to take account of career 
breaks - caused by unemployment, illness, child-
care or elder-care? The danger is that women, 
whose working lives are less linear than men's, 
will be penalised through this development. In 
the longer term, this trend could also work 
against the kinds of changes taking place in the 
working life-cycle, such as time taken off work at 
intervals to update skills. 
Objective: Foster the adaptation of public 
pension schemes to the ageing of 
European populations. 
Key action: Develop comparable projections 
of pension expenditure using 
common forecasting methodolo­
gies and harmonised economic 
and demographic assumptions; 
assess the elements of reform 
which seem to be most adapted to 
ensuring the sustainability of 
public pension schemes while pre­
serving their core aspects of soli­
darity and present the conclusions 
in the Social Protection in Europe 
report to be published at the end 
of 1997. 
Most European countries have changed the 
indexation of pensions from income or wage 
11 
2.3.2 Providing a secure environment 
for supplementary pension 
schemes 
In addition to ensuring the sustainability of the 
public pension schemes, it will be increasingly 
important to ensure that current employees and 
future pensioners are in a position to maintain 
post-retirement income at a level that will 
enable them to avoid a drop in their standard of 
living. One way of achieving this is to encourage 
the development of supplementary pension 
schemes operating on a fully-funded basis. 
Pension funds can be expected to stand side by 
side with the public PAYG schemes in those states 
where the development of such schemes takes 
hold. Whether such schemes do take hold will be 
a matter to be decided by the Member States. 
As the importance of supplementary pensions 
increases, it becomes more important for 
governments to provide a secure environment 
for the efficient operation of supplementary 
funded schemes. All Member States have rules of 
prudential management. At Community level, 
Directives 80/987/EEC and 77/187/EEC21 ensure 
the safety of assets, notably in the event of an 
employer's insolvency or the transfer of an 
undertaking. If workers can individually choose a 
financial institution for their retirement provi­
sion they should have access to understandable 
information helping them to make the right 
choices and avoid pension levels which remain 
below their expectations. 
In the context of the single market, there is an 
opportunity for making the development of fun­
ded occupational schemes more effective, for 
the benefit of scheme members and the econo­
my as a whole. This can be achieved through the 
Treaty rights of free movement of capital and 
free provision of services. The freedom of capital 
movements guaranteed by Article 73b of the 
Treaty enables pension funds in all Member 
States to diversify their assets, both domestically 
and internationally. This should enhance returns, 
reduce risks arising from domestic economic 
cycles and reduce the negative impact on asset 
prices during periods of disinvestment, when 
elderly generations realise their wealth. 
However, the freedom of capital movements can 
be seriously restricted by currency matching rules 
imposed by the Member States for prudential 
reasons. The regulatory framework must also implement 
the principle of equal treatment for men and 
women. The 1996 "Post-Barber" Directive22, fol­
lowing several judgements of the European 
Court of Justice, sets out the principles for this 
implementation. The practical application of 
these principles in the management of pension 
funds should not work to the disadvantage of 
women, who should not be penalised for their 
greater than average longevity. This could hap­
pen through, for example, a reduction in take-
home pay, because of a requirement to pay extra 
contributions, or from a reluctance on the part 
of employers to recruit women because they 
represent higher employment costs than men 
performing the same work, due to higher contri­
butions. 
The difficulty in achieving equal treatment 
demonstrates the need to regulate the mecha­
nisms of supplementary pension systems. Social 
protection - in contrast to private insurance -
seeks through a large-scale pooling system to 
separate the level of individual risk for each insu­
red person from the contributions paid by indivi­
duals or their employing organisations. This is 
designed to avoid bad risks being penalised, 
either through lower net salaries or through 
higher employment costs. This pooling of risks is 
more difficult to achieve in the limited context of 
supplementary defined benefit schemes and is 
absent from defined contribution schemes. Even 
though funded supplementary schemes are not 
grounded in solidarity, it is important to ensure 
that there is fair treatment of all schemes mem­
bers, including those such as part-time workers 
or those who take career breaks, especially given 
the expected increase in importance of such 
schemes. 
