REPORT FROM THE COMMISSION - SOCIAL PROTECTION IN EUROPE 1995
Date: 1995-10-31
Institutions: European Commission
Subjects: European social policy, social analysis, social change, social security, social well-being

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  31.10.1995 
COM(95)457  final 

REPORT FROM THE  COMMISSION 

SOCIAL  PROTECTION 

IN 

EUROPE 
1995 

Table of contents 

Table of contents 

Foreword 

Summary and conclusions 

Chapter 1 

Systems of social protection in the Union 

Chapter 2 

Adapting to change: recent reforms 
and key developments 

Chapter 3 

Trends in social protection and its financing 

Chapter 4 

Unemployment compensation and  incentives 
to look for work 

Chapter 5 

Reforms in health care 

Chapter 6 

Social protection and the self-employed 

Chapter 7 

Social protection and caring  responsibilities 

Sources and  methodology 

/- 

-5 

Summary and conclusions 

Summary and conclusions 

The  development  of  extensive 

systems  of  social  protection  to 
support  and  assist  people  in  need 
has  been  a  prominent  feature  of 
European societies over the post-war 
years. The systems which have been 
established differ in detail in terms of 
their  organisation  and  methods  of 
funding,  reflecting  the  cultural, his 
torical  and  institutional  differences 
which exist between Member States. 
Nevertheless,  they  share  a common 
characteristic  of protecting  all those 
who require support, whether tempo 
rarily,  because  they  fall  ill  or  lose 
their  job  or  have  a  baby,  or  on  a 
longer term basis, because they retire 
from  paid employment, become per 
manently disabled or have children to 
bring up, irrespective of their ability 
to pay. 

It is the universal nature and extent of 
this support, and the scale of redistribu 
tion of income entailed, which distin 
guish  systems  of  social  protection  in 
Europe from those in most other parts 
of the world  or, indeed,  from  private 
insurance schemes. While systems are 
based  on  insurance  principles  in  va 
rying degrees throughout the Union, so 
that in many cases the amount received 
in benefit is related to the contributions 
which  have  been  made,  there  is  no 
direct link between what each person 
pays as their contribution to  financing 
the  system  and  their  vulnerability  to 
illness,  disability,  unemployment  or 

any of the other risks covered. At the 
same time, in most Member States, a 
minimum  level  of  income  and  basic 
support is guaranteed to everyone irre 
spective of whether they can afford to 
pay anything or not. 

As such, systems of social protection 
contribute  significantly  to maintain 
ing  social  cohesion  and  strengthen 
ing solidarity within the Union. They 
have arguably played a major role in 
helping  societies  cope  with  the  in 
creasing strains imposed on them by 
the  significant  economic  and  social 
changes  which  have  occurred  over 
the  past  two  decades  in  particular, 
which  have  been  accompanied  by 
high  and  rising  unemployment,  in 
creased uncertainty and instability of 
employment  and  income, the  influx 
of  large  and  growing  numbers  of 
women  onto  the  job  market,  an 
ageing population as life expectancy 
has risen and  substantial  changes in 
the  structure  of  households,  with  a 
marked  growth  in  the  number  of 
people  living  alone  and  in  lone-
parent  families. 

All of these developments, however, 
have  equally  imposed  strains  on 
social protection systems themselves 
as  the demands  on  them  have  esca 
lated  and,  more  especially,  as  the 
numbers  of  people  requiring  long-
term support and assistance have in 
creased  to  levels  never  envisaged 

when  the  systems  were  designed. 
The costs of maintaining the systems 
and  of  providing  extensive  support 
have,  therefore,  risen  significantly 
throughout  the  Union.  At  the  same 
time, the income available to finance 
these costs has become  increasingly 
constrained  as  long-term  economic 
growth  across  Europe  has  slowed 
down  markedly  in  relation  to  the 
rates prevailing before the mid-1970s 
when most of the systems were estab 
lished. The financial constraints have 
been  particularly  evident  in  recent 
years because of the recession of the 
early  1990s  and  the prevailing  con 
cern  of  policy  to  reduce  budget 
deficits  and limit public expenditure 
growth in order to contain  inflation 
ary  pressure, to  avoid  imposing  ex 
cessive  costs  on  businesses  facing 
increasing competition in markets in 
side and outside Europe. 

Although  the  commitment  to  pro 
moting a high level of social protec-
tion  throughout  the  Union,  as 
enshrined  in  the  Maastricht  Treaty 
(Article  2),  remains  undiminished 
and although attachment to the exist 
ing  system  of  social  support  re 
mains  deeply  entrenched  in  popular 
opinion,  financing  problems  and 
the  growing  demand  for  support, 
coupled with the high and increasing 
level  of  long-term  dependency  on 
social  assistance,  have  given  rise  to 
fundamental  questions  being  asked 

(e 

Summary and conclusions 

in  many  Member  States  about  the 
function, scope and means of funding 
systems of social protection. 

Equally, there is growing  awareness 
of  the  substantial  economic,  social 
and  demographic  changes  which 
have  taken  place  since  the  systems 
were,  for  the  most  part,  developed 
and which  are  still occurring  and of 
the  very  different  context  in  which 
they  have  to  operate.  In  particular, 
economies  in the Union  are becom 
ing  ever  more  closely  integrated, 
though at the same time more open to 
competition  from  outside. Partly, as 
a  result,  increasing  economic  flexi 
bility and the promotion of individual 
initiative have become major  objec 
tives  of  policy,  aims  which  systems 
of  social  protection  can  either  work 
against by adversely affecting  incen 
tives or help to achieve by providing 
support  in  the  event  of  failure,  so 
encouraging  greater  risk-taking.  At 
the same Lime, the costs imposed on 
businesses by the need to finance so 
cial protection are a growing cause of 
concern, and prevailing demographic 
trends threaten to add significantly  to 
the need for income transfers and for 
support  throughout  the  Union  in  10 
to  15 years  time  as  the  baby  boom 
generation reaches retirement age. 

Moreover,  in  the  context  of  the  in 
creasing  emphasis  of  policy  across 
the  Union  on  raising  employment, 
there is a growing focus on the poten 
tial links between prevailing systems 
of  social  protection  and  the  process 
of  job  creation.  The  1993  Com 
mission  White  Paper  on  Growth, 
competitiveness,  employment  called 
for  more  detailed  analysis  of  this 
issue,  while  successive  Community 
Summits  in  Brussels,  Corfu,  Essen 

and Cannes, have drawn attention to 
the  links  between  social  protection 
and  the way  it is funded  and incen 
tives both to offer and accept work. 

Against this background, there is not 
only general recognition that, despite 
their diversity, social protection sys 
tems  across  the  Union  are  facing 
common  problems  and  a  common 
need  to  adapt  to  changing  circum 
stances  and  priorities,  but  also  a 
growing  awareness  of  the  potential 
advantages of cooperation. This was 
already evident in the adoption by the 
Council in  1992 of two Recommen 
dations to work towards the conver 
gence  of  social  protection  policies 
and objectives  and to establish com 
mon  criteria  for  defining  minimum 
levels  of  income  and  social  assist 
ance.  The  present  Report,  which  is 
aimed at describing and analysing the 
systems  operating  in  the  different 
Member States and the way they are 
developing,  is  a  product  of  those 
Recommendations. 

A new framework 
for debate 
There is now, however, widespread 

agreement  on  the  desirability  of 
going beyond  the exchange of  infor 
mation  on  policies  and  their  effects, 
important as this is, to joint consider 
ation on the future development of sys 
tems of social protection in the Union 
and  the  appropriate  responses  to  the 
common challenges which they face. 
In consequence, the Commission  has 
proposed that the Community institu 
tions  and  the  Member  States  should 
embark  together  on  a process  of  co 
operative  reflection  on  the  future 

measures  which  should  be  taken  to 
make social protection  systems more 
conducive to employment growth and 
more  efficient,  to  ensure  that  they 
facilitate the free movement of labour 
between countries as well as the reali 
sation  of the potential benefits  of the 
internal  market  and  increasing  econ 
omic  integration  and  their  equitable 
distribution. 

Aims of the Report 
This Report is intended to contrib 

ute to that process by analysing 
not only the way in which social pro 
tection  systems  are  developing 
across  the  Union  but  equally  the 
problems  which  they  face  and  the 
forces  to which they have to respond 
and  so  increase  mutual  under 
standing  of the options for  develop 
ment,  in  the  light  of  their  diverse 
forms  of  organisation  and  institu 
tional characteristics. 

The focus  is on the links between so 
cial  protection  and  employment.  As 
such,  it  is  intended  as a complement 
(published every two years) to the an 
nual  Employment in Europe Report, 
the latest issue of which was published 
in July. This examined trends in em 
ployment  and  unemployment  across 
the Union, the changes which are oc 
curring in the nature of jobs and in the 
pattern of work, the factors which in 
fluence the process of job creation and 
the measures taken in Member States 
to increase the number of people em 
ployed. 

In particular,  it analyses —  in Chap 
ter 4 — rates of unemployment benefit 
in  different  parts  of  the  Union  as 

-8 

Summary and conclusions 

compared with take-home pay when in 
work,  which  is  likely  to  be  a  major 
determinant of the incentive for people 
receiving benefit to seek employment 
and, therefore, of the scale of the un 
employment  trap  which  exists.  This 
complements the analysis both in Em 
ployment  in  Europe,  1995  and  in 
European  strategy for  employment-
recent  progress  and  perspectives 
(COM(95) 465), a recently published 
Commission  report  following  up the 
Essen Council meeting, of the poten 
tial effect of social charges and payroll 
taxes levied  to finance  social protec 
tion  on  labour  costs  and  so  on  the 
incentive of employers to take on more 
staff. The two together, therefore, give 
an  indication  of  the  effect  of  social 
protection, in terms of both its funding 
and the income support which it pro 
vides, on the two sides of the employ 
ment equation—on the willingness on 
the part of employers to create jobs and 
on the willingness of those out of work 
to take them up. 

In addition, it examines in detail two 
aspects  of  social  protection  systems 
which are becoming increasingly rele 
vant  as  a  result  of  the  structural 
changes in employment which are oc 
curring throughout the Union, in part 
in  response  to  government  policies. 
Specifically, it considers, in Chapter 6, 
the access of the self-employed  to so 
cial  insurance  and  support  and  their 
treatment  as  compared  with those in 
waged employment, who are the tradi 
tional focus  of systems of social pro 
tection.  As such, it indicates  how  far 
policies in this area are consistent with 
labour  market  measures  designed  to 
encourage people, especially those out 
of work, to set up small businesses. It 
also considers, in Chapter 7, social pro 
tection  arrangements  in  respect  of 

those,  mainly  women,  who  have  to 
give up paid work for a time, or work 
fewer  hours, to look after  children or 
disabled  or  elderly  people,  usually 
relatives,  in  need  of  care.  Given  the 
increasing number of women in work, 
coupled with the growing numbers of 
people living into old age and, there 
fore, likely to require care, this is be 
coming an important issue not only for 
social policy but also for employment 
policy across the Union. 

In  addition  to  these  employment-
related  themes,  the  Report  examines 
(in  Chapter  1)  the  principal  charac 
teristics of social protection systems in 
the  Union  and  the  way  they  differ 
between  Member  States;  the  main 
developments which have occurred in 
recent  years  in both  the provision of 
support  and  its  funding  (Chapter  2); 
the scale and pattern of expenditure, its 
rate of growth in relation to people in 
need of support and the changing im 
portance of different sources of finance 
(Chapter  3);  and  the  reforms  which 
have been introduced in recent years in 
different  parts of the Union to contain 
the costs of health care and to improve 
the efficiency  of the service provided 
whilst maintaining standards of treat 
ment and care (Chapter 5). 

The main points to emerge from this 
analysis are summarised below. 

terms  of their objectives  and cover 
age. In particular, there is a common 
attempt  in  all  15 Member  States  to 
provide universal support and assist 
ance  to  all  those  in  need  whether 
temporarily  or for  longer periods of 
time. The major gap in coverage is in 
the  Southern  countries,  in  Greece, 
Spain, Italy and Portugal, where, un 
like elsewhere in the Union, there is 
no  guarantee  of  at least a  minimum 
level of all income support in all cir 
cumstances.  Although  efforts  have 
been  made to provide some  support 
for the elderly and disabled, those not 
eligible for certain standard  benefits 
(sickness  and  unemployment 
benefits,  especially),  because  they 
are  not,  or  have  not  been,  in  paid 
employment,  either  at  all  or  for  a 
sufficient period of time, can only fall 
back on assistance  from  local or re 
gional  authorities,  which  to  a  large 
extent  is  discretionary  and  non-
standardised. 

There are, however, large  differences 
in  the  scale  of  protection  provided 
and,  in  particular,  in  access  to  in 
come-  (or  contribution-)  linked  in 
surance benefits, especially between 
those  in work —  and, more  specifi 
cally, those in waged employment — 
and others, as well as in the extent of 
reliance  on  means-tested  assistance 
as opposed to automatic payments. In 
these respects, Member States can be 
divided into four groups: 

Similarities 
and differences 
As  indicated  above,  social  pro 

tection systems in the  different 
Member  States  may  differ  in  the 
details  of  their  organisation  and 
methods of funding but are similar in 

• 

the three Scandinavian countries, 
where  social  protection  extends 
to  all  citizens  as  of  right  and 
everyone  is  entitled  to  the  same 
basic  amount,  with those in paid 
employment 
addi 
tional,  earnings-related  benefits, 
and  where  only  unemployment 

receiving 

-9 

Summary and conclusions 

insurance  is  separate  from  the 
State-run  integrated  system  and 
voluntary  rather  than  compul 
sory; 

• 

the  UK  and 
Ireland,  where 
coverage  is  virtually  universal 
(though  the  national  health  sys 
tem  in  Ireland  is  only  fully  ac 
cessible  free  of  charge  to  those 
on low incomes), where  flat-rate 
basic amounts are also the norm, 
though  on  a  lower  scale,  and 
there  is  extensive  use  of  means-
testing; 

•  Germany,  Austria,  France  and 
the Benelux countries, where the 
insurance  principle  is  more  evi 
dent,  where  benefits  are  mostly 
earning:; ^laiea  and, 
together 
with  health  care,  are  linked  to  a 
greater  extent  to  employment 
and to contributions  and  vary  in 
some  degree  between  occupa 
tional  groups  (though 
the 
Netherlands, a number of univer 
sal  schemes,  for  pensions  espe 
cially,  have  been  established) 
and  where  gaps  in  coverage  are 
filled  by  an  extensive  social  as 
sistance scheme; 

in 

• 

and 
Italy,  Spain,  Portugal 
Greece, where the attempt to es 
tablish universal systems is more 
recent and systems are a mixture 
of  fragmented,  occupational  and 
insurance-based 
income  main 
tenance  schemes, with  relatively 
generous  pension  formulas,  but 
with  gaps  in  coverage,  as  noted 
above,  and  national  health  ser 
vices,  which  are  not  yet  fully 
universally-accessible  except  in 
Italy. 

There  are,  moreover,  differences 
both  between  and  within  these  four 
groups  as  regards  the  regulations 
governing  eligibility  to  the  various 
benefits  and the duration of their re 
ceipt.  In particular,  pensionable  age 
is around 65 in most countries, but is 
57 for women and 62 for men in Italy, 
60 for both in France and 67 for both 
men and women in Denmark.  Simi 
larly,  insurance-based  unemploy 
ment  benefits  are  payable  almost 
indefinitely  in Belgium, but for only 
a  year  in many  countries,  while ac 
cess  to  sickness  and  invalidity 
benefits  in  the  Netherlands  and  the 
UK  has  generally  been  easier  than 
elsewhere. These two aspects, eligi 
bility criteria and the duration of pay 
ment, more than the «<^1- or benefits 
paiJ  have  come  under  increasing 
scrutiny in recent years, in the search 
for ways of limiting expenditure and 
discouraging  avoidable  long-term 
dependency, as noted below. 

The scale of 
expenditure 
These differences  in the  features 

of  prevailing  systems  between 
Member  States  are  reflected  in  the 
cost of maintaining them. In general, 
expenditure  on  social  protection 
tends to be much higher in the North 
of the Union than in the South, in part 
reflecting the difference in prosperity 
and,  therefore,  in  the  availability  of 
resources  to  fund  them,  in  part,  the 
less  developed  nature  of  systems  in 
Southern  countries,  Greece  and 
Portugal,  in  particular.  Although 
there is a clear tendency for countries 
to  spend  more  on  social  protection 
in  relation  to  GDP  as  the  latter 

increases,  some  systems  are  evi 
dently more costly than others. 

In the Scandinavian countries, in par 
ticular,  where  coverage  is  universal 
and benefits  relatively  generous, total 
expenditure  on  social  protection 
amounts  to  well  over  30%  of  GDP 
(33%  in  Denmark  in  1993,  around 
35%  in Finland — though the figure 
here  is  increased  markedly  by  the 
severe  recession  in GDP  (in  1990, it 
was  26%) — and probably  about the 
same in  Sweden, though  comparable 
figures  are  not  yet  available).  In  the 
Netherlands, spending  is also high as 
compared with other Member States in 
relation to the level of rcai income per 
v-aJ  (around 33% of GDP in 1993 as 
against  31%  in Germany  and  France 
where income per head is higher). In 
the UK and Ireland, on the other hand, 
where  relatively  modest  flat-rate 
benefits are the norm and, in the former 
especially, where a relatively high pro 
portion  of  payments  are  subject  to 
mean-testing, expenditure is compara 
tively low  in  relation  to  income  per 
head (27% of GDP in the UK in 1993, 
2l72%  in Ireland). Similarly  in Italy, 
where there are more gaps in the cover 
age  of  the  system  than  in  Northern 
Member States with comparable levels 
of  income per head, spending  is also 
relatively  low  (just  under  26%  of 
GDP in  1993), as it is in Greece and 
Portugal, where systems are still being 
developed (1672% of GDP in  1993 in 
the former,  18% in the latter). 

The pattern 
of financing 

'he relative importance of  differ 
ent sources of finance for social 

-  10-

Summary and conclusions 

protection  reflects  the  systems  in 
operation.  In  Germany,  France  and 
Belgium,  two-thirds  or  more  of  the 
revenue levied to fund  social protec 
tion comes  from  contributions, with 
employers  being  responsible  for 
around 60% of these. In Greece, the 
proportions  are  similar,  while  in 
Spain, Italy and Portugal, as well as 
in the Netherlands and Luxembourg, 
contributions remain the main source 
of finance but taxes are more import 
ant.  In  the  UK  and  Ireland,  more 
revenue comes from taxes than from 
contributions, while in the Scandina 
vian  countries,  taxes  predominate 
and  revenue  from  contributions  is 
small. 

The pattern 
of spending 

While the level of social protec 

tion  expenditure  varies,  the 
division between  the main  functions 
is relatively similar, especially in the 
North,of  the  Union  where  systems 
are more developed, though there are 
a few significant  differences,  reflect 
ing variations partly in the people in 
need of support, partly in eligibility, 
partly  in  the  rate  of  benefit  paid  or 
level  of  service  provided.  Old-age 
pensions  are  the  largest  element  of 
spending  throughout  the  Union 
—  apart  from  in  Ireland  where  the 
relative  number  of  elderly  people is 
less than elsewhere—accounting for 
some 43% of total spending in 1993, 
followed by health care and sickness 
benefits,  which  together  absorbed 
around  24%  of  the  total,  invalidity 
benefits  (9%)  and  unemployment 
compensation (7%). 

In Greece and Italy, however, around 
60% of expenditure in  1993 went on 
old-age  pensions,  in  the  former 
largely  reflecting  the  comparatively 
low  level  of  provision  of  other 
benefits and services, in the latter, the 
large  number  of  people  drawing  a 
pension. Thus in Italy, there are not 
only  a relatively  high  proportion  of 
the  population  who  are  elderly  as 
compared  with  other  parts  of  the 
Union,  but  also  the  official  age  of 
retirement  is  fixed  at  a  lower  level 
than  elsewhere  (though,  as  noted 
below,  reforms  have  recently  been 
introduced to alter this). 

In  the  Netherlands,  the  relative 
amount  spent  on  invalidity  benefits 
in 1993 was over twice that in the rest 
of the Union (over 21% of the total), 
the  result  of  the  relative number  of 
recipients being also twice as high as 
in  other  Member  States,  except  for 
the UK. Here the number was simi 
larly  high,  though  the  average 
amount  received  was  considerably 
lower  (in  1994,  15-16%  of  those 
aged 55 to 64 in these two countries 
reported  in  the  Community  Labour 
Force  Survey  that  they  were  not 
working  because  they  were  perma 
nently disabled as opposed to 7% in 
the Union as a whole) In both cases, 
the  large  number  of  recipients  re 
flects in part the nature of the system 
and the fact that invalidity benefit has 
been used to provide income support 
for  many  who  are  effectively  long-
term unemployed or prematurely re 
tired. Policy efforts  have been made 
in the recent past in both countries to 
tighten the rules governing eligibility 
for  benefit. 

over  twice  as  high  relative  to  GDF 
than in other parts of the Union, ac 
counting  for  20% of  total  spending 
on  social  protection,  but  this  was 
mainly because the relative numbers 
unemployed were also twice as high 
as  in  the  rest  of  the Union.  On  the 
other  hand,  in  Denmark,  where un 
employment  was  below  the  Union 
average,  relative  expenditure  was 
only slightly below the level in Spain, 
reflecting  both a comparatively high 
rate of benefit  paid and a high level 
of eligibility for benefit among those 
out  of  work.  As  in  the  Netherlands 
and  the  UK,  the  extent  of  income 
support  has  come  under  increasing 
scrutiny in recent years. 

The effectiveness 
of social protection 
One  major  issue  which  this 

Report has been unable to ad 
dress  is  the  effectiveness  of  social 
protection systems in providing sup 
port  and  assistance to those in need 
and,  related  to  this, their success  in 
ensuring  that  no-one's  income  and 
access to services falls below a mini 
mum  level. Although  there is  infor 
mation on the scale of support which 
is in principle available as well as on 
the  rules  and  regulations  governing 
access  to  them  and  although  esti 
mates  can  be  made  of  the  numbers 
liable to be at risk, there are little or 
no  satisfactory  data  on  how  many 
people are in need of support in prac 
tice, how many of these actually re 
ceive assistance and how much they 
receive in relation to their need. 

In Spain, expenditure on income sup 
port for the unemployed in 1993 was 

Until such data become available, it 
will  remain  impossible  to  assess 

11 

Summary and conclusions 

satisfactorily  the adequacy  or other 
wise  of  existing  systems,  especially 
as  experience  demonstrates  that ac 
tual  receipt  of  income  support  can 
differ  markedly  from  the theoretical 
entitlement.  This  is  even  more  the 
case as means-testing becomes more 
important  since  in  these  circum 
stances what is received depends not 
only on individual income and accu 
mulated  savings  but  also  on  assist 
ance actually being claimed. 

The only effective  way of providing 
these data is through detailed surveys 
of  households.  A  new  Household 
Panel  Survey  has  been  established 
by Eurostat to do precisely this. Spe 
cifically  it  aims  to  collect  detailed 
information about household charac 
teristics,  sources  of  income  and liv 
ing conditions across the Community 
from a sample of households. As yet, 
however,  results  are  not  available 
(though they should be by around the 
end of 1995) and it remains to be seen 
how effective an instrument it will be 
in answering the kind of fundamental 
question posed above. 

The growth 
of expenditure 
Over the long-term,  expenditure 

on social protection has tended 
to increase relative to GDP. In 1970, 
expenditure  amounted  to  19%  of 
GDP over the Union as a whole (in 
this  case  excluding  Spain,  Portugal 
and Greece for which no figures are 
available).  By  1980, the  proportion 
had risen to 24% (2472%  excluding 
the  same  three  countries)  and  by 
1993,  to  just  under  28%.  It  is  this 
seemingly  upward  long-term  trend 

which  has  been  a  cause  of  wide 
spread concern across the Union and 
has  been  one of  the reasons  for  the 
recent  emphasis  on  expenditure 
restraint.  These  figures,  however, 
need  to  be  interpreted  with  some 
care, in part, because of the  signifi 
cant  influence  of  fluctuations  in 
GDP  growth  and  the  underlying 
level of economic activity on the per 
centage, in part because of the vari 
ation in experience between Member 
States. 

The increase has by no means  been 
uniform  across the Union. Unlike in 
the  1970s, when most countries  ex 
perienced  significant  growth  of  ex 
penditure  relative to GDP, between 
1980  and  1990,  spending  rose  by 
only one percentage point in relation 
to GDP (from  24% to 25%). In  four 
countries  —  Belgium,  Germany, 
Ireland and Luxembourg—expendi 
ture  was  lower  relative  to  GDP  in 
1990 than in 1980. Only in the coun 
tries  where  systems  were  being  de 
veloped — Greece, Spain, Italy and 
Portugal — plus France, did the in 
crease  amount  to  more  than  2  per 
centage  points  in  relation  to  GDP. 
Moreover,  in  the second  half  of  the 
1980s when the European economies 
were recovering from  recession, ex 
penditure  declined  relative  to  GDP 
in  the  Union  as  a  whole,  though  it 
continued to rise in the four Southern 
Member  States  (as  well  as  in 
Denmark,  where  economic  growth 
slowed down). 

Over  the  three  years  1990 to  1993, 
spending  on  social  protection  went 
up in all Member States as a propor 
tion of GDP as their economies went 
into  recession,  in  7  countries 
—  Denmark,  Spain,  France, 

Luxembourg,  Portugal, the  UK  and 
Finland  —  by  around  3  percentage 
points  or  more.  This  rise,  however, 
was largely due to the marked slow 
down in GDP growth — or, in some 
cases, a fall in GDP — and the steep 
rise in unemployment which accom 
panied  this.  Although  in  real  terms 
(adjusted by the increase in consumer 
prices),  expenditure  increased  by 
4l/2% a year in the Union as a whole, 
significantly  more  than  over  the 
preceding  five  years  (under  372%), 
excluding  unemployment  compen 
sation (which went up by almost 50% 
over the period), it rose by under 4% 
a  year,  only  marginally  more  than 
over the preceding five years. Since 
part of the growth in pensions, sick 
ness  and  invalidity  benefits  was  al 
most  certainly  recession-related 
(resulting from increased early retire 
ment, for example), there is little sign 
of any underlying acceleration in the 
growth of social protection spending 
over this period (expenditure on each 
the  three  items  mentioned,  in  fact, 
grew by less between  1990 and 1993 
than between  1985 and 1990). 

Nevertheless, in the context  of  very 
little  growth  in  GDP  and  a  policy 
emphasis both on fiscal restraint and 
on  limiting  public  expenditure  in 
order to avoid excessive increases in 
taxes and social charges on business 
and  the  costs  of  employment,  a 
growth of almost 4% a year — even 
after adjusting  for unemployment — 
in  a  major  component  of  public 
spending was a matter of widespread 
policy  concern.  Against  this  back 
ground,  the  common  focus  on 
measures to limit expenditure on so 
cial  protection  which  has  been  fea 
ture  of  the  recent  past  is  perhaps 
understandable. 

12-

Summary and conclusions 

The impending 
demographic 
time-bomb 
The  emphasis  on  cost  contain 

ment  is  also  understandable  in 
terms of  the increasing  demands  on 
systems  of  social  protection  which 
are  almost  certain  to arise  from  the 
ageing of the population: In 1995, the 
population aged 65 or over (the pres 
ent or planned  official  age of retire 
ment  in  most  Member  States) 
amounted to some 23% of the popu 
lation of working age (15 to 64) in the 
Union as a whole. In ten years time 
in 2005, it will have risen to 26% on 
the  latest  projections  (assuming  no 
significant acceleration in net inward 
r^Vration  flows  of  those  below  re 
tirement  age).  Vvniie  Jiio  ;;;!!  rrt-
doubtedly  increase  expenditure  on 
pensions, unless there is an increase 
in  the  actual  age  of  retirement,  in 
contrast to present trends, the amount 
involved  is  relatively  small.  If  the 
average  pension  was  to  remain  un 
changed in relation to GDP per head, 
for example, it would result in expen 
diture in the Union rising from  12% 
of GDP to just under 13 72% — much 
the same rate of increase as between 
1980 and 1993. 

The major expansion in potential ex 
penditure  does  not  come  until  after 
2005 when the post-war baby boom 
generation  begin  to  retire  in  large 
numbers.  In  2015,  the  population 
aged 65 and over is likely to represent 
30%  of  that  of  working-age  and  in 
2025, 3572%. Whereas in 1995 there 
are  4-5  people  of  working  age  to 
support  each  person  of  retirement 
age,  in  30  years  time,  there  will  be 
less  than  three.  In  some  countries, 

Italy  in  particular,  it  will  only  be 
around  272.  If  average  pensions 
remained  unchanged  relative  to 
average income, then this growth in 
numbers alone will add almost 572% 
of GDP to the cost of social protec 
tion  over  the  next  30  years  in  the 
Union as a whole. At the same time, 
the large expansion in the numbers of 
elderly people is likely to impose in 
creasing demands on the health care 
and social service systems. 

Nevertheless,  despite  the  apparent 
scale of the pressures  in prospect, it 
is important to keep them in perspec 
tive.  In the first place, expenditure on 
social protection increased by 8% of 
GDP between  1970 and  1993 in the 
Union — half  as much  again  as the 
rise  in  spending  on  pensions  on the 
above  assumption.  Secondly,  the 
ease Oi acmeving cue uamici to those 
above  retirement  age  and  the  strain 
imposed  on the future  generation of 
working-age  will  depend  critically 
on  the  underlying  growth  of  the 
European  economies  between  now 
and then and what happens to jobs. In 
recent  years,  the  effective  depend 
ency ratio has risen substantially not 
because of the ageing of the popula 
tion but because of earlier retirement 
and  increasing  unemployment,  both 
the result of reduced job availability. 
In consequence, many  fewer  people 
in  employment  have  had  to  support 
increased numbers not in work, both 
above and below retirement age. 

If  job  availability  through  GDP 
growth  could  be  expanded  over  the 
next  30  years  to  reduce  unemploy 
ment  back  to the levels  of  the early 
1970s and  to accommodate  a conti 
nuing  increase  in  the  participation 
of women in the work force, as well 

as  perhaps  a  reversal  of  the  trend 
towards early retirement, this would 
more  than  offset  the  effect  on  the 
dependency ratio of the ageing of the 
population  and  make  it  easier  to 
effect the income transfer required. If 
on  the  other  hand,  underlying  GDP 
growth  does  not  improve  and  job 
availability  remains  low,  then  any 
significant  transfer  will  present 
serious  problems,  irrespective  of 
how pensions schemes are funded  in 
the meantime. 

Changes in sources 
of finance 
In the light of the reduction  in the 

numbers  in  employment  em 
ployed  which  occurred  over  this 
period,  the  widespread  shift  from 
contributions to taxes as a source of 
finance  is also understandable. Over 
the  Union  as  a  whole,  the  share  of 
revenue raised from  taxes rose  from 
2772%  to 2972%  between  1990 and 
1993,  with  only  Belgium  and  the 
Netherlands  showing  the  reverse 
tendency.  Moreover,  this  was  ac 
companied  by  a  parallel  shift  away 
from  employers'  contributions  to 
these  being  levied  on  the  person 
being  protected,  with  only  Portugal 
experiencing  a  shift  in  the  opposite 
direction.  Nevertheless,  these 
changes  have  been  comparatively 
small  and  over  the  1980s  and  early 
1990s, the broad structure of financ 
ing  of  social  protection  remained 
largely the same. 

Although no data as yet exist for the 
period after  1993, it appears from the 
measures  introduced  in  Member 
States  since  1993, and noted  below, 

13 

Summary and conclusions 

that  these  shifts  in  the  pattern  of 
financing  have  become  more  pro 
nounced. At the same time, the shifts 
to a large extent have been a tempor 
ary response to increased unemploy 
ment and, as noted below, have taken 
the form of a reduction in employers' 
contributions  if  firms  take  on  the 
long-term  unemployed,  the  young 
and  other  'hard-to-place'  people 
from  the  unemployment  register, 
though rates have also been reduced 
in respect of the low-paid in a number 
of countries to stimulate job creation 
for the less skilled and younger mem 
bers of the work force (as in Belgium, 
France, Ireland and the UK). 

There is as yet, however, little sign of 
any  fundamental  change  in  the 
method  of  financing  and  in  most 
countries  contributions  remain  the 
major  source of funding,  largely be 
cause of the wish to refcun the insur 
ance-based  nature  of  the  system. 
Indeed,  in  Scandinavian  countries, 
there  have  been  some  moves  to  in 
crease contributions relative to taxa 
tion,  partly  to  widen  sources  of 
finance,  partly  to  link  benefit  pay 
ments  more  closely  to  employment 
and so discourage working in the in 
formal or grey economy. On the other 
hand,  in  countries  where  finance 
comes  mainly  from  contributions, 
attempts  have  been  made  to  widen 
the sources of funding by  identifying 
those elements  of  the  social  protec 
tion  system  which  are  not  employ 
ment-related, such as health care and 
family  allowances,  and  financing 
these from taxes, as well as earmark 
ing certain taxes for funding  particu 
lar expenditure  (such  as  the  general 
social  contribution,  CSG,  levied  in 
France on personal income which is 
used to fund  basic pensions). 

14-

In  addition,  in  some  countries,  the 
search for alternative sources of fin 
ancing  has  been  combined  with  at 
tempts to shift the burden of taxation 
from the employment of labour to the 
use of natural resources, with the aim 
of  stimulating  job  creation  while 
encouraging  energy  and  resource 
saving. 

Such measures have been motivated 
not  just  by  cost  considerations  but 
also by a concern to reduce depend 
ency on social protection both for the 
welfare of the individuals concerned 
and  to  maintain  public  support  for 
social protection systems — or more 
'specifically their funding — by dem 
onstrating a willingness to minimise 
possible abuse. 

Recent reforms 
affecting spending 
Almost all policy action taken in 

respect  of  social  protection  in 
recent years has been aimed  at con 
taining costs and where possible re 
ducing them. This has taken the form 
of: 

tightening 
the  regulations  on 
eligibility  to  benefit  —  espe 
cially  insurance-based,  income-
related payments; 

increased targeting of support on 
those  most 
through 
more  extensive  use  of  means-
testing and by taxing benefits; 

in  need, 

increased  emphasis  on  active 
measures to get people into work 
so  that  they  can  support  them 
selves  as  opposed  to  passive 
measures of income transfer; 

• 

• 

• 

• 

Responses to 
demographic and 
economic pressures 
The  heightened  policy  concern 

with the growth of social protec 
tion  expenditure  in  the  recession 
years of the early 1990s has helped to 
focus  attention  on  the  longer  term 
trend  and  on  the  underlying  forces 
tending to push this up. In particular, 
it  has  helped  highlight  the  conse 
quences  for  pensions  of  the  conti 
nued ageing of the population in the 
Union  and  of  the  post-war  baby 
boom generation reaching retirement 
age from around 2005 onwards. This, 
in turn, has led to widespread  reform 
of pension systems in Member States 
and  a  shift  away  from  a  policy  of 
encouraging  early retirement, which 
was widespread in the  1980s, to one 
of trying to limit or reduce the pros 
pective  amount  of  income  trans 
ferred  to pensioners. 

increased  privatisation  in  a  var 
iety  of forms,  including  not only 
contracting-out  services  but  per 
haps  more  importantly  shifting 
the  responsibility  of  providing 
protection  to  individuals  them 
selves  or  to  those  employing 
them. 

In five Member States — Germany, 
Greece,  Italy,  the  UK  and  Finland 
(for  public  sector  employees)  — 
measures have been introduced since 
1992  to  increase  the  official  age of 
retirement in the coming years and in 
a sixth, France, much the same effect 
has  been  achieved  by  raising  the 

Summary and conclusions 

number of years of contributions re 
quired for  a full  pension  (from  3772 
to 40). In most cases, the increase is 
planned  to occur  gradually  over the 
next two decades and will have little 
effect on those retiring in the next few 
years  (in  Germany,  for  example,  it 
will be raised from 63 for men and 60 
for  women  to 65 between  2001 and 
2012,  in  the UK, from  60 to  65  for 
women between 2010 and 2020). In 
all  cases,  a  major  aim  has  been  to 
bring  the retirement  age for  women 
into line with that of men for equity 
reasons,  though  this  has  been 
achieved  by  increasing  the  former 
rather than reducing the latter as was 
envisaged a few years ago. 