Innovative approaches will need to be found if 
the growing importance of supplementary 
schemes is not to lead to a breakdown in the 
principle of solidarity. In particular, it would be 
damaging to those in non-standard or precarious 
occupations (part-timers, career-breakers) to be 
left without a fair coverage by occupational 
schemes. 
21 Directive 77/187/EEC - OJ L061 of 5 March 1977 - on the approximation of the laws of the Member States relating to 
the safegarding of employee's rights in the event of transfer of undertakings, businesses and Directive 80/987/EEC - OJ 
L283 of 20 October 1980 - on the approximation of the laws of the Member States relating to the protection of 
employees in the event of the insolvency of their employer. 
22 Directive 96/97/EEC of 20 December 1996 - OJ L046 of 17 February 1997 - modifying Directive 86/378/EEC concerning 
equality between men and women in occupational social security schemes. 
12 
Objective: Provide a secure environment for 
supplementary pension schemes. 
Kay actions In the first half of 1997. the 
Commission will issue a Green 
Paper on supplementary pensions 
with a view to identifying, with all 
parties concerned, including the 
sodaf partners, the main elements 
of a framework at European level 
to provide a secure environment 
for the efficient operation of sup­
plementary funded schemes. 
2.3.3 Meeting new care needs for 
older people 
As our societies change, so do our needs in terms 
of social protection. Life expectancy has increa­
sed considerably since the immediate post-war 
years, and old age can in general no longer be 
considered as a difficult time in economic terms. 
However, new needs are emerging in relation to 
living conditions in the final phase of people's 
lives and the ageing of Europe will have a parti­
cularly strong impact on care needs. 
Advances in the treatment of acute illnesses as 
well as the general increase in life expectancy 
means that a growing number of people spend 
their last years in a state of dependency on 
others for the day-to-day basics of life. Until 
now, care in these cases was often provided 
informally by family members. This form of fami­
ly solidarity is becoming less feasible, however, 
as more women work outside the home and as 
greater geographic distances separate parents 
from their adult children. All European countries 
subscribe to the objective of enabling older 
people to stay in their own homes if at all pos­
sible rather than enter a care institution. The 
older people concerned clearly share this wish. 
Amongst the enabling conditions for dependent 
older people to live at home is the availability of 
medical and paramedical care as well as home 
help for day-to-day needs. The cost of these ser­
vices, taken over a number of years, can be very 
high. In several countries, there is a strong fear 
that voluntary insurance for dependence along 
these lines could give rise to the phenomenon of 
adverse selection and moral hazard. These make 
cost forecasting - and thus premium fixing - very 
difficult. The end result could well be a risky and 
therefore unattractive product for private insu­rance companies. In the case of voluntary insu­
rance, there is also the fear that a large part of 
the population will underestimate the risk which 
they face and will choose not to take out the 
necessary insurance in time. 
Thus we are witnessing the emergence of a new 
branch of social protection. The economic as well 
as social interest in compulsory cover of the 
population against the risk of dependence 
appears well founded. However, it is not easy to 
reconcile the need to meet these new care needs 
with the imperative of containing the relevant 
care costs. The main questions concern the type 
of cover given by a system of compulsory insu­
rance: services or money - the latter giving a grea­
ter choice to beneficiaries; the way to evaluate 
care needs and to manage delivery of benefits in 
accordance with needs, and the advantages and 
disadvantages of targeting benefits and selecting 
beneficiaries based on their income. 
in any case, a growing need for social services 
will emerge, the satisfaction of which has a great 
employment potential, and requires careful poli­
cy-design. Special attention should be paid to 
equal opportunities with respect to the new jobs 
created in the caring sector to prevent the emer­
gence of a gender imbalance. Finally, the delive­
ry of services must meet high quality standards. 
Objective: Revisit social protection systems to 
meet the care needs of dependent 
older people 
Key action: Analyse in the 1997 Social Pro­
tection in Europe report the expe­
rience of Member States which 
have already implemented care-
related provisions with a view to 
identifying the most efficient pat­
terns of a long-term cere insuran­
ce scheme. 