Whether this will result in a reduction 
in  the  numbers  of  people  in  retire 
ment  is  questionable.  Despite  the 
change in the emphasis of policy, the 
trend towards early retirement accel 
erated  rather  than  diminished  in 
the  early  1990s, largely  because  of 
the  economic  recession  which  was 
accompanied  by  large-scale  redun 
dancies and a lack of alternative em 
ployment  opportunities  for  those 
losing  their  jobs.  Nevertheless,  the 
changes will tend to reduce the num 
bers in receipt of State pensions and 
so  shift  the  burden  of  support  from 
the State to the individual. 

At the same time, measures have also 
been introduced in a number of coun 
tries to reduce the amount of pension 
received,  either  by  lowering  the 
maximum proportion of earnings re 
ceivable (as in Finland for public sec 
tor  employees)  or  by  taking  more 
account of other income in the calcu 
lation of tax (as in Denmark and the 
Netherlands) or by altering the basis 
for  calculating  entitlement  (by 

increasing the number of years over 
which earnings on which the pension 
is  based  are  assessed,  as  in  France 
and Portugal). 

This latter kind of change has poten 
tially important  implications  for  the 
position  of  women  relative  to  men. 
Because they are more likely to have 
to  interrupt  their  working  careers 
to bring up children or look after  in 
valid  relatives,  any  increase  in  the 
number  of  years  of  contribution  re 
quired  for  a full  pension or in those 
used  to  calculate  entitlement  will 
tend adversely to affect women more 
than men. 

The growth of pension liabilities has 
also  caused  attention  to  be  focused 
more generally on the schemes them 
selves  and,  specifically,  on  whether 
schemes  should  change  towards 
being  fully-funded  (ie  where  future 
liabilities  determine  the  amount  of 
contributions)  from  being  'pay-as-
you-go'  (ie where  contributions  are 
determined  by present  pension  pay 
ments)  as now in most countries. A 
shift  towards  more  reliance  on  pri 
vate  insurance  schemes  and  giving 
more responsibility to individuals to 
decide  on  the  level  of  pension  and 
contributions,  as  in  the  UK,  espe 
cially,  is  seen  to  be  one  means  of 
achieving this, while at the same  time 
relieving  the direct financial  cost  to 
on the State. 

In most countries, however, there has 
been  little  attempt  to  move  away 
from  the  'pay-as-you-go'  principle, 
perhaps because it is highly uncertain 
whether such a change would  make 
it any easier to meet pension commit 
ments when the time comes for pay 
ment,  since  this  ultimately  depends 

on the state of the economy — on the 
level  of  real  income,  the  rate  of 
growth and the numbers unemployed 
who  also  require  support  —  at  the 
time. At the same time, it should be 
noted that, in practice, the distinction 
between 'pay-as-you-go' and funded 
pension  schemes  is  by  no  means 
clear-cut.  In  most  Member  States, 
there has been a conscious policy of 
building up reserves  to cover  future 
pension  liabilities, which  has  led  to 
revenue  collected  to  finance  social 
protection  being  invariably  higher 
than  current  expenditure,  in  some 
cases significantly  so. 

Increased targeting 

As  the  cost  of  social  protection 

has  risen,  so  increased  efforts 
have been made to direct expenditure 
more towards those most in need of 
support.  This  has  been  achieved 
through a variety  of means, through 
tightening eligibility criteria (as with 
unemployment  and 
invalidity 
benefits in particular), setting income 
limits to the receipt of benefits  (as in 
Germany, the Netherlands, Italy and 
Spain, where family allowances have 
been linked to income), imposing or 
increasing taxes (as in the Scandina 
vian  countries)  or  subjecting  pay 
ments  to  means-testing.  The  latter 
has  been  most  prevalent  in  the  UK 
and Ireland, though in many Member 
States,  the  extent  of  means-testing 
has  increased  in  recent  years, espe 
cially  of  unemployment  compensa 
tion,  partly  reflecting  the  growth  in 
numbers  of  long-term  unemployed 
whose  entitlement  to  insurance-
related benefit  has expired. 

-15 

Summary and conclusions 

In the UK, however, more than else 
where,  the  extension  of  means-
testing  has  been  a deliberate  policy 
move to contain costs. While this is 
arguably a way of concentrating  the 
resources available more  effectively, 
it can also give rise to problems. Most 
importantly  perhaps,  identifying 
those most in need is difficult  and, in 
practice, the onus has to be placed on 
them to claim support, which signifi 
cant  proportions  for  one  reason  or 
another do not do (up to 20% of those 
qualifying  for  Income  Support,  for 
example) and are so left inadequately 
protected. At the same time, concen 
trating  support  on a relatively  small 
group who are classified  as worst off 
by  some  criterion  is  liable  to  mean 
that those only  slightly better off  on 
the same criterion receive less assist 
ance  tha  they  need.  Moreover, 
means-testing  is  administratively 
costly, can  discourage  saving, if ac 
cumulated  wealth  is  taken  into  ac 
count,  as  it  tends  to be,  and  reduce 
incentives to work if  extensive sup 
port is withdrawn  as soon  as a reci 
pient  finds  a  job  or  if  the  test  is 
applied  to  household  income  and 
someone  else's  earnings  from  em 
ployment (a wife, for example) result 
in a reduction or loss of entitlement. 

Although efforts  have been  made to 
reduce  these  problems  —  by  in 
creased  publicity  and  by  the  intro 
duction  and  extension  of  in-work 
benefits  (Family  Credit)  to  increase 
income when in work — they remain 
important. The Job  Seeker's  Allow 
ance planned  for  1996 will  increase 
reliance on means-testing even more 
by restricting  the receipt  of  flat-rate 
insurance  benefits  to  the  first  six 
months of unemployment. 

From passive to 
active measures 

A 

further  aspect  of  the  planned 
XJLJob  Seeker's  Allowance in the 
UK is to impose more pressure on the 
recipient  to  look  for  work,  while  at 
the  same  time  providing  more  help 
and advice  though  the  Employment 
Services. The increased emphasis on 
getting people into work has been a 
common  feature  of  policy  in  recent 
years in most Member  States, moti 
vated  in  part  by  the  persistence  of 
large  numbers  of  long-term  unem 
ployed even through the years of high 
job  creation  in  the  late-1980s.  This 
has  taken  the  form,  not  only  of 
improvements  in  the  employment 
services  to  provide  more  effective 
help  on job  search,  but  also  of  in 
creased  subsidies  to  employers  or 
lower social charges levied on them 
(which  have  an  equivalent  effect). 
For  the  most  part,  these  have  been 
targeted  on  the  long-term  unem 
ployed, young people or other  'hard-
to-place groups'. 

How far such measures result in a net 
increase  in the number  of  people in 
employment  rather  than  a  displace 
ment  of existing  workers by newly-
recruited  subsidised  ones,  however, 
remains  unclear,  as  does the  net  ef 
fect of special schemes for providing 
work  for  the  unemployed  ('work-
fare'),  which are liable to result in a 
loss  of  trade  for  established  busi 
nesses  or  the  redirection  of  activity 
towards work of lower value (unless 
overall  expenditure  in  the  economy 
is  raised).  Nevertheless,  increasing 
the  rate  of  turnover  of  the  unem 
ployed,  even  without  reducing  the 
numbers, can be a desirable objective 

in itself, though it is unlikely to lead 
to a reduced need for expenditure on 
social protection  and  could,  indeed, 
result  in  an  overall  increase  if  the 
amount  spent  on  subsidies  is  taken 
into account. 

In the Scandinavian countries, inno 
vative policies have recently been de 
veloped for reducing unemployment 
by  sharing  available  work  more 
evenly.  Under  these  schemes,  em 
ployers  are  encouraged  to  allow 
employees  time-off  for  training, 
parental  leave  or  simply  to  pursue 
their  own  activities,  and  to  take  on 
people from  the unemployment reg 
ister  to  replace  them,  so  effectively 
increasing  the  number  of  jobs  per 
employee by  each  of  these  working 
less. 

Limited trends 
towards 
privatisation 

Increased  pressure on  social protec 
tion  systems  has  also  led  to  some 
shift  from  public  to  private  sector 
provision  and,  more  extensively,  to 
active  discussion  about  the  possi 
bilities,  and  desirability  of  moving 
further,  in  this  direction,  and,  as  a 
corollary,  about  the  scope  of  State-
provided  support  and  services  and 
the  functions  which  should  be  in 
cluded. One suggestion, in particular, 
is that the State should concentrate on 
providing basic support and services 
and leave individuals to take care of 
their further  needs, whether in terms 
of  pensions,  health  care  or  income 
support  at  times  of  incapacity  for 
work.  Although  this  would  not 
necessarily  reduce  the  overall 

-  16 

Summary and conclusions 

amount ofresources going into social 
protection, widely defined—indeed, 
it could well lead to an increase, es 
pecially  as  regards  health  care —  it 
would  have  the  effect  of  relieving 
government of some of the financial 
burden  and  take  decisions  on  the 
level  of  provision  out  of  the  public 
sphere.  At  the  same  time,  the  US 
example  demonstrates  that  it  would 
not  necessarily  avoid  the  need  for 
difficult  political choices to be made 
and may make it harder for adequate 
support to be provided for those who 
need it. 

Debate in this area, however, has pro 
ceeded further than action, partly be 
cause of  the difficulties  involved  in 
making  fundamental  changes  with 
out reducing the level of support  for 
those in need,  partly  because  of  the 
entrenched  popular belief  in the de 
sirability of an extensive welfare sys 
tem.  In  many  Member  States,  the 
development  of  private  pension 
schemes has been encouraged  in re 
cent years, though largely to supple 
ment public provision  rather than to 
replace  it.  In  the  UK,  on  the  other 
hand,  it  has  been  an  explicit  policy 
aim to devolve responsibility for sup 
plementary  pensions  to  the  private 
sector,  to  encourage  individual?  to 
have personal  pension  schemes  and 
to  increase  the  importance  of  such 
pensions  by  limiting  the  role  of  the 
basic pension. This has given rise to 
difficulties  of  regulation  (especially 
of  unscrupulous  employers  control 
ling  the  funds)  and  to  problems  of 
high  contribution  levels  partly  be 
cause  of  the  need  to  cover  future 
(rather than present) liabilities. 

An analogous solution to the problem 
of restraining costs has been applied 

to  sickness  benefits  in both  the  UK 
and  the  Netherlands.  In  both  coun 
tries,  responsibility  for  paying 
benefit  has  been  shifted  to  the  em 
ployer — for the first six weeks in the 
Netherlands, for the first six months 
in the UK (compensated by a uniform 
reduction  in  employers'  contribu 
tions)  —  who  has  also  been  made 
responsible for checking the validity 
of claims. The aim in each case is to 
give  employers  a cost  incentive  for 
reducing the incidence of sick leave 
and  to  shift  the costs  of  monitoring 
from the State. Nevertheless, there is 
a  danger  that  without  more  detailed 
and  stronger  regulation  by  govern 
ment,  the  change  will  discriminate 
against workers with records of poor 
health  whom firms will be reluctant 
to  take  on  or  to  retain,  as  well  as 
against  those  employed  in  small 
firms which may fail to pay. 

Extensions 
in support 
While the main thrust of policy 

throughout  the  Union  has 
been  directed  at  cost  containment, 
there  are,  nevertheless  examples  of 
increased  levels  of  support  in  a 
number  of  countries,  especially  in 
Southern Member States where sys 
tems have continued  to develop and 
improve. In Germany, moreover, the 
scope  of  the  system  has  been  ex 
tended to include compulsory  social 
insurance  cover  for  long-term  care 
(Plegeversicherung),  while  in  the 
Scandinavian countries as well as in 
Belgium,  new  entitlements  to  leave 
for employees have been introduced, 
to  enable  more  time  for  training  as 
well  as  for  child  care.  Given  the 

increased  pace  of  technological 
advance,  this  should  be  beneficial 
both for workers who need to update 
their skills and for firms who need to 
be  able  to  take  advantage  of  new 
methods of working. 

Reforms in 
health care 
There  has  been  a  marked  trend 

towards privatisation in the pro 
vision of health care. This has taken 
two related forms: the growth of pri 
vate treatment per se and an increase 
in the extent of co-payment for pres 
criptions  and  consultation  (ie  of 
patients paying an increasing propor 
tion of the costs). While expenditure 
on health care has  risen  significantly 
in relation to GDP since 1980 in most 
Member  States  —  though  by  no 
means  all  (in  Ireland  and  Sweden, 
it  has  declined  and  in  Denmark 
and  Germany,  it  has  remained  un 
changed)  —  much  of  this  has  been 
due  to  an  increase  in  private  sector 
provision,  which  increased  its  share 
of  total  spending  markedly  in  most 
parts  of  the  Union,  the  only  excep-
tions  being  Belgium  and  the 
Netherlands.  The  relative  rise  was 
particularly  pronounced  during  the 
early 1990s when restraints on public 
expenditure were  intensified. 

The trend towards more private sec 
tor  involvement  has  been  accompa 
nied by increased efforts  to raise the 
effectiveness  of expenditure  and the 
efficiency  of  the  provision  of  treat 
ment  and  care  without  jeopardising 
standards. In the absence of a market 
to signal the costs of provision to both 
suppliers  and  purchasers, 

17 

Summary and conclusions 

incentives  for  the former  to  seek  to 
minimise such costs while supplying 
to the latter  what  they  need  and  for 
purchasers to take these into account 
when  deciding  what  to buy,  a com 
mon tendency  has been to introduce 
cost  signals  where  possible  and  to 
strengthen contractual  arrangements 
where not. In many countries, the aim 
has been to develop contracts  which 
specify  more precisely the level and 
standard of service required of hospi 
tals and doctors and the amount that 
will be paid for this and which, at the 
same time, incorporate incentives for 
those  responsible  for  expenditure 
(the  regional  or  local  authorities  in 
national health systems and the insur 
ance  funds  in  insurance-based  sys 
tems) to allocate this efficiently  and 
in line with consumer needs. 

A major  obstacle to improving  effi 
ciency  in  all  systems  is  the  pre 
valence  of  monopoly  elements 
among both providers of finance and 
suppliers of service coupled with in 
built  inertia  to  change  (as  well  as 
collusion  between  those  involved). 
Partly  because  of  incomplete  infor 
mation and the need for local supply, 
problems  exist, for  example, in giv 
ing  patients  effective  freedom  to 
choose between  doctors  or  between 
insurance funds,  and spending  auth 
orities  to  choose  between  hospitals 
when  each  one  may  specialise  in 
treating a particular illness or ailment 
or  where  these  are  geographically 
dispersed.  Nevertheless,  the  intro 
duction of more choice and more ele 
ments  of  competition,  coupled  with 
imposing  increased  incentives,  and 
deterrents,  on  purchasers  and  sup 
pliers  alike  to  spend  their  budgets 
efficiently  (by,  for  example,  setting 
fixed  limits  on  expenditure  or 

requiring them to raise additional fin 
ance from their own resources) seem 
to have helped contain costs, though 
many of the reforms are still in their 
infancy  and remain to have their full 
effect. 

One key issue which largely remains 
unresolved  throughout  the  Union, 
and,  in  some  cases,  unaddressed, 
concerns the scope of health care sys 
tems  and  the  basis  on  which  re 
sources  are  allocated  between 
alternative  kinds  of  care  and  treat 
ment  if  the  provision  of  service  is 
limited  below  what  it  otherwise 
would be (whether by means of fixed 
budgets  or  of  ceilings  on  contribu 
tions). This is becoming  particularly 
acute as advances in technology and 
know-how expand what it is possible 
to provide as well as typically raising 
the  cost  of  treatment.  It  is  likely, 
moreover,  to  become  even  more  so 
as the number of very elderly people 
who impose disproportionately  high 
demands  on  services 
increase 
sharply over the coming decades. 

One  commonly  suggested  solution 
to  this  is  to  limit  the  provision  of 
public health care to basic needs and 
to  those  who  cannot  afford  private 
treatment  and  to  leave  the  private 
sector  to  meet  other  needs  and  to 
cover  other  sections  of  the  popula 
tion. Nevertheless, such an approach, 
on US experience, is likely to result 
in  an  expansion  in  the  overall  re 
sources  absorbed  by  health  care  as 
well  as  a  diversion  of  resources 
(medical  expertise  and  equipment) 
towards  treatment  and  care  which 
people  are  most  willing  to  pay  for, 
which is not necessarily those which 
are  most  desirable  from  a  social 
perspective. 

Unemployment 
benefits and 
incentives to 
seek work 

Although  expenditure  on  unem 

ployment  compensation  in 
most  countries  accounts  for  a  rela 
tively low proportion of what is spent 
on social protection  (over  10% only 
in Denmark, Spain and Ireland) and 
amounted to only 2% of GDP in the 
Union as a whole in 1993, it has been 
a  major  focus.of  policy  in  many 
Member States. (These figures, how 
ever,  understate  the  true  scale  of 
transfers  associated  with  unemploy 
ment, since they leave out of account 
transfers to the dependants of the un 
employed as well as those to people 
who  are classed  as  sick or  disabled 
rather  than  unemployed  and  those 
who take early retirement because of 
lack of jobs.) This is not only because 
of the significant  increase which has 
occurred as unemployment has risen, 
but also because of a concern to avoid 
high  benefit  levels  deterring  those 
out of work from actively looking for 
a job, especially  the less skilled and 
less productive among them, who are 
capable  of  commanding  only  rela 
tively  low  rates of pay. Such a con 
cern  is  motivated  hot  only  by  the 
desirability  of  reducing  dependency 
on the system and reducing costs but 
also  by  a  need  to  reassure  those  in 
work  who  provide  the  finance  for 
income  support  that  excessive 
amounts  are  not  being  transferred 
unnecessarily. 

These concerns, however, need to be 
balanced against the aim of providing 
sufficient  income  that  those  out  of 

-18 

Summary and conclusions 

work  can  maintain  an  acceptable 
standard of living for themselves and 
their families and, moreover, that they 
have sufficient time to look for a job in 
line  with  their  skills  and  aptitudes, 
which  is  important  for  the  efficient 
functioning of the labour market. 

In  practice,  there  is  a  good  deal  of 
difficulty  in  comparing  the  level  of 
income  received  when  unemployed 
with take-home pay when in work, in 
part  because  restrictions  on  entitle 
ment  to  benefit  of  varying  severity 
across the Union make it hard to assess 
what will be paid in reality to any given 
person out of work. The rates of com 
pensation  prevailing  in  mid-1993  in 
Member States, together with the rules 
governing  eligibility,  suggest  that  a 
single person on the average wage of a 
production  worker  qualifying  for  in 
surance-based benefits would have re 
ceived  disposable  income  if  they 
became unemployed of less than half 
that when in work in Greece, Ireland 
and the UK — less than in the US — 
and  around 60% or  less  in  Germany 
and Italy. In Denmark, Spain and the 
Netherlands,  however,  the  figure 
was  above  70%  and  in  France, 
Luxembourg  and  Portugal,  80%  or 
higher. After two years of unemploy 
ment, in four of the latter six countries 
— the exceptions being  Luxembourg 
and Portugal — the figures would still 
have been  above  70%, though  in  all 
other  Member  States,  it  would  have 
been 55% or less. 

If the person concerned  was married 
with  two  children,  then  disposable 
income when becoming unemployed 
would have been 70% or more of that 
when in work in all Member  States, 
except Belgium, Italy (66% in both) 
and Greece (55%). 

However,  most  of  the  unemployed 
earn  less  than  the  average  wage, in 
many  cases,  because  they  are  rela 
tively  unskilled,  women  (who  on 
average earn only around 75% of the 
male average wage) or young people 
under  25  without  a  sufficient  em 
ployment record to qualify  them  for 
benefits.  In  most  Member  States, 
replacement  rates  (disposable  in 
come  when  unemployed  relative  to 
that in work) increase when earnings 
fall, though not over the entire earn 
ings  range  in  Germany,  Spain, 
Luxembourg,  the  Netherlands  and 
Portugal,  and the extent  varies con 
siderably  (the rise being  greatest  in 
countries where benefits are flat-rate 
rather than related to earnings, such 
as Denmark, Ireland and the UK). At 
65%  of  average  earnings,  the  re 
placement  rate  for  a  single  person 
qualifying  for benefit was over 80% 
in five Member  States —  Belgium, 
Denmark,  France, Luxembourg  and 
Portugal — but below 90% in all but 
Denmark  —  and  75%  or  above  in 
another three •— Spain, Italy and the 
Netherlands; only in Ireland and the 
UK was it below 60%. For a couple 
with  two  children,  however,  it  was 
around  80%  or  above  throughout 
the Union. 

Even for someone on earnings as low 
as  half  the  average,  the  replacement 
rate  for  a  single  person  was  below 
100%  in  all  countries  apart  from 
Portugal and below 80% in five, while 
a young person not qualifying  for in 
surance benefits who could command 
only  this level  of  pay  when  in  work 
received  nothing  in  Greece  and 
Portugal and under 60% in another six, 
with the rate being above 70% in only 
Denmark,  Luxembourg  and  the 
Netherlands.  (The  analysis  excludes 

the three new Member States; a recent 
OECD  study  suggests  that  replace 
ment  rates  in Sweden  were  typically 
slightly lower than in Denmark at earn 
ings  below  the  average,  but  slightly 
higher than in Finland over most of the 
earnings range, except at very low and 
very high levels.) 

How high the level of disposable in 
come when out of work needs to be 
in  relation  to  that  when  in  work  to 
constitute  a  significant  disincentive 
to look for a job is open to question. 
At  low  levels  of  income,  even  the 
possibility  of  increasing  income  by 
20%  could  well  prove  attractive. 
Moreover, some survey evidence and 
observation  seem  to  suggest  that, 
even  for  similar levels  of income, a 
substantial number of people tend to 
prefer  to  be  in  work  rather  than  be 
unemployed,  largely because  career 
and  income  prospects  depend  on 
being employed and, in general, par 
ticipation in society is closely linked 
to working. Other research points to 
the  risk  in  countries  with  high  re 
placement rates and long duration of 
benefit  that  people  might  rationally 
decide  to  remain  unemployed.  In 
practice,  the  increased  pressure  on 
those in receipt of benefit  to take up 
employment,  which  has  been  im 
posed in many Member States in re 
cent  years,  is  likely  to  make  it 
difficult  to  go  on  receiving  income 
support for any length of time with 
out seriously seeking a job. 

At  the  same  time,  attention  should 
be  paid  to  the  risk  of  increasing 
poverty  if  benefit  levels  are  re 
duced  significantly.  If  the  level  of 
benefits  is  regarded  as  preventing 
wages  from  falling  by  enough  to 
stimulate the creation of jobs for the 

19-

Summary and conclusions 

less skilled, then perhaps the focus of 
policy  attention  might  switch  to in 
troducing  or  extending  in-work 
benefits,  aimed  at  keeping  labour 
costs  down  whilst  ensuring  that  in 
come  from  work  is  sufficiently 
higher  than  income  when  unem 
ployed to attract people into employ 
ment.  The  difficulty  here,  however, 
is that such benefits, because they are 
targeted  on a relatively  small  group 
at the bottom end of the pay scale and 
are, therefore, withdrawn or reduced 
significantly  as  earnings  increase, 
tend  to result in  very high  marginal 
effective  tax  rates  for  these  (in  the 
UK,  the  rate  for  those  in  receipt  of 
Family Credit can often exceed 90% 
— see Employment in Europe, 1995, 
Part  3,  Section  1).  The  danger  is, 
therefore, replacing one disincentive, 
that of discouraging job search when 
unemployed,  with  another,  that  of 
discouraging  work  effort  when  in 
employment. 

Social protection 
position of the 
self-employed 

In most Member  States, measures 

are in place to encourage people, 
especially  the  unemployed,  to  start 
up  their  own  business.  The  social 
protection  provided  for  the  self-
employed,  however,  who  numbered 
22 million in the Union as a whole in 
1994,  15% of  those in  employment, 
is, in a number of cases, significantly 
less  extensive  or generous  than  that 
for  employees,  despite  the  indica 
tions that substantial numbers of the 
self-employed  have  very  low  earn 
ings and/or are in sectors of activity, 

where  income  fluctuates  consider 
ably. 

Although  efforts  have been made in 
many Member States in recent years 
to improve the position, a number of 
gaps  remain.  In  most  countries,  the 
self-employed  will tend  to receive a 
lower pension than an employee with 
comparable earnings, either because 
they  have  been  incorporated  into 
State earnings-related  schemes  only 
relatively  recently  or  because  they 
have to contribute to  supplementary 
pension  schemes  on  a  voluntary 
basis. Some may choose not to con 
tribute  on this basis  and others  may 
feel  unable  to  do  so  because  of  the 
high level of contributions  involved 
and uncertainty  about future  income 
levels.  Similarly,  in  the  case  of 
maternity benefits, in many countries 
—  Belgium,  Greece,  Italy,  France 
and the UK, for example — the total 
amount received  is typically less, in 
some  cases  significantly,  and  in 
Ireland, no benefit  is payable at all. 

Perhaps  the most  serious  gaps, how 
ever, relate to periods of incapacity and 
unemployment.  In  four  countries  — 
France, Ireland, Italy and the Nether 
lands  —  the  self-employed  are 
excluded  from  social  insurance 
schemes  in  respect  of  the  receipt  of 
sickness benefits, as are a large propor 
tion in  Greece, while  unemployment 
benefits  for  the  self-employed  exist 
only in  the three Scandinavian coun 
tries and Luxembourg. In other coun 
tries, a major obstacle is seen to be the 
difficulty  of  distinguishing  genuine 
unemployment in the sense of business 
failure  from  cases  where  trading 
has  ceased  voluntarily.  Moreover, 
though social assistance is available to 
those  whose  businesses  fail  in  all 

Member  States,  apart  from  Greece, 
Portugal, Spain and Italy (though in the 
latter  two  countries  regional  or  local 
support may be available on a discre 
tionary  basis), support is not generally 
obtainable  for  temporary  periods  of 
low  earnings  in  Denmark,  France, 
Austria  and  the  UK  and  is  likely  to 
have to be repaid in the Netherlands. 

Social protection 
and caring 
responsibilities 
As  the  population  ages  and  as 

more women take up paid em 
ployment,  the issue  of  the  effect  on 
the  social  protection  rights  of  those 
who need to look after  young  child 
ren,  disabled  adults  or  elderly  in 
valids  of  having  to  interrupt  their 
working  careers  is  becoming  more 
important.  Indeed  the  problems 
many face in this respect are increas 
ingly  recognised  across  the  Union, 
and  in  many  Member  States, 
measures  have  been  introduced  in 
recent years to improve the position. 
Nevertheless,  most  of  the  focus  has 
so far been on caring for children and 
in many cases difficulties  remain for 
those caring for the disabled and in 
valid.  At  the  same  time,  even  for 
child  care,  the  amount  of  benefit 
payable  and  the  extent  of  provision 
for time-off  with job reinstatement at 
the end  of the period vary  markedly 
across the Union. 

Schemes  for  providing  benefits  for 
those  caring  for  adults  exist  only  in 
four  Member  States  —  the  UK, 
which  has  the  longest-standing 
scheme,  Ireland,  Finland  and 
Germany,  where  social  protection 

20 

Summary and conclusions 

arrangements  for  long-term  nursing 
care were introduced  in  April  1995. 
More limited provision is available in 
six other countries, though  in Spain, 
Luxembourg,  the  Netherlands, 
Austria  and  Portugal,  no  provision 
for benefits  exists at all. 

There are, moreover, other aspects to 
the problem. Carers, either of child 
ren or adults, returning to work may 
have an insufficient  employment rec 
ord  to  qualify  for  insurance-based 
benefits,  especially  for  unemploy 
ment  benefit.  In  addition,  if  carers 
work part-time, then in five countries 
— Germany, Spain, Ireland, Austria 
and the UK — they have to earn more 
than  a  minimum  amount  and/or  be 
employed for more than a minimum 
number of hours a week to be eligible 
for social, insurance (the corollary of 
not having to pay  contributions  and 
giving rise to lower labour costs as a 
result). If they work part-time and/or 
earn  relatively  low  wages  because 
they  have  interrupted  their  working 
careers,  they  will  tend  to  receive  a 
lower  level  of  earnings-related  pen 
sion  and  in  some  cases  may  be 
ineligible  for  occupational  pension 
schemes. 

In a number of Member States, how 
ever, arrangements exist to moderate 
the effect  on the final pension, either 
in the form  of calculating  this on the 
basis of earnings over a limited num 
ber of best years rather than over the 
entire time spent in employment  (as 
in Spain, Portugal, Italy or Finland), 
dropping  years  of  caring  explicitly 
from the calculation (as in the UK or 
Ireland), crediting contributions dur 
ing  periods  of caring  (as  in Luxem-
bourg,  G e r m a n y,  Austria  or 
Belgium)  or  allowing  voluntary 

payment of contributions (as in Italy 
or Greece). In many cases, however, 
such arrangements provide only par 
tial compensation. 

Divorce adds a further  complication 
for  those,  especially  women,  who 
have been engaged in caring, particu 
larly  where  they  can  no  longer  rely 
on derived rights to social protection 
and  where  pension  entitlements  are 
not divided equally at the time of the 
divorce. 

Future issues 
The ageing of the population and 

the  implications  of  this  for  in 
come transfers, health care and social 
services coupled with the continuing 
need  to  respond  to  changing  econ 
omic and social conditions are not the 
only challenges for systems of social 
protection which he ahead. 

The  development  of  systems  across 
the  Union  in  future  years  is  almost 
certain to be affected  by the increas 
ing integration of the European econ 
omies.  As  this  takes  place  and 
remaining  constraints  on  f^e  free 
movement  of  labour,  capital,  goods 
and  services  are  removed,  it  is  an 
open  question  how  far  the  systems 
which  now  operate  can  retain  their 
present diversity. 

So far the main focus has been on the 
changes  required  to facilitate  the  free 
movement of labour, which at a mini 
mum requires that those moving from 
one country to another have their social 
protection rights, including their pen 
sion entitlement, safeguarded and can. 
therefore, effectively transfer the  rights 

built  up  in  one country  to  the other. 
Difficulties  arise, however, in translat 
ing  this  requirement  into  practice 
where the level of provision and/or the 
method  of  funding  (ie  between  con 
tribution-based  and  tax-based  sys 
tems)  vary  significantly  between 
Member  States. Indeed  recent  trends 
towards  the  increased  importance of 
supplementary schemes coupled with 
the  more  extensive  use  of  means-
testing to target benefits on those most 
in need tend in themselves to impede 
mobility. 

Moreover,  if  methods  of  financing, 
and specifically the extent of reliance 
on employers'  contributions, remain 
significantly  different,  transnational 
companies,  which  are  becoming 
more prevalent, will face continuing 
difficulties  in  both  setting  wage le 
vels in different countries, because of 
the  substantial  difference  in  overall 
labour costs associated  with a given 
net wage, and moving staff from one 
country to another. Such  differences 
are  liable  to  affect  location  policy 
disproportionately  in  relation  to 
other, more fundamental,  factors. 

More  generally,  there  is  a  serious 
question  over how  far  levels of pro 
vision  of  social  protection,  and, 
therefore, the scale of financing asso 
ciated  with  them, can  vary  between 
Member States within a single econ 
omic space without this affecting  the 
underlying  conditions  of  competi 
tion.  Other  things  being  equal,  the 
level of charges imposed on business 
(almost  irrespective  of how  revenue 
is raised) and, therefore, the costs of 
production are likely to be higher in 
countries  where  social  support  is 
both extensive and generous  putting 

21 

Summary and conclusions 

them at a potential competitive disad 
vantage 

Such  considerations  suggest  that 
policies designed to increase the in 
tegration  of  European  economies 
have implications for systems of so 
cial protection, just  as the operation 
of these systems is liable to affect the 
outcome of those policies. In conse 
quence, it would seem to be import 
ant  to  adopt  an  integrated  approach 
when  taking  policy  decisions  on 
either front. The same considerations 
suggest that there is a need for more 
joint  consideration  of  social  protec 
tion issues between Member  States, 
including not only the common chal 
lenges  imposed  by  demographic, 
economic  and  social  changes  but 
equally importantly the organisation 
of systems and methods of funding in 
an integrated Union. The new Frame 
work  for  debate  on  the  Future  of 
Social  Protection  provides  an 
opportunity for this (see Box). 

22 

Summary and conclusions 

The future of social protection — a framework for a European debate 

A  new  initiative  on  the  future  of  social  protection  was  published  by  the  European  Commission  in  October  1995 
(COM (95) 466). Its main features  are set out below. 

While Member States remain responsible for achieving the common objectives set by the European Union in this area, 
they will continue to adapt their systems in line with the underlying objective of social cohesion and solidarity in order 
to maintain or attain  a high level of social protection.  Since it is responsible for  freedom  of movement of people and 
the freedom  to provide services and to compete, the Union has an interest in social protection issues in these areas. It 
is, therefore, important to ensure that social objectives are taken into account in other policy fields. Care must be taken 
to prevent  options  made in other  areas from  predetermining  major  social protection  choices. An integrated  approach 
should be followed  and the Commission accordingly proposes that the Community institutions and the Member States 
should embark together on a process of common reflection on the future measures which should be taken to make social 
protection systems more employment-friendly  and more  efficient. 

This common reflection  should be a collective process in which the Commission, as well  as the Member States, have 
a role and to which the social partners and all the other parties concerned will be called upon to contribute. The European 
Parliament, the Economic and Social Committee and the Committee of the Regions must also be fu'ly  associated in the 
process. The aim is to take slock  of this debate before  the end of  1996 and to propose appropriate  follow-up. 

The  Commission  will  initiate  this process of  reflection,  presenting  analyses  and directions  for  debate, with  Member 
States and the other parties concerned also contributing material. The Commission's main counterpart for dialogue will 
be the consultation group of Social Security Directors-General, though other consultation groups will also be involved 
in the employment and internal market areas. The European social dialogue bodies will be asked to take an active part 
in the reflection. 

Several issues in particular appear to call for further  analysis and a common  reflection: 

• 

the challenges arising from the narrowing gap between the size of the labour force  and the number of pensioners; 

• 

the ways of making social protection more employment-friendly; 

• 

the financing  of social protection; 

• 

• 

• 

the changes in  systems of health care and the establishment of more systematic exchanges of experience  between 
Member States; 

the coordination of social security schemes for people moving between Member States and the relationship between 
coordination and convergence of social protection  systems; 

the  principles  under  which  the  institutions  managing  both  statutory  and  supplementary  schemes  and  insurance 
companies can operate alongside each other in the internal  market; 

• 

the future  of social protection in the longer term. 

-23  0^ 

Chapter 1 -Systems  of social protection in the Union 

Chapter 1  Systems of social protection 

in the Union 

A common profile 
Together  with  liberal  democracy 

and  the  market  economy,  exten 
sive  systems  of  social  protection  rep 
resent a fundamental  component and a 
distinguishing feature  of the European 
model  of  society.  Ever  since  the  last 
decades  of  the  19th  century,  welfare 
institutions  have  played  a  prominent 
role in the modernisation  of  European 
countries,  smoothing  the  strains  aris 
ing  from  the  economic  cycle,  demo 
graphic  trends,  changing  social 
behaviour  and  the  transition  from  ag 
rarian  to  industrial  modes  of  produc 
tion  —  the  prime  reason  for  the 
development  of  social  protection  sys 
tems. 

Viewed  from  within  Europe,  the  so 
cial  protection  systems  of  Member 
States of the Union  appear to be very 
different:  indeed  so  different  that  it 
may  seem  impossible  to 
identify 
common  traits and pointless to speak 
of the European  welfare  model.  Each 
nation  has followed  a distinct  path  in 
the  development  of  its  social  policy 
which  has greatly  influenced  the pre 
cise characteristics  of the present sys 
tem. To  a  large  extent,  this  Report  is 
concerned  to  highlight  and  measure 
this diversity,  though  it will  also  em 
phasise certain  important  similarities 
and  converging  trends.  Indeed,  from 

a broader comparative perspective, it 
is not difficult  to discern the common 
nature  of  European  social  protection 
systems which distinguish them  from 
other  parts  of  the  world,  especially 
the  US  and  Japan.  In  most  respects, 
social  protection  systems  in  Europe 
are  more  different  from  systems  in 
these  latter  two  countries  than  they 
are from  each other. It is  noteworthy, 
moreover,  that  Central  and  Eastern 
European  countries  are  row  develo 

ping  systems  of  social  protection 
which  closely  follow  the  Western 
European  model. 

The  most  visible  of  these  charac 
teristics  is  certainly  the  scale  of  ex 
p e n d i t u re  on  social  protection: 
governments  in Europe tend to spend 
more  on  this  than  other  developed 
parts  of  the  world.  At  the  beginning 
of  the  1990s,  public  expenditure  on 
social  protection  averaged  22%  of 

1 

Social  protection  expenditure  in  relation  to  GDP, 
1990 

%GDP 

Japan  Australia  US  Canada  N. Zeal 

E12  Austria  Finland  Sweden 

Souae: OECD 

?3b 

Chapter 1 -  Systems of social protection in the Union 

2 

Attitudes on the social role of government: basic 
income, 1992 

100  r 

n  100 

Source: See box 

Attitudes on the  social role of government: care 
for the sick, the elderly and the unemployed, 1990 

DThe sick 
HThe elderly 
•  The unemployed  J 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

West D 

East D 

Italy 

US 

Australia 

Source: See box 

24 

GDP in the Union. By contrast, it was 
around  19% in  Canada  and  New 
Zealand,  15%  in  the US, 13% in 
Australia  and under  12%  in  Japan 
(Graph 1). 

Many  factors  account for the  larger 
scale  of  social  expenditure  in the 
Union. The  coverage  of social  pro 
tection tends to be more extensive in 
terms of the risks included  (particu 
larly  as  regards  short-term  cash 
benefits,  social  services  and labour 
market  programmes).  Access to  the 
benefits and services provided is also 
greater,  especially  in  comparison 
with the US (where, for example, the 
public health service only covers the 
aged  and the least  well off) or with 
Australia (where public pensions are 
confined to those whose income falls 
below a certain level). In addition, in 
Europe rates of benefit  are typically 
more generous (especially in the case 
of pensions). 

Because  of its wider  scope  and  the 
higher  level  of benefits,  social  pro 
tection makes a greater difference to 
people's  lives  in Europe  than  else 
where  in the world.  Transfer  pay 
ments  account,  for  instance,  for a 
larger share of household income and 
in comparison with the US, they also 
appear  more  effective  in  reducing 
poverty. 

The central position occupied by so 
cial protection in the European Union 
is  also  demonstrated  by public  atti 
tudes.  Almost  all  the  people  in 
Europe  consider  social  security  a 
major  achievement  of  modern so 
ciety.  The contrast  between  Euro 
pean  and  non-European  attitudes 
towards the role of the State in safe 
guarding the welfare of its citizens is 

Chapter 1 ~ Systems of social protection in the Union 

indicated  in  a  survey  conducted  in 
1992  (see  Box),  this  revealed  that 
most respondents in the Netherlands, 
Italy, the UK and Germany (the only 
Union Member States) believed that 
governments  should  provide a basic 
income for all, whereas less than half 
thought  so  in  Canada  and  the  US 
(Graph  2).  Moreover,  respondents 
from  the  former  Czechoslovakia, 
Poland and Hungary, also manifested 
a  marked  preference  for  the  public 
provision  of  a  basic  income.  Simi 
larly, only  a minority  of  Americans 
and  a  bare  majority  of  Australians 
surveyed  considered  that  the  State 
has a responsibility for providing in 
come  support  to  the  unemployed, 
whereas  in  Germany,  the  UK  and 
Italy more than 75% of  respondents 
thought that it should (Graph 3). 

An  extensive  welfare  system  is,  of 
course, costly. It is also liable to give 
rise  to  rigidities  of  various  kinds, 
which  could  erode  competitiveness 
relative  to  other  trading  areas  and 
adversely affect economic growth. In 
the long run, the financial, social and 
economic  implications  of  a  costly 
and  rigid  social  protection  system 
might even undermine a high level of 
popular  support  and  deeply  entren 
ched  political  legitimacy.  The chal 
lenges  confronting  the  European 
welfare  states have been widely dis 
cussed  in  recent  years.  They  have 
been the subject of a number of Com 
mission  documents  (such  as  the 
White  Papers  on  Employment  and 
Social Policy). This Report provides 
additional material for the policy de 
bate. 

Throughout  the  European  Union 
significant  reforms  of systems of so 
cial  protection  are  at  present  under 

consideration,  and  in  a  number  of 
cases  being  introduced,  in  response 
to the need to curtail costs, to adapt 
to rapidly changing  social and econ 
omic  conditions  and  to  replace  the 
old  rigidities  with  more  flexibility. 
While  it  is  as  yet  unclear  how  far 
Europe  will  maintain  its  social  dis 
tinctiveness in  this  process,  the  im 
plementation  of  change  will  not  be 
made in a normative vacuum. If the 
values  of  European  citizens  ex 
pressed in surveys, as well as in pol 
itical  elections,  are  to  be  taken 
seriously, it seems safe to predict that 
social protection will continue to oc 
cupy a central place in our societies: 
European  governments  are likely  in 
the future  as in the past to endeavour 
to ensure that nobody is left deprived 
when  unemployed,  poor,  ill, or dis 
abled. 

Dimensions 
of diversity 

The diversity of systems of social 

protection across the Union has 
many  aspects.  One  which  is  often 
identified  for classification  purposes 
is  the  basis  of  entitlement  to  social 
support  and,  in  particular,  whether 
this is through contributing to a social 
insurance scheme, usually one based 
on being in work with benefits linked 
to contributions,  or through  being  a 
citizen and in need of assistance. The 
first  approach  predominates  in  the 
countries  of  Continental  Europe, 
while  the  second  approach  is  more 
important  in  the  UK,  Ireland  and, 
most especially, in the Scandinavian 
countries. 

The International 
Social Survey 
Programme 

The  ISSP  was  launched  in 
1984 by a number of research 
institutes  with  the  aim  of 
collecting  standardised  and 
comparable  data  on  popular 
attitudes  in  different  coun 
tries  on  a  broad  range  of 
issues. A new survey is con 
ducted every year. The 1990 
survey was on the role of gov 
ernment and the 1992 survey 
on social inequality. All data 
are stored in Cologne, at the 
Zentral  Umfrage  Archiv 
(ZUMA). 

Although  the  contrast  between  the 
'Bismarckian'  (ie the first  type) and 
'Beveridge'  traditions  corresponds 
to  an  important  historical  divide  in 
the  formation  of  European  Welfare 
States, it is too imprecise a distinction 
to provide an accurate description of 
their configuration  in the mid-1990s. 
All  European  social  protection  sys 
tems today display some elements of 
each basic system. 

Rather  than  starting  from  historical 
developments  and  ideal  or  typical 
models,  the  following  attempts  to 
summarise the main  similarities  and 
differences  between  the  social  pro 
tection  systems  of  the  15  Member 
States  by  reference  to  four  distinct 
aspects: 

•  risk  coverage and eligibility; 

• 

the structure of benefits; 

-25 

Chapter 1 -  Systems of social protection in the Union 

• 

financing  regulations; 

•  organisational arrangements. 

These  aspects  are the most  relevant 
from  both an analytical and a practi 
cal  viewpoint.  Since  they  are  not 
necessarily  the  same as  regard  each 
of the three main broad  functions  of 
social  protection  —  to  maintain  in 
comes, to provide health care and to 
supply  social  services  —  the  latter 
are examined separately below. 

Income support 
All  15  Member  States  provide 

specific  income  maintenance 
benefits  to cover the classic risks of 
old age and retirement, the death of a 
provider, disability, sickness, mater 
nity,  dependent  children  and  unem 
ployment.  Most  countries  also  have 
some specific form of benefit for oc 
cupational  injury  or disease, though 
in the Netherlands and Greece, these 
are covered  by general sickness and 
disability insurance. 

These  risks,  however,  are  often 
defined  differently  in  the  various 
countries.  There  are,  for  example, 
differences  in the age of  retirement, 
and different definitions of disability. 

Beside  the  classic  risks,  in  some 
countries  other  contingencies  are 
also covered. Perhaps the most novel 
is  long-term  care,  for  which  social 
insurance  was  recently  introduced 
in Germany (as described in Chapter 
2). Others  include  the cost  of child 
ren's  education  (eg  the  education 
allowances paid in France, Germany 
and Luxembourg), the cost of caring 

for disabled  or sick relatives  (eg the 
invalid care allowance in the UK, the 
'accompanying'  allowance  in  Italy 
or  the  various  allowances  paid  to 
families  with  disabled  children  in 
Belgium,  Greece,  Spain,  France, 
Ireland,  Luxembourg  and  Portugal) 
or sole parenthood (specifically  sub-
sidised  in  Denmark,  Finland, 
Germany,  Greece,  France,  Ireland, 
Sweden and the UK). 

The  residual  risk  of  having  insuffi 
cient  resources  is  also  covered  by 
m i n i m um  income  a l l o w a n ce 
schemes in all Member States except 
Greece, Portugal, Spain and Italy. In 
the  latter,  those  not  eligible  for  the 
standard  benefits  can  only  rely  on 
discretionary, non-standardised  cash 
support  from  local  authorities 
(though  in  Italy,  minimum  income 
schemes  operate  in  a  number  of 
regions and in Spain, a system guar 
anteeing  levels  of  income  is  being 
progressively  introduced  at  the 
regional  level  and  in  Portugal,  the 
social  security  non-contributory 
scheme  aims  to  provide  minimum 
resources to those who do not qualify 
for  insurance-based  old-age,  inva 
lidity and family  benefits). 

Differences  in  eligibility  —  the ex 
tent of protection — are much more 
pronounced  than  differences  in  the 
risks covered. Here, there are notice 
able  differences  not  only  between 
countries  but  also  between  risks  in 
some countries. 

In the case of old-age pensions, four 
countries  (Denmark,  Sweden, 
Finland  and  the  Netherlands)  have 
national schemes covering  everyone 
who is resident. The UK and Ireland 
also have national insurance schemes 

which  cover  only  those  who  are 
working or looking for work (ie who 
are  part  of  the  labour  force)  and 
whose  earnings  exceed  a  minimum 
level (around 70 ECU a week in the 
UK and 40 ECU a week in Ireland). 
In the UK, however, others not in the 
labour  force  or  earning  below  the 
lower  limit  for  paying  social  con 
tributions  can  make  voluntary  con 
tributions  to  obtain  a  national 
insurance pension (though this is not 
the case for other insurance benefits). 

In the remaining 9 countries, there is 
no  national,  single  scheme.  Eligi 
bility is based on occupational status 
and  rules  (eg  regarding  the  age  of 
retirement) often vary between those 
working  in  the  public  sector  and 
those in the private sector as well as 
between  wage or salary  earners and 
the  self-employed.  Membership  of 
one of the several insurance schemes 
is compulsory for the vast majority in 
employment. There are no minimum 
earnings  requirements  except  for 
Germany  (compulsory  coverage 
starts  at  a minimum  of  580  DM — 
around  285 ECU — per month) and 
Austria (250 ECU per month). There 
are gaps in eligibility in a number of 
cases,  affecting  some  categories  of 
self-employed  (as  described  in 
Chapter 6), as well as some atypical 
workers who are not covered, includ 
ing as a rule family  workers. 

Minimum benefits are available in all 
countries,  however,  to  all  those 
people  who  reach  the  age  of  retire 
ment  without  adequate  insurance 
coverage. 

In addition  to the basic pension (the 
so-called  first  pillar), there are  sup 
plementary  pensions  (the  second 

26-

Chapter 1 -  Systems of social protection in the Union 

pillar)  in  all  15  Member  States. 
Membership  of supplementary  pen 
sion  schemes  is  compulsory  in  8 
countries  for  particular  groups  and 
voluntary for others. In Sweden and 
Finland, all workers (employees and 
self-employed),  however,  are 
covered; in Denmark, the UK and the 
Netherlands,  only  wage  and  salary 
earners (and only in some  industries 
in the latter,  where  they  are mostly 
based  on  contractual  agreements 
between employers and employees); 
in  France,  all  wage  and  salary 
earners plus some categories of self-
employed and in Greece, only certain 
categories  of  employees  and  self-
employed.  In  all  these  countries, 
supplementary pensions are adminis 
tered  by  statutory  bodies,  although 
in  the UK, people  can contract out 
and  become  members  of  a  private 
scheme instead of the State scheme. 
In a number of cases, however, there 
are voluntary schemes to supplement 
compulsory  schemes. In the remain 
ing  7  countries  (Ireland,  Belgium, 
Luxembourg,  Austria,  Italy,  Spain 
and  Portugal),  supplementary  pen 
sion insurance is largely a matter of 
contractual  agreement  between em 
ployers  and employees  and  is  also 
somewhat  less  developed  (though 
private  individual  schemes  do exist 
in a number of cases). 

Entitlement  to  retirement  pensions 
generally  carries  with  it  a  right  to 
survivor  and  disability  benefits.  In 
the  case  of  disability  benefits,  in 
countries where the national scheme 
does  not  cover  all  residents,  non-
contributory  payments  are available 
to  those  not  eligible  for  insurance 
benefits,  though means-tests for this 
are  applied  everywhere  except  in 
Luxembourg, Greece and Italy. 

In the case of sickness benefits, eligi 
bility is confined to wage and salary 
earners  in  Austria,  France,  Greece, 
Ireland,  Italy  and  the  Netherlands, 
but also covers the self-employed in 
B e l g i u m,  D e n m a r k,  Spain, 
Luxembourg, Portugal, Sweden, the 
UK  and  (partially)  Germany.  In 
Finland,  everyone  who  is  resident 
whether  in  employment  or not (in 
cluding  housewives and students) is 
eligible for at least a minimum daily 
allowance. 

In the case of maternity benefits, all 
women who are economically active 
are  eligible  in  all countries,  except 
Ireland  and the Netherlands,  where 
the  self-employed  are  excluded, 
while  in Luxembourg,  Sweden and 
Finland  women  who are not in em 
ployment are also covered. In a few 
countries,  fathers  who are in  work 
can  claim  benefit  for  a  new-born 
child  instead  of the mother  (for de 
tails, see Chapters 6 and 7). 

Only  wage  and  salary  earners  are 
typically eligible for cash benefits in 
case of occupational injuries and dis 
eases, though the self-employed are 
partially  covered  in  Denmark, 
Finland,  France,  Germany,  Italy, 
Luxembourg,  Spain  and  Sweden, 
while in a few countries, students are 
also  included  in  compulsory  insur 
ance  schemes.  As  already  noted, 
there  are  no  specific  schemes 
to  cover  this  in  Greece  and  the 
Netherlands. 

In  the  case  of  unemployment 
benefits,  rules  governing  eligibihty 
vary  not only  across  countries, but 
also in respect of the type of benefit 
scheme  in  force.  In  Denmark, 
Finland  and  Sweden  membership 

of  unemployment  insurance  funds 
is voluntary and also open to the self-
employed.  Finland  and  Sweden 
provide  specific  assistance  benefits 
to  those  who  are  not  members  of 
insurance funds. In all the other coun 
tries,  unemployment  insurance  is 
compulsory, but only for employees: 
Luxembourg  is  the  only  country 
which offers insurance benefits to the 
self-employed.  Some countries pro 
vide  specific  unemployment  assist 
ance which is paid when eligibility to 
insurance benefits has not matured or 
has  expired  —  France,  Germany. 
Spain,  Portugal  and  Ireland,  for 
example.  In the latter,  eligibihty  to 
unemployment  assistance  also  ex 
tends  to  the  self-employed.  In  all 
countries  except  Portugal  and 
Greece,  private  sector employees in 
industry  are  eligible  for  special 
benefits  in case of partial or tempor 
ary  unemployment.  This  type  of 
benefit is especially relevant in Italy, 
where  agricultural  workers  are also 
eligible.  It  should  also  be  noted 
that  in  some  countries  (Belgium, 
Denmark,  Germany,  Ireland  and 
Luxembourg)  young  people  in 
search  of  their  first  job  are  also 
eligible for benefit. 

Finally,  all  families  are  entitled  to 
child allowances irrespective of their 
income  in  Belgium,  Denmark, 
Finland,  France,  Ireland,  Luxem 
bourg,  the  Netherlands,  Portugal, 
Sweden and the UK; whereas in the 
other  countries  allowances  depend 
on income (though not in all cases in 
Spain, such as in respect of disabled 
with  children).  In  Belgium,  allow 
ances  are paid at a lower rate to the 
self-employed,  while in Greece and 
Italy,  with  minor  exceptions,  they 

27-

Chapter 1 ~ Systems of social protection In the Union 

receive nothing at all (see Chapter 6 
for details). 

The structure 
of benefits 

The formulas used for the calculation 
of  income  maintenance  allowances 
probably  represent  the  most  diverse 
aspect  of  European  social  protection 
systems.  Like  the  niles  governing 
eligibility, formulas  vary not only be 
tween countries, but also between  risks 
within each country, between types of 
benefit  in  respect  of  each  risk  and 
(especially  in  Continental  Europe) 
between occupational groups. 

A fundamental  divide can be drawn 
between  'Beveridge',  flat-rate  for 
mulas  and  'Bismarckian',  earnings-
related  formulas.  In  Northern 
Member  States, the former  type ap 
plies  to  the  benefits  paid  by  the 
various  national insurance  schemes. 
Thus, a basic pension is payable to all 
residents  in  Denmark,  Sweden  and 
Finland  when  they  reach  retirement 
age, and to all those who have been 
in  employment  (and  paid  contribu 
tions)  in the UK and Ireland. In addi 
tion to the basic pension, workers in 
these countries  who  are  eligible  (ie 
have paid contributions) also receive 
a  supplementary  pension  which  is 
earnings-related.  Means-tested  pen 
sion  supplements  are  available  for 
those in need. In general,  short-term 
cash benefits are also flat-rate. How 
ever, for certain occupational groups 
they  are  earnings-related  in  some 
cases. Sickness, maternity and occu 
pational injury benefits are earnings-
related for all those in employment in 
Denmark,  Finland  and  Sweden, 
where  members  of  unemployment 

;n s u r a n ce  funds  also  receive 
earnings-related  benefits  when  un 
employed. In the UK, Statutory Sick 
Pay became flat-rate in 1995, though 
Statutory Maternity Pay is earnings-
related.  In  Ireland  also,  maternity 
benefits  are earnings-related for cer 
tain women. 

In Continental Europe, all benefits ex 
cept  family  allowances  are normally 
earnings-related.  In  the  Netherlands, 
however, old-age pensions are flat-rate 
as  are  disability  benefits  for  non-
employees. In many  Member States, 
pensions are raised to a minimum level 
if the calculations based on earnings or 
contributions result in amounts which 
are too low (Belgium, Spain, France, 
Italy,  Luxembourg  and  Portugal,  in 
particular). In Belgium, Greece, Spain, 
France and Portugal, minimum levels 
also apply in respect of unemployment 
benefits. There are, on the other hand, 
ceilings on earnings used as the basis 
for  the  calculation  of  basic  pensions 
(first pillar) in Belgium, Greece, Spain, 
France,  Italy  and  Luxembourg. 
Benefit  formulas  also  often  vary be 
tween occupational groups. In general, 
formulas applying to public sector em 
ployees  tend  to  be  more  favourable 
than those in the private sector and are 
usually  least  favourable  for  the  self 
employed (see Chapter 6). 

The  actual  statutory  amounts  of 
benefits vary a great deal. The flat-rate 
benefits in Scandinavian countries are 
generally higher than those in the UK 
and Ireland. The earnings-related rates 
of  Southern  European  countries  (at 
least  in  the case  of  pensions)  are, in 
turn, higher than in the other Continen 
tal  countries  (where  supplementary 
pensions  are,  however,  more  wide 
spread). It should be noted, however, 

that the generosity  of protection does 
not only reflect the statutory rates, but 
depends on other important aspects of 
the benefit formulas  such as the exist 
ence of ceilings and the availability of 
supplements, indexation, tax rules, the 
duration  of benefits,  the  existence of 
waiting  periods  and  so on. The vari 
ation in all these aspects is, again, very 
marked, especially as regards the self-
employed (detailed information can be 
found  in the annual MISSOC  reports 
—the Community information system 
on social protection). 

Financing 

Social security contributions  are the 
main  source  of  financing  of  income 
maintenance  benefits  in  the  Union. 
The  primary  exception  is  Denmark 
where  benefits  are  predominantly 
tax  financed,  though  in  1994, 
employees' contributions were intro 
duced  for  sickness  and  unemploy 
ment benefits. In addition, in the UK, 
Statutory  Sick  Pay  and  Statutory 
Maternity  Pay  are financed  through 
general taxation. 

Contribution  rates  vary  a great  deal 
between Member States and between 
the different  types of risk. In Ireland, 
the UK, Finland,  Sweden,  Belgium, 
Spain  and Portugal  no  distinction  is 
made between risks and a global rate 
is applied to earnings (separate rates 
exist,  however,  for  unemployment 
insurance  in  Finland,  Sweden  and 
Spain).  In  the  remaining  countries, 
different  rates  apply  to  the  various 
risks.  Contributions  are  normally 
divided between employers and em 
ployees,  in  proportions  which  also 
vary between risks and  occupational 
groups, and regulations usually exist 

28 

Chapter 1 ~ Systems of social protection in the Union 

for  civil  servants  and  the  self-
employed  (see the MISSOC  report 
for further details). In schemes relat 
ing  to  industrial  injuries,  contribu 
tions are often defined on the basis of 
actuarial  principles and fixed sector 
by sector. 

Revenue from  general  taxation pro 
vides  part  of the funding  in all the 
Member States, even though relying 
heavily on social contributions. The 
State  is  responsible  for  all  non-
contributory  benefits  (such  as 
means-tested pensions) and in a num 
ber of cases  also contributes  to cer 
tain  insurance  funds  on  a  statutory 
basis.  Family  allowances  are  fully 
financed by taxes in six countries — 
Denmark,  Germany,  Ireland,  the 
Netherlands, Sweden and the UK. In 
addition, the State  assumes  the role 
of payer of last resort to cover deficits 
of insurance funds if they arise. In all 
Member  States,  long-term  benefits 
(predominantly  old-age  pensions) 
are  financed  on  a  pay-as-you-go 
basis (ie present contributions go to 
meet  present  rather  than  future 
liabilities), except to some extent in 
respect  of earnings-related  and sup 
plementary pensions. 

Organisation 

Three distinct models of administra 
tion of social protection systems can 
be distinguished in the Union. In the 
Anglo-Saxon model, overall respon 
sibility for the provision  of virtually 
all cash benefits generally hes with a 
single  government  department  (the 
Department of Social Security in the 
UK — though  the Northern  Ireland 
Office  has responsibility  for admin 
istering social security in that part of 

the  UK —  and  the  Department  of 
Social  Welfare  in  Ireland);  there is 
little  involvement  (and  only  of  an 
advisory  nature)  of either the social 
partners or benefit recipients in man 
agement or policy. In the Scandina 
vian  model,  there  is  also  a  unitary 
system (instead of there being separ 
ate  schemes),  but  administration  is 
more  decentralised  (especially  in 
Denmark)  and  the  social  partners 
participate  in  the  management  of 
national  insurance  (in  the  National 
Insurance  Board  in  Sweden  and 
the  Social  Insurance  Institution  in 
Finland). In all thre». Member States, 
unemployment insurance is run sep 
arately by the trade unions. 

In the Continental model of adminis 
tration,  the system  is fragmented  in 
a  number  of  semi-autonomous 
schemes  for  different  occupational 
groups. The administrative  structure 
is extremely varied and each country 
to  a large  extent  has a unique  con 
figuration,  reflecting its historical de 
velopment as well as socio-economic 
and institutional characteristics. 

The  contrasts  between  these  three 
models should not, however, be over 
stated. In all countries, social security 
institutions are relatively tightly con 
trolled  by government,  even  in  the 
seemingly  more  pluralistic  Con 
tinental systems. However, organisa 
tional  char-cteristics  are not totally 
devoid of significance. In the South 
ern European countries, for example, 
the  various  pro. .ssional  schemes 
have  proved  very  jealous  of  their 
autonomy  (however  small  this  is) 
and  have  recently  resisted  attempts 
by central government to unify  them 
with the larger schemes for purposes 
of financial  rationalisation. 

Health care 
All Member  States  have  mature 

.health  care  systems  providing 
benefits  in kind and services for the 
cure and prevention of illnesses and 
rehabilitation.  Virtually  everyone in 
the Union is covered and — as indi 
cated by the  1992 Eurobarometer on 
social  protection  —  most  of  them 
seem  relatively  happy  with  the 
quality of services they receive. 

To illustrate the way in which health 
care is organised in different  parts of 
the Union, a distinction is often made 
between 'national health services' and 
'health  insurance  systems'.  The for 
mer typically  provide care through a 
single universal scheme accessible to 
the  whole  population  and financed 
through  taxation;  the  latter  provide 
care through a number of social insur 
ance funds catering to different  occu 
pational  groups  and financed  mainly 
by contributions. The prototype of all 
European national health services was 
established  in the UK between 1946 
and  1948. Eight other Member States 
—  Ireland,  Denmark,  Sweden, 
Finland,  Italy,  Spain,  Portugal  and 
Greece — have followed  suit, estab 
lishing national systems. The other six 
countries  —  Germany,  France, 
B e l g i u m,  L u x e m b o u r g, 
the 
Netherlands  and Austria — have by 
contrast  maintained  and  developed 
their health insurance systems. 

A  better  understanding  of  the  dif 
ferences between these two models of 
health care provision, as well as of the 
most  significant  differences  within 
them,  requires  closer  inspection  of 
eligibility  rules,  sources  of  financing 
and  overall  organisation,  each  of 
which is examined in turn below. 

29-

Chapter 1 -  Systems of social protection in the Union 

Eligibility 

In  the  national  health  services  in  the 
UK  Denmark, Sweden,  Finland  and 
Italy  all  resident?  are  compulsoiily 
covered and are equally entitled to all 
benefits and services. The Irish service 
also covers all residents, but only the 
holders of means-tested medical cards 
(around  35%  of  the  population)  are 
entitled to the full range of benefits free 
of charge. In the three other countries 
with  national  health  services,  eligi 
bility rules are in a process  of transi 
tion.  In  Portugal,  all  residents  are 
entided  to public health care, but the 
national  health  service  as  such  only 
covers around 75% of the population. 
The others (mostly civil servants) re 
main  members  of traditional  occupa 
tional  insurance  schemes,  with 
different  rules  regarding  treatment 
conditions. A similar situation exists in 
Spain, where universal coverage was 
enacted in  1986 as an objective to be 
achieved in progressive steps. In 1989, 
beneficiaries  of public assistance pro 
grammes were brought into the health 
service,  which  covers  at  present 
around 93% of the population. There 
remains,  however,  a  special  system, 
with separate rules, for public servants 
who  may  opt  for  private  coverage. 
Moreover,  people  in  the  highest  in 
come groups are exempt from compul 
sory  insurance.  Finally,  in  Greece, 
eligibility  is  still  primarily  based  on 
occupational  and  family  status,  with 
significant  variations in conditions of 
treatment and the national health ser 
vice  (formally  established  in  1983) 
only covers those who are  not mem 
bers of an insurance fund. 

In  Germany,  Austria,  France, 
Belgium,  Luxembourg  and  the 
Netherlands,  eligibility  to  public 

health care primarily depends on em 
ployment  status. Typically,  those in 
employment  and  the  recipients  of 
cash benefits  are covered  by  one of 
the several health funds. Their family 
dependants  have,  in  turn,  a  derived 
right  to  the  same  coverage.  Those 
who slip through the social insurance 
net  are covered  by  social  assistance 
(which  subject  is to  means  testing). 
In these systems as well as in national 
health  service  ones, virtually  every 
one  is,  therefore,  covered  either  on 
the  basis  of  individual  or  derived 
rights or means-tested need. Only in 
Germany  and  in  the  Netherlands  is 
coverage  of  State  systems  signifi 
cantly  lower than  100%, largely be 
cause those  earning  above  a certain 
amount  (around  37,500 ECU  a year 
in the old Lander, 30,500 ECU a year 
in  the  new  and  27,500  ECU  in  the 
Netherlands)  have  no  obligation  to 
insure  with  State  schemes.  In  the 
Netherlands,  however,  there  is  a 
universal  scheme for  the reimburse 
ment of  'exceptional medical costs'. 

What distinguishes national health ser 
vices (typically the British, Scandina 
vian  and  Italian  ones)  from  health 
insurance  systems  with  respect  to 
coverage is more internal variations in 
eligibility  than  the  overall  scope. In 
deed, in the health insurance systems 
the different  funds  sometimes operate 
under  different  rules,  giving  rise  to 
various  differences  in  the  range  and 
types of service available, the margin 
of  consumer  choice,  the  payment  or 
reimbursement procedures, and so on. 
A marked example of this is the poorer 
provision for the self-employed  in the 
case of  'small  risks'  in  Belgium  and 
France (see Chapter 6). Moreover, in 
the insurance systems, those who are 
ehgible through social assistance may 

face  restrictions  on  the  range  of 
benefits  or  the  choice  of  providers 
open to them (as in France in the case 
of the assistance publique). 

Financing 

The  British  and  Scandinavian  na 
tional health  services are almost en 
tirely financed from taxation (though 
in the UK, a proportion of social con 
tributions  goes  to  help  finance  the 
service). In Ireland the major  source 
of  finance  is  also  general  taxation, 
though  a  health  contribution  of 
1.25% is levied on all earnings. 

In Southern Europe, a shift from con 
tributions to tax financing  was set as 
an objective under the reforms which 
established national services, but this 
has not yet been completed. In Italy 
and  Greece,  earmarked  health  con 
tributions are still levied on earnings. 
In  Spain  and  Portugal,  part  of  the 
overall  contribution  revenue is used 
to  finance  the  national  service  — 
most notably  the traditional  occupa 
tional  funds  which  still  exist.  In  all 
four  Southern  Member  States,  the 
share  of  expenditure  which  is  fin 
anced  from  taxes  has risen continu 
ously over the past decade. 

Health  contributions  (with  differing 
rates) are a primary source of  finance 
of  the  various  funds  operating  in 
Germany,  Austria,  France,  Belgium, 
Luxembourg  and  the  Netherlands, 
though in a number of these countries 
general taxation has also been used to 
cover the increasing gap between con 
tributory  receipts  from  contributions 
and expenditure. 

30-

Chapter 1 -  Systems of social protection in the Union 

Besides  general  taxation  and  ear 
marked contributions a third source of 
financing has been gaining importance 
over  the  past  decade,  namely 
user charges. In all countries, patients 
are  liable  to  pay  part  of  the  cost  of 
prescriptions.  In  Belgium,  France, 
Luxembourg,  Portugal  and  Sweden 
patients share part of the cost of medi 
cal  consultations  and  a  small  fee  is 
charged for hospital stays in Belgium, 
Germany,  France,  Luxembourg  and 
Finland.  Broad  exemptions  from 
charges  apply  in  most  countries  for 
special  illnesses and/or  economically 
disadvantaged groups. 

Organisation 

National health services and health in 
surance systems tend to be organised 
differently. Since the former are single, 
all-inclusive  schemes, their  organisa 
tions  are  typically  more  unitary  and 
homogeneous.  In  the  UK,  Ireland, 
Denmark, Sweden, Finland and Italy, 
general policies are determined by the 
Ministry  of  Health,  while  responsi 
bility  for  the  implementation  of 
policies  and  the  actual  provision  of 
care  hes  with  lower tiers of  govern 
ment (regions, municipalities  or local 
health  districts  or units), which  have 
varying degrees of autonomy. Again, 
Spain,  Portugal  and  Greece  are  in  a 
process  of  transition.  Parallel  to  the 
new,  unitary  and  decentralised  na 
tional  health  service  administration, 
the old funds  continue to operate na 
tionwide  (in a few regions in Spain) on 
a sectoral basis and still occupy a very 
prominent position in Greece. 

Health  insurance  systems  tend  to  be 
organised both sectorally and territor 
ially.  Health  Ministries  have  overall 

policy responsibility, though some re 
sponsibility hes with regional or local 
governments. The various health funds 
enjoy,  however,  a  certain  organisa 
tional  autonomy  (especially  in 
Germany and the Netherlands) in the 
actual provision ofcare and sometimes 
over  financing,  as  in  Germany,  for 
example. The funds are also organised 
on a territorial basis and are governed 
by boards in which consumer interests 
are directly represented. As in the case 
of income maintenance schemes, each 
country has its own individual organi 
sational structure, shaped to a signifi 
cant extent by history. In Belgium and 
the  Netherlands,  for  example,  the 
health  funds  still retain  their  original 
ideological  and/or  religious  denomi 
nation — even though many members 
chose  between  them  purely  on com 
mercial grounds. 

Other  relevant  organisational  aspects 
of health care systems concern the re 
lationship  between financing institu 
tions  and  providers  (most  notably 
health  professionals),  the  specific 
method of operation of the various le 
vels of care (eg hospitals), the public/ 
private mix, overall budgetary proce 
dures,  and  so  on.  These  aspects  are 
important  from  the  point  of  view  of 
cost  containment  and  are  currently 
under  reform  in many  countries  (see 
Chapter 5 of this Report). 

economic or psycho-physical condi 
tions  (disabled  or  drug  addicts,  for 
example) and the elderly. Social ser 
vices  to  these  people  may  be  pro 
vided  in  relatively  standardised 
forms  (day  care  centres  for  infants 
and  children  or  residential  care  for 
the elderly, for example) or in a more 
personalised  way  (such  as  home 
care).  These  kinds  of  service  have 
grown in importance in recent years 
and  have  proved  themselves  to  be 
potentially flexible means of combat 
ing various forms of social exclusion. 

The  responsibility  for  providing  so 
cial  services  lies  in  most  countries 
with  regional  and/or  local  govern 
ments.  Only  in  Spain  is  this  sector 
managed  centrally  by  a national  or 
ganisation (INERSO), though the re 
gional  authorities  have  acquired 
some autonomy in this area as well. 
In the Scandinavian Member States, 
most  services  are  provided  directly 
by public authorities. In Continental 
countries there is a more varied mix 
between  public  sector  direct  provi 
sion and subsidised private or volun 
tary (third sector) provision. General 
taxation is the main source of financ 
ing throughout the Union, though in 
some  countries  small  fees  are 
charged for certain services. 

Social services 

Besides  income  maintenance  and 
health  care,  social  protection  in 
cludes in all countries a wide variety 
of other services aimed at taking care 
of  special  needs.  There  are  three 
main  target  groups:  children  and 
young  people,  adults  in  difficult 

One, four or 
fifteen models? 
What  pattern  emerges  from  a 

close  examination  of  social 
protection  systems in the Union? At 
the  cost  of  some  simplification,  it 
can  be  said  that  the  Member  States 
tend  to  cluster  into  four  distinct 
'geo-social'  groups,  sharing  similar 

31 

partners play a prominent role in in 
come maintenance, but no longer in 
health care and for the latter, general 
taxation  is  gradually  replacing  con 
tributions as the source of financing. 

The  four-way  partition  presented 
here should not be interpreted rigidly. 
As noted at the outset, with the eyes 
of an outside observer the similarities 
across  the  four  groups  would  prob 
ably  appear  greater  than  their  dif 
ferences, while a detailed inspection 
would  suggest  treating  each  system 
as a unique configuration.  Classifica 
tions, moreover, tend by their nature 
to be static artefacts. As the following 
chapters will show, social protection 
systems in the Union have been grad 
ually changing in the past few years, 
often  in  response  to  common  chal 
lenges, and  in the long  run,  adapta 
tions  and  change may  well  result in 
the  social  geography  of  Europe  be 
redesigned in a similar way. 

Chapter 1 ~ Systems of social protection in the Union 

traditions  and  institutional  charac 
teristics. 

public authorities. The social partners 
are only marginally involved in policy 
determination or management. 

The  first  group  comprises  the 
Scandinavian  countries:  Denmark, 
Finland  and  Sweden.  Social  protec 
tion is here a citizen's right, coverage 
is  fully  universal  (even  as  regards 
sickness and maternity cash  benefits 
in  Sweden  and  Finland)  and  every 
body  is  entitled  to  the  same  'basic 
amount'  when a 'risk' arises, though 
the gainfully  employed receive addi 
tional  benefits  through  mandatory 
occupational schemes. General taxa 
tion plays a predominant (though not 
exclusive)  role  in  financing.  The 
various functions of social protection 
are  closely  integrated  within  a uni 
tary  administrative  framework  and 
state authorities (centrally or locally) 
are  directly  responsible  for  service 
provision. The only aspect which re 
mains  somewhat  separate  from  the 
public  core  of  social  protection  is 
unemployment  insurance,  which  is 
voluntary  and managed by the trade 
unions  (though  it  is  heavily  subsi 
dised by the State). 