2.3.4 Improving health services 
Each Member State's health system is different as 
it reflects a unique pattern of historical and cul­
tural developments. Nevertheless, the systems in 
the European Union fall into two basic groups: 
either mixed systems which make use of services 
from both private and public organisations 
financed mainly from compulsory health insurance 
contributions; or national health services in which 
provision and financing is mainly located within 
the public sector. 
13 
Total expenditure on health in the Member States 
varies from just over 5 to nearly 10 per cent of GDP. 
Expenditure in absolute terms has been rising for 
many years and all Member States are experiencing 
mounting pressure on their health services. For ins­
tance, per capita expenditure for health care for 
the very old is five times as high as for a person of 
working age. As the age group 75 and over will 
increase by nearly 50% during the next 20 years, it 
will have a significant effect on total health care 
expenditure. This development arises not only from 
demographic change, but is also a result of rising 
expectations of what health systems can and 
should provide. 
The pressures on health systems have led to a num­
ber of reform initiatives in the Member States with 
the aim of improving both the overall effectiveness 
of health provision in terms of health gain and of 
the services' efficiency. The 1995 report on the State 
of Health in the European Union23 outlined some of 
the reforms being undertaken and also confirmed 
that Member States are giving more prominence to 
disease prevention and health promotion activities 
in the belief that modest investments in these areas 
will have a significant impact on the powerful fac­
tors affecting the main causes of mortality and mor­
bidity. Following earlier unsuccessful attempts to 
contain the costs of public health systems, e.g. by 
increasing co-payment, a number of Member States 
are now trying to introduce market mechanisms 
into their health care systems in recent years. One 
particularly notable reform has been the separation 
between the functions of purchasing services and 
their delivery. Hospitals and other service providers 
enter into contracts with local health authorities for 
the provision of particular services. In this way, these 
authorities are forced to define their requirements 
more clearly and seek the most cost-efficient ways 
of meeting them. Competition between service pro­
viders is thus encouraged. 
There are clearly risks that in the search for cost 
savings both providers and authorities will be 
tempted to go for the cheaper rather than the 
optimal solution. Moreover, there have also been 
examples of contracts which are imprecisely 
drawn up in terms of what is to be delivered and 
to what standard. However, it is still much too 
early to make definitive judgements about the 
consequences of these and other measures. 
In the quest to improve the efficiency of health 
systems, putting health care insurers - private or 
public - in competition with each other, while 
establishing the proper regulatory framework 
and guarantees, is attempted in some Member 
States. It is essential to exclude elements, such as 
risk selection, which may deprive individuals from the necessary cover. On the other hand, 
subject to proper conditions to avoid distorting 
effects, each insurer should be able to contract 
with those service providers which will provide 
them with the best services at affordable prices. 
The combination of these factors may well lead 
to a reduction in costs, although the greater 
gains are bound to be found in health care costs 
rather than in the management of the insurance 
activity itself. 
In these conditions, it is crucial that the freedom to 
provide health services and place relevant pro­
ducts on the internal market is underpinned by 
such a framework so as to benefit the health sys­
tems and result in continuity and affordability of 
health care across the Community. Such a frame­
work can be constructed on the principles of facili­
tating the timely sharing of validated information 
on the comparative merits of interventions, the 
efficiency and cost-effectiveness of new technolo­
gies, encouraging the transfer of know-how in ser­
vice organisation, promoting the optimal utilisa­
tion of existing resources, in particular in border 
areas, and minimising the number and extent of 
additional administrative arrangements applicable 
to users of services from other Member States. 
Objective: Improve the efficiency, cost effec­
tiveness and quality of health sys­
tems so that they can meet the 
growing demands arising from the 
ageing of the population and other 
factors. 
Key action; -carry out an assessment of the 
potential impact of prevention 
on the reduction of health care 
costs; 
-clarify to what extent and under 
what conditions, introducing mar­
ket forces within health care sys­
tems can help save costs while fos­
tering a better quality of services 
and ensuring access for all to health 
care; 
-the Commission will bring toge­
ther work carried out in the 
Member States on the efficiency 
and cost-effectiveness of health 
care systems, and assess which 
initiatives can be taken at 
Community level to assist 
Member States in reducing costs 
while maximising health gains. 
23 COM (95) 357 of 19 July 1995. 
14 
2.4 Adapting social protection 
to the change in the gender 
balance: towards an 
individualisation of rights 
Female participation in the labour market will 
continue to increase during the years to come. In 
order to maximise the potential contribution of 
women, it is essential to adapt social protection to 
the new gender balance. This implies: 
i) finding new arrangements for reconciling 
working and family life; 
11) implementing progressively an individualisa­
tion of rights. 
The changing pattern of household composition 
and family types requires new responses. Innovative 
and viable schemes need to be developed to recon­
cile working life with the needs of families, house­
holds and individuals, while avoiding putting the 
burden for all care on families. In line with the com­
mitments of the Fourth Action Programme for 
Equal Opportunities for Women and Men(1996 -
2000)24 , the Commission is exploring a range of 
practical initiatives and policy options, including 
consideration of measures aiming at setting higher 
standards for the care of children and other depen­
dants. At the initiative of the Commission, the social 
partners reached an agreement on parental leave 
giving men and women an individual right to 
parental leave with the guarantee of being able to 
return to the former workplace after the leave per­
iod. The agreement was adopted as a Council 
Directive on 3 June 199625. 
In virtually all Member States, the social protec­
tion system contains elements which connect the 
social protection of an individual to his or her 
specific family situation, single, married, cohabi­
ting, etc. In the past, such derived rights have 
been successful in protecting many people from 
poverty. They take account of family links, the 
value of work at home and care work and give 
those who have not participated on a continuing 
basis in paid work in order to serve their families 
the security of an income after the death of the 
breadwinner. In that respect, splitting pension 
credits between partners in case of divorce could 
be seen as a recognition of the implicit contribu­
tion of the non-active or low-paid partner. 
However, derived rights pose certain problems. 
They create dependency on the person who has 
a direct entitlement to social security benefits. Direct social security rights being, in most cases, 
acquired through paid employment, the lower 
participation of women is reflected in a lack of 
direct rights. Women are therefore more vulne­
rable when a relationship breaks down, e.g. in 
cases of divorce. Furthermore, derived rights are, 
in most countries, given to spouses and children 
only. They do not always take account of other 
forms of cohabitation which are increasing. 
Secondly, derived rights can create disincentives 
for women to enter the labour market and can 
lead to incentives to take up jobs in the informal, 
unprotected economy. In some countries, margi­
nal employment does not provide access to social 
security at all. This is only tolerated because the 
marginally employed generally benefit from 
derived rights and their work is not regarded as 
an independent way of making a living, but 
rather as a supplement to the family budget, lea­
ving the person in question to depend on the 
social security of their partners. 
Finally, survivors' pensions enable people to 
benefit from a pension on the strength of the 
contributions of his/her deceased spouse without 
the former having had to make any additional 
contribution. This can lead to the situation whe­
reby a spouse who has never worked outside the 
home can receive a higher pension, calculated on 
a complete career and high income of the decea­
sed spouse, than a single person having worked 
all his/her life with a lower income. As a result, 
derived rights tend to re-distribute social securi­
ty benefits from the average income earner to 
the dependants and survivors of the high income 
earners. 
The individualisation of rights would aim to halt 
the practice of taking account of personal links 
when ensuring social protection of an individual. 
It would contribute to bringing social protection 
in line with legislation governing employment 
contracts, which considers workers as individuals. 
More generally, individualisation is in line with 
the general trend towards a greater autonomy 
of the individual. In that sense, it goes beyond 
gender issues and also concerns the relations 
between parent(s) and children in the light of 
new family patterns and structures. 