The second  group comprises the UK 
and  Ireland.  In  the  former  also,  the 
coverage of social protection is univer 
sal and in the latter almost  so  (some 
gaps  exist  for  those at the margin  or 
outside the labour market and the Irish 
national  health  service  provides  full 
eligibility  only  on  the basis  of  econ 
omic  need).  The  basic  amounts  of 
benefits are more modest than in Scan 
dinavia  and  there  is  a  wider  use  of 
means-testing. Health care is  financed 
through general taxation, but contribu 
tions  play  an  important  role  in  the 
financing  of  cash  benefits.  As  in 
Scandinavia, there is an integrated ad 
ministrative  framework  centred  on 

The  third  group  includes  Germany, 
France,  the  Benelux  countries  and 
Austria.  Here  the  'Bismarckian' 
tradition  of  coverage  through  em 
ployment or family status is still evi 
dent  in  both  income  maintenance 
and  health  care  systems.  Only  the 
Netherlands  has  partially  deviated 
from  this  tradition  by  establishing 
some universal  schemes. The  insur 
ance  principle  still  underlies  the 
determination  of  benefits  (mostly 
earnings  related)  and  the method of 
financing (mostly based on contribu 
tions)  —  with  distinct  regulations 
often  applying  to  different  occupa 
tional  groups.  Though  extensive, 
social  insurance  nevertheless  still 
leaves  some  gaps  in  protection, 
which  are  filled  by  the  (highly  de 
veloped)  social  assistance  scheme. 
Professional  funds  play a prominent 
administrative role, with high invol 
vement of the social partners. 

The  fourth  group  comprises  Italy, 
Spain, Portugal and Greece. In these 
countries, the institutional  design of 
social  protection  systems  shares  a 
similarly 'mixed' pattern. On the one 
hand,  there  are  highly  fragme  :ed 
and  'Bismarckian'  income mainten 
ance  systems,  with  very  generous 
pension  formulas,  but  no  national 
minimum  income  scheme,  so  that 
gaps  in  coverage  are  greater  than 
elsewhere in the Union. On the other 
hand,  these  countries  have  estab 
lished  national  health  services  with 
universal and standardised  coverage 
(though  this is not yet fully  realised 
in  Spain,  Portugal  and  Greece). 
Occupational  funds  and  the  social 

-32 

Chapter 2 -  Adapting to change: recent reforms and key developments 

Chapter 2  Adapting to change: recent 

reforms and key developments 

Throughout the European Union, 

systems  of  social  protection 
have  been  a  focus  of  increasing 
policy  concern  over  recent  years, 
irrespective  of  their  precise  charac 
teristics. In all Member States, even 
in countries  in the South  of  Europe 
where their present form  is of much 
more recent origin, the systems pain 
stakingly developed over the years to 
provide an extensive level of support 
and  assistance  have  faced  growing 
pressure  for  change  and  even  re 
trenchment. Although in most coun 
tries  this  pressure  has  stopped  well 
short  of  threatening  the principle of 
universal support for those in need on 
which  European  social  protection 
systems  have  been  constructed,  the 
great majority of changes introduced 
in Member  States  over  the past  few 
years  have  been  aimed  at  reducing 
expenditure.  Moreover,  active  con 
sideration is being given in a number 
of countries  to wide-ranging  reform 
of the way in which systems operate 
—  their  coverage,  the  level  of 
benefits  paid and the sources of fin 
ance —  with  the common  objective 
of  curbing  costs,  in  many  cases  by 
targeting  what  is  spent  more  nar 
rowly on those most in need. 

nature of demands on them or being 
extended to cope with new needs — 
most  notably  in  Germany  with  the 
introduction  of  a  special  nursing 
allowance for those engaged  in  full-
time caring. 

This  increasing  emphasis  on  cost 
containment  stems  from  a  range of 
economic,  social  and  demographic 
factors, which affect most parts of the 
Union and which  share the common 
characteristic of imposing increasing 
demands on systems of social protec 
tion and/or tightening constraints on 
the  funds  available  for  their  financ 
ing.  While  individually  each  seems 
to  be  manageable,  in  combination 
they  present  a formidable  challenge 
to the systems now in place. 

None of the factors are new. All have 
been evident for  some time and sys 
tems  have  already  adapted  to  some 
extent in response to them. Indeed, in 
all parts of the Union, systems which 
differ  in detail in the way they  func 
tion  have,  in  general,  proved  very 
effective  in maintaining social cohe 
sion and preventing widespread pov 
erty in the face  of the economic and 
other upheavals of the past 20 years. 

At the same time, there are examples 
of systems being modified to respond 
more  effectively  to  the  changing 

The  two  major  factors  which  both 
represent  serious  challenges  to  the 
systems now in place are the ageing 

of  the  Union's  population  resulting 
from  declining  birth  rates  and  in 
creased life  expectancy  and the per 
sistence  of  high  unemployment 
combined  with the depressed rate of 
long-term economic growth which it 
reflects.  The  former  implies  rising 
expenditure  not  only  on  retirement 
pensions  and  an  increasing  share of 
income  going  to  people  who  no 
longer  contribute  directly  to  its 
generation  but  also  on  health  and 
other  forms  of  care.  The  latter  im 
plies, on the one hand, high levels of 
expenditure  on  income  support  for 
those  not  able  to  find  a job  and  on 
active  labour  market  measures  for 
improving  their  employability  and 
preventing their social exclusion, on 
the  other,  reduced  income for  fund 
ing expenditure because of the smal 
ler numbers in work. This latter effect 
has been reinforced by increased par 
ticipation in education by the young 
coupled with early retirement among 
older people. 

While high unemployment has repre 
sented a serious and growing problem 
in  most  parts  of  the  Union  since the 
mid-1970s, especially  because of the 
significant increase in its average dur 
ation which has occurred at the same 
time, the ageing of the population has 
so  far  had  only  a  relatively  modest 
effect  on the need  for  expenditure as 

-33-

Chapter 2 -  Adapting to change: recent reforms and key developments 

compared  with  what  hes  ahead  as 
those who are part of the post-war baby 
boom generation reach retirement age. 
Although the full impact of this will not 
be felt until 15-20 years time, the pen 
sion  rights  which  those  concerned 
have  accumulated  is  a  source  of  in 
creasing alarm in many countries as the 
time  when  they  will  be  exercised 
draws  closer.  How far  such  alarm  is 
warranted  and how far  it justifies  the 
cutbacks  in  prospective  expenditure 
which  are  now  being  made  or  pro 
posed are matters for debate. There is 
no question,  however,  that  the  strain 
imposed on the European  economies 
and societies by growing numbers of 
people in retirement will be very much 
more  difficult  to  bear  if  long-term 
economic  growth  remains  depressed 
and unemployment remains high. 

A third  factor  threatening  to push up 
expenditure, which has been a no less 
important focus  of policy  concern, is 
the  rising  cost  of  health  care  which 
stems  not  only  from  the  greatly  in 
creased numbers of people living to an 
old  age  and,  therefore,  imposing 
greater  demands  on  health  systems, 
but also from  advances in  techniques 
and know-how which make it possible 
to treat  incurable illnesses  as  well as 
from  a  marked  tendency  for  the de 
mand  for  health  care  to  increase  as 
income rises. Although by  no means 
all  new  treatments  involve  increased 
costs — micro-surgery  which greatly 
reduces  the  time  it  takes  to  recover 
from  an operation being a major case 
in point — a significant proportion do 
and by increasing life expectancy add 
to the costs of care. 

A fourth factor is the increasing partici 
pation of women in the labour market 
which has been a consistent trend in the 

more developed parts of the Union for 
the past 20-30 years, but which dates 
back  only  to  the  1980s  in  the  less 
(socially  as  well  as  economically) 
developed parts (in Greece, Spain and 
Italy, the activity rate for women of 25 
to 49 was still below 60% in 1994 and 
in  Ireland,  below  55%).  Although 
there  are  recent  signs  of  the  upward 
trend coming to an end in the Scandi 
navian Member States, where activity 
rates of  women have reached  a level 
only  slightly  below  that  of  men  (in 
Denmark, 84% of women aged 25-49 
were economically  active in  1994), it 
still almost certainly has some way to 
go in other countries. There will, there 
fore, continue to be a growing need for 
the  provision  of  support  facilities 
which enable women to pursue work 
ing careers while bringing up children. 
The  same tendency,  moreover, gives 
rise  to pressure for the development of 
arrangements within social protection 
systems  which  avoid  penalising 
women  for  interrupting  working 
' careers to take care of children. 

A fifth factor  is the changing  struc 
ture of the traditional family unit and 
the  growth  in  importance  of  'atypi 
cal' households, such as lone parents, 
divorcees  or  cohabiting  couples, 
which  also  involve  a  need  for  the 
modification  and extension of social 
protection  systems  to  provide  spe 
cific support as well as for the devel 
opment  of  individual  in  place  of 
derived  rights  for  the  women  con 
cerned. 

A sixth factor  is the increased  open 
ness of  Union economies  which has 
led to the intensification  of competi 
tion  and  the  growing  necessity  to 
maintain  competitiveness  on  world 
markets. This, in turn, has restricted 

the  scope  for  independent  action  in 
Member States and imposed  greater 
pressure to contain production costs 
and  to  avoid  policies  which  could 
push these up, including, in particu 
lar,  the  growth  of  social  protection 
expenditure  and  the  higher  charges 
which  might  fall  on businesses  as a 
result. 

A  seventh  factor  is  the  significant 
growth  in the number of  people de 
pendent  on  social  protection  which 
has  resulted  from  the  developments 
listed  above,  particularly  from  the 
emergence  of  long-term  unemploy 
ment as a major feature of the labour 
market  and  the  significant  numbers 
who  stand  little chance of finding  a 
job.  Such  a  growth  in  dependency, 
and  the  financial  burden  on  the  re 
duced numbers who have to finance 
the associated expenditure, threatens 
to undermine popular support for the 
maintenance  of  systems  of  social 
protection  in their  present  form,  es 
pecially  in  the  context  of  slower 
growth  in  real  incomes.  Partly  as a 
response  to  this,  governments  have 
sought to shift  the balance of policy 
from  passive  measures  of  income 
support to active measures of getting 
people  into  work  and  reduce  their 
dependency on social benefits. In ad 
dition, they have intensified efforts to 
detect fraud and prevent abuse of the 
system  in order to boost public con 
fidence  in existing  arrangements, as 
well as to curb expenditure, and have 
begun  to  look  more  closely  at  the 
level of benefits paid in relation to the 
disposable  income  of those  in work 
who are providing the finance. 

These  factors  have by  no means  af 
fected  Member  States  to  the  same 
extent  —  the  ageing  process,  for 

-34-

Chapter 2 ~ Adapting to change: recent reforms and key developments 

example, is taking place at  differing 
rates  across  the  Union,  as  shown 
below, and unemployment  has risen 
to much higher levels in some places 
than  others  —  but  all  have  had  to 
respond  in some degree to the chal 
lenges  which  they  pose  and  all will 
have to continue to do so in the years 
ahead. Moreover, in Southern coun 
tries, governments  have had to cope 
with  significant  growth  of  expendi 
ture inherent  in the  development  of 
systems  comparable  to  those  in  the 
North  of  the  Union  as  well  as  the 
effects  of these factors per  se. 

Common  reactions  on  the  expendi 
ture side have so far  taken the  form 
of: 

• 

• 

• 

tightening  regulations  and  qual 
ifying  conditions  governing  en 
titlement  to  income  support  and 
restricting  eligibility  for  benefit 
to  the  more  'deserving'  cases 
more than cutting rates of benefit 
directly; 

increased  targeting  as  part  of 
this,  by  greater  use  of  means-
testing, by linking the amount of 
benefit  received  to  income  and 
by taxing benefits; 

increased privatisation of a num 
ber  of  aspects  of  the  system,  in 
cluding  not  only  the  contracting 
of  the  provision  of  services  to 
firms  in  the  private  sector  but 
also  giving  more  responsibility 
to individuals to provide for their 
own  protection  against risks, es 
pecially  so  far  as  pensions  and 
health care are concerned; 

noted  above, in order  to  prevent 
long-term  dependency  on 
in 
come support. 

On  the  financing  side,  the  wide 
spread reaction has been to: 

• 

reduce  social  charges  falling  on 
businesses,  particularly  in  the 
form  of  non-wage  labour  costs, 
in  order  to  prevent  these  from 
both  eroding  international  com 
petitiveness  and  deterring  em 
ployment 
to 
directly 
stimulate job creation; 

and 

•  seek alternative forms of  funding 
social  protection 
in  order  to 
spread  the  burden  more  widely 
and  prevent  it being  overly con 
centrated  on  businesses  and 
those in employment. 

Outline 
In what follows, the main  specific 

measures  implemented  in  Mem 
ber  States  over  the  recent  past  are 
examined and compared, on both the 
expenditure  and  financing  side, 
together  with  the  proposals  for 
change  which  are  at  present  under 
active consideration. In addition, the 
more  general  issues  to  which  these 
changes give rise and their potential 
consequences for those at risk as well 
as for public sector finances  are dis 
cussed  in the light of the economic, 
social  and  demographic  develop 
ments taking place, which were listed 
above. 

developments,  especially  those  in 
prospect,  concentrating  on  changes 
relating to retirement pensions which 
are a major item of expenditure in all 
countries. In addition, it considers the 
underlying  scale  of  the  impending 
demographic  problem  with  which 
pensions  systems  have  to  contend 
and  attempts  to  put  these  into  per 
spective by relating them to the diffi 
culties  imposed  by  the  high  and 
rising  levels  of  unemployment  ex 
perienced over the past 20 years. 

Secondly,  it  examines  the  move to 
wards more targeting and the greater 
concentration  of  spending  on  those 
most in need, including, in particular, 
the increased  deployment  of means-
testing and its potential drawbacks as 
well as advantages. 

Thirdly, it considers the shift towards 
more active social policies in the con 
text  of  both  high  unemployment 
generally  and high long-term  unem 
ployment  more  specifically  and  the 
cost  implications,  as  well  as  the in 
creasing focus on the potential disin 
centive  effects  of  overly-generous 
income maintenance schemes. 

Fourthly, the major developments in 
sources  of  finance  are  examined 
together with the implications of any 
radical  restructuring  of  funding 
towards  more  reliance  on  general 
taxation  and  less  on  contributions, 
whether  by  employers  or  by  em 
ployees. 

• 

increased  emphasis  on  active 
rather  than  passive  measures, as 

More  specifically,  the  analysis  fo 
cuses,  first,  on  the  response  of 
Member  States  to  demographic 

Finally,  the  various  moves  to  pri 
vatise  particular  aspects  of  social 
protection are considered. 

-35 

Chapter 2 -  Adapting to change: recent reforms and key developments 

Responses to 
demographic and 
economic pressures 
In  most  Member  States,  the  em 

phasis of policy has switched dur 
ing  the  first  half  of  the  1990s  from 
active  encouragement  of  earlier  re 
tirement — including, in some cases, 
reducing  pensionable  age as well as 
increasing  income support  for  those 
no  longer  working  —  to  containing 
the  growth  of  expenditure  on  pen 
sions.  This  has  been  motivated  by 
two  principal  concerns  which  have 
reinforced  each  other:  the  growing 
numbers  opting to retire  early  as re 
dundancies rose during the recession 
and  jobs  became  scarcer  and  the 
prospective escalation in the propor 
tion  of  the  population  above  retire 
ment age from around 2010 onwards 
as  the  post-war  baby  boom  gener 
ation reaches 65, as described below. 
The  changes  introduced  have  taken 
several  different  forms  and  in  some 
cases have had other aims in view — 
in particular, equalising the treatment 
of  men  and  women  —  but  all  have 
had  the  effect  of  reducing  prospec 
tively the amount transferred  in pen 
sions. 

.  Increases in 
the age of retirement 

In  five  Member  States,  the  official 
age of retirement has either been in 
creased  or  is  in  the  process  of  so 
being.  In  Germany,  the  retirement 
age  will  be  progressively  increased 
from  63 for  men and  60 for  women 
to 65 for both between the years 2001 
and  2012,  while  those  opting  for 

early retirement will have their pen 
sion reduced  by  3.6%  for  each  year 
before the official age that they leave 
work.  In  Greece,  the  age  of  retire 
ment  was  also  raised  for  women  as 
well as  men to 65 as part  of  the re 
forms introduced in 1992 to make the 
pension  system  more  coherent.  In 
Portugal,  the  retirement  age  for 
women  is  in  the  process  of  being 
raised from  62 to 65 (by six months 
each year beginning in January 1994) 
to  match  that  for  men, while  in  the 
UK, it is planned to bring the retire 
ment  age for  women  (now  60) pro 
gressively into line with that for men 
over the period 2010 to 2020 (though 
only  for  those  aged  under  44  in 
1995). Similarly,  in Finland,  the re 
tirement  age  for  public  sector  em 
ployees  has been increased  from  63 
to 65 to match that of those working 
in the private sector. In Italy, where 
the retirement age is now 62 for men 
and  57  for  women,  it  is  planned  to 
move progessively by 2008 to a flex 
ible  situation  where  both  men  and 
women can retire any time between 
57 and 65. 

In  a  sixth  Member  State,  France, 
while the age of retirement has been 
kept  at  60,  the  number  of  years  of 
contributions  required  for  entitle 
ment to a full pension has been raised 
from  37V2 to 40, which, in practice, 
has much the same effect  as the pel 
icy  followed  in  the  five  countries 
listed above, especially for those re 
maining in education or training into 
their 20s. (Though this is, therefore, 
hkely to mean that such people have 
to  postpone  retirement  until  a  later 
age than  those starting  work earlier, 
at  the  same  time,  they  will  tend  to 
have  higher  than  average  incomes, 
giving them more choice about when 

to  retire  as well  as  more  possibility 
for remaining in work to a later age.) 

Although  these  changes  will  tend  to 
reduce social protection expenditure in 
future  years,  it  does  not  necessarily 
follow  that the numbers in retirement 
will  diminish.  Despite  the  general 
change in policy away from  encoura 
ging  early  retirement,  the  numbers 
leaving the labour force before reach 
ing  pensionable  age  have  risen  at  a 
higher rate since 1990 than before (see 
below), largely because of the increase 
in redundancies and the difficulties  of 
finding  alternative  employment  ex 
perienced  by  those  losing  their jobs 
during the recession  years. The main 
effect,  therefore,  might  simply  be  to 
shift  the  burden  of  support  from  the 
state to the individual. 

Other measures 
affecting pensions 

In  addition  to  these changes,  which 
effectively  serve  to  diminish  the 
numbers in receipt of pensions, espe 
cially  in  future  years  when  demo 
graphic trends begin to bite, there has 
been  a  widespread  tendency  to  re 
duce the scale of benefits paid, taking 
the  form,  in  particular,  of  changing 
the basis on which pensions are based 
and/or uprated. 

In  France,  from  1994, the  basis  for 
determining  the  amount  of  pension 
receivable has been changed from the 
earnings  received  over  the  10 years 
of  employment  when  these  were 
highest  to  the  best  25  years,  while 
both reference  earnings and the pen 
sions  paid  are  now  revalued  or  up 
rated  on the basis of  price  increases 
rather  than  wage  rises  (see  box  on 

36-

Chapter 2 -Adapting to change: recent reforms and key developments 

pension  reforms).  Similarly,  in 
Portugal,  from  the  same  year,  the 
basis ofcalculation has been changed 
from  earnings in the best five of  the 
last 10 years to those in the best 10 of 
the  past  15,  and  the  minimum  con 
tributions' requirement to qualify  for 
any pension was increased from  120 
months to 15 years. 

At  the  same  time,  however,  in 
Portugal,  this  effective  reduction  in 
the amount  payable  has been  offset 
by  indexing  the earnings  serving  as 
the basis for calculation  in line with 
price rises rather than not at; all, while 
pensions at the lower end of the scale 
have been increased significantly, as 
they  were  in  Greece  in  1992.  Such 
changes demonstrate that not all the 
reforms  undertaken have been moti 
vated by the aim of reducing expen 
diture — in some cases, especially in 
Member  States  where  systems  are 
still  being  developed,  they  have 
served to meet genuine needs and to 
improve the extent  of  social protec 
tion. 

In  Finland,  on  the other  hand,  a re 
duction  in  expenditure  has  been 
achieved  more  straightforwardly  by 
lowering  the  maximum  pension  re 
ceivable by public sector employees 
from  65%  of  previous  earnings  to 
60%. 

A  similar  effect  has  resulted  in 
Denmark jyid the Netherlands by tak 
ing  more  account  of  additional  in 
come received by pensioners or their 
partners  in  the determination  of  the 
amount payable in the form either of 
basic  pension  or  supplementary 
allowances  as well  as, in  Denmark, 
by  making  pensions  and  minimum 
income  guarantees  taxable  (though 

with  compensatory  increases  in 
the  sum  received)  and,  in  the 
Netherlands,  by  restricting  entitle-
ment to higher rate basic pensions. 

In a number of cases, moreover, such 
as  in  Italy  and  Sweden  (for  sup 
plementary  pensions), changes  have 
beçn introduced  with the aim of en 
suring that sufficient  funds are avail 
able to meet future pension liabilities 
by basing the amount of pension re 
ceived more closely on contributions 
paid rather than on past income. At 
tempts to shift responsibility for pro 
viding  pensions  more  on  to  the 
individual  and  away  from  the  State 
and  to encourage  the growth  of pri 
vate  insurance  schemes  for  sup 
plementary  pensions  —  which  has 
occurred in the UK, in particular —-
are partly motivated by the same ob 
jective though it is not necessarily the 
majn  reason  behind  them.  Such 
moves  represent  a  shift  away  from 
the  prevailing  'pay-as-you-go'  sys 
tem under which present generations 
in work finance those in retirement to 
one where the contributions paid by, 
or on behalf of, those now in employ 
ment are earmarked for the pensions 
they will receive when they retire. 

In  practice,  however,  whatever  the 
formal  arrangements  adopted,  it  is 
debatable how far the effective  posi 
tion is altered and prospective  future 
funding problems alleviated. There is 
no guarantee that the future stream of 
(national) income out of which pay 
ment has effectively  to be made will 
be  expanded  to  the  extent  required 
simply  by  increasing  the  amount of 
forced  saving.  Unless  this  leads  to 
more savings overall which is trans 
lated  into  higher  growth  of  invest 
ment or to an increased rate of return 

— both of which will depend on the 
counterpart changes  in the company 
sector  profits  as  savings  rise  in  the 
personal  sector (ie there is no direct 
link between  a rise in  personal  sav 
ings and an increase in investment or 
increased  efficiency  with  which 
loanable funds  are deployed) —  the 
rate of economic growth and the level 
of future  GI?P out of which  transfers 
have  to  be  made  will  remain  the 
same.  Indeed,  if  it  leads  to  lower 
economic  growth  —  which,  for 
example, might be the case if an in 
creased  proportion  of  investment 
funds  are channelled  abroad — then 
although  pension  funds  might  be in 
balance  and  capable  of  meeting  lia 
bilities,  those  in  employment  might 
nevertheless, be  in  a  worse  position 
than if they were responsible directly 
for financing  pensions. 

The uncertainty of the effect  of mov 
ing over to a fully-funded  system per 
haps  explains  why  the  impending 
expansion of the relative numbers of 
retirement pensioners has not led to a 
more  widespread  move  across  the 
Union  to  restructure  pensions 
schemes  more  radically  than  has  so 
far occurred. At the same time, there 
is evidence of a general trend across 
the  Union,  especially  in  respect  of 
supplementary  pension  schemes,  to 
shift  towards systems where it is the 
amount  of  contributions  paid  which 
is the key determinant of the value of 
pension received rather than earnings 
when in work, however computed. 

Finally,  when  tne  changes  which 
have  occurred  have  been  predomi 
nantly been aimed at reducing expen 
diture  and  increasing  the  financial 
viability  of  pension  schemes,  men 
tion  should  be  made  of  the  recent 

37-

Chapter 2 -  Adapting to change: recent reforms and key developments 

Reforms of retirement pensions 

France 

Structural  reforms  of  the  pension  insurance  system 
were introduced  in  1993 with  the aim in part of bal 
ancing finance and expenditure. Changes were made 
in the method of calculating the average annual salary 
taken as reference  for computing the amount of pen 
sion payable as well as in the length of the period over 
which contributions need to be paid for entitlement to 
a  full  pension. The period  for  determining  the refer 
ence salary, which was previously the  10 years when 
salary was highest, is to be increased every year by one 
year up until 2008 when it will be the best 25 years. At 
the  same  time,  the  period  over  which  contributions 
have to be paid for the person concerned to be entitled 
to  a  pension  equal  to  the  maximum  of  50% of  the 
reference  salary is to be increased progressively from 
150 quarters to  160 (40 years) by 2003. For each year 
by  which  the  contributions  record  falls  below  40, 
benefit  is  reduced  by  5%  for  each  missing  year  of 
contributions if  a person  retires before  65,  thereafter 
the reduction in the rate payable is based on age. For 
particular  categories  (such  as  employees  with  50% 
incapacity, manual workers with 3 children, veterans 
or war victims), the full rate is payable irrespective of 
the number of years of contributions. 

Italy 

In  Italy, where  there  has  been  a particularly  marked 
growth of expenditure on pensions over the past two 
decades owing to a low retirement age and high benefit 
rates,  a  first  pension  reform  was  introduced  in 
1992/1993, raising the age of retirement and restricting 
access to 'seniority' pensions (claimable after 35 years 
of contributions, or 20 in the public sector, regardless 
of age). In the Summer of 1995, a new pension bill was 
approved,  phasing  in  a system  of  flexible  retirement 
under  which  by  2008  both  men  and  women  will  be 
allowed to retire between  57 and 65. The same rules 
will apply  to all occupational categories — a signifi 
cant change, given the marked disparities in the pres 
ent  system.  The  most 
important  modification, 
however, concerns the basis of calculation of  benefits 
which  will be no longer be related to earnings but to 
contributions. The total  amount of contributions paid 
during  working  life  will be divided by a  'conversion 
coefficient'  ranging from 4.719% (at 57) to 6.13% (at 
65). This coefficient  will be reviewed every ten years 

-38-

and potentially adjusted in line with demographic and 
economic  developments.  The  rate  of  contribution 
payable is reviewed annually on the basis of changes 
in GDP aver a five-year period. The pension itself will 
be inflation-proofed  and a state-financed social allow 
ance will continue to be paid to those not eligible  for 
a contributory benefit  The system will remain pay-as-
you-go but actuarial criteria will in future govern the 
determination  of benefits. In addition to the *first pil 
lar* contributory pension, the development of 'second 
pillar*  voluntary  supplementary pensions will be en 
couraged. 

Sweden 

The  Swedish  Parliament  decided  on  principles  for 
reforming  the old-age pension  system in  1994. Prior 
to this, it provided  a universal flat-rate pension (with 
means-tested supplements) and a national supplemen 
tary pension (ATP) financed by contributions but the 
amount of which  was related  to earnings. Under the 
new  system,  there  will  be  an  integrated  scheme  of 
earnings-related  pensions,  linking  benefits  more  di-
recdy with contributions. The pension received will be 
a function  of total contributions paid during a person's 
working life (adjusted by a wage index), which will be 
divided by a factor to determine the annual pension at 
the age of retirement. This factor will be the same for 
everybody in an age group but may vary between age 
groups  depending  on  average  life  expectancy.  The 
amount of pension in the first year of retirement will 
then be adjusted  according to both price changes and 
the  real  growth  in  the economy.  The  pay-as-you-go 
system will be retained, but will be supplemented by 
elements  of  an  individually  funded  pension  entitle 
ment, under which 2% of the 18.5% pension contribu 
tion will be saved in a premium reserve system and on 
retirement, the individual will receive their saved capi 
tal and the yield accrued. Although this new  'defined 
contribution' (and partially funded)  formula will con 
stitute the central pillar of the reformed  system, basic 
protection, in the form of a state financed guaranteed 
pension, will continue to be provided to those unable 
to  mature  contributory  benefits.  In  addition,  supple 
ments will also be paid to those who only mature a low 
contributory  pension.  Voluntary  occupational  pen 
sions (the 'third pillar') will continue to exist The new 
system will be introduced gradually and the new rules 
will apply in full  only to those bom in  1954 or after. 

reduction  in the rate of  contribution 
for  retirement  pensions  in  Germany 
(from  19.2% to  18.6% of  earnings) 
which  would  seem  to  demonstrate 
that  problems  of  funding  pensions 
are  not  universally  becoming  more 
severe (though in part this might re 
flect  the effects  of recent  substantial 
immigration  on  the  German  work 
force and, therefore, on those making 
contributions).  Recent  studies  sug 
gest, however, that even in Germany, 
funding  problems he ahead. 

The effect of changes 
on men and women 

One aspect of the changes in the basis 
of  determining  pension  entitlement 
concerns  the  impact  on  women  in 
relation to men. Because women are 
much  more likely  to be  involved  in 
taking  care  of  children  or  invalid 
relatives  than  men,  they  are,  there 
fore, more hkely to need to interrupt 
periods of employment. This tends to 
make it more difficult  for  women to 
meet  the  qualifying  conditions  for 
receipt of a full pension, a fact recog 
nised in the regulations  in a number 
of Member  States,  where  either  the 
number  of  years  of  contributions  is 
lower for women than for men (as in 
Belgium or the UK — five years less 
in both cases) or some  allowance.is 
made for years of caring in the calcu 
lation  of  the  contributions'  record 
(though not necessarily  a full  allow 
ance — see Chapter 7 below for de 
tails).  In  the  UK,  this  allowance  is 
planned  to  be  extended  to  the  state 
supplementary  pension  scheme  to 
compensate  in  some  degree  for  the 
increase in the retirement age, while 
in Ireland a similar allowance (in this 
case,  enabling  those  concerned  to 

Chapter 2 -  Adapting to change: recent reforms and key developments 

exempt up to 20 years of caring from 
their contributions record) was intro 
duced from  April  1994 in respect of 
people caring for disabled or invalid 
dependants  and  children  below 
school age. 

At the same time, eligibility for survi 
vors'  pensions,  which  tend  to  affect 
women more than men, have recently 
been extended in Austria and Portugal. 

The potential discriminatory effect of 
pension  regulations,  however,  also 
applies  to  the  earnings  used  in  the 
computation of pensions. Because of 
women having to take more time off 
work than men, extending the period 
of reference over which the earnings 
basis  is  calculated,  as  in  France  or 
Portugal, is liable to penalise women 
more than men  since the  cumulated 

earnings  in question  are likely  to be 
lowered to a greater extent. 

The result of the changes introduced 
or planned  in Member  States has in 
general  been  to  make  pension  sys 
tems  more  similar,  ie  towards  con 
vergence  rather  than  divergence. 
Thus  at the beginning  of  1995, in 7 
Member States, the age of retirement 
for men was 65, in another, Belgium, 
it  was  between  60  and  65  and  in 
Germany, it is in the process of being 
raised  to  65,  leaving  only  France 
(lower at 60), Denmark (higher at 67) 
and,  prospectively,  Italy  (where  it 
will  be  between  57  and  65)  with  a 
different  age. At  the  same time, the 
retirement  age  for  women  was  also 
65  in  four  Member  States  (and  be 
tween 60 and 65 in Belgium) and will 
be  increased  to  65  in  the  future  in 
Germany,  Greece,  Portugal  and  the 

Retirement ages and number of years of 
contributions required for full pension by sex  in 
Member States, January  1995 
Retirement age 

Years of contributions 

h 

70 

60 

50 

40 

30 

20 

10 

•  Years of contributions  men 

•  Retirement  age  men 

•  Years of contributions women 

•  Retirement  age  women 

mim™ 

IRU 

GR 

NL 

P 

E 

L 

F 

! 

UK 

B  • 

DK 

O years of contributions  not specified, DK & NL number of years  of  residence  required 

70 

60 

50 

40 

30 

20 

10 

39 

Chapter 2-  Adapting to change: recent reforms and key developments 

5 

Population 65+ in relation to population  15-64 in 
the Union, 1970-2025 (mean projection) 

% population 15-64 

50  r 

6 

Population 65+ in relation to population  15-64 in 
Member States,  1995, 2015 and 2025 (mean 
projection) 
% population 15-64 

50 

• 1995 
02015 
• 2025 

40 

30 

20 

10 

-,  50 

40 

30 

20 

10 

B  DK  D  GR  E 

F 

IRL 

L  NL  P  UK  A  SF  S  E15 

D includes new Lander 

40 

UK, leaving only the three countries 
noted  above  with  a  different  age 
(Graph 4). 

On the other hand, there continues to 
be  more  diversity  in  the  number  of 
years of contributions  required for a 
full  pension, which varies from  only 
35  in  Spain  and  Greece  to  48  in 
Ireland, though the recent increase in 
France was a move towards conver 
gence  with  most  other  countries. In 
Denmark and the Netherlands, unlike 
elsewhere,  the  qualification  for  a 
pension  is based  on residence rather 
than  contributions  (in  the  former 
case, because pensions are funded by 
general  taxation  rather  than by con 
tributions, as noted below). 

The impending 
demographic 
time-bomb 

The increases in the age of retirement 
discussed above are for the most part 
timed  to  coincide  with  the  baby-
boom  generation  reaching  pension 
able age, on the general  expectation 
that this event will increase substan 
tially the numbers drawing  pensions 
and,  therefore,  the  cost  burden  im 
posed on economies. In 1995, around 
15%  of  the population  in the Union 
is aged 65 or over and these amount 
to  some  23%  of  the  population  of 
working age (ie those between 15 and 
64),  who  through  their  employment 
and  the  income  they  generate  have 
effectively  to  support  them  in  their 
retirement. In ten years time, in 2005, 
those of 65 and over will, according 
to  the  latest  projections,  amount  to 
26%  of  working-age  population,  in 
20 years time in 2015, to 30% and in 
30  years  time  in  2025  to  3572%.  In 

Chapter 2 ~ Adapting to change: recent reforms and key developments 

Changes in population/activity and employment 

While it is undoubtedly  the case that the numbers of 
people aged 65 and over have, over recent years, risen 
in relation to those of working age — the dependency 
ratio  as  usually  measured  —  and  stand  to  increase 
dramatically from the year 2010 on, the increase so far 
has been dwarfed by other factors which, in practice, 
have proved more important determinants of the effec 
tive  degree  of  dependency  as  more  appropriately 
measured.  Moreover,  since  1980, the  growth  of  the 
numbers in retirement has been the consequence more 
of people  withdrawing  from  the labour  force  prema 
turely than of demographic  factors, which in turn has 
been a reflection  of increasing unemployment and the 
scarcity  of  jobs  (see  Employment  in  Europe  1995, 
Part 1). In addition, two factors have been much more 
important in determining  the rise in the effective  de 
pendency ratio—more appropriately measured by the 
number in retirement relative to the number in employ 
ment  —  than  demographic  trends.  The  first  is  the 
decline in the rate of participation of those aged  15 to 
64 in the labour  force,  especially  of  younger  people 
under 25 (which has fallen over the Union as a whole 
from 54.3% in 1980 to 45.7% in 1994 — see Graph 7) 
and of  older  people  aged between  50 and  64 (which 
has declined in the Union from 51.3% in 1980 to 47.1 % 
in  1994  as job  shortages  became  more  acute  —  see 
Graph  8).  In practice,  lower  rates  of participation  in 
younger  and  older  age  groups have  over  the past  15 

years been compensated by strongly rising participa 
tion of women, a trend which is as potentially import 
ant as the demographic one in determining the  future 
size of the Union's labour  force. 

The second factor  underlying  the rise in the  effective 
dependency  ratio  is  the  fall  in employment  of  those 
who  are  part  of  the  labour  force  and  the  growing 
numbers of the economically active—and if working-
age— who are unemployed (Graph 9). 

Despite the  scale of  the  impending  expansion  in the 
relative  numbers  of  those of  65  and  over,  the  future 
path of employment,  and unemployment,  is likely to 
be equally, if not more, important in determining  the 
extent of dependency  and of financing  problems. In 
deed, areturn to the levels of unemployment prevailing 
across  the  Union  before  the  oil  price  crisis  in  the 
mid-1970s (2-3% of the labour force) allied to a con 
tinuing upward trend in the participation of women in 
the work force would  more than offset  the rise in the 
numbers of people aged 65 and over and make it easier 
to finance pensions in 20 or 30 years than now. If on 
the  contrary,  economic  growth  and  the  rate  of  job 
creation  remains depressed  and unemployment  stays 
high, then  the difficulties  of  achieving  the necessary 
transfer  from  those below  65  to those  above will  be 
acute  and  the  pressure  radically  to  reform  pension 
systems could prove irresistible. 

7 

Active population  15-24 in relation to  total 
population  15-24 in Member States, 1980  and 

8 

Active population  50-64 in relation  to total 
population  50-64 in Member States, 1980 and 

100 F 

t  100 

E12  B  DK  D  GR  E 

F 

IRL 

I 

L  NL  P  UK 

E12  B  DK  D  GR  E 

F 

IRL 

I 

L  NL  P  UK 

0 exclude* new tender 

0 excludes new Lander 

41 

Chapter 2 -  Adapting to change: recent reforms and key developments 

other words, whereas  now  there are 
4-5 people of working age for every 
person  of  65  and  over,  in  30  years 
time,  there  will  be  less  than  3  (see 
Graph  5).  In  some  Member  States, 
Italy,  in  particular,  the  dependency 
ratio will  be  even  higher  (people of 
65 and over are projected to increase 
to almost  40% of those  of  working-
age in Italy over the next 30 years — 
Graph 6). 

Such  prospective  developments, 
however, are only part of the picture. 
Other potential changes have also to 
be  taken  in  to  account  before  it  is 
possible to assess the overall  effects 
on expenditure and, more especially, 
the  availabihty  of  finance,  particu 
larly the number of people who will 
actually be in work of those of work 
ing  age  who  in  practice  will  be  the 
ones  supporting  those  in  retirement 

(as  well  as  those  who  are  unem 
ployed) (see box on changes in popu 
lation,  activity  and  employment). 
The  scale  of  future  funding  prob 
lems,  in  other  words,  depends  as 
much  on  the  path  of  employment, 
and  unemployment,  as  on  demo 
graphic trends. 

Targeting 
Growing concern about the scale 

of  expenditure  on  social  pro 
tection, both actual and prospective, 
in a context where, for the most part, 
there is an equal concern to maintain 
the fundamental principles of univer 
sal coverage and common access to 
the  services  and  support  provided, 
has  led  to  an  increasing  focus  of 
policy on improving the efficiency of 

Employment in relation to active population  in 
Member States, 1980 and 1994 

, -,.. % active population 
IUU  r 

1980 

11994 

100 

E15  B  DK  D  GR 
O excludes new Lander 

E  F 

42-

systems and their effectiveness.  As a 
result,  measures  have  been  intro 
duced in a number of Member States, 
and  proposals  have  been  made  in 
others,  to  target  expenditure  more 
closely  on those in most need of as 
sistance. This has taken a number of 
forms,  varying  both between  Mem 
ber States, according  to the  specific 
problems  they  face,  their  traditions 
and  institutional  arrangements,  and 
between different parts of the system. 

Although  often  used  as  a  synonym 
(or  euphemism)  for  means-testing, 
the notion is much wider, encompas 
sing  efforts  both  to ensure that ade 
quate levels of support are provided 
for specific groups (Uke the mentally 
ill, severely disabled or lone parents) 
and to tailor assistance to meet spe 
cial needs (such as housing), as well 
as the linking of rates of assistance to 
income  (which  is  not  the  same  as 
means-testing  per  se,  as  explained 
below), the taxation  of  benefits  and 
the imposition  of  eligibihty  criteria. 
The  more  restrictive  definition  of 
those eligible for income support, in 
particular, has been a common means 
in recent years of both increasing the 
effectiveness  of expenditure and pre 
venting abuse as well as reducing the 
amount  spent,  unemployment  and 
invalidity  benefits  being  principal 
targets throughout the Union. 

Means-testing 

Means-testing, in the sense of  those 
requiring  support  needing  to  make 
specific claims and having to demon 
strate  that  their  lack  of  income  and 
savings qualifies  them for  assistance 
(as  opposed  to  the  withdrawal,  or 
reduction,  of  benefits  from  those 

Chapter 2 - Adapting to change: recent reforms and key developments 

whose income exceeds a certain level 
—  ie  'affluence  testing'  rather than 
means-testing),  has,  however,  been 
perhaps  the  most  discussed  method 
of  targeting.  Its  application,  on  the 
other  hand,  has  been  by  no  means 
widespread across the Union and has 
largely been confined to the UK and, 
to a lesser extent, Ireland, where the 
earnings-related  element  of  unem 
ployment  benefit  has  recently  been 
abolished. 

Since  1980, in particular — though it 
was more prevalent than in other coun 
tries even before then—the proportion 
of  social  protection  expenditure  sub 
ject to means-testing has increased sig 
nificantly  in the UK as entitlement to 
national insurance benefits have been 
more  narrowly  restricted  and  the 
amount payable reduced m real terms 
and as assistance specifically aimed at 
lower income groups, such as Housing 
Benefit, Family Credit or Income Sup 
port, has  been  given more emphasis. 
As a result, the numbers dependent on 
means-tested support, including many 
of those in receipt of insurance benefits 
whose income still leaves them below 
the  minimum  level  as  defined,  has 
risen markedly.  At  the  same  time, a 
loans  scheme  (and  some  grants)  has 
been  introduced  to provide  those re 
ceiving  assistance  with the means of 
meeting  one-off  needs  (such  as  the 
purchase  of  new  furniture  or  house 
hold appliances). 

The most recent example of the exten 
sion of means-testing in the UK is the 
proposed  introduction  from  October 
1996 of a Job Seeker's  Allowance to 
replace  the  present  system  of  unem 
ployment benefits and income support 
for  the  unemployed.  This  will  be 
payable  as  a  flat-rate  sum  without  a 

means-test  to  those  satisfying  con 
tribution requirements for the first six 
months of unemployment  (instead of 
the present  12 months), but thereafter 
will  be  means-tested  (though  those 
with dependants will be able to claim 
an  additional  allowance  if  there  in 
come falls below a minimum level in 
the first six months as well afterwards). 
It  will  also  be  accompanied  by  in 
creased pressure on the unemployed to 
find  work, though with increased help 
and  advice  from  the  employment 
services (see box). 

While  means-testing  has  some  at 
traction  as  a  way  of  concentrating 
support  on  those  most  in  need  and 
economising  on  what  is  spent  and 
while  it  potentially  enables  individ 
ual  circumstances  to  be  taken  into 
account  in  the  payments  made  and 
the  kinds  of  assistance  provided,  it 
has  a  number  of  drawbacks,  espe 
cially if it becomes a principal com 
ponent  of  the  social  protection 
system. These drawbacks also apply 
in  some  degree  to  targeting per  se, 
whatever forms it takes as discussed 
in  more  detail  below.  In  the  first 
place,  the  imposition  of  means-
testing,  and  indeed  targeting  gener 
ally,  implies  that  it  is  possible  to 
identify  those most in need of assist 
ance. In practice, because of the dif 
ficulties involved, the onus has to be 
put  on  the  individual  or  household 
concerned  to  claim  assistance.  For 
many  reasons — ignorance, lack of 
education, the social stigma attached, 
indolence and so on — a  significant 
proportion  of  those  entitled  to  sup 
port  tend  not  to  claim  (in  the  UK, 
estimates  suggest that some 34% of 
those  entitled  to  Family  Credit  and 
20% of those qualifying  for  Income 

Support fail toclaim, though many of 
these appear to be only just ehgible). 

Secondly,  because  it  is  applied  to 
accumulated  wealth  and  not  just 
income, means-testing can act as a sig 
nificant  disincentive to saving (in the 
UK, those with accumulated  savings 
of more than around  10,000 ECU are 
not ehgible for Income Support at all 
until these are run down). 

Thirdly, it can also act as a major dis 
incentive  to  work,  not  only  because 
wide-ranging support (including hous 
ing benefits  if a mortgage rather than 
rent is being paid) is withdrawn when 
an individual finds work and starts to 
earn a wage — unless they are ehgible 
for  Family  Credit  —  but  because 
means-testing is applied to households 
rather than individuals. Thus a woman 
in  employment,  even  working  part-
time so long as she works more than 
16 hours a week (increased to 24 under 
the proposed Job Seeker's Allowance) 
can  find  that  the  hours  worked 
(regardless of income earned) prevents 
her husband receiving Income Support 
if he loses his job or, more especially, 
if he is unemployed for any length of 
time and benefits are means-tested. By 
the same token, there is an equal disin 
centive  for  someone  not  to  look  for 
work  under  such  à  system  if  their 
spouse is receiving Income Support. 

Although some effort  has been made 
in the UK to find ways of reducing the 
incidence of such disincentive  effects 
— part of the reason for the introduc 
tion of Family Credit for those in low-
paid jobs with dependent children was 
to  raise  disposable  income  when  in 
work above that received when unem 
ployed — these remain important. 

43-

Chapter 2 ~ Adapting to change: recent reforms and key developments 

The planned UK Job Seeker's Allowance 

From October 1996, it is planned in the UK to replace the existing National 
Insurance benefits and Income Support paid to the unemployed by a single 
scheme, the Job Seeker's Allowance. Those who become unemployed and 
meet the requirements in respect of National Insurance contributions and 
other conditions will receive the new benefit as of right without a means-
test. This  will be the case, however, only  for  the  first  six  months of 
unemploymentinstead of the first 12 months as at present After six months, 
the payment of benefit will be subject to a means-test All other people, 
including the self-employed, will have their allowance subject to a means-
test from the beginning as now. The official expectation is that at any one -
time 75% of claimants will be paid the allowance on a means-tested basis. 
Rates of benefit will be based on current Income Support rates, so that those 
under 25 will receive a lower rate as now. The new allowance is to be 
accompanied by increased efforts to help people find jobs and to give them 
more encouragement to do so. 

The underlying idea, according to the White Paper on Job Seeker's Allow 
ance, (1994), is to help people in their search for work while ensuring that 
they understand and fulfil  the conditions for receipt of benefit. As part of 
the scheme, therefore, the intention is to draw up a Job Seeker's Agreement 
with each individual, setting out a course of action designed to achieve a 
return to work as soon as possible, assisted where appropriate by measures 
to improve their employability. Conditions for receipt of benefit will be 
designed to reinforce the obligation of claimants to look for work and, as 
previously, claimants will not be able'to refuse jobs without good cause, 
and there will be reduced access to benefit for those who fail to meet the 
entitlement conditions, including actively seeking work and completing a 
satisfactory Job Seeker's Agreement. Their partners will also be encour 
aged to work. At present, unemployed on means-tested allowances lose 
entitlement  to benefit  if their partner works in paid employment  for 16 
hours a week or more. This will be increased to 24 hours or more under the 
new proposals to exclude those working .relatively few hours a week. In 
addition, individuals working part-time while on income support will be 
able to build up a 'back to work bonus', a lump-sum equal to half their 
part-time earnings (up to a maximum of £1,000 —just over 1,200 ECU). 
In addition, a partner's earnings can build up the bonus, while the bonus is 
also  payable  if  the  claimant,  or  more  generally,  the partner  goes  into 
employment which takes the family off Job Seeker's Allowance. 

Other forms 
of targeting 

In other Member States, there has not 
been the same shift from  social insur 
ance  to  means-tested  assistance.  In 
most of  these countries, the principle 

of social insurance to provide adequate 
levels of income when a person is un 
able  to  work  is  more  firmly  entren 
ched.  Nevertheless,  there  has  been 
some move away from everyone being 
entitled to receive an equal amount of 
benefit  in  all cases  and  income thre 
sholds  governing  the  receipt  of 

44 

benefits have increased in importance. 
In particular, in Germany, the Nether 
lands, Italy and Spain, the amount of 
family  allowance  receivable  has  in 
most  cases been  made dependent  on 
income  in  recent  years  as  well  as 
numbers  of  children  (those  earning 
more receive less) and similar moves 
are  being  considered  in  Belgium 
and  Portugal.  In  addition,  in  the 
Netherlands  and  Italy  income  limits 
have been introduced  with respect to 
survivors' benefits, while in the latter 
country limits have also been imposed 
as regards the receipt of minimum pen 
sions. 

A third variant of this general trend is 
observable  in  Southern  European 
countries. As well as the imposition 
of income thresholds, in Greece and 
Italy, in particular, efforts  have been 
made  in  recent  years  to  reduce  the 
opportunity  for  cumulating  benefits 
(such  as  pensions)  which  can  result 
in  certain  groups  receiving  much 
more  in  the  way  of  income  support 
than  intended  and  in  their  effective 
'over-protection'. This has been mo 
tivated by a desire not only to avoid 
excessive  expenditure  and  to  target 
what is spent more on those in need 
but  also  to  diminish  the  perception 
that  the  social  protection  system  is 
being widely abused and so maintain 
support for  its maintenance and  fur 
ther development. At the same time, 
measures  have been taken  in South 
ern Member States to improve social 
assistance  schemes,  which  need  in 
herently  to  be  means-tested,  which 
remain  under-developed  and  have 
moved closer to establishing systems 
which  guarantee  than  everyone 
receives at least a minimum  level of 
income, which are a feature  of other 
parts of the Union. 

Chapter 2 -  Adapting to change: recent reforms and key developments 

In the Scandinavian Member States, 
there has so far been less of a move 
towards  a  more  selective  approach. 
Though  the  problems  created  by 
universalism  are  being  widely  de 
bated,  in  Denmark,  Finland  and 
Sweden,  reductions  or  containment 
of  expenditure  have  largely  been 
achieved  through  general  cuts  in 
benefits,  in  particular,  by  reducing 
the rate in relation to earnings. At the 
same  time,  since  most  benefits  are 
taxable  in  these  countries,  propor 
tionately  more  of  what  is  paid  out 
tends to be clawed back from  higher 
income groups than from  those more 
in need. 

The attachment to universalism is il 
lustrated by the debate in Sweden in 
early  1995  on  the  proposal  to  link 
child allowances to income as part of 
budgetary  cutbacks.  This  was  re 
jected  for  fear  that  it  might  erode 
broad  public  support  for  the  all-
embracing  system  of  social  protec 
tion  which  operates.  Instead 
allowances  were reduced  for  every 
one —  for  the  first  time  since  their 
introduction in 1948. 

Cash benefits have not been the only 
area where attempts have been made 
to  target  expenditure  more  selec 
tively.  In  most  Member  States,  as 
discussed  below,  free  access  to 
health and medical care has tended to 
be restricted more narrowly in recent 
years  on  those  on  low  incomes  or 
most in need, such as the elderly. 

The problems 
of targeting 

As indicated  above, there  has been a 
pronounced tendency across the Union 

towards  targeting  social  expenditure 
on those most in need of support This 
is set to continue in the future, perhaps 
at an accelerating rate given the chal 
lenges facing Member States and the 
constraints within which governments 
have to operate. There are, however, 
potential problems which could arise 
as  the  strategy  is  extended.  First,  as 
noted above in respect of means-test 
ing, for targeting to be effective, those 
most in need of assistance have to be 
identified.  The  difficulty  here,  quite 
apart from the administrative costs in 
volved, is not only lack of information 
—we have only a very hazy idea of the 
numbers living below any given level 
of income in Member States or of the 
conditions  in which  they  live —  but 
equally importantly a lack of an agreed 
definition  of  need  except  in  very 
general terms. Because individual cir 
cumstances are likely to vary consid 
erably, even among  those on  similar 
levels  of  income,  it  is  unlikely  that 
targeting  support on households with 
income below a certain level will en 
sure  that  adequate  assistance  is pro 
vided to everyone in need of help. 

Secondly, the more support is targeted 
on a narrowly defined group, the more 
important are disincentive effects  and 
dependency  likely  to be. If  those re 
ceiving support lose a significant  part 
of it if their income or circumstances 
change only slighdy, there will inevit 
ably be a major incentive to avoid such 
a  change.  In  other  words,  if  those 
deemed to be living in poverty, how 
ever defined, have their income  lifted 
to  an  acceptable  level  but  support  is 
withdrawn once that level is reached or 
tapers off considerably, then it may be 
extremely difficult for them to improve 
their circumstances substantially by, in 
particular,  finding  a job  —  or  in  the 

case of in-work benefits finding a bet 
ter job — and becoming independent 
of State support They are, in essence, 
caught in an unemployment or poverty 
trap which it is hard to escape from (see 
Employment in Europe 1995, Part 3, 
Section 1 for details of the high effec 
tive marginal rates of deduction  from 
income in some countries, the UK and 
Luxembourg  especially,  for  those  at 
the bottom  end of the earnings  scale 
which  result  from  attempts  to  bring 
their income up to acceptable levels). 

Thirdly, the inevitable counterpart of 
targeting benefits  more narrowly on 
those  in  need  is  that  those  in  less 
need, or in no need at all, receive less 
or  even  nothing.  The  principle  of 
universality  is,  therefore,  eroded 
which  could  have  repercussions  on 
the degree  of public support  for  so 
cial protection systems and wider im 
plications as regards those which are 
strongly based on an insurance prin 
ciple  and  funded  predominantly  by 
contributions. In particular, as in the 
case  of  the  Swedish  proposal  in re 
spect  of  child  allowances  noted 
above, relating  benefits  inversely  to 
income could undermine the support 
of  the  high  income  groups  who  get 
less or nothing. (On the other hand, it 
is  equally  arguable  that  paying 
benefits  to wealthy  members  of  so 
ciety  who  do  not  need  them  could 
threaten  the  support  of  those  lower 
down  the  income  scale.)  Where 
benefits  are funded  by contributions 
and linked closely to the payment of 
these,  the  problems  are  likely  to  be 
much more acute since targeting ine 
vitably  means  breaking  the  link 
between  the  two  and  eroding  the 
insurance-basis  of  the  system.  In 
countries  with  insurance-based  sys 
tems, therefore, targeting has tended 

45-

Chapter? - Adapting to change: recent reforms and key developments 

to be concentrated  on those  benefits 
which  are  funded  by  general  taxa 
tion, such as child, or family, allow 
ances or the provision of health care, 
rather than by contributions. 

Work and welfare 
In all Member States, as unemploy 

ment has risen and remained  at a 
high level, attention has focused  in 
creasingly  on  both  the  regulations 
governing  entitlement  to  income 
support and the scale of benefits paid, 
with  the  aim  not  only  of  reducing 
expenditure but of preventing  abuse 
and trying to ensure that those draw 
ing benefits have sufficient  incentive 
to  look  for  work.  There  has,  there 
fore, been a general tendency throug 
hout the Union to tighten conditions 
for  eligibility  for  receipt  of  benefits 
and to avoid rates of support being so 
high in relation to the wage whichthe 
unemployed could earn in work that 
they discourage them from  finding a 
job (see Chapter 4 below for an ana 
lysis  of  the  scale  of  unemployment 
compensation  in  relation  to  dispos 
able income when in work across the 
Union). 

While  Germany  and  Sweden  have 
been  two of  the few  countries  to cut 
benefits  direcdy in the recent past (in 
Germany by  1% of previous earnings 
for those with dependent children and 
by  3% for  those  without  in  January 
1994, in Sweden, by 10% of previous 
earnings  and  by  a  further  5%  from 
January  1996). In Belgium, however, 
the period young people have to wait 
before receiving benefits has been in 
creased  and  the  duration  of  certain 
benefits  curtailed  and  in  Ireland,  the 

earnings-related supplement has been 
abolished  (though  accompanied  by a 
10% rise in basic benefit). In a number 
of countries, moreover, the definition 
of what is deemed to constitute a 'suit 
able'  offer  of  employment  has  been 
narrowed to make it more difficult  for 
those  drawing  benefits  to turn down 
jobs without valid reason. 

In the UK, more radically than else 
where,  under  the  new  Job  Seeker's 
Allowance, planned to be introduced 
in  1996, unemployment  compensa 
tion, even paid at a flat, and relatively 
low, rate, will only be available with 
out  being  means-tested  for  six 
months, as noted above, while there 
will  be  increased  pressure  on  those 
being  assisted  to  explore  every 
possible job opportunity with poten 
tial loss of benefit  if they turn down 
what is regarded as a suitable  offer. 

The new scheme is being introduced 
against a policy background in which 
the development of low-paid jobs has 
been  encouraged  to  a  much  greater 
extent  than  elsewhere  in the Union, 
partly  through  the  abolition  of  re 
strictions  on  the  payment  of  low 
wages, partly through setting unem 
ployment  compensation  at  a  low 
level and partly through a system of 
paying  in-work  benefits  to  those 
whose earnings fall below a particu 
lar  level.  This  system,  known  as 
Family Credit, is designed to ensure 
that  those  in employment  are hkely 
to  be  better  off  than  if  they  were 
unemployed  and  thus  represents  an 
incentive  to  work  even  in  a  poorly 
paid job. At present, it applies only to 
workers  with  dependent  children 
(though  there  is  also  a  parallel 
scheme  for  disabled  workers),  but 

active consideration is being given to 
extending it more generally. 

A potential problem of Family Credit 
and  other  similar  in-work  benefit 
schemes  in  operation  or being  con 
sidered in other parts of the Union is 
the high implicit marginal tax (or de 
duction) rates which they inherently 
involve  for  those  on  low  pay.  As 
noted  above,  since  to  keep  down 
costs  they  tend  to  be  targeted  on  a 
comparatively small group at the bot 
tom  end  of  the  earnings  scale, they 
are usually withdrawn at a relatively 
high rate (in the UK, at 70% of any 
increase in pay, which with taxes and 
contributions tends to mean marginal 
deduction  rates  of  90% or more  for 
many  recipients)  as  income  from 
work rises. The net gain from earning 
more is, therefore, likely to be small 
if not negligible which means that it 
is  difficult  for  those  concerned  to 
achieve a significant  increase in real 
income and escape from  the poverty 
trap  so created  and, in turn,  implies 
that there is little incentive to look for 
a better, and more productive, job. 

The move from passive 
to active measures 

The UK system in essence is aimed at 
providing  active  encouragement  to 
those unemployed to find a job as soon 
as possible. In other parts of the Union 
as  well,  in  addition  to  the  focus  on 
systems  of  compensation  as  such, 
there  has  been  a  growing  emphasis, 
encouraged by the Commission (in its 
two recent White Papers)  and by the 
Council  (most  recendy  at  the  Essen 
Summit),  on  shifting  the  balance  of 
both  employment  and  social  pohcy 
from passive measures of income sup-

-46 

Chapter 2-Adapting  to change: recent reforms and key developments 

port to active measures to get people 
into work and reduce dependency on 
social  protection  systems.  This  has 
been motivated by the increasing num 
bers  drawing  benefits  for  prolonged 
periods and the costs involved both to 
the  State  and  the  people  concerned. 
Though these are most commonly the 
long-term  unemployed  whose  num 
bers  have  grown  markedly  to  reach 
almost 8V2 million in 1994, almost half 
of the total unemployed in the Union, 
they  also  include  those  registered  as 
sick or disabled, whose numbers also 
seem to be affected  by the state of the 
job  market  (increasing  significandy 
during  the  recent  recession).  In  all 
Member States, a primary aim of pol 
icy  has  become  one  of  reintegrating 
these people into employment and of 
preventing  those  losing  their jobs  or 
becoming disabled in the future  suffer 
ing the same experience, not  only in 
order to  reduce  expenditure  over the 
long-term but equally importantiy for 
the  self-fulfilment,  self-esteem  and 
general  well-being  of  the  people 
concerned. 

Indeed, it is quite likely that expanding 
active measures increases rather than 
reduces  overall  social  expenditure  at 
least in the short-term. Those assisted 
in this way, through training, rehabili 
tation programmes, counselling and so 
on,  still  need  income  support  while 
receiving such help. On the other hand, 
active measures need not involve sub 
stantial cost, especially if they take the 
form of eliciting private sector cooper 
ation, whether by persuasion or legis 
lation (by, for example, compelling all 
firms  above a certain size to employ a 
minimum number of disabled people), 
or by trying to alter the way in which 
the  labour  market  functions  (by,  for 
example, making it easier for firms to 

take on or dismiss workers, abohshing 
restrictions on the operation of private 
sector  employment  agencies  or  by 
removing obstacles to low rates of pay 
so  as  to  make  it  profitable  for  com 
panies  to  employ  relatively  low 
productive workers). 

The  more  interesting  question  is 
whether in practice expanding  active 
labour  market  measures  of  whatever 
form  is likely to reduce what is spent 
on social protection in the long-term. 
The answer is by no means clear-cut 
Ultimately, it will depend'on whether 
the  measures  taken  increase  the 
capacity  of  the  Union  economies  to 
maintain  and  expand jobs,  which  in 
turn depends on their effect on growth 
potential,  including  in  particular  on 
competitiveness, on the efficient  func 
tioning  of the labour marked and on the 
employment-intensity  of  output.  If 
they have tittle effect  in these regards, 
then their main impact will tend to be 
on  the distribution  of  unemployment 
and on job rotation. In other words, if 
there  is  no  overall  expansion  in  the 
number of jobs in the economy, then 
to the extent that people are helped into 
work by active measures it will inevit 
ably be at the expense of someone else. 
Spreading the incidence of unemploy 
ment, however, might well be regarded 
as a desirable end itself, especially in 
sofar as it is accompanied by a reduc 
tion in long-term  unemployment  and 
social exclusion. 

The active measures 
introduced in 
Member States 

The balance of pubhc expenditure as 
between active and passive measures 
has  not changed  greatly  over  recent 

years in the Union (in most Member 
States, the former  increased  relative 
to the latter over the period  1985 to 
1990  as  unemployment  —  and  the 
need for income support of the unem 
ployed — fell markedly but declined 
again  in  the  early  1990s  as  unem 
ployment rose and increased the need 
for  support  once  more  —  see 
Employment in Europe 1995, Part II, 
Section  4).  Nevertheless,  expendi 
ture on active policies has generally 
risen  in  relation  to  GDP,  while  in 
addition  measures  not  directly  in 
volving public spending as such have 
expanded in importance. 

In  particular,  as well  as more  being 
spent on pubhc employment services 
to provide help and advice for people 
to find jobs  (in 8 of  the  14 Member 
States  for  which  data  are  available 
expenditure  on  such  services  rose 
relative to GDP even when  adjusted 
to  allow  for  the  rise  in  unemploy 
ment), services were reorganised and 
their efficiency  improved  in a num 
ber  of  countries.  Private  placement 
agencies were legalisedin Sweden in 
1993 and in Germany and Austria in 
1994,  as  were  non-profit  making 
agencies  and  those  specialising  in 
temporary  placements  in  Spain.  In 
addition,  in  Italy  the  obligation  to 
notify  all job vacancies to the pubhc 
employment  services  was  abolished 
in  1995. In  both  Belgium  and  Ger 
many,  moreover,  local  employment 
agencies  were  established  with  the 
specific purpose of placing the unem 
ployed in temporary jobs. 

In  many  countries,  pohcy  has  in 
creasingly been targeted on the long-
term unemployed. In France, special 
placement  initiatives  were  taken  in 
1992 under 'Programme 900,000' ; in 

47 

Chapter 2 - Adapting to change: recent reforms and key developments 

Belgium, a plan to monitor  all long-
term  unemployed  of  45  and  below 
was introduced  in  1993. In  trie UK, 
'Restart'  interviews were introduced 
to provide systematic assistance and 
advice to those who had been unable 
to find a job for a long period; more 
over,  from  April  1996,  employers 
taking  on  those  previously  unem 
ployed  for  two  years  or  more  will 
receive a refund of employers' social 
contributions for the first. 12 months. 
In  Denmark,  the  'Employment  Op 
portunities' plan was developed with 
the  aim  of  offering  a job  to  all  the 
unemployed  who  were  still  without 
work after  a year. 

In  the  latter  country,  as  well  as  in 
Germany,  France,  Finland  and 
Sweden,  wage  subsidies  have  been 
expanded  significandy  in  the  1990s 
to  stimulate  increased  job  creation 
for  the  long-term  unemployed  and 
others who are hard to place, in par 
ticular. In all of these Member States, 
expenditure was around twice as high 
in  relation  to  GDP  in  1993  than  in 
1990  and  has  continued  to  increase 
since  (see  Employment  in  Europe, 
1995, Part II, Section 4). In addition, 
in  Spain,  a  series  of  measures  di 
rected  at  the  same  abjective  have 
been introduced since 1992, partly in 
the form of reductions in employers' 
contributions.  In  F r a n c e,  for 
example, an extensive range of sub 
sidies  are  now  in  place  to  provide 
incentives  for  firms  to  hire  low 
skilled  workers.  Here  as  elsewhere, 
however,  there  is  a  questionmark 
about their effectiveness  as means of 
expanding  the  numbers  in  employ 
ment  overall  insofar  as  firms  may 
merely  replace  existing,  higher  cost 
workers  by  new  recruits  for  whom 
they receive a subsidy. Studies have, 

therefore,  tended  to  show  that  such 
substitution  effects  can  be  signifi 
cant. 

Similar potential problems arise over 
'workfare'  programmes  of  various 
kinds  which  involve  persuading  the 
unemployed  to take up  work,  how 
ever  funded.  Such  schemes  are  at 
first sight attractive in the sense that 
the unemployed do something rather 
than nothing for  the income support 
they  receive while  at the same time 
adding  to  economic  output.  More 
over the additional costs involved to 
government  over  and  above  the 
benefits paid can be relatively small, 
especially if the unemployed receive 
no  additional  financial  inducement 
for  taking  up  such  work.  Neverthe 
less, the displacement effects  can be 
substantial,  whether  work  is  per 
formed  in  the  public  sector  which 
would  otherwise  have  been  under 
taken by pubhc sector employees or 
contracted  out to private firms or in 
the  private  sector  under  subsidy.  In 
addition, it raises questions about the 
value of such work if  it is not econ 
omic  to carry it out without  subsidy 
(whether explicit or implicit). 

to be involved (and where, therefore, 
there is no possibility of firms losing 
business or jobs in the private sector 
being  displaced). This applies  espe 
cially to collective services, and en 
vironmental  activities, in  particular, 
and  in a number  of Member  States, 
projects of this kind have been intro 
duced in recent years. For example, 
in Spain, a large number of the young 
unemployed  have worked on restor 
ing historical buildings and in France 
in  national  parks; in  Berlin,  the un 
employed  receiving  benefit  are 
allowed to work 32 hours a week on 
the renovation of schools, while in an 
experiment in a town in the UK, the 
unemployed have been building eco 
logically-sound  houses,  which,  for 
lack  of  funds,  would  not  otherwise 
have been built. 

A question about such projects  con 
cerns not so much their value to the 
community but their effectiveness  in 
integrating the unemployed back into 
work  on  a  permanent  basis  rather 
than  providing  temporary  tasks  for 
them to do. So far there is littie evi 
dence on this and further  studies are 
called for. 

Equally,  however,  are  clearly  areas 
of the economy where potentially so 
cially  valuab'e  activities  are  not 
undertaken because of market imper 
fections  (see the Commission  report 
on  Local  development  and employ 
ment  initiatives,  SEC  564/95,  pub 
lished  in  1995).  These  could 
potentially  be carried  out by the un 
employed at the same time as provid 
ing  them  with  work  experience  and 
training  at  relatively  littie  financial 
cost  or  damage  to  wider  economic 
interests  if  concentrated  in  areas 
where only the pubhc sector is hkely 

At the same time, there is some evi 
dence  that  these  kinds  of  active 
measure  for  providing  employment 
can give rise to problems over  financ 
ing. In particular, since responsibility 
for  providing  the  unemployed  with 
work  or  finding  jobs  in  the  private 
sector  for  them  often  resides  with 
regional  or  local  authorities,  while 
the  pohcy  itself  is usually  designed 
and launched by central government, 
the costs  involved,  which  are  prone 
to  being  under-estimated,  and  who 
bears these, are liable to be causes of 
some  conflict.  In  Germany,  for 

-48-

Chapter 2 -  Adapting to change: recent reforms and key developments 

example,  the  Federal  Government 
devised  an extensive  plan for  refor 
ming  social  assistance  aimed  at 
combining  income  support  with 
personalised  assistance  to find each 
person a job. The scheme, however, 
had to be abandoned  because of the 
opposition  of  municipalities  faced 
with the supplementary  costs  gener 
ated by the project. A similar conflict 
arose  in  Denmark  in  1994  over  the 
Employment Opportunities plan. 

Subsidies  to  encourage job  creation 
do  not  necessarily  have  to  take  the 
form of expenditure. The same effect 
on  the  costs  of  employment  can 
equally  be  achieved  through  reduc 
ing charges on firms, in particular by 
relieving employers in part or in total 
of  the  need  to  pay  social  contribu 
tions. (Indeed  in a number of coun 
tries,  despite  their  equivalence,  this 
measure seems to be more acceptable 
than subsidies, which in part  reflects 
a greater reluctance to increase pub 
hc expenditure than to reduce tax and 
other  government  receipts.)  As  de 
scribed  in  more  detail  below,  such 
reductions have been made in a num 
ber of Member States in recent years, 
though  for  the  most  part  they  have 
been  targeted  on  particular  groups, 
especially  the  young  and  long-term 
unemployed. 

A somewhat different approach to pro 
viding  jobs  for  the  unemployed  is 
through exphcitly trying to share avail 
able work more evenly. This has been 
developed  in the Scandinavian coun 
tries in particular, where it is linked to 
training  and  other forms  of leave  for 
existing  employees.  In  Sweden,  the 
'trainee temporary  replacement sche 
me' was introduced in 1991 to encour 
age employers, through reductions in 

Labour market reform to establish a more active 
employment policy in Denmark 

In January 1994, legislation was introduced in Denmark with the aim of 
expanding vocational training and achieving a greater rotation of jobs, A 
significant innovation was the introduction of three types of leave, training, 
parental and sabbatical leave, which can be integrated into a programme 
of work sharing allowing workers to have more free time while providing 
more jobs  for the unemployed. The idea is that if,  for example, three 
workers decide to take sabbatical leave of one week each month, someone 
unemployed can be hired to replace each in turn so that they also work for 
three weeks a month. During the week when they are on leave, each of the 
three workers receives 72% of their salary. 

This measure already seems to have had some success. In 1994,73% of the 
workers on leave had been replaced by someone unemployed. 

The measure is financed from the 'Labour Market Fund', partly  financed 
in turn by the introduction  of a new  contribution  levied on employees 
amounting to 5% of earnings, while employers will also have to contribute. 

the training levy, both to allow workers 
time-off  to improve their skills and to 
take  on  someone  temporarily  to  re 
place  them.  In  Denmark,  a  similar 
scheme, though extending to sabbati 
cal and parental leave as well as train 
ing, was introduced in  1994 with the 
aim  of  stimulating  a rotation  of jobs 
between  those  in  work  and  those 
unemployed  (see  box).  In  Finland, 
moreover, there are plans to introduce 
a job rotation system for the same rea 
sons. 

been  shifted,  at  least  for  the  initial 
period of illness from the State to the 
employer,  with  the aim  of  encoura 
ging more effective policing of entit 
lement,  as  discussed  further  below. 
In  Sweden,  moreover,  occupational 
injury  and sickness benefits have re 
cently been reduced significantly,  in 
part  to  encourage  beneficiaries  to 
participate  in  active  rehabilitation 
programmes. 

Active measures have not only been 
confined to those registered as unem 
ployed.  They  have  been  extended 
also  to  the  sick  and  disabled  who 
have tended to increase in number as 
well. In the Netherlands and the UK 
— where the relative numbers of dis 
abled and working days lost to sick 
ness are both  higher than  elsewhere 
in the Union — as well as in Spain, 
responsibility  for  providing  income 
support  for  those reporting  sick  has 

Financing 
As  pressure  has  increased  on 

social  expenditure,  so  too  has 
attention focused on both the scale of 
finance  required  to fund  social  pro 
tection  systems  and  the methods  of 
raising it. In particular, attempts have 
been  made  in  many  parts  of  the 
Union  to  relieve  the burden  on  em 
ployers who, through their contribu 
tion  to  insurance-based  systems 

-49 

Chapter 2 -Adapting to change: recent reforms and keydevelopments 

especially,  have  traditionally  pro 
vided a significant  proportion of the 
income required. This has been mo 
tivated by a concern to avoid unduly 
adding to labour costs in a context of 
both  high  unemployment  and  in 
creasing  exposure  of  producers  to 
external  competition.  In  almost  all 
Member  States, therefore,  the  share 
of finance  for  social protection pro 
vided  by  employers'  contributions 
has tended to decline in recent years 
(see  Chapter  3  below).  Though  no 
data are as yet available, the indica 
tions from  the  measures  introduced 
by Member  States  suggest  that  this 
decline  has,  moreover,  accelerated 
since  1993 as increased efforts  have 
been made to reduce the costs of en> 
ployment. 