Admittedly, the individualisation of rights could 
lead to hardship. For instance, derived rights can 
give the unemployed indirect entitlement to 
benefits for dependent children. Individua­
lisation could also lead to specifying the age 
24 COM(95)381 of 19 July 1995, JO C306 of 17 November 1995. 
25 Council Directive 96/34/EEC of 3 June 1996 on the Framework Agreement on parental leave concluded by UNICE, CEEP 
andtheETUC OJ LI45/4 of 19 June 1996. 
15 
requirements for entitlement to benefits. 
Nevertheless, a strategy must be devised to 
encourage all potential workers to participate in 
the labour market in their own right without 
putting undue strain on family finances. 
The individualisation of rights would have diffe­
rent effects on the individual as well as on public 
budgets depending on the branch of social pro­
tection considered. Individualising entitlements 
to health care and unemployment benefits 
seems to be relatively straightforward due to the 
small budgetary effect it probably would have. 
The most important and the most difficult bran­
ch to individualise would be retirement pen­
sions, which is the area where the bulk of deri­
ved rights is granted. Not only would individua­
lising mean abolishing supplements for depen­
dants but it would also mean replacing the sur­
vivor's pension with another type of replacement 
income. For widow(er)s under the retirement 
age a special transitional pension could be gran­
ted until the retirement age or until a job is 
found. 
Given the current position of women on the 
labour market, it is most probable that taken as 
a group, they would lose considerably if survi­
vor's pensions were abolished, and many could 
even fall below the poverty line. The idea of a 
basic old-age pension supplemented by an occu­
pational pension might be able to accommodate 
this very complex problem, the first element 
assuring that all above the retirement age would 
receive a sufficient amount to enable them to 
provide for themselves. But the current trend in 
Member States' pension reforms is going in the 
opposite direction, i.e. establishing a closer link 
between contributions paid through employ­
ment and the amount of pensions (see 2.3.1 
above), thus making the solution of this problem 
more difficult. An in-depth reflection on the 
impact of career breaks on pension rights is 
necessary in order to find ways of overcoming 
this apparent conflict of objectives. In that res­
pect, Member States should learn from the diver­
sity of approaches that exist within the Union. Objectiva: Adapt social protection to the 
new gender balance in working 
life and to changes in family struc­
tures. 
Key action: -the Commission will present ini­
tiatives aimed at setting higher 
standards for the care of children 
and other dependants; 
-the 1997 Annual Report on Equal 
Opportunities will assess the 
attempts made by the Member 
States to make progress towards 
individualisation without jeopar­
dising the economic situation of 
women. 
2.5 Improving social protection 
for people moving within 
the Union 
Regulation 1408/71, based on Articles 51 and 235 
of the EC Treaty, co-ordinates social security 
arrangements for people moving within the 
Union. It is a prerequisite for the free movement 
of workers. This regulation provides a high stan­
dard of protection for people moving between 
Member States. 
However, there are still a number of gaps in the 
protection offered by Regulation 1408/7126. 
Moreover, the co-ordination system, as it cur­
rently stands, is in danger of becoming outdated 
and losing touch with a number of develop­
ments. Member States have recently introduced 
new types of benefit, for example those for an 
increasingly ageing population requiring long 
term care, which cannot be easily accommoda­
ted within the legal concepts contained in 
Regulation 1408/71, based on the classical 
branches of social security. The introduction of 
new forms of social protection in the Member 
States should not be hindered by uncertainty 
about the possible impact of the co-ordination 
system on the new schemes. 
The original dimension of European integration, 
i.e. a common market allowing and fostering 
free movement of workers, has been enriched by 
a new concept, namely that of European citizen­
ship. The personal scope of Regulation 1408/71 
should be adapted accordingly. 
The co-ordination of the various national social 
security schemes is inevitably complex. However, 
unnecessary complexity should be avoided and 
rules should be simplified wherever possible. The 
aim should be to make the rules more easily 
26 A number of these gaps have been discussed in the Commission's Green Paper "Education, Training, Research: 
The Obstacles to Transnational Mobility" COM (96) 462. 
16 
understandable for citizens moving within the 
Union and to overcome practical problems and 
red tape in the day-to-day application of the 
Regulation, which can obscure the advantages 
which it aims to provide. The Commission will 
develop a strategy to simplify and reform the co­
ordination system so that it meets current and 
future requirements. The national authorities 
and institutions, the European Parliament and 
the social partners will be closely involved in the 
development of such a strategy. 
The opinion has been expressed on many sides 
during the debate that it is no longer justifiable 
that a worker who is insured and legally residing 
in a Member State, and therefore covered by 
national social protection arrangements, should 
be completely excluded from the protection 
offered by the co-ordination system simply 
because he or she is not an EU national. In the 
second half of 1997, the Commission intends to 
present a proposal to the Council aimed at 
extending, wholly or partially, the co-ordination 
provisions to employed and self-employed per­
sons insured in a Member State who are not EU 
nationals. 
The debate also demonstrated a need for in-
depth discussion on the current provisions on 
cross-border access to health care, notably with a 
view to permitting greater and more efficient 
use of existing facilities, especially in border 
regions. However, the consequences for the 
financial equilibrium of health insurance in the 
Member States should be taken into considera­
tion and the financial provisions in the co-ordi­
nating Regulations in relation to health care 
should also be re-examined. Subject to the jud­
gements of the Court in the Decker and Kohll 
cases" , the Commission will present a proposal 
to amend Regulation 1408/71 in order to facilita­
te cross-border access to health care services. 
Furthermore, the fact that there is no Com­
munity co-ordination of taxation, while social 
security is subject to co-ordination, sometimes 
creates anomalous situations; for example in the 
case of certain frontier workers who may be obli­
ged to pay twice for social security - on the basis of high 
taxation in the state of residence, and via high insuran­
ce contributions in the state of work. The Commission 
intends to investigate these problems during 1997 and 
identify ways in which action at Community level could 
overcome them. There is a broad consensus that the absence of 
any co-ordination system at European level for 
supplementary pension schemes constitutes a 
real problem for persons moving within the 
Union. This is particularly the case in those 
Member States where occupational schemes play 
an important role in social protection. The 
Commission's Communication of July 199128iden-
tified the particular obstacles in this field. Given 
the specific nature of many of the schemes in 
question and their extreme diversity at national 
level as regards their origin, their occupational 
and material scope, as well as their legal and 
technical forms, the current co-ordination system 
created for statutory schemes does not seem to 
be the appropriate instrument to address the 
problems. A more flexible approach is required. 
The report of the High Level Panel on Free 
Movement of People chaired by Mme Simone 
Veil29 suggested to the Commission a way for­
ward in this area. The Commission will consider 
all the obstacles to free movement arising in this 
area in the framework of a Green Paper on sup­
plementary pensions which will be published 
shortly. It intends, however, as a first step 
towards dealing with these obstacles, to present 
a proposal for a directive which should in prin­
ciple cover the aspects highlighted by the High 
Level Panel's report. 
Objective: Adapt the co-ordination system to 
new forms of social protection 
and new needs in the field; avoid 
unnecessary complexity and remo­
ve barriers to cross-border mobility. 
Key action: -The Commission will develop a 
strategy both to reform and sim­
plify and to update the co-ordina­
tion system, closely involving 
national authorities, the Euro­
pean Parliament and the social 
partners. 
-The Commission will publish a 
Green Paper on supplementary 
pensions in which all the obstacles 
to free movement arising in this 
area will be considered. As a first 
step towards dealing with these 
obstacles, the Commission int­
ends to present a proposal for a 
Directive which should in princi­
pe cover the aspects highlighted 
by the High Level Panel's report. 
27 The Court of Justice is currently examining the extent to which the current provisions of Regulation 1408/71, which 
permit access to cross-border health care, at the expense of the competent State, only under strict conditions, are 
compatible with Article 30 EC Treaty (free movement of goods such as pharmaceuticals) and Article 59 EC Treaty 
(freedom to provide services such as health care services): Cases Decker (C-120/95) and Kohll (C-158/96). 