The  concern  to  keep  down  em 
ployers'  contributions  and  to  com 
pensate  for  any  reductions  made  in 
these has led to an intensified  search 
for  alternative  forms  of  financing 
and, associated with this, a reassess 
ment  of  the  balance between  insur 
ance contributions and taxation. The 
insurance-based nature of social pro 
tection  systems  in  most  Member 
States, however, represents  a formi 
dable  obstacle  to  any  substantial, 
wide-ranging  restructuring  of  fin 
ance. The link between contributions 
and  benefits,  in  other  words,  is  an 
integral element of the system which 
cannot  easily  be loosened,  let alone 
broken,  without  altering  fundamen 
tally the way it functions. 

This  inherent  problem  has  led  gov 
ernments  in  a  number  of  Member 
States  to  seek  to  differentiate 
between  those  elements  of  social 
protection  expenditure  which are an 
integral  part  of  the  social  insurance 

system,  where  the  payment  of  con 
tributions  gives  entitlement  to 
benefits, such as unemployment and 
earnings-related pensions, and others 
where the transfers  or  services pro 
vided  are  not  so  closely  linked  to 
contributions,  more  uniform  and 
more  universally  available,  such  as 
health  care  and  family  allowances. 
Making such a distinction, therefore, 
opens  up  the  possibility  of  shifting 
from contributions to taxes, in what 
ever  form,  as  a  means  of  financing 
the  latter.  This  approach  has  been 
followed,  for  example  in  Germany, 
where,  there  have  been  recent  at 
tempts  to  differentiate  between  un 
employment  benefits  linked  to 
employment  records  and  the  con 
tributions  paid  and  other  aspects  of 
labour market policy which are more 
generally  open  to  those  who  are  in 
need  of  assistance.  Similarly  in 
Luxembourg,  the funding  of  family 
benefits was shifted  from  employers 
to general taxation in  1994, while in 
Greece  and  Spain  increasing  con 
sideration is being given to the same 
kind of restructuring of finance. 

As  a corollary,  there is also  a tend 
ency to earmark the taxes which are 
raised  or  introduced  to  compensate 
for  reductions  in  contributions 
specifically  for  social  protection.  In 
France,  a  new  'solidarity'  tax,  the 
'Generalised  Social  Security 
Contribution'  (CSG),  levied  on  all 
personal  income,  was  introduced  in 
1991  and  increased  in  1993,  the 
revenue raised going towards financ 
ing  basic  (ie  non-contributory) 
pensions. A similar contribution (the 
'Personal  Social  Contribution')  has 
been levied on all taxable income in 
Belgium  since  1994 and  part  of  en 
ergy and value-added taxes as well as 

excise duties and property taxes have 
been earmarked for social protection, 
while in Luxembourg, a special levy 
on  fuel  has  been  introduced  to help 
fund  employment promotion. 

These latter two changes are part of 
a  tendency  in  many  parts  of  the 
Union to shift, the burden of taxation 
from  employment  (the  demand  for 
which  needs  to  be  encouraged)  to 
natural  resources  (the excessive use 
of  which  needs  to  be  discouraged). 
This is in line with the  Commission 
proposal  to  combine  a  CO^energy 
tax  with  a  reduction  in  employers' 
contributions  to  stimulate  job  cre 
ation while at the same time encour 
aging  energy  saving  and  lower 
emissions to help safeguard the envi 
ronment. Other examples of Member 
States  following  this  principle  are 
Denmark,  where  taxes  on  labour 
have been  reduced and taxes on en 
ergy  increased,  the  UK,  where  em 
ployers'  contributions  have recently 
been reduced  and VAT imposed  on 
fuel  as  well  as  a  new  landfill  tax 
announced,  and  the  Netherlands, 
where  a tax  on  energy  use  is  being 
considered. 

On  the  other  hand,  in  Scandinavian 
countries, an opposite trend is appar 
ent.  Here  social  expenditure  has al 
ways  been  predominantly  financed 
by  general  taxation  and  insurance-
type contributions have played a very 
minor role in most respects. Increas 
ing consideration, however, is being 
given  to  the  extension  of  contribu 
tions,  partly  to  diversify  sources  of 
finance,  but  mainly  to  establish  a 
closer link between funding  and en 
titlement  to  benefit,  which  poten 
tially provides a means of restricting 
access to the benefit concerned or of 

50 

Chapter 2 -Adapting to change: recent reforms and key developments 

varying  the  amount  paid  out  or 
the level  of  service provided  in line 
with  what  has  been  contributed.  In 
Denmark, in particular, where in the 
past social protection, at least so far 
as  statutory  aspects  are  concerned, 
has been financed  entirely from  tax 
ation,  since  1994, all  workers  have 
had to make a contribution (of 5% of 
their gross salary, though 8% as from 
1998) to labour market  funds  out of 
which  unemployment  and  early  re 
tirement benefits  as well  as  support 
for the new forms of leave discussed 
above  are  paid.  From  1997,  more 
over,  employers  will  also  have  to 
contribute. 

At  the  same time,  in Germany,  fol 
lowing  reductions  in  the  contribu 
tions rates for pensions between 1991 
and  1994,  contributions  for  em 
ployers  as  well  as  employees  were 
raised in 1994 (by equal amounts) on 
the introduction of the new long-term 
care  insurance  scheme  (discussed 
below).  To  compensate  employers 
for the additional cost, however, this 
was accompanied by the cancellation 
of a public holiday. 

Given  the  difficulties  of  across-the-
board  reductions  in contributions of 
any  size (though in a number coun 
tries, employers'  contributions  have 
been cut in the recent past—in Spain 
and Portugal, for example in the for 
mer,  together  with  a  cut  in  em 
ployees'  contributions)  two  trends 
are  apparent.  One  is  to  shift  the 
burden  of  contributing  from  em 
ployers  to  employees,  which  seems 
to have occurred  in Northern  Mem 
ber  States  (particularly  in  Belgium, 
France,  the  Netherlands  and,  more 
recently,  the  UK)  though  less  so  in 
the  South  of  the  Union  (where, 

except in Italy, the share of total fin 
ance provided by employees fell be 
tween  1980 and 1993 — see Chapter 
3 below). The other is to make selec 
tive rather than general reductions in 
employers'  contributions.  This  has 
especially been the case in respect of 
low-paid  workers.  A  particular  aim 
in  many  countries  has  been  to  en 
courage  the  employment  of  those 
with  relatively  low  skill levels or of 
young  people  who  are  capable  of 
commanding  only  comparatively 
low  rates  of  pay  and  account  for  a 
disproportionate  share of the unem 
ployed.  For  these  especially,  high 
social charges can represent a signi 
ficant deterrent to firms which other 
wise might take them on. 

In Belgium and Ireland, for example, 
employers'  contributions  were  re 
duced in 1994 in respect of employees 
on  low  pay,  and  in  Ireland  a  further 
reduction (from 9% instead of 12% for 
those earnings less than around 15,000 
ECU a year) was made in 1995. In the 
UK, a further  reduction was made in 
employers'  contributions  in  1995. In 
addition, in France employers in 1993 
were  granted  a  five-year  exemption 
from  contributing  to  family  allow 
ances  as regards employees paid less 
than  1.3 times the statutory minimum 
wage (SMIC). 

The  young,  the  long-term  unem 
ployed  and  the  disabled  have  been 
particular target groups. In Italy as in 
Portugal, a special reduction in con 
tributions  has  been  introduced  for 
employers recruiting anyone belong 
ing to these groups (with wider con 
cessions  applying  in  the  South), 
while  in  Belgium,  employers  are 
entitled  to  a  reduction  of  contribu 
tions for a three year period (of 100% 

in the first year and 50% in the third) 
if they take on someone who has been 
employed for a year or more or who 
is under 26 and has been out of work 
for at least six months. Similarly, in 
Spain,  firms  which  take  on  young 
people,  someone unemployed  of 45 
or  over  or  a  disabled  person  on  a 
temporary  contract  (of  1-3  years) 
have  their contributions  reduced  by 
75%  and  for  small  firms  reductions 
apply  for anyone taken on who  was 
previously  unemployed. 

A  further  tendency  apparent  across 
the  Union  is  to  supplement  tradi 
tional  sources  of  finance  by  user 
charges, which in some sense can be 
considered a form of taxation. These 
are discussed below. 

Privatisation 
— towards a new 
welfare mix? 
A widespread reaction to the evi 

dent  pressures  from  economic 
and  impending  demographic  devel 
opments  has  been  to  search  for 
radically  new  approaches  to  the 
organisation,  operation  and  funding 
of  social  protection  systems  in  Eu 
rope. A particular focus  has been on 
the possibilities of increasing private 
sector  involvement  in  a  number  of 
ways as well as of shifting  responsi 
bility for certain risks from  the State 
to  the  individual,  or  sometimes  the 
employer. In the extreme, it has been 
suggested  in  some quarters  that  the 
concept of universal coverage and of 
equal  access  of all citizens  to  social 
protection  according  to  need  is 
outdated  and/or  too costiy  for  mod 
ern  economies  to  support  and  that 

51 -

Chapter 2 -Adapting to change: recent reforms and key developments 

State systems  should be confined  to 
providing  basic  assistance  and  sup 
port  to  those  without  the  means  of 
providing for themselves. 

Although  the more  general  issue of 
defining the desirable scope of social 
protection, especially in areas such as 
health  care  or  pensions,  has  been  a 
major topic of debate, there has been 
little support for this kind of extreme 
solution  to the funding  problems of 
existing systems. Indeed, as noted in 
Chapter 1, there is deep-seated popu 
lar attachment  in all Member  States 
to a broadly-based  social  protection 
system,  and  successive  European 
Summits  have  reiterated  the  central 
importance  of  maintaining  present 
systems  in  the  Union  not  only  for 
reasons of social cohesion but also to 
strengthen  the  basis  for  economic 
growth  and  improving  competitive 
ness. 

Nevertheless,  the  role  of  the  private 
sector and the desirable scope of indi 
vidual responsibility are both issues of 
importance which are likely to become 
more so in future years as real incomes 
continue  to  grow  and  demographic 
trends unravel. Already tendencies to 
wards privatisation in various senses, 
of contracting out activities to the pri 
vate  sector,  of  encouraging  private 
provision  of  services  or  support,  of 
shifting responsibility for protection to 
individuals or part of the costs of pro 
vision onto them, are evident in most 
Member States. While the aim of re 
ducing  costs  to  the  government  is  a 
major  motivation  underlying  such 
moves,  it  is  also  argued  that  greater 
private sector involvement is a means 
of introducing more competition in the 
delivery of services and, therefore, of 
increasing efficiency.  Equally, giving 

52-

more  responsibility  to  individuals  to 
provide  for  their  own  protection 
widens  their freedom  of  choice  over 
how much and what kind of insurance 
to  have and so arguably  is  a way of 
increasing the effectiveness  of expen 
diture,  in  the  sense  of  the  pattern  of 
what is spent conforming more closely 
to  consumer  —  and  social  —  pref 
erences. 

A point worth emphasising given the 
prevailing  preoccupation  with  cost 
containment  is  that  privatisation  in 
these  senses  does not  necessarily  re 
duce what is spent overall on protec 
tion though it may help to keep down 
public  expenditure  and,  therefore, 
taxes and contributions. In a number of 
areas  leaving  consumers  freer  to 
choose what they spend may well re 
sult in higher expenditure, especially 
as real incomes increase. This is most 
notably the case as regards health care 
as witnessed by the scale of spending 
and the range of services provided in 
the  US  —  where  it  is  also  open  to 
question how far economic  efficiency 
is boosted by greater freedom  of con 
sumer choice—but it may also be true 
of saving for retirement as people look 
forward  to a longer period of old age 
as life expectancy increases. 

The  trend  towards  privatisation  is 
wide-ranging  but is most apparent in 
respect of retirement pensions, health 
care and social services and sickness 
and invalidity benefits. Recent devel 
opments  in  each  of  these  areas  are 
examined in turn below. 

to encourage the development of pri 
vate insurance schemes for the provi 
sion  of  pensions  over  the  past  few 
years.  With  the  major  exception  of 
the UK, however, such  schemes  are 
not intended to replace public sector 
provision  directly  but  to  enable 
people  —  occupational  groups  in 
particular  —  to  supplement  their 
state pensions if they so wish. In this 
way, as well  as  giving  people  more 
choice over how much they wish to 
contribute,  it  is  hoped  to  relieve 
pressure  for  an  expansion  of  State 
supplementary  schemes.  Occupa 
tional  schemes  of  this  kind  have 
existed  for  some  time  in  both 
Belgium and Germany, while in Italy 
legislation took effect  in  1994 to fa 
cilitate the development of company 
pensions. 

In the UK, on the other hand, a major 
aim of pohcy in this area for the past 
decade and more has been to hive off 
responsibility for a large part of pen 
sion  provision  to  private  insurance 
companies  and  employees  have  the 
right to contract out of the State sup 
plementary  system  so  long  as  they 
belong to an approved privately man 
aged  scheme.  In  the  past,  such 
schemes  were  predominantly  or 
ganised by employers and were spe 
cific  to  particular  occupational 
groups  or companies.  Over the  past 
few  years,  however,  attempts  have 
been made, through financial  incen 
tives and publicity, to encourage the 
development of personal pensions as 
a substitute for, rather than as an ad 
dition  to,  State  supplementary  pen 
sions. 

Retirement pensions 

In a number of Member States, gov 
ernments have introduced incentives 

This approach, however, has recently 
been called into question for two rea 
sons.  First,  the  Maxwell  scandal, 

Chapter 2 -  Adapting to change: recent reforms and key developments 

where pension fund money was used 
by an employer for his own purposes 
and  lost  as  the company  failed,  has 
demonstrated  the  need  for  closer 
supervision  and  much  tighter  con 
trols on  private  pension  funds.  Sec 
ondly,  members  have  had  to  pay 
higher  levels  of  contributions  to 
cover  the  higher  costs  associated 
with  running  individual  pension 
schemes as compared with large oc 
cupational  schemes.  Given  such 
costs  and  the  costs  of  supervising 
private schemes effectively, added to 
the  greater  inflexibility  associated 
with a multitude of different  occupa 
tional schemes which  in some cases 
increase the costs of moving between 
jobs,  it  is  open  to  question  how  far 
privatisation on the scale obtaining in 
the  UK  represents  a  more  efficient 
and lower cost solution to the provi 
sion of adequate pensions. 

Health care and 
social services 

A combination of public and private 
provision is most prevalent in respect 
of health care. In all Member States, 
the private sector is involved to some 
extent in the supply of treatment and 
services and in most countries its im 
portance  has  increased  since  1980 
(the  only  exceptions  between  1980 
and  1993 were Belgium, the Nether 
lands  and  Finland  —  see  Chapter  3 
below). At the same time, an increas 
ing  proportion  of  the  cost  of  treat 
ment  and  of  prescriptions  has  been 
passed  onto  patients.  Moreover,  in 
two  countries,  in  particular,  the 
Netherlands and the UK,  significant 
reforms  have taken place in the way 
the  system  is  organised,  both  with 
the  intention  of  introducing  more 

competition  and  so  increasing  effi 
ciency (see Chapter 5 below). 

In Sweden, privatisation has in recent 
years been extended to social service 
activities, in particular, to the provi 
sion  of  various  personal  services, 
such  as child  care, where there was 
previously a public sector monopoly, 
though this is essentially bringing the 
situation  into line with that  existing 
in  other  parts  of  the  Union. To  en 
courage  this  development,  State 
grants have been introduced for those 
providing such services. 

A different  example of privatisation, 
in a broad sense, in this general area 
is the establishment of the Child Sup 
port Agency  in the UK in  1993, set 
up  to  identify  and  trace  absent  par 
ents — fathers, in particular — with 
the aim of increasing the amount that 
they  pay  to  support  their  children 
(through  the  application  of  a  fixed, 
and controversially rigid, formula  to 
their  present  income)  and,  accord 
ingly, to reduce the amount the State 
has to pay? 

Sickness and 
invalidity benefits 

Concern about the scale and growth 
of  sickness  and  invalidity  benefits 
has, in recent years, led governments 
in two countries, in particular — the 
Netherlands  and  the  UK —  to look 
for ways of reforming  the system of 
payments  in  order  to  curb  expendi 
ture, partly through tightening eligi 
bility  criteria  and  partly  through 
reducing the level of income support 
or abolishing benefits completely. In 
both  countries,  policy  has  been 
aimed  at  shifting  responsibility  for 

payment and, therefore, for checking 
the validity of claims onto employers 
(see box  on the relative numbers  of 
people who regard themselves as per 
manently disabled in these two coun 
tries). 

In  the  Netherlands,  legislation  was 
introduced in 1993 to make the level 
and  duration  of  benefits  dependent 
on  age,  to  widen  the  definition  of 
what  is  deemed  to  be  suitable  em 
ployment  for  the  claimant  and  to 
introduce  regular  medical  examin 
ations.  In  1994,  further  legislation 
was  enacted  to make employers  en 
tirely responsible for income support 
for the first six weeks of sickness and 
to  encourage them  to check  that the 
person  concerned  is  really  too  ill to 
work  and  to  set  up  counselling  ar 
rangements. At the same time, com 
panies  are  required  to  develop 
policies  on  reducing  the  prevalence 
of sick leave. 

Similar  measures  have  been  intro 
duced in the UK. As from April 1995, 
short-term  sickness  and  longer-term 
invalidity  benefits  were  amalga 
mated  into  a  single  Incapacity 
Benefit,  with  the  level  of  payment 
increasing  with  duration  and  with 
regular  independent  and  more strin 
gent medical checks being  required. 
In  addition,  from  April  1994,  em 
ployers have become responsible for 
covering  the first 28 weeks  of  sick 
ness.  The  extra  cost,  however,  has 
been  offset  by  a  reduction  in  their 
social  insurance contributions  (pro 
portionately  greater  for  lower'than 
higher wage-earners), which on aver 
age  more  than  compensates  for  the 
expected additional expenditure they 
are likely to incur. 

53 

Chapter 2 -  Adapting to change: recent reforms and key developments 

Numbers of disabled in the Union 

Comparable and reliable data on the number of people drawing invalidity 
or disability benefits in the Union are not available. Some indication of the 
numbers involved can be gained from the Community Labour Force Survey 
which includes a question on why respondents were not actively seeking 
work and suggests being permanently disabled as a possible reason. 

The relative numbers of people classified  as permanently disabled in the 
Netherlands and the UK on this basis in relation to other parts of the Union 
is striking. In both countries, some 7% of people in the 45 to 54 age group 
and 15-16% of those in the 55 to 64 age group considered themselves to 
be permanently disabled  in  1994 (Graph  10). These proportions, which 
almost certainly reflect the kind of income support which they are receiving 
rather than the actual number of people who are disabled, are twice as high 
as the averages for the Union as a whole — though it should be noted that 
the data are incomplete for some countries, France, in particular, for which 
there are no data at all. Around half of all the disabled people in the Union 
were, therefore, living in these two countries. Moreover, in both cases, the 
proportions have tended to increase over time, though there was some fall 
in the Netherlands for the younger of the two age groups between 1993 and 
1994, perhaps in response to the tightening of eligibility conditions. 

10  People aged 45-54 and 55-64 economically  inactive 

because of being permanently  disabled, 1987 and 
1994 
% pop 45-54 

% pop 55-64 

18  r 

As in the Netherlands, such a change 
is deliberately  designed  to give em 
ployers a marked incentive to reduce 
the  incidence  of  sick  leave.  Never 
theless, while more systematic moni 
toring  of  leave  might  be  called  for, 
there is a danger that  a result  of  the 
change  will  be  to  discourage  em 
ployers  from  hiring  people  who  are 
regarded  as  likely  to  be  prone  to 
spells  of  absence  for  illness  or  to 
retain those who have already shown 
themselves to be. 

The  experience  in  Germany,  where 
employers have been responsible for 
some time for  the  payment  of  sick 
ness  benefit,  seems  to  indicate  that 
this  is  not  so  much  of  a  potential 
problem.  The  experience  also  sug 
gests, however, that it is important to 
have rules  governing  hiring  and fir 
ing  which  specifically  prevent 
employers having access to an appli 
cant's  detailed  medical  record  or 
being  able  to  fire  someone  purely 
because  of  their  state  of  health  and 
which are strictly enforced.  In  prac: 
tice, the people hkely to suffer  most 
from the change in arrangements are 
those employed by small companies 
where controls, are deliberately rela 
tively lax. At the same time, the Ger 
man  experience  also  seems  to 
suggest  that  there  is  unlikely  to  be 
much if any saving in overall expen 
diture on sickness benefits as a result 
of  the  change,  even  though  pubhc 
spending will be lower. 

As governments in these two countries 
and others in the Union have focused 
on  reducing  social  expenditure,  in 
Germany, the scope of the system has 
been extended to include a new func 
tion, insurance against long-term care 
{Pflegeversicherung), financed,  as 

54 

Chapter 2 -  Adapting to change: recent reforms and key developments 

noted above, by a general increase in 
contributions.  The  novelty  of  this 
move is not the provision of support for 
care  itself  —  in  a  number  of  other 
Member States, care is provided as part 
of health or social services or as part of 
their social assistance arrangements— 
but its incorporation in the social insur 
ance system as such. 

Cost  containment  has  also  been  a 
major  objective  in  the  provision  of 
health care where in a number of coun 
tries, in addition to the Netherlands and 
the UK where reforms have been most 
substantial, such as Italy, Germany and 
Spain, attempts have either been made 
or  are being  considered  to  introduce 
more competition into the system with 
a view to raising efficiency. 

Concluding 
remarks 

One  conclusion  to  be  drawn 

from  the above  is that, just  as 
Member  States  are characterised  by 
significant  differences  in their social 
protection systems, as emphasised in 
Chapter  1, so too have  there been a 
number  of  disparate  developments 
over  recent  years.  Nevertheless, 
there are clear signs of some conver 
gence  in  the  measures  taken  and  in 
the  focus  of  policy  effort,  which 
should not be too surprising given the 
common nature of the problems and 
challenges  faced. 

Most  particularly,  in  all  Member 
States,  governments  have  been  in 
creasingly  concerned  with  contain 
ing  costs,  especially  of  old-age 
pensions  and  unemployment  com 
pensation, two areas where the actual 
and impending pressure for expendi 
ture growth is acute. The action taken 
in this respect has also been  similar, 
taking  the  form  of  targeting  entitle 
ment to benefit  more narrowly — in 
respect  of  pensions,  by  raising  the 
age of  retirement  — as much as di 
rectly  reducing  the  rates  of  benefit 
paid. 

In addition, there is a common trend 
away  from  a  passive  policy  of  in 
come  support  towards  active 
measures to get people into a position 
where  they  can  support  themselves 
rather  than  having  to  rely  on  the 
State.  The  precise  measures  taken, 
however,  vary  somewhat  across  the 
Union,  especially  in  respect  of  the 
role  played  by  government,  at  the 
regional and local as well as central 
level.  In  some  Member  States,  the 
pubhc authorities are much more ac 
tively  engaged  in  the  job  creation 
process  than  in  others,  where  they 
have concentrated more on an enab 
ling  role,  removing  restrictions  and 
obstacles  to  employment  growth. 
What  is  meant  by  active  policy, 
therefore,  differs  in  some  degree 
across  the  Union  and  has  come  to 
cover a broad range of widely  differ 
ing  measures  and  approaches.  In 
most  Member  States,  however,  im 
proving  the  functioning  of  the  em 
ployment  services  and  the help  and 
advice given to job seekers has been 
a central part of policy. 

In financing,  there has been a wide 
spread shift away from contributions, 
especially those levied on employers 
towards  increased  reliance  on  taxa 
tion on the grounds that the former is 
liable  to  add  to  labour  costs  and  so 
deter job  creation  and  damage  cost 

competitiveness.  As  part  of  this,  a 
general  search  for  alternative  forms 
of  funding  is evident,  as well as  the 
development of taxes earmarked  for 
the financing  of  specific  benefits  or 
services.  On  the  other  hand,  in 
Denmark  the  opposite  is  occurring 
with the introduction  and  expansion 
of  contributions,  though  from  an 
other perspective this can be seen as 
move towards convergence with the 
rest  of  the  Union  where  there  is  a 
more mixed pattern of  financing. 

Common  trends  are  also  apparent 
with regard to privatisation, if this is 
defined  in  very  general  terms  to 
encompass  any  changes  which  lead 
to more private sector involvement in 
the provision  of  social protection  or 
individuals  having  more  responsi 
bility and choice over the amount and 
form  of  protection  provided.  At  the 
same time, there is little sign of any 
general move to narrow the scope of 
social  protection  coverage  or  away 
from universal entitlement to income 
support and access to services. 

Indeed,  in the Southern countries  of 
the Union as well as in Ireland, sub 
stantial  progress  has  been  made 
towards the establishment of systems 
comparable in their coverage and the 
level of support provided to those in 
other  Member  States.  Equally,  in  a 
number  of  countries,  protection  has 
been  improved  or extended  to  meet 
new  needs,  not  only  in  Germany, 
with the introduction of its long-term 
care insurance, but also in Denmark 
and  Sweden,  where  entitlement  of 
workers to periods of leave for train 
ing  or  parental  care  has  been  intro 
duced  or  extended  and  combined 
with the provision of temporary jobs 
for the unemployed. 

55 

Chapter 2 -  Adapting to change: recent reforms and key developments 

56 

Chapter 3 -  Trends in social protection and its financing 

Chapter 3  Trends in social protection 
and its financing 

In 1993, expenditure on social pro 

tection — defined  to include old-
age  pensions,  health  care,  sickness 
and  invalidity  benefits,  unemploy 
ment compensation and spending on 
pubhc  employment  services,  family 
allowances  and  maternity  benefits 
and  housing  benefits  as  well  as  ad 
ministrative  costs  —  averaged 
around  29%  of  Community  GDP. 
This  was  equivalent  to  just  over 
4,500  ECU  per  person  living  in  the 
Member States. 

Variations  in  the  scale  of  spending 
across the Union, however,  are sub 
stantial. Whereas in Denmark and the 
Netherlands,  expenditure  amounted 
to over 33% of GDP (and to around 
35% in Finland, where the figure has 
been  increased  markedly  by  the 
slump  in  GDP,  and  around  30% in 
Sweden, though for the latter not di 
rectly  comparable  figures  as  yet 
exist), in Ireland, it was only around 
2l72%,  in  Portugal  18%  and  in 
Greece just over  16% (Graph  11). 

In terms  of average expenditure per 
head  of  population,  differences  are 
even  wider.  While  Luxembourg  in 
1993 spent an average of over 6,600 
ECU (expressed in purchasing power 
standards  to  make  the  figure  more 
comparable,  in  terms  of  the  com 
mand  over  real  resources,  with  that 

for  other countries  in the Union) on 
social  protection  for  every  person 
resident in the country, Greece spent 
only  1,600  ECU  per  person  (stand 
ardised in the same way), a difference 
of over 4 times. Although the extent 
of variation was less for other Mem 
ber  States,  it  was  still  the  case  that 
there  was  a considerable  difference 
between  the  level  of  expenditure  in 
the  more  developed,  more  pros 
perous countries  in the North  of the 

Union and those in the South together 
with  Ireland.  Both  the  Netherlands 
and  Denmark,  therefore,  spent  al 
most twice as much per head on so 
cial  protection  in  purchasing  power 
terms in  1993 than Spain, over twice 
as much  as Ireland  and  almost three 
times as much as Portugal. 

Although these differences  largely re 
flect  differences  in  levels  of  real  in 
come — and purchasing power — per 

11 

Social protection expenditure  per head and  in 
relation to GDP, 1993 

Social protection expenditure per head, PPS (1000s) 

% GDP 

5  V 

LM 
GR  P  IRL  E  UK 

I  E1  B  F  D  NL  DK  L 

GR  P  IRL  E  UK 

I  E1  B  F  D  NL  DK  L 

D includes new Lander 

2 

2 

35 

30 

25 

20 

15 

10 

57 

Chapter 3 -  Trends in social protection and its financing 

head, it is, nevertheless, the case that 
there is a perceptible tendency, even if 
by no means uniform, for social expen 
diture to be higher in relation to GDP 
the  higher  the  level  of  real  income 
(Graph  12). In other words, as econ 
omies develop and become richer, they 
tend to devote an increasing proportion 
of resources to social protection in its 
various  aspects. The extent  to which 
this happens, however, itself varies be 
tween countries. The Netherlands and 
Italy  with  much  the  same  levels  of 
GDP  per  head  when  expressed  in 
purchasing  power  standard  terms 
have very different  levels of spending 
on social protection in relation to GDP. 
Whereas  in  the  former  it  amounted 
to 33'/2%  in  1993, in the latter it was 
under  26%.  Indeed,  in  all  Northern 
Member  States where GDP per head 
was  higher  than  in  the  Netherlands 
(or  Denmark),  social  protection 

expenditure was lower, in some cases 
significantly  so.  The  choice  of  how 
much  to  spend  on  social  protection 
even  between  countries  with  similar 
levels of real income, therefore, differs 
markedly between Member States. 

Real income, on the other hand, is by 
no means the only determinant of ex 
penditure levels. Countries also vary in 
terms of the need for social protection 
because of different  population struc 
tures  (the  proportion  of  elderly 
people), different  levels of unemploy 
ment,  different  disparities  in  under 
lying income distribution and so on. 

Outline of analysis 

'hese  differences,  and  the 
changes which have occurred in 

12 

Social protection  expenditure  and GDP per head, 
1993 

Social protection expenditure {% GDP) 

35 

30 h 

25 

20 V 

15 

10 

6 

• E 

• IRL 

• P 

• GR 

• NL  OK 

•D  •F 

,E12 

• B 

'UK 

• I 

i 35 

H 30 

^ 25 

1 20 

15 

10 

8 

10 

12 

14 

16 

18 

20 

D includes new Lander; excluding L 

GDP per head, PPS (1000s) 

-58-

them over time are among the issues 
examined  in  this  chapter,  which  is 
concerned  not  only  to  review  the 
comparative  levels  of  social  protec 
tion  expenditure  across  the  Union 
and  how  these  have  changed  over 
time in relation to economic growth, 
but  also  to try to identify  the proxi 
mate  reasons  for  the  differences 
which exist and the variations in rates 
of change. In particular, a major aim 
is to consider  how  far  demographic 
trends, and more specifically change-
s in the numbers potentially  in need 
of protection, or support, can account 
for the changes in social expenditure 
which  have  occurred  over  the  past 
decade or so. 

Such  an analysis, however, is by no 
means  straightforward.  What can be 
achieved  is  very  much  limited  by 
data  problems.  Thus  while  there  is 
now  a relatively  well  developed  set 
of data on social protection expendi 
ture  in the  Union  designed  to be as 
comparable  as  possible  (though  not 
as yet including two of the three new 
Member  States),  which  forms  the 
basis for the analysis here (see Notes 
and sources at the back of the report), 
there is considerably less information 
about the number of people in receipt 
of  social  protection,  whether  of  in 
come  support  or of  the  various  ser 
vices provided. In general, the lack of 
data  on  beneficiaries  means  that 
population  or labour  market  figures 
for  groups  at  risk  (for  example,  the 
number  of  people  above  retirement 
age in the various countries) have to 
be used instead to serve as a proxy for 
the numbers  receiving  support. As a 
result,  it  is  not  possible  to  examine 
what  is  happening  to  the  extent  of 
coverage  of  social  protection  sys 
tems,  in  the  sense  of  whether  an 

Chapter 3 -  Trends In social protection and its financing 

increasing  or  declining  number  of 
people at risk have access  to  assist 
ance, or, in other words, to the pro 
portion  of  people  at  risk  who  are 
assisted. 

This is a major weakness of the ana 
lysis  since  it  hes  at  the  root  of  any 
assessment  of  the  effectiveness  of 
systems  in  actually  reaching  the 
people in need and providing adequ 
ate levels of protection and  support. 
(Prospectively,  the  new  Household 
Panel Survey established by Eurostat 
will  provide  information  about  the 
numbers receiving income support in 
various forms from the social protec 
tion system  across the Union at any 
one  time  and  the  amount  involved. 
The first results of the survey should 
be available around the end of 1995.) 

In what follows,  the growth  of  total 
expenditure  on  social  protection  in 
Member  States  between  1980  and 
1993 (the latest year for  which  data 
are  available)  is  first  examined  in 
relation  to  the  growth  of  GDP  and 
population in order to try to assess the 
long-term trend — ie whether and to 
what  extent  there  is  a  tendency  for 
social  protection  to  absorb  an  in 
creasing proportion ofresources over 
time. 

Secondly, the pattern of  expenditure 
on the main functions  and the way in 
which  this  varies  between  Member 
States  are  considered  together  with 
the  changes  which  have  occurred 
over  time  to  identify  the  areas  of 
growth and decline. 

Thirdly,  expenditure  on  each  of  the 
main  areas,  or  functions,  of  social 
protection  is  examined,  in  turn,  in 
some detail in order to assess how far 

the changes which have occurred re 
flect  changes  in  the  numbers  of 
people potentially in need of support 
(for  example,  growing  numbers  of 
people  in  retirement)  as  opposed  to 
changes  in  the  average  level  of 
benefit  provided.  In  addition,  the 
changing  structure  of  individual 
kinds of benefit — in particular, the 
extent  to  which  they  are  subject  to 
means-testing  and  the  relative  im 
portance of supplementary payments 
— is also considered. 

Finally,  the  changes  in  sources  of 
finance for social protection systems 
over  the  past  decade  or  so  are  ana 
lysed,  focusing  especially  on  the 
amounts raised from contributions in 
relation to the revenue obtained from 
general taxation. 

Growth in 
expenditure, 
1980 to 1993 
Between  1980 and  1993, total ex 

penditure on social  expenditure 
increased  in  relation  to  GDP  in  all 
Member States with only two excep 
tions  —  Belgium  and  Germany 
where it declined. Over the Union as 
whole, average expenditure went up 
from  24% to just under 28% (29% if 
the  new  Lander  are  included),  a 
slower  rate  of  increase  than  in  the 
1970s when all Member States with 
out exception experienced  a marked 
expansion of spending (Table 1). 

Countries  showing  the  largest  rises 
since  1980 include  in  particular  the 
Southern  Member  States,  Greece, 
Spain,  Italy  and  Portugal,  all  of 
which  were  engaged  to  differing 

extents  in  developing  their  social 
protection systems to be comparable 
in coverage with those in the North 
of the Union. On the other hand, they 
also  include  the  UK,  where  pohcy 
was directed perhaps more than else 
where at restraining  social  expendi 
ture growth. (It should be noted that 
because the figures for social protec 
tion  expenditure  in  Austria  and 
Sweden are not directly  comparable 
with those for  the rest of the Union, 
the levels, either in value terms or in 
relation to GDP, are not included in 
the graphs and tables in this chapter. 
The changes over time, however, are 
included  wherever  possible  since 
these  ought  to  be  more  comparable 
with  the  changes  shown  for  other 
Member  States.  For  Finland,  com 
parable data are available but only for 
the years  1990 to 1992 and these are 
included  in  the  analysis  wherever 
possible.  Changes  for  years  before 
1990 are based on national data.) 

However, the change over the period 
as a whole conceals markedly  differ 
ent developments  within the period. 
In particular,  most  of  the  growth  in 
spending  which  occurred  between 
1980 and  1993 was concentrated  in 
the three years of recession between 
1990 and 1993 when GDP expanded 
only  slowly  or  not  at  all.  Over  the 
Union  as  a  whole,  whereas  social 
expenditure rose by 2V2% of GDP in 
the early  1990s, it  went  up by  only 
1%  of  GDP  over  the  whole  of  the 
1980s and between  1985 and  1990, 
when  economic  growth  was  rela 
tively high, spending declined in re 
lation to GDP. 

A  similar pattern  is evident  in most 
Member States. (The level of expen 
diture  relative  to  GDP  is,  however, 

-59 

Chapter 3 -  Trends in social protection and Its financing 

Table 1 — Current social protection expenditure, 1970-1993 

B 

DK 

D  GR 

E 

F 

IRL 

I 

L 

NL 

P 

UK  E12  A*  SF*  S* 

Total social expenditure as % of GDP 

1970 

1980 

1985 

1990 

1993 

18.7  19.6  21.5 

- 

-  19.2  13.2  17.4  15.9  20.8 

-  15.9  19.0 

28.0  28.7  28.8 

9.7  18.2  25.4  20.6  19.4  26.5  30.1  12.9  20.6  24.1 

29.3  27.8  28.4  15.4  20.0  28.8  23.6  22.6  23.4  31.7  14.2  23.8  25.9 

27.0  29.8  26.9  16.1  20.6  27.7  19.5  24.1  22.1  32.2  15.0  22.1  25.2 

27.6  33.2  27.6  16.3  24.0  30.9  21.4  25.8  24.9  33.6  18.3  27.3  27.7 
(28.7) 

(31.0) 

26.0 

35.4 

Annual change in  expenditure as  % of  GDP 

1970-80 

1980-85 

1985-90 

1990-93 

0.9 

0.9 

0.7 

0.3 

-0.2 

-0.1 

-0.5 

0.2 

0.4 

1.1 

-0.3 

0.3 

0.1 

0.0 

0.6 

0.7 

0.7 

0.6 

0.2 

1.1 

0.6 

-0.6 

-0.2 

-0.8 

0.3 

-0.3 

1.1 

0.6 

0.6 

0.9 

0.9 

0.3 

0.1 

0.5 

0.4 

0.1 

1.1 

0.5 

0.6 

0.5 

0.4 

-0.3 

-0.1 

1.7 

0.8 

0.3 

0.2 

1.1 

0.8 

0.3 

0.2 

0.0 

0.6 

0.1 

0.1 

0.2 

Social  expenditure  excluding  unemployment  compensation  as  % of GDP 

1970 

1980 

1985 

1990 

1993 

18.2  19.2 21.3 

. 1 9 .0  9.4  17.4 15.9 20.2 

12.5  18.1 

25.6  25.7 28.0  '9.5 ' 15.5  24.3 19.0 19.0 26.3 28.3 12.6 19.1 22.9 

26.3  24.7 27.0  ^5^  16.5 27.4 20.5 21.8 23.1 28.1 13.9 21.5  24.2 

24.6  26.6 25.8 15.7 17.4 26.2 17.2 23.7 22.0 29.6 14.8 21.3  23.9 

25.0  29.1 26.1 
(29.0) 

15.7  19.2 28.9 18.4 25.3 24.7 30.7 17.4 25.6  25.9 

(26.7) 

25.4 

32.0 

Annual  change  in  expenditure  as  % of  GDP 

1970-80 

1980-85 

0.7 

0.2 

0.6 

0.7 

-0.2 

-0.2 

1985-90 

-0.3 

0.4 

-0.2 

1990-93 

0.1 

0.8 

0.1 

0.9 

1.1 

0.1 

0.0 

1.5 

0.2 

0.2 

0.6 

0.5 

0.6 

1.0 

0.3 

0.2 

1.0 

0.8 

0.6 

-0.6 

-0.2 

-0.7 

0.4 

-0.2 

0.9 

0.4 

0.5 

0.9 

1.3 

0.3 

0.2 

0.9 

0.7 

0.5 

0.5 

0.3 

0.1 

0.0 

-0.1 

•0.1 

0.8 

0.4 

0.0 

0.1 

1.4 

0.6 

0.4 

3^3 

-0.5 

0.0 

0.3 

0.4 

Note: 

The figure for the EC in  1970  refers to the 9 Member States for which data are available.  The change between  1970  and 1980 
relates to the average for these 9 Member States. Figures in parenthesis are for total Germany,  including the new Lander; other 
figures for Germany exclude new Lander. The figures for the UK have been adjusted to a calendar year basis (and therefore, 
differ very slightly from those published in Eurostat, Social Protection Expenditure and Receipts, 1980-1993 
*  A, SF, S  1990-92. 

Source:  Eurostat, ESSPROS database; A and S from national sources; SF for  1980-90 from national sources and for  1990-92 from 

ESSPROS 

60 

Chapters-  Trends In social protection and its financing 

very sensitive to the economic cycle 
and though the timing of this is fairly 
uniform  between countries, the pre 
cise years in which turning-points oc 
curred vary slightiy which affects  the 
changes shown over specific periods 
of  time.)  In  five  countries  — 
Belgium,  Germany,  France,  Ireland 
and the UK—social expenditure fell 
relative to GDP in the second half of 
the 1980s and only in Denmark, Italy, 
Portugal and Finland was there a sig 
nificant  rate of  increase  (more  than 
0.1 % of GDP a year). In all countries 
without  exception,  social  expendi 
ture went up in relation  to GDP be 
tween 1990 and 1993, in six Member 
States  —  Denmark,  Spain,  Luxem 
bourg, Portugal, the UK and Finland 
— by more than  1% of GDP a year. 

A major reason for the rise in expen 
diture  in  relation  to  GDP  over  this 
period was clearly  the economic re 
cession. This both added to the need 
for  spending,  because  of  the  steep 
rise in unemployment  with which it 
was associated, and more  importan 
tly depressed GDP directly. In prac 
tice, in  most countries  only  a  small 
part of the rise in expenditure relative 
to GDP during  the  early  1990s  was 
due to higher payment of unemploy 
ment compensation (on average over 
the Union as a whole, it accounted for 
just  0.2  percentage  points  a year of 
the  0.8  percentage  points  by  which 
expenditure  rose  as  a  proportion  of 
GDP — Table 1). On the other hand, 
in Germany  and Spain, it  accounted 
for  half  or  more  of  the  rise  and  in 
Sweden  for  more than  all  of  the in 
crease (here spending excluding un 
employment pay declined relative to 
GDP  —  in  this  case  over  the  two 
years  1990 to 1992). 

In  order  to  isolate  the  effect  of  the 
depressed  state  of  GDP  on  the 
figures,  it  is  instructive  to  examine 
the rate of growth of expenditure on 
social  protection  in  itself.  Between 
1980 and  Ï993, average expenditure 
on  social  benefits  in  the  Union  (ie 
excluding  administrative  expenses) 
grew by 3-3 V2% a year in real terms 
(deflating by the change in consumer 
prices — the growth in the total in 
cluding administration was much the 
same).  Growth,  however,  was  far 
from  uniform  over  time.  Between 
1980 and 1985, it averaged just over 
272% a year in the Union as a whole, 
between 1985 and 1990, as economic 
growth  picked  up,  it  rose to  almost 
372%  and  between  1990 and  1993, 
when  for  the  most  part  when  the 
European  economies  were  into  re 
cession, it increased further to almost 
4V2% a year (Table 2). Much of this 
acceleration,  however,  reflects  the 
effect  of variations in the rate of un 
employment. If social transfers to the 
unemployed  —  social  assistance  as 
well as benefits — are excluded, the 
difference  in  the  rate  of  growth  of 
expenditure  both  between  the  first 
and  second  half  of  the  1980s  and 
between the second half of the 1980s 
and the early 1990s narrows appreci 
ably. Indeed, on this basis, growth of 
expenditure  on  social  benefits  was 
only very slightly higher in the years 
1990  to  1993  than  over  the  period 
1985 to  1990 (just over 3'/2% a year 
as opposed to just under). 

Moreover,  the  effect  on  social  pro 
tection  expenditure  of  changing  le-
vels  of  unemployment  is  not 
confined  solely  to  unemployment 
transfers. Spending on family  allow 
ances will also be affected  to the ex 
tent that transfers are made to support 

the dependent children of the unem 
ployed,  while  spending  on  old-age 
pensions will also tend to be  affected 
through changes  in  early  retirement 
(see  Chapter  2  above).  The  under 
lying rate of spending growth in the 
early  1990s, therefore, was probably 
no higher than over the latter part of 
the  1980s,  and  possibly  slightly 
lower. Nevertheless, even taking ac 
count  of  thèse  other  elements,  the 
underlying  growth  rate  between 
1990  and  1993 was  still  over  3% a 
year,  higher  than  the  long-term  of 
growth of the Union economies over 
the  past  15-20  years,  implying  an 
upward  trend  in  expenditure  on  so 
cial protection relative to GDp. This 
in large measure reflects the growing 
needs for social support from both an 
ageing  population  and  a  changing 
structure of households. 

The  pattern  of  expenditure  growth 
over time has by no means been uni 
form  between  Member  States.  In 
most countries, even allowing for ris 
ing  expenditure  on  unemployment 
benefits, spending on social  benefits 
in real terms rose at a faster  rate be 
tween  1990 and  1993 than  over  the 
preceding five years, which  perhaps 
explains in part the widespread  em 
phasis on cost containment described 
in Chapter 2. 

In  terms  of  expenditure  on  social 
benefits  per  head,  this  increased  in 
real  terms  by just  under  3% a  year 
between  1980 and  1993 —  slightly 
less than the overall growth  because 
of the (small) rise in population. The 
growth, however, varied  from  under 
2%  a  year  in  Sweden,  Belgium, 
Germany and the Netherlands, to 5% 
a year or more in Finland and Portu 
gal (Graph  13). 

-61  -

Chapter 3 -  Trends In social protection and Its financing 

Table 2 — Growth of expenditure on social benefits at constant prices by function, 
1980-85,1985-90 and 1990-93 (annual % change) 

Old-age  Sickness  Invalidity  Unempl.  Family  Maternity 

Total 

Total 
excl. 
unempl. 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

P 

UK 

EUR12 

A 

SF 

S 

1980-65 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-93 
1980-85 
1985-90 
1990-92 
1980-85 
1985-90 
1990-92 
1980-85 
1985-90 
1990-92 

1.2 
3.0 
3.2 
2.5 
2.4 
2.5 
0.0 
3.2 
1.7 

11.3 
2.3 
-0.9 
4.5 
5.5 
4.5 
4.6 
2.3 
3.1 
2.8 
1.9 
3.6 
6.7 
6.0 
4.8 
0.8 
6.2 
8.0 
1.1 
6.0 
1.8 
1.2 
11.4 
8.9 
4.3 
1.8 
6.9 
1.6 
2.7 
2.2 
3.1 
3.7 
3.3 
5.8 
47 
4.5 
2.5 
3.4 
4.0 

-0.8 
4.8 
2.2 
-2.1 
0.6 
3.3 
0.1 
3.3 
2.5 
1.8 
0.8 
16.9 
0.1 
8.3 
5.0 
3.3 
3.9 
3.7 
1.0 
1.0 
7.7 
3.0 
7.1 
-0.5 
1.0 
6.2 
8.6 
-1.0 
3.9 
3.3 
6.0 
4.6 
12.3 
1.6 
3.7 
5.1 
1.1 
4.3 
3.2 
1.3 
4.4 
8.7 
6.6 
5.2 
-2.2 
0.3 
4.2 
-15.1 

0.1 
0.1 
1.4 
2.2 
3.6 
4.2 
0.9 
2.5 
3.2 
16.9 
0.9 
-4.3 
3.3 
5.4 
4.7 
2.0 
2.6 
0.5 
5.9 
2.8 
6.7 
3.5 
4.9 
1.3 
0.8 
3.4 
5.8 
-0.1 
3.9 
1.6 
2.7 
7.9 
5.3 
4.4 
7.2 
6.1 
1.7 
3.7 
3.1 
1.1 
1.0 
3.4 

7.3 

3.4 
-0.3 
4.7 
3.3 
1.7 
9.8 
11.2 
-1.4 
15.9 
9.1 
6.4 
6.3 
6.5 
3.0 
15.2 
7.4 
4.7 
11.0 
17.6 
-1.0 
12.8 
13.2 
-8.4 
12.4 
14.3 
-7.7 
24.7 
15.6 
-3.3 
5.5 
0.3 
4.6 
46.1 
10.2 
-14.6 
24.5 
9.0 
-2.1 
13.9 
17.6 
4.5 
15.1 
7.4 
-0.7 
116.4 
15.5 
-4.8 
83.0 

-2.5 
0.1 
-2.9 
-0.3 
5.8 
4.2 
-4.9 
3.9 
1.0 
8.7 
-17.6 
-9.5 
-10.4 
-6.5 
12.9 
1.4 
0.8 
2.4 
8.4 
3.5 
6.3 
-0.9 
2.5 
-7.2 
-1.4 
9.8 
13.5 
-2.6 
-2.0 
-2.0 
1.5 
5.9 
1.3 
2.4 
1.4 
7.4 
-1.2 
1.4 
2.3 
-1.9 
0.0 
1.7 
8.9 
M 
5.2 

-0.5 
3.4 
16.8 
12.9 
6.4 
2.4 
-4.1 
4.5 
2.4 
5.1 
-2.3 
-1.2 
-1.3 
1.7 
4.3 
-0.1 
1.2 
0.2 
-1.8 
0.8 
6.9 
3.3 
-1.5 
2.9 
3.9 
6.0 
6.9 
-0.5 
7.2 
13.2 
-0.8 
6.4 
6.7 
0.2 
-3.0 
15.6 
-0.6 
1.0 
5.0 
-0.4 
3.9 
31.2 

6.2 

0.6 
2.3 
2.3 
1.7 
2.8 
5.0 
0.1 
3.3 
2.6 
10.4 
1.7 
1.5 
3.1 
5.7 
6.8 
3.8 
2.8 
3.8 
4.1 
1.1 
6.7 
5.3 
5.6 
3.0 
0.9 
6.5 
8.0 
1.2 
3.4 
1.8 
2.3 
8.5 
10.6 
4.8 
1.3 
8.3 
2.6 
3.3 
4.4 
2.7 
3.5 
6.0 
6.6 
LI 
8.6 
1.8 
3.5 
-1.9 

0.3 
2.6 
2.1 
1.4 
2.9 
4.4 
-0.3 
3.5 
2.0 
10.4 
1.6 
1.4 
2.4 
6.3 
4.9 
3.7 
2.7 
3.3 
2.7 
1.5 
5.8 
5.1 
6.0 
2.9 
0.8 
6.6 
7.9 
0.0 
4.2 
1.5 
2.4 
8.8 
9.6 
4.3 
2.6 
7.5 
2.2 
3.6 
3.8 
1.9 
3.4 
5.2 
6.5 
5,5 
4.5 
1.4 
3.8 
-4.9 

Note:  Expenditure figures are deflated by the consumer price index in each case. Old-age includes survivors; invalidity includes disability 

and occupational accidents and diseases; A: invalidity consists of occupational accidents and diseases only; SF: family includes 
maternity. D exclude new Lender 

Source:  Eurostat, ESSPROS database; A and S from national sources; SF  1980-90 from national sources and  1990-92  from ESSPROS. 

62 

Chapter $ -  Trends in social protection and its financing 

In practice, as for differences  in levels 
of expenditure, there is some tendency 
for  the  growth  of  social  expenditure 
per head in real terms to vary with the 
rate  of  growth  of  GDP  per  head, 
though  there  are number  of  Member 
States  where  GDP  growth  per  head 
grew relatively slowly in which social 
expenditure  increased  at  a  compara 
tively  high rate (Greece and Finland, in 
particular) (Graph 14). 

In five Member States, the growth in 
social expenditure per head increased 
progressively over these three periods, 
though the changing amount spent on 
unemployment  compensation  ac 
counts for part of the rise (Graph 15). 
In ten countries, growth occurred at a 
higher  rate  between  1990  and  1993 
than over the 1980s. In six of these — 
Spain, Ireland, Luxembourg, Portugal, 
the UK and Finland —  growth aver 
aged  6%  a year or more in the early 
1990s. In four countries — Belgium, 
Germany, Greece and the Netherlands 
— on the other hand, the rise in real 
spending per head was kept down to 
below  2%  a  year  over  this  period, 
while  in  Sweden  (at  least  on  the 

national  data  available)  expenditure 
was reduced. 

The structure 
of expenditure 

Although  the  pattern  of  social 

protection  expenditure,  in  the 
sense of what is spent on the different 
kinds  of  function,  varies  across  the 
Union,  it  is  relatively  similar  for 
many  of  the  more  developed  coun 
tries  in  the  North.  In  all  Member 
States,  with  the  sole  exception  of 
Ireland — then  only just — the lar 
gest share of expenditure is devoted 
to  old  age  pensions  (which  is  here 
defined  to  include  survivors'  pen 
sions).  Over  the  Union  as  a  whole, 
these  accounted  for  almost  45% of 
total social spending in 1993, though 
in Greece and Italy theyamounted to 
over 60% of the total (Table 3). Only 
in  the  Netherlands  (37%)  and 
Denmark  (34%)  in  addition  to 
Ireland  (28%),  was  the  proportion 
lower than 40%. 

However,  in  Denmark  and  the 
Netherlands, the difference  from  the 
Union  average  largely  reflects  the 
high level of social spending on other 
functions  (in relation to GDP, spend 
ing  on pensions in both countries is 
close  to that  in most  other  Member 
States)  and in Greece, the low  level 
of  expenditure  elsewhere.  In  Italy, 
on  the  other  hand,  expenditure  on 
pensions  was  higher  in  relation  to 
GDP  than  any  other  country  in  the 
Union  (15V2%  as  against  a  Union 
average of  12%) and in Ireland, sub 
stantially lower (under 6% of GDP). 

Health  care  and  sickness  benefits 
(not  separately  distinguished  in  the 
ESSPROS data, but mainly compris 
ing the former) are the second largest 
element  together  accounting  for  an 
average  of  almost  25% of  expendi 
ture  in  the  Union  in  1993,  though 
varying from  around 30% in Ireland 
and  Portugal  to  under  20%  in 
Denmark and the UK and under 15% 
in  Greece.  In  the  other  7  countries, 
however,  the  proportion  was  not 
markedly  different  from  the  Union 
average  (see  Chapter  5 below  for  a 

13  Growth in expenditure  on social  protection 

14  Growth of social  expenditure per head  and 

benefits  per head,  1980-93 

7  ^Annual growth at 1985 prices (%) 

growth  of GDP per head, 1980-93 

j  Annual change in social expenditure per head (%) 

6  r 

• 
8F 

•  P 

*QR 

«UK 

. 

•mi 

E12«A 

DK 

* 

•  • 

2  • 

1 

D excludes new Under, A, SF, S: 1980-92 

S  D  B  NL  DK  F  E12  A 

IRL  L  UK  QR  E 

I  SF  P 

D excludot new Under, A, SF, a  1960-92 

2 

3 

4 

Annual change In GDP per head {%) 

63 

Chapter 3 -  Trends in social protection and Its financing 

separate  analysis  of  health  care  ex 
penditure based on OECD figures). 

Invalidity,  disability  and  occupa 
tional  injury  benefits  are  the  third 
largest item accounting for 9% of the 
total over the Union as a whole, but 
in this case varying  somewhat  more 
markedly  than the former  two kinds 
of  spending,  from  over  22%  of  the 
total  in  the  Netherlands,  where  ex 
penditure was as large as on sickness 
and  health  care  in  1993,  to  only 
around 7V2% in  France  and  Ireland. 
In relation to GDP, the scale of Dutch 
spending  was  even  more  striking, 
amounting  to  over 7%  as  compared 
with a Union average of 2V2% and a 
figure  of  only  lV2%  in  Ireland  and 
Greece. Expenditure on this  function 
alone is a major  part of the explana 
tion  of  the  relatively  high  expendi 
ture  on  social  protection  in  the 

Netherlands  as compared with other 
countries  in  the  Union,  though  it  is 
important  to  be  cautious  in  this  re 
gard  since  those  who  are  supported 
by means of invalidity benefits  here 
might  well  be  supported  by  other 
kinds  of  benefit  elsewhere  (such 
as  unemployment  benefits,  for. 
example). 

Similarly,  the  high  level  of  overall 
expenditure in Denmark owes much 
to  the  comparatively  high  level  of 
spending on unemployment compen 
sation  and  the  public  employment 
services,  which,  despite  the  rate  of 
unemployment being below average, 
together  accounted  for  19%  of  the 
total in  1993 as opposed to a Union 
average  of  around  8%.  Indeed, 
spending on this function was almost 
as high  in Denmark as in Spain and 
higher  than  in  Ireland,  in  both  of 

15  Growth in expenditure  on social  protection 

benefits per head, 1980-85,1985-90 and 1990-93 

Annual growth at 1985 prices (%) 

12  r 

B  DK  D  GR  E  F 

IRL 

I 

L  NL  P  UK  E12  A  SF  S 

D  excludes new  Lânden A. SF. S:  1990-92 

-64 

which  unemployment  was  substan 
tially  greater.  Though  the  com 
parative  level  of  spending  on 
unemployment  compensation  re 
flects  in  some  degree  the  scale  of 
unemployment,  differences  in  the 
average benefit paid and in the cover 
age of assistance seem to be equally 
if  not  more  important  factors,  as 
examined further  below. 

Family  benefits,  which  are the  fifth 
largest  category  of  spending,  vary 
equally  widely  between  Member 
States.  On  average,  they  accounted 
for 6'/2% of total spending on social 
protection in 1993, but for over 10% 
in  Denmark,  Ireland,  Luxembourg 
and the UK and for  only  1% or less 
in Spain and Greece, though in some 
degree,  this  difference  reflects  the 
method  of  paying  benefits  (directly 
from  employers  in  Greece)  and  the 
extent of tax concessions and allow 
ances which serve the same essential 
purpose (and which should ideally be 
incorporated  in  the  analysis  if  the 
data were available). 

Maternity  benefits  vary  somewhat 
less, though expenditure was signifi-
cantiy  larger  in  1993  in  Denmark, 
especially  in  relation  to  GDP,  than 
elsewhere  in the  Union  and  signifi 
cantly  smaller  in  the  Southern 
Member States — Greece, Italy and 
Portugal,  in  particular  (where  it 
amounted to only 0.1% of GDP). 

For  the  rest,  there  are  marked  dif 
ferences  in  housing  benefits,  which 
in part reflect the way in which those 
receiving  income  support  are  as 
sisted. In the UK, in particular, hous 
ing  benefits,  which  are  much  more 
important  than  in  other  parts  of  the 
Union,  effectively  compensate  for 

Chapter 3 ~ Trends in social protection and its financing 

Table 3 — Division of social protection expenditure by function. 1993 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

P 

UK  E12 

SF 

%  total  expenditure 

Old-age + survivors? 

.  43.2  33.1  39.0  63.0  39.1  41.2  26.8  59.7  45.1  35.4  38.6  39.7  42.3  32.1 

Sickness 

21.8  18.3  25.7  14.1  24.4  24.9  28.3  21.1  23.9  21.2  29.2  18.9  23.3  21.0 

Invalidity, disability + 
occupational 
accidents and diseases 

10.4 

9.1  11.2 

9.4 

9.6 

7.2 

7.1 

8.5  14.0  21.4  13.1  11.5  10.4  15.2 

Unemployment 

9.5  12.3 

6.4 

3.2  19.9 

6.4  13.8 

2.0 

Placement, vocational 
guidance, resettlement 

1.6 

6.1 

2.6 

0.0 

0.5 

1.4 

2.5 

0.1 

0.8 

0.1 

8.7 

4.6 

6.0 

6.9 

9.4 

0.0 

1.6 

1.1 

1.6 

4.0 

Housing 

Family 

Maternity 

Other 

0.0 

2.5 

0.8 

0.5 

0.4 

3.0 

2.9 

0.0 

0.2 

1.0 

0.0-  6.5 

1.9 

1.1 

6.7 

0.8 

9.8 

7.0 

0.5 

0.9 

7.7  10.1 

3.1  10.8 

4.6 

4.3 

9.7 

6.5  10.0 

1.7 

0.7 

1.3 

4.5 

2.4 

0.5 

3.9 

0.9 

1.3 

2.0 

0.4 

1.4 

0.5 

0.8 

1.2 

1.0 

1.4 

2.0 

0.0 

0.1 

2.6 

2.8 

1.5 

0.9 

1.7 

2.4 

2.0 

Administration 

4.6 

2.6 

4.3 

4.8 

3.3 

5.6 

4.4 

5.0 

3.5 

4.5 

5.0 

3.9 

4.5 

2.9 

Total 

100 

100 

100 

100 

100 

100 

10tf 

100 

100 

100 

100 

100 

100 

100 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

P 

UK  E12 

SF 

%GDP 

Old-age + survivors 

11.9  11.0  12.1  10.2 

9.4  12.7 

5.7  15.4  11.2  11.9 

7.0  10.8  11.9  11.4 

Sickness 

6.0 

6.1 

8.0 

2.3 

5.9 

7.7 

6.1 

5.4 

5.9 

7.1 

5.3 

5.1 

6.5 

7.4 

Invalidity, disability  + 
occupational 
accidents and diseases 

Unemployment 

Placement, vocational 
guidance, resettlement 

Housing 

Family 

Maternity 

Other 

2.9 

3.0 

3.5 

1.5 

2.3 

2.2 

1.5 

2.2 

3.5 

7.2 

2.4 

3.1 

2.4 

5.4 

2.6 

4.1 

0.4 

2.0 

2.0 

0.8 

0.5 

0.0 

4.8 

2.0 

3.0 

0.5 

0.2 

2.9 

0.8 

1.6 

0.1 

0.4 

0.5 

0.0 

0.0 

0.0 

0.3 

0.3 

1.9 

0.3 

3.3 

1.4 

0.0 

0.8 

0.2 

0.1 

0.1 

0.9 

0.6 

0.0 

0.1 

0.3 

0.0 

1.8 

0.5 

0.4 

1.9 

0.2 

0.4 

3.3 

2.2 

0.1 

0.2 

2.4 

2.2 

0.8 

2.7 

1.6 

0.8 

2.6 

1.8 

3.5 

0.5 

0.2 

0.1 

0.2 

0.4 

0.4 

0.1 

0.4 

0.2 

0.1 

0.3 

0.3 

0.8 

1.5 

0.0 

0.6 

0.2 

0.4 

0.4 

0.0 

0.0 

0.9 

0.5 

0.4 

1.1 

0.7 

Administration 

1.3 

0.9 

1.3 

0.8 

0.8 

1.7 

1.0 

1.3 

0.9 

1.5 

0.9 

1.1 

1.3 

1.0 

Total 

27.6  33.2  30.3  16.3  24.0  30.9  21.4  25.8  24.9  33.6  18.3  27.3  28.5  35.4 

Note:  D includes the new Lander,  SF 1992 

Source:  Eurostat,  ESSPROS database 

-65 

Chapter 3 -  Trends in social protection and Its financing 

relatively  low  levels  of  compensa 
tion  paid  as  of  right  by  means  of 
unemployment  benefits  or  through 
basic pensions. The level of expendi 
ture,  therefore,  reflects  the  more 
extensive  reliance  in  the  UK  on 
means-testing,  of  which  housing 
benefits  are one element. 

Expenditure 
by function 

Distinguishing  between  the 

changes  which  have  occurred 
in expenditure on the different  func 
tions  of  social  protection  gives  an 
indication  of  the  areas  in  which the 
main  growth  of  spending  has  oc 
curred. In  practice, there was an in 
crease in spending relative to GDP in 

the  Union  in  all  the  main  areas  of 
expenditure between 1980 and 1993, 
with the exception of family  benefits 
where  spending  declined  from  just 
over  2%  to just  under  2%. The  in 
crease  was  especially  marked  in 
respect of pensions, on which spend 
ing went up from an average of 10% 
of  GDP  in  1980  to  12%  in  1993, 
rising  in  all  Member  States,  apart 
from Germany and Ireland. 

The  rise  was  particularly  high  be 
tween  1990 and  1993 (almost  1% of 
GDP),  though  as  noted  above  this 
partly  reflects  the  effect  of  the  de 
pressed  growth  of  GDP  during  this 
period.  Expenditure  on  unemploy 
ment compensation also rose over the 
early  1990s  as  unemployment  in 
creased.  In  the  Union  as  a  whole, 
however,  the rise amounted  to  only 
around  72% of GDP and despite the 

18  Expenditure on old-age pensions per person above 

retirement age in relation'to GDP per head, 1980, 
1990 and 1993 

%  GDP per  head 

100 

100 

B  DK  D  GR 

E 

F 

IRL 

I 

UK  E12 

Includes survivors' pensions; D excludes new Lander 

66-

large numbers out of work, expendi 
ture in 1993 represented under 2% of 
GDP. 

A key  issue  in  respect  of both  pen 
sions and unemployment benefits  as 
well  as  the  other  main  functions  is 
how far the increases which have oc 
curred  are  the  result  of  expanding 
need,  as  reflected  in  underlying 
demographic trends — or, in the case 
of  unemployment,  economic  trends 
—  and,  therefore,  changes  in  the 
number  of  potential  claimants,  and 
how far they reflect the development 
of  more  generous  systems, in terms 
of  the  average  level of  income sup 
port provided and the extent of cover 
age.  This  is  considered  below  by 
examining each ofthe major types of 
benefit  in turn. 

Old-age pensions 

Expenditure on old-age pensions (in 
cluding survivors' pensions), in rela 
tion to GDP can be decomposed,  as 
for benefits  in general, into two ele 
ment — the average pension paid per 
recipient  relative  to  GDP  per  head 
(not  the  same,  it  should  be  empha 
sised,  as  average  earnings)  and  the 
number of recipients relative to total 
population (see Box for a description 
ofthe approach). In practice, because 
satisfactory  data  on  the  number  of 
people  receiving  pensions  are  not 
available (partly because ofthe  diffi 
culties  of  avoiding  over-counting  of 
beneficiaries  when  they  can  receive 
more than  one pension), a proxy  in 
dicator  has to be used  instead  — in 
this case, the number of people over 
the official  retirement age in each of 
the Member  States  plus  those  who, 
according to the Community  Labour 

Chapter 3 -  Trends in social protection and its financing 

Force Survey, have retired early (see 
Box). Such  an indicator  itself  is not 
entirely  satisfactory,  since  it  leaves 
out of account both those who retire 
before they reach the official  age and 
those  over  the  official  age  who  are 
not in receipt of a pension. Neverthe 
less, there seems tittle effective  alter 
native. 

As noted above, expenditure on pen 
sions relative to GDP over the Union 
as a whole rose from  10% in 1980 to 
just under  12% in 1993 (Table 4). At 
the same time, the number of people 
over  retirement  age  increased  from 
16%  of  total  population  to  19%, 
while  those  who  had  retired  early 
also  rose  slightly. The  overall  num 
bers  potentially  in  receipt  of  pen 
sions,  therefore,  went  up  by 
marginally  less  than  the  rise  in  ex 
penditure  relative to  GDP.  Average 
pension,  measured  as  spending 
divided by the number above retire 
ment age plus the number of people 
retiring  early,  relative  to  average 
GDP per head, accordingly, also in 
creased  very  shghtiy  between  1980 
and  1993, but went  up by  more be 

tween  1990 and  1993 than  over  the 
preceding  10  years.  In  the  early 
1990s,  therefore,  the  growth  of  ex 
penditure  relative  to  GDP  was  the 
result  of  an  increase  both  in  the el 
derly  population  and  in the  average 
pension. 

Although there was a general rise in 
the proportion of people above retire 
ment  age  in  most  of  the  Member 
States'between  1980 and 1993 — all 
except for Luxembourg — the rate of 
increase  varied  considerably.  It was 
highest in Italy where the proportion 
above  retirement  age  went  up  from 
18% to almost 25% while those tak 
ing  early  retirement  also  rose,  and 
where the growth  of expenditure on 
pensions  was  substantial. While  the 
average  pension  appears  to  have 
risen in Italy, therefore, the rise was 
less than in a number of other coun 
tries,  and  most  of  the  increase  in 
spending  seems to have been due to 
demographic trends. 

In  Greece  and  Portugal,  where 
spending on pensions also rose mar 
kedly  relative  to GDP, the  rise  was 

predominantly  the  result  of  an  in 
crease  in  the  average  value  of  pen 
sion relative to GDP per head, though 
in this case, this almost certainly re 
flects  an  increased  proportion  of 
those above retirement age receiving 
pension  as  well  as  more  generous 
benefit  rates. Other countries  show 
ing relatively large rises in the aver 
age value of pension over this period 
were  Luxembourg,  the  Netherlands 
and the UK. 

In  Germany,  on  the  other  hand, 
where  expenditure  on  pensions  de 
clined relative to GDP between 1980 
and  1993,  population  above  retire 
ment age increased and, accordingly, 
average pension relative to GDP per 
head  fell  significantly,  from  65% to 
52%, by more than anywhere else in 
the  Union.  The  average  value  also 
fell  in  Ireland,  more  than  offsetting 
the relatively small growth in retire 
ment-age population and giving rise 
to a decline in expenditure relative to 
GDP, though this was confined to the 
1980s. 

19  Old-age pensions: the  extent  of means-testing  of 
basic pensions (first  pillar), 1980,1988 and  1993 

20  Old-age pensions: importance  and structure  of 

supplementary  pensions, 1980,1988 and  1993 

I Other 

a  Means-tested 

" 

Jl 

100 

40  % total pension 

60 

20 

F  1981; L 1989; B 1992; left bar  1980, middle bar  1968, fight bar  1993; 0  exclude» new Lander 

67 

Chapter 3 -  Trends in social protection and its financing 

Estimates of the relative numbers entitled 
to social protection support and expenditure per person 

The lack  of reliable data on numbers of recipients  of 
the  main  kinds  of  social  benefit  make  it difficult  to 
identify  the proximate reasons for both differences  in 
the  scale  of  expenditure  between  countries  and 
changes over time—in particular, whether these result 
from  differences  or changes in the number of people 
requiring support, in the number who actually receive 
support (ie in the extent of coverage of systems) or in 
the average benefit  received. AH that it is possible to 
do in practice is to estimate the number of people  'at 
risk'  —  or  potentially  in  need  of  support  —  in  the 
different  Member  States,  in  the  sense  that  they  are 
above the official  age of retirement, registered as un 
employed  or  young  enough  to  be  eligible  for  child 
allowances. This, of course, does not mean that all of 
these  will  actually receive benefit  or that others will 
not — such as, in particular, those who retire early — 
but it at least provides some indication of the potential 
demand  on  social  protection  systems  and  how  this 
varies across the Union, as well as how it has tended 
to change over time. 

Old-age pensions 

In practice, the analysis of old age pensions is particu 
larly difficult  since it is affected by a number of factors 
—  both  demographic  and  institutional.  Not  only  do 
retirement  ages  differ  between  Member  States,  but 
there are a variety of different  types of pension avail 
able, including supplementary occupational ones. Any 
one person in retirement might therefore be in receipt 
of more than one and sometimes several types. Ident 
ifying  the  number  of beneficiaries,  even if  complete 
information  were to be available, gives rise to signifi 
cant problems of over-counting. 

The  analysis  here  is  based  instead  on  estimates 
(derived from detailed population data) of the number 
of people over retirement age in each of the countries 
plus the numbers below retirement age reporting in the 
Community  Labour  Force  Survey  that  they have re 
tired  (retirement  age is held constant over the period 
at  the  official  age  in  1993)  and expenditure  on  pen 
sions is decomposed into the following  two elements: 

• 

the  proportion  of  the  total  population  (POP) 
entitled to old-age pensions (POPRET) 

• 

the  average  pension  received  by  each  pensioner 
(OAP/POPRET)  in  relation  to  GDP  per  head 
(GDP/POP) 

These two elements are equal by identity to expendi 
ture on pensions in relation to GDP: 
OAP/GDP  =  POPRET/POP  x  (OAP/POPRET)/ 
(GDP/POP) 

The two elements are shown separately in Table 4. It 
should be emphasised that GDP per head in this con 
text relates to GDP divided by total population, which 
is not the same as average earnings. 

Early retirement 

These estimates take account of early retirement which 
is  important  in  all  Member  States, especially  in  the 
case of men. In 1994, according to Community Labour 
Force Survey data, despite the fact that the official  age 
of retirement for men was 65 or above in all countries 
except Belgium (60 to 65), France (60), Italy (61) and 
Germany (63), 52% of men aged between 60 and 64 
were retired in the Union and only in Ireland and the 
UK was the proportion below 40% (though in the UK, 
as in the Netherlands, a much larger proportion  than 
elsewhere were classed as disabled, as noted in Chap 
ter  2  above)  (Graphs  16  and  17).  Moreover  in  all 
Member  States  apart  from  Portugal,  where  it  was 
unchanged, and the UK, where it declined shghtiy, the 
proportion has tended to increase over time. 