28 Communication of the Commission to the Council, "Supplementary social security schemes: the place of supplementary 
pension schemes in the social protection of workers and their effect on free movement" SEC(91)1332. 
29 Report on supplementary pensions adopted at the meeting of 28/29 November 1996 of the High-Level-Panel. 
17 
3. SUPPORTING THE ADAPTATION PROCESS THROUGH 
ACTION AT EUROPEAN LEVEL 
This Communication is based on the principle of 
subsidiarity. Each Member State is responsible 
for the organisation and financing of its own 
social protection system. The Union remains res­
ponsible for the co-ordination of social security 
schemes as regards the protection of people who 
make use of their right to move within the 
Union. Moreover, the exchange of experience 
between the Member States represents impor­
tant added value at EU level. 
Modernising and improving social protection in 
the Union cannot be achieved without the active 
participation of all involved. In part II of this 
Communication, the Commission has announced 
a number of key actions aimed at setting out 
both orientations for achieving that goal and 
more concrete steps for further reflection. 
The Commission invites the Council, the 
European Parliament, the Economic and Social 
Committee, the Employment and Labour Market 
Committee and the Economic Policy Committee 
to give their opinions on the ideas for the 
modernisation of social protection systems pre­
sented in this Communication. 
The Commission invites the social partners, at all 
appropriate levels, to contribute to the debate, 
in particular with regard to the three following 
points: 
• impact of the ageing of the population on 
the transition to retirement; 
• details of a regulatory framework at Euro­
pean level to provide a secure environment 
for the efficient operation of supplementary 
schemes; 
• implication of the development of new pat­
terns of work, and especially the impact of 
career breaks on social security rights. 
Social protection issues will have to be integra­
ted into the development of European employ­
ment policy. Today, employment is the first prio­
rity for the European Union and the Member 
States and their greatest challenge. This commit­
ment creates both a need and a potential for fur­ther action at Community level. The Commission 
will make a contribution to this process in the 
Single Report which will be presented to the 
European Council in Luxembourg in December 
1997. This contribution will analyse the reforms 
already implemented by the Member States to 
make social protection more employment-
friendly and will propose further lines of action. 
The Group of Directors General for Social 
Security will be invited to contribute to the pre­
paration of this report. 
This process of common reflection must also 
involve a wider range of participants, including 
the representatives of civil society. The whole 
issue will be at the top of the agenda of the 1998 
European Social Policy Forum. The forum will 
involve Member States, the social partners and 
NGOs, as well as European institutions. It will dis­
cuss the direction of the reforms of social pro­
tection systems for the next decade. More speci­
fically, ways of adapting social protection sys­
tems to the new needs described above will be a 
key issue for that discussion. 
Finally, the Social Protection in Europe report, to 
be published at the end of 1997, will bring toge­
ther more evidence and analysis on recent deve­
lopments in Member States, as a contribution to 
the process of joint reflection. 
18 
Appendix 
Population growth between 1995 and 2015 for three age groups 
Central scenario 
Austria Belgium 
0-19 20-59 60+ 
Denmark 0-19 20-59 60+ 
Germany 
0-19 20-59 60+ 0-19 20-59 60+ 
Spain Finland 
0-19 20-59 
France 60+ 46.4% 
0-19 20-59 0-19 20-59 60+ 
19 
Ireland Italy 
51.1% 
0-19 20-59 60+ 
Luxembourg 
0-19 20-59 60+ 
Portugal 
0-19 20-59 60+ 
United Kingdom 
0-19 20-59 
Source : EUROSTAT 60+ 0-19 20-59 60+ 
Netherlands 
0-19 20-59 
Sweden 
0-19 20-59 60+ 
European Union 
40% 
20% 
•20% 
20-59 
20 
}r ISSN 0254-1475 
COM(97) 102 final 
DOCUMENTS 
EN 05 04 
Catalogue number : CB-CO-97-104-EN-C 
ISBN 92-78-17134-4 
Office for Official Publications of the European Communities 
L-2985 Luxembourg