Even below 60, significant numbers of men are retired 
—  17% of the 55 to 59 age group in the Union  as a 
whole in 1994,32% in Italy, 29% in Belgium and 25% 
in  France,  though  only  4%  in  the  UK  and  9%  in 
Ireland. Again the proportion has increased over time 
in most Member States. 

Unemployment  benefits 

Analysing  expenditure  on  unemployment  involves 
similar  difficulties.  Not  all  those recorded as  unem 
ployed in Member States will be eligible for  benefit. 
Moreover, the registered numbers of unemployed tend 
to differ  markedly from the numbers complying with 
the  official  ILO  definition  of  unemployment  (in  the 

-68-

Chapter 3-  Trends In social protection and its financing 

• 

• 

• 

16 

100 

80 

60 

sense of being available for work and actively seeking 
a job). 

Nevertheless,  outiays  on  unemployment  benefits 
(UNB) in relation to GDP can be analysed in a similar 
way to old-age pensions by distinguishing the follow 
ing factors: 

•  working age population (15-64 years) in relation 

to total population (POP15-64/POP) 

the activity rate, or active population in relation to 
population of working age (POPACT/ POP15-64) 

the unemployment rate, or the number of unem 
ployed 
to  active  population 
(UN/POPACT) 

relation 

in 

the average benefit received by each person unem 
ployed 
to  GDP  per  head 
relation 
in 
(UNB/UN)/(GDP/POP) 

Inactive and retired men aged 55-59 as a 
proportion of the male population  aged 55-59 in 
the Member States, 1985 and  1994 
f%  of population aged 55-59 

100 

Combining these factors produces the identity: 
UNB/GDP = POP15-64/POP x POPACT/POP 15-64 
x UN/POPACTx (UNB/UN)/(GDP/POP) 

Family benefits 

Potential recipients of family benefits have been taken 
as the number  of children  under the official  age of 
eligibility for allowances, which is 18 in all Member 
States except Germany (16), Ireland (16), the Nether 
lands (17), Portugal (15) and the UK (16). However, 
in many cases, concessions will be made for young 
people  in  full-time  education  who are  likely  to  be 
eligible for benefit in certain circumstances. The esti 
mates, therefore, will be affected  by differences  be 
tween  Member  States  in the numbers remaining  in 
education beyond the normal age for receipt of allow 
ances. 

17 

Inactive  and retired men  aged 60-64 as  a 
proportion of male population  aged 60-64 in  the 
Member States,  1985 and  1994 

1 00  f%  of population aged 60-64 

1  100 

I 

•Other tnacfve 

•  Retired 

•Other  inactive 

•  Retired 

80 

60 

69 

Chapter 3 -  Trends in social protection and its financing 

Table 4 — Decomposition of expenditure on old-age pensions 

Old-age 
pensions 
(% GDP) 

People over 
retirement age 
(% total) 

Early 
retirement 
(% total 
population) 

Total 
retirement 
(% total 
population) 

Expenditure 
per person 
(% GDP 
per head) 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxembourg 

Netherlands 

Portugal 

UK 

EUR12 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 
1993* 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

11.0 
11.3 
11.9 

10.0 
10.6 
11.0 

11.9 
11.0 
11.0 
12.1 

6.1 
10.5 
10.2 

7.2 
8.5 
9.4 

10.5 
11.7 
12.7 

6.2 
5.7 
5.7 

9.9 
13.6 
15.4 

12.0 
9.9 
11.2 

9.5 
11.4 
11.9 

4.6 
6.0 
7.0 

8.5 
9.1 
10.8 

10.0 
11.0 
11.9 

16.4 
16.9 
16.8 
12.5 
13.7 
13.7 
17.1 
18.9 
20.3 
19.9 
14.6 
17.0 
18.0 
11.0 
13.4 
14.4 
17.1 
19.1 
19.7 
10.1 
11.4 
11.4 
18.1 
23.7 
24.7 
14.0 
13.4 
13.8 
11.5 
12.8 
13.0 
12.6 
14.9 
15.6 
17.6 
18.3 
18.2 
16.0 
18.3 
19.0 

2.8 
3.6 
3.5 
2.3 
3.0 
3.1 
1.1 
0.7 
0.9 
1.1 
1.9 
3.6 
3.6 
1.8 
1.9 
2.1 
1.2 
1.3 
1.1 
0.7 
1.0 
1.0 
1.5 
1.8 
1.9 
2.2 
2.7 
4.1 
1.1 
1.0 
1.6 
4.5 
4.5 
4.4 
1.0 
0.8 
0.7 
1.6 
1.7 
1.7 

19.2 
20.6 
20.3 
14.7 
16.7 
16.7 
18.3 
19.6 
21.2 
21.8 
16.5 
20.6 
21.5 
12.8 
15.3 
16.5 
18.3 
20.4 
20.8 
10.8 
12.4 
12.4 
19.5 
25.4 
26.6 
16.2 
16.0 
17.9 
12.5 
13.8 
14.6 
17.1 
19.4 
19.9 
18.5 
19.1 
19.0 
17.6 
20.0 
20.8 

57.5 
55.1 
58.9 
67.7 
63.6 
65.6 
65.3 
55.9 
51.9 
55.6 
37.0 
51.2 
47.6 
55.8 
55.5 
56.7 
57.4 
57.5 
61.2 
57.3 
45.8 
46.2 
50.9 
53.6 
57.8 
74.2 
62.0 
62.8 
76.1 
82.6 
81.4 
26.7 
31.0 
35.3 
45.8 
47.6 
57.1 
57.0 
55.2 
57.2 

:  Note:  Old-age includes survivors; Germany  1993* includes the new Lander. 

Source:  Eurostat, ESSPROS database, Demographic Statistics and Community Labour Force Survey (for early retirement the  1983 LFS 

data are used to represent 1980). 

-70-

Ireland also illustrates the benefits of 
having  fewer  numbers  of  people 
above retirement age relative to total 
population than other Member States 
(only  ll72%  in  1993) and  fence ap 
parently  taking  early  retirement. 
Though in practice this is combined 
with a relatively low level of average 
pension, it is the major reason for for 
the low level of expenditure to GDP. 
Similarly,  the  higher  number  of 
people potentially in receipt of a pen 
sion is the main explanation for high 
spending  relative  to  GDP  in  Italy. 
Indeed, the average level of pension 
in  Italy  in  1993  was,  in  practice, 
much the same relative to GDP as the 
average for the Union. The generos 
ity  of  the  Italian  pension  system, 
therefore,  lies not in  a high  average 
amount  of  benefit  paid  but  more  in 
the low age of retirement (60 for men, 
55  for  women  —  lower  than  else 
where  in  the  Union).  As  noted  in 
Chapter  2  above,  one  of  the  objec 
tives of the recent Italian reforms was 
to raise the retirement age. 

The structure of pensions 

Unfortunately details of the structure 
of  pensions  in  terms  of  the  import 
ance  of  supplementary  payments 
('second pillar') relative to basic pen 
sions  ('first  pillar')  and  of  means-
tested payments relative to payments 
as  of  right  are  available  only  up  to 
1988 for most countries in the Union. 
These show, first, that there is only a 
limited  degree  of  means-testing  in 
this area — the main exception being 
Ireland  —  and  that  there  was  no 
general  tendency  for  its  importance 
to increase over the 1980s — only in 
Spain, Portugal  and the  Netherlands 
did  any  rise  occur,  and  in  the  latter 

Chapter 3 -  Trends in social protection and its financing 

21 

Expenditure  on sickness per .resident in relation  to 
GDP per head, 1980,1990 and 1993 

01980 
B1990 
•  1993 

% GDP per head 

1 

7  r-

5  H 

4  H 

3  H 

2  H; 

B 

DK 

D  GR 

E 

F 

IRL 

I 

L 

NL 

P 

UK  E12 

D excludes new Lànder 

22 

Expenditure  on  invalidity benefit  per person  aged 
15-64 in relation to GDP per head, 1980,1990 and 
1993 

°/<rGDP per  head 

B.  DK 

D  GR 

E 

F 

IRL 

I 

L 

NL 

P  UK  E12 

Includes occupational accidents and diseases; D excludes new Lander 

71 

Chapter 3 -  Trends in social protection and Its financing 

Table 5 — Decomposition of expenditure on invalidity, 
disability, occupational accidents and diseases 

Benefits 
(% GDP) 

Population  Expenditure 
per person 
(%GDP 
per head) 

15-64 
(% total) 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxembourg 

Netherlands 

Portugal 

UK 

EUR12 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 
1993* 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

3.4 
2.9 
2.9 

2.5 
2.8 
3.0 

3.4 
3.1 
3.3 
3.5 

0.9 
1.8 
1.5 

1.8 
2.0 
2.3 

2.2 
2.2 
2.2 

1.3 
1.4 
1.5 

1.9 
2.1 
2.2 

4.3 
3.3 
3.5 

7.0 
7.0 
7.2 

1.8 
2.2 
2.4 

2.0 
2.6 
3.1 

2.1 
2.2 
2.4 

65.6 
67.0 
66.4 

64.7 
67.4 
67.5 

66.3 
69.5 
68.6 
68.5 

64.0 
66.9 
67.4 

63.1 
66.9 
67.9 

63.7 
65.9 
65.5 

58.9 
61.5 
62.9 

64.6 
68.6 
68.8 

67.6 
69.2 
68.3 

66.2 
68.9 
68.6 

63.1 
66.2 
67.2 

64.1 
65.3 
64.9 

64.5 
67.3 
67.1 

5.2 
4.3 
4.3 

3.9 
4.1 
4.5 

5.1 
4.5 
4.8 
5.1 

1.4 
2.7 
2.3 

2.9 
3.0 
3.4 

3.5 
3.3 
3.4 

2.2 
2.3 
2.4 

2.9 
3.1 
3.2 

6.4 
4.7 
5.1 

10.6 
10.2 
10.5 

2.9 
3.3 
3.5 

3.1 
4.0 
4.8 

4.2 
4.0 
4.4 

Note: D  1993* includes the New Lander. 

Source: Eurostat, ESSPROS database and Demographic Statistics. 

72-

country,  this was followed  by  a  fall 
between  1988 and  1993 (Graph 19). 

Secondly, there was a general  tend 
ency  for  supplementary  pensions  to 
become more  important,  their  share 
ofthe total pension received increas 
ing in most Member States over the 
1980s and reaching over 30% in the 
Netherlands in 1988 (though remain 
ing  at  that  level  during  the  sub 
sequent five years) and over 25% in 
the UK  (Graph  20). There  was  also 
some  tendency  for  payments  from 
voluntary schemes to rise relative to 
those from compulsory ones. 

Sickness 

Expenditure on sickness benefits and 
health care combined went up in the 
Union  as a whole from  6% of  GDP 
in  1980 to 6V2% in  1993 (and  since 
the  potential  recipients  in  this  case 
are  all  those  people  resident  in  the 
Union, average spending  per person 
also rose relative to GDP per head), 
with almost all of the rise occurring 
in the early  1990s. Since  population 
growth  has  been  relatively  small, 
most  of  the  increase  reflects  an  ex 
pansion  in  spending  per  person 
(Graph 21), though given the dispro 
portionate  pressures  on  the  service 
imposed  by  very  elderly  people,  it 
also partly reflects  the changing  age 
structure  of  the  population  and  the 
growing numbers living into old age. 
It is difficult, however, to identify the 
effect  of  the  latter  and  to  gauge  its 
importance  as  compared  with  other 
factors,  such  as  rising  real  income 
levels,  technical  progress  and  in 
creased  know-how  in  respect  of 
medical treatment which might well 
have been more  significant. 

Nevertheless,  expenditure  has  not 
expanded  over  the  past  decade 
throughout  the  Union.  In  Denmark, 
Germany and Ireland, it was lower in 
relation to GDP in 1993 than in 1980, 
though,  apart  from  in  Italy,  in  all 
countries,  including  these  three,  it 
rose  between  1990  and  1993.  The 
increase over  the  period  as  a whole 
was  particularly  pronounced  in 
Greece  and  Portugal  where  the  ser 
vice was being developed (see Chap 
ter 5 for an analysis of expenditure on 
health care, including private as well 
as pubhc spending). 

Invalidity, disability 
and industrial injuries 

Between 1980 and 1993, expenditure 
on invalidity benefits  (defined  to in 
clude payments for disability and in 
dustrial  injuries)  went  up  from  an 
average of 2% of GDP in the Union 
to almost 2'/2% (Table 5). In this case, 
however,  the  rise  was  less  general. 
In  Belgium,  Germany,  France  and 
Luxembourg,  spending  was  either 
less in 1993 than in 1980 or the same. 
In  relation  to  the  population  poten 
tially ehgible for benefit (in this case, 
those of  working-age,  taken  here as 
15 to  64), the  average  amount  paid 
relative  to  GDP  per  head  rose  only 
slightly between  1980 and  1993 and 
in the four  countries  listed  above as 
well  as  in  the  Netherlands  (where 
average  benefit  is  substantially 
higher than elsewhere  in  the Union, 
but has been for some time), declined 
(Graph 22). 

In terms of the structure  of  benefits, 
the  prevalence  of  means-testing 
tended to increase over the 1980s, the 
only exceptions being Ireland, where 

Chapter 3 -  Trends in social protection and its financing 

23 

Invalidity: structure of benefits,  1980 and  1990 

% total pension 

•  Basic benefit  H Means-tested  •  Supplementary 

100  mm 

tum  rn  nn  mm  nn  mm  mm  SH  nn  mm  mm  100 

80 

60 

40 

20 

80 

60 

40 

20 

B 

DK 

0 

GR 

E 

F 

IRL 

I 

L 

NL 

P 

UK 

F 1981; B. DK, GR, UK 1988; E 1989; left bar 1980. right bar 1990; D excludes new Lander 

24  Expenditure on  unemployment  per  registered 
unemployed in relation to GDP per head, 1980, 
1990 and 1993 

% GDP per head 

120 

r 

I Placement, vocational guidance, resettlement 

•I Unemployment 

Left bar 1980, middle bar 1990, right bar 1993; D excludes new Lander 

n  120 

-73 

Chapter 3 -  Trends in social protection and its financing 

Table 6 — Decomposition of expenditure on unemployment benefits 

Pop. 15-64 
(% total) 

Activity rate 
(%) 

Unemploy 
ment rate 
(%) 

Unemploy 
ment benefits 
(% GDP) 

Expenditure 
per person 
(%  GDP 
per head) 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxembourg 

Netherlands 

:  Portugal 

UK 

EUR12 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 
1993* 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

65.6 
67.0 
66.4 

64.7 
67.4 
67.5 

66.3 
69.5 
68.6 
68.5 

64.0 
66.9 
67.4 

63.1 
66.9 
67.9 

63.7 
65.9 
65.5 

58.9 
61.5 
62.9 

64.6 
68.6 
68.8 

67.6 
69.2 
68.3 

66.2 
68.9 
68.6 

63.1 
66.2 
67.2 

64.1 
65.3 
64.9 

64.5 
67.3 
67.1 

41.3 
41.8 
42.2 

51.1-
55.1 
54.8 

45.3 
48.0 
47.7 
47.6 

35.2 
38.0 
37.5 

35.6 
39.7 
38.3 

43.4 
44.0 
43.8 

36.8 
38.7 
40.4 

39.1 
44.9 
44.2 

43.7 
50.1 
52.4 

39.3 
44.1 
46.1 

47.4 
49.0 
49.0 

47.9 
49.5 
48.1 

42.6 
45.4 
44.9 

9.1 
97 
12.9 

6.7 
9.4 
12.1 

3.2 
6.2 
7.3 
8.9 

1.1 
3.6 
4.5 

9.6 
15.2 
17.0 

6.2 
10.0 
12.6 

8.1 
16.5 
20.4 

7.2 
16.4 
19.3 

0.7 
1.1 
1.7 

5.4 
5.4 
5.9 

5.1 
6.3 
7.2 

5.9 
5.8 
10.4 

5.9 
9.6 
12.0 

2.4 
2.4 
2.6 

3.0 
3.2 
4.1 

0.9 
1.1 
1.6 
2.0 

0.3 
0.4 
0.5 

2.7 
3.2 
4.8 

1.0 
1.5 
2.0 

1.6 
2.3 
3.0 

0.4 
0.4 
0.5 

0.1 
0.1 
0.2 

1.8 
2.6 
2.9 

0.3 
0.3 
0.8 

1.5 
0.8 
1.6 

1.2 
1.3 
1.9 

65.3 
59.6 
48.2 

88.0 
61.3 
61.8 

58.7 
36.0 
45.0 
46.8 

64.9 
32.6 
31.1 

79.6 
52.5 
73.7 

38.6 
33.2 
36.1 

51.9 
35.8 
35.8 

14.6 
5.1 
6.2 

49.2 
22.1 
23.4 

83.5 
107.5 
108.5 

13.2 
9.4 
23.7 

53.2 
28.8 
32.6 

48.1 
29.8 
34.9 

Note:  D  1993* includes the new Lander. 

Source:  Eurostat, ESSPROS database. Activity rate relates to employed plus registered unemployed. Employment data are from National 

Accounts, except for Italy, the Netherland and Portugal where data are from the Community Labour Force Survey. 
Unemployment rate relates to registered unemployed (data from Eurostat, SOCI database). 

74-

it was already relatively high in 1980, 
Denmark, Greece and Luxembourg, 
where  it  is  insignificant  or  non 
existent  (Graph  23). In  1990,  how 
ever,  the  proportion  of  payments 
which were subject to means-testing 
was  over  10%  only  in  Belgium, 
Spain,  France  (where  it  was  over 
25%,  higher  than  anywhere  else  in 
the Union), Ireland, Italy and the UK. 

On  the  other  hand,  there  was  little 
tendency for supplementary  benefits 
to  increase  in  significance,  the only 
countries  where  payments  were  of 
any  size  being  the  Netherlands 
(where they accounted for 30% of the 
total  paid  in  1990, though  this  was 
less than ten years earlier), Germany, 
Greece  and  France  (where  in  each 
case they accounted for 7% or less of 
the total). 

Unemployment 
compensation 

The  amount  paid  in  unemployment 
compensation  (social  assistance  as 
well  as  insurance  benefits)  rose 
relative to GDP in all Member States 
between  1980  and  1993,  and  most 
especially in the early  1990s  (Table 
6).  Expenditure  per  person  unem 
ployed  relative  to  GDP  per  head, 
however,  declined  throughout  the 
Union, except in two Member States 
—  the Netherlands, where it rose to 
over  100%  of  GDP  per  head,  and 
Portugal, where though it rose signi 
ficantly,  it  remained  at  a  relatively 
low  level  (see  Box  above  for  a de 
scription  of  the  method  of  calcula 
tion). The fall was especially marked 
over  the  early  1980s  and  between 
1990 and 1993, the rise in unemploy 
ment  was  accompanied  in  many 

Chapter 3 -  Trends in social protection and its financing 

cases  by  an  increase  in the  average 
level of benefit — from 30% of GDP 
per head over the Union as a whole 
to 35% (Graph 24). 

The latter rise reflects  in part the  ef 
fect  of  the  steep  increase  in  unem 
ployment  itself.  Since  this  was 
associated  with a marked  growth  in 
the numbers coming onto the unem 
ployment-register, who were likely to 
be ehgible for higher rates of benefit 
than those who had been on the reg 
ister  for  some  time  (because  rates 
tend  to  decline  the  longer  someone 
has  been  out  of  work),  the  average 
amount  paid  to  each  person  was 
likely to have risen. At the same time, 
a  growing  number  of  young  people 
receiving relatively low benefits also 
joined  the  unemployment  register. 
As the rise in unemployment^oder-
ates,  it  may  well  be  the  case  that 

average benefits  decline once more, 
as over the 1980s. 

In  terms  of  average  benefit  levels, 
these  vary  significantly  between 
Member  States, from  over  100% in 
the  Netherlands  in  1993,  as  noted 
above, to under 24% in Portugal and 
only  6%  in  Italy  (though  here  the 
unemployed receive income support 
in other ways). 

In  general,  differences  in  average 
levels  are  not  closely  related  to 
variations  in  GDP  per  head.  In 
Luxembourg,  which  has  by  some 
way the highest GDP per head in the 
Union, the average benefit paid to the 
unemployed,  as  measured  here, 
amounted to under 30% of GDP per 
head,  below  that  of  Greece,  and  in 
France, the country  with the second 
highest  GDP  per  head,  only  36%, 

25  Unemployment: structure of benefits,  1980 and 

1992 

% total pension 

I Basic 

•  One-off 

nn  nn  m .. 

.. 

D Means-tested 
nn  nn  m 

100 

B 

DK 

D 

OR 

E 

F 

IflL 

I 

L 

NL 

P 

UK 

OK 1984; E, F 1981, GR 1991; left bar 1980, right bar 1992; D excludes new Lander 

75 

Chapter 3 -  Trends in  social protection and Its  financing 

Table 7 — Decomposition of expenditure 
on family allowances 

Family 
allowances 
(% GDP) 

Children 
(% total 
population) 

Expenditure 
per  person 
(% GDP per 
head) 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxembourg 

Netherlands 

Portugal 

UK 

EUR12 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 
1993* 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

2.8 
2.1 
1.9 

2.8 
3.0 
3.3 

2.6 
1.9 
1.8 
2.2 

0.2 
0.1 
0.1 

0.5 
0.2 
0.2 

2.6 
2.2 
2.4 

1> 
2.0 
2.2 

1.2 
1.0 
0.8 

2.2 
2.0 
2.7 

2.6 
1.7 
1.6 

0.8 
0.8 
0.8 

2.3 
2.1 
2.6 

2.1 
1.7 
1.8 

25.0 
21.9 
21.8 

25.6 
21.3 
20.9 

19.9 
16.2 
17.0 
17.4 

22.8 
23.8 
22.3 

31.1 
24.7 
22.6 

27.3 
24.5 
23.8 

30.4 
29.0 
27.5 

27.3 
16.5 
15.4 

23.4 
20.6 
21.2 

25.9 
20.8 
20.7 

25.8 
20.4 
18.6 

22.7 
20.2 
20.6 

25.3 
21.2 
20.6 

11.4 
9.7 
8.5 

10.8 
14.0 
15.7 

12.8 
11.6 
10.8 
12.4 

0.9 
0.5 
0.4 

1.6 
0.6 
1.0 

9.4 
9.1 
10.0 

5.0 
6.9 
7.8 

4.5 
4.8 
4.2 

9.5 
9.9 
12.6 

10.0 
8.2 
7.5 

3.1 
4.0 
4.2 

10.2 
10.3 
12.8 

8.5 
7.9 
8.6 

Note:  Children are defined as those below age limit for receipt of family benefit. 

Germany 1993* includes new Lander. 

Source:  Eurostat, ESSPROS database and Demographic Statistics. 

-76 

much the same as in Ireland. By con 
trast,  in  Spain,  which  is  among  the 
poorer  Member  States,  the  average 
benefit in 1993 was 74% of GDP per 
head (see Chapter 4 below  for a de 
tailed analysis of unemployment  re 
placement rates). 

The structure of 
unemployment 
compensation 

The  form  in  which  unemployment 
benefit  is  paid  differs  markedly  be 
tween Member  States. In  particular, 
whereas  in  four  Member  States  — 
Belgium,  Denmark,  Italy  and 
Luxembourg  —  benefits  tend  to  be 
related  to  earnings  when  in  work 
and  do  not  depend  on  current  in 
come  or  accumulated  savings,  in  a 
number  of  others,  the  receipt  of  in 
come  support  is  subject  to  means-
testing. In Ireland  and the UK,  over 
60%  of  unemployment  compensa 
tion  was  means-tested  in  1992,  in 
each  case  substantially  higher  than 
12  years  earlier  (Graph  25).  In  the 
Netherlands,  around  45%  of  pay 
ments  were  means-tested,  while  in 
Germany, it amounted to some 30% 
and in Spain, 25%, in all three cases 
a  considerably  greater  proportion 
than in  1980. Of the countries where 
means-testing  is  part  of  the  system, 
only Greece and Portugal  witnessed 
a decline  in its importance over this 
period  —  in  the  latter,  reflecting  a 
move  away  from  complete  means-
testing of all payments. 

Family allowances 

Family  or  child  allowances  are 
the  only  broad  function  to  have 

experienced  a reduction  in expendi 
ture  relative  to  GDP  since  1980, 
though even here, spending rose be 
tween 1990 and 1993. This pattern of 
change was repeated in the  majority 
of Member States (Table 7). 

Expenditure  per  child  (where  the 
latter  is  defined  in  terms  of  entitle 
ment  to  allowance),  however, 
remained  unchanged  relative  to 
GDP per head in the Union over the 
period as a whole (at 872%), reflect 
ing the fall in the number of eligible 
children  relative  to  total  population 
(Graph 26). Nevertheless, in the ma 
jority of Member States (8 ofthe 12), 
as in the Union as a whole, average 
benefit levels rose between  1990 and 
1993. 

In  terms  of  average  levels,  dif 
ferences  are  substantial,  average 
benefit  per  child  in  Denmark  and 
Luxembourg amounting to 15V2% of 
GDP per head in 1993 and to almost 
13%  in  Germany  and  the  UK,  as 
against  1%  or  less  in  Spain  and 
Greece. 

As  in  the  case  of  unemployment 
compensation,  there  was  a  wide 
spread increase over the 1980s in the 
use  of  means-testing  to  determine 
family  allowance  levels.  The  only 
country  experiencing  a  decline  was 
Denmark — though in Belgium and 
Greece,  they  remained  largely  un 
used  (Graph  27).  In  Spain,  the  UK 
and  Ireland,  the  expansion  in  their 
use was substantial, and in the latter 
two countries, around 40% of spend 
ing  on  allowances  paid  to  support 
children was subject to means-test — 
the money  being  paid  largely  to the 
unemployed. 

Chapter 3 -  Trends In social protection and its financing 

26 

Expenditure on family benefit  per child in  relation 
to GDP per head, 1980,1990 and 1993 

„  % GDP per head 
16  r 

B  DK  D  GR  E 

F 

IRL 

I 

L  NL  P  UK  E12 

O excludes new Lander 

27 

Family: structure of benefits,  1980 and 1990 

% total pension 

100 

I Basic benefit  •  Means-tested  D Supplementary 

100 

80 

60 

40 

20 

8 

DK 

D 

QR 

E 

F 

IRL 

I 

L 

NL 

P 

UK 

Left  bar  1980, right bar  1990; D excludes new  Lander 

-77 

Chapter 3 -  Trends In social protection and Its financing 

28 

Expenditure on maternity benefit  per live birth  in 
relation to GDP per head, 1980,1990 and 1993 

% GDP per head 

50 

40 

30 

20 

10 

B  DK  D  GR  E 

F 

IRL 

L  NL  P  UK  E12 

D  excludes new Lander 

29 

Financing of social protection expenditure  by 
source,  1980,1990,1993 

%GDP 

50 

•  Other receipts 
O General government 
•  Protected person's contributions 
•  Employers' contributions 

40 

D excludes new Lander, left bar  1980, middle bar  1990, right bar 1993 

78-

Maternity benefits 

Spending  on  maternity  benefits, 
which  is  very  small  in  relation  to 
GDP,  declined  slightly  over  the 
period  1980 to  1993. This  was  at a 
time  when  the number  of births  ex 
pressed as a proportion of total popu 
lation  fell  (markedly  so  in  Greece, 
Spain,  Ireland  and  Portugal  or  re 
mained  stable  —  the  case  in  most 
Member  States.  In  Denmark  and 
Luxembourg, however, the birth rate 
increased over the period. 

Average  expenditure  per  birth  rose 
marginally,  and  most especially  be 
tween  1990  and  1993  (Graph  28). 
Indeed  in  all  Member  States  apart 
from  Germany and France, the aver 
age amount paid was higher in 1993 
than  13  years  earlier.  In  Denmark, 
average  benefit  doubled  over  the 
period  and in  1993, at 42% of  GDP 
per head, was by far the highest in the 
Union, and at the same time the num 
ber  of  live  births  went  up  signifi 
cantly. 

The  rise  in  average  benefits  which 
occurred  in  many  Member  States 
however, was not necessarily the re 
sult  of  benefit  rates becoming  more 
generous. Given the marked increase 
in the participation  of women in the 
labour force over this period, it partly 
reflects  an increase in the proportion 
of births to working mothers who are 
ehgible for  benefit. 

The changing 
structure of finance 

'he  relative  importance  of  the 
various  sources  of  finance  for 

social  protection  systems  is just  as 
much  an  aspect  of  divergence  be 
tween Member States as the pattern 
of  expenditure.  In  1993,  whereas 
most countries  in the  Union  funded 
their systems mainly from  social in 
surance contributions, in three coun 
tries  —  Denmark,  in  particular, 
Ireland and the UK, general taxation 
played  the predominant  role  (Graph 
29). 

Between  1980  and  1993,  however, 
there  was  a  widespread  tendency 
to increase reliance on taxes relative 
to  contributions.  This  was  espe 
cially  the  case  after  1990. Over  the 
Union as a whole, the share of taxes 
in total finance rose from  2772%  to 
2972%,  with  only  Belgium  and  the 
Netherlands showing a fall in the im 
portance of tax revenue. 

Within  contributions,  there  was  a 
parallel shift from levying charges on 
employers  to  levying  them  on  em 
ployees, the major motivation being 
to relieve pressure on labour costs at 
a  time  of  high  unemployment.  On 
average, therefore,  the proportion of 
contributions  collected  from  em 
ployers in the Union fell from 6772% 
in  1980  to  6372%  in  1990  and  to 
under  62%  in  1993. The  reduction 
was common to most Member States, 
the  only  exception  being  Portugal, 
where employers' contributions rose 
markedly  between  1990  and  1993 
(from  68%  of  the  total  to  almost 
75%). 

These  shifts  in  the  relative  reliance 
on different  sources of funding  have 
resulted  in employers'  contributions 
declining shghtiy in relation to GDP 
since  1980.  In  relation  to  labour 
costs, however,  they  have tended  to 

Chapter 3 -Trends  In social protection and its financing 

Table 8  - Decomposition of expenditure 
on maternity benefits 

Maternity 
benefits 
(% GDP) 

Number of  Expenditure 
per person 
(%GDP 
population)  per head) 

births 
(% total 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxembourg 

Netherlands 

Portugal 

UK 

EUR12 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 
1993* 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

1980 
1990 
1993 

0.2 
0.2 
0.2 

0.3 
0.5 
0.5 

0.3 
0.2 
0.2 
0.2 

0-1 
0.1 
0.1 

0.2 
0.2 
0.2 

0.5 
0.4 
0.4 

0.6 
0.4 
0.4 

0.1 
0.1 
0.1 

0.3 
0.3 
0.4 

0.1 
0.1 
0.2 

0.1 
0.1 
0.1 

0.3 
0.2 
0.3 

0.3 
0.2 
0.3 

1.3 
1.2 
1.2 

1.1 
1.2 
1.3 

1.0 
1.2 
1.1 
1.0 

1,5 
1.0 
1.0 

1.5 
1.0 
1.0 

1.5 
1.3 
1.2 

2.2 
1.5 
1.4 

1.1 
1.0 
0.9 

1.1 
1.3 
1.3 

1.3 
1.3 
1.3 

1.6 
1.2 
1.2 

1.3 
1.4 
1.3 

1.3 
1.2 
1.1 

Note:  Germany  1993* includes the new Lander. 

Source:  Eurostat, ESSPROS database and Demographic Statistics. 

12.5 
12.4 
19.4 

22.9 
42.7 
42.4 

26.0 
18.1 
19.4 
21.7 

5.9 
8.8 
8.5 

16.2 
18.0 
21.3 

32.9 
30.0 
32.5 

27.4 
26.1 
31.1 

10.9 
10.3 
11.9 

28.1 
24.8 
26.0 

8.4 
9.3 
13.7 

8.5 
11.1 
12.6 

23.6 
14.8 
24.7 

21.9 
18.8 
22.6 

79 

rise, reflecting the fall in labour costs 
relative to GDP (Graph 30). Only in 
the  Netherlands  were  employers' 
contributions  significantly  lower 
relative to labour costs in  1993 than 
in 1980, though this largely reflects a 
change in classification  (employers' 
contributions were reduced and those 
of  employees'  increased  but  gross 
wages  were raised  at the same  time 
to  compensate).  In  Portugal  and 
Belgium  (in the former  despite their 
rise  as  compared  with  employees' 
contributions), employers'  contribu 
tions fell between  1990 and  1993. 

At  the  same  time,  employee's  con 
tributions have shown an even more 
marked  increase  relative  to  labour 
costs, rising from  1072% to  14% be 
tween  1980 and 1993. 

Chapter 3 -  Trends in social protection and Hs financing 

30  Employers' and protected person's  contributions 

in relation to labour costs, 1980,1990 and 1993 

%  labour costs 

I Protected person's contributions 
I Employers1 contributions 

50 

40 

-,  50 

D excludes new Lander; left bar 1980, middle bar 1990, right bar 1993 

Financing and expenditure 

In most Member States, total receipts to finance social protection systems 
in 1993 exceeded total expenditure, including the costs of administration 
as well as of benefits and services. This is especially so in countries with 
funded  pensions  systems,  such  as  the Netherlands  and the UK, where 
receipts are determined in relation to future liabilities rather than present 
spending. In the former, therefore, receipts were almost 14% higher than 
expenditure in 1993 and in the latter  10% higher. In 1990, the difference 
was 15% and 21%, respectively. In a number of other countries supposedly 
without funded systems, however, receipts were also significandy higher 
than expenditure, reflecting,  in part, the building up of reserves to cover 
future pension payments. 

Receipts  also  tend  to  exceed  expenditure  as  a  result  of  governments 
maintaining  a reserve  against  contingencies,  which  is usually  reduced 
during periods of recession when the yield from contributions and taxes is 
depressed. It is comparatively rare, however, for social protection to be in 
deficit. In 1993, at the depth of the recent recession, only three Member 
States, France, Portugal and, to a very small extent, Ireland, were in deficit, 
while  Denmark  and  Luxembourg  has  surpluses  almost  as  large  as the 
Netherlands and the UK. In 1990, only Ireland was in deficit, and then only 
to a small extent. 

80 

Chapter 4 -  Unemployment compensation and incentives to look for work 

Chapter 4  Unemployment compensation 

and incentives to look for work 

The  persistence  of  high  levels  of 

unemployment  in  most  parts  of 
the  Union  throughout  the  1980s and 
the  significant  increases  experienced 
in virtually all Member States during 
the period of economic recession in the 
early  1990s  have  focused  attention 
both on the underlying causes and on 
the  economic  and  social  conse 
quences.  The  continuing  concern  of 
pohcy  has been, on the one hand, to 
develop effective responses to the fac 
tors which have given rise to the prob 
lem and, on the other, to alleviate the 
effects  on the people who have been 
hit. In both regards, systems of social 
protection have come under increasing 
scrutiny.  Not  only  have  they  had  to 
withstand increasing financial and ad 
ministrative  pressure  as  the  numbers 
needing  support  have risen, but  they 
have been singled out as one ofthe root 
causes of high unemployment 

Thus it has been widely argued that the 
generosity  of  unemployment  benefit 
and  income  maintenance  schemes 
across  the  Union  has  provided  an 
overly attractive alternative to employ 
ment, especially in low-paid jobs, and 
have given people too little incentive 
to look for work. The sums available 
have, therefore, on this view tended to 
depress  effective  labour  supply,  not 
necessarily in the sense of reducing the 
labour force as measured but more in 

the sense of pushing down the numbers 
in the labour force who are genuinely 
looking for work. On the same view, 
they have potentially reduced the de 
mand for labour by effectively  setting 
a  floor  to  wages  and  so  preventing 
these from falling to levels at which it 
is profitable  for employers to take on 
lower skilled workers. In other words, 
it  is  argued  that  benefits  have  been 
fixed in  many  Member  States, above 
the level which firms can afford to pay 
to employees who are capable of con 
tributing  relatively  little  to  value-
added, which has meant that too few 
jobs have been created for such people. 

Few  would  seriously  claim  that  the 
operation ofthe social protection sys 
tems and the scale of benefits  avail 
able  are the  main,  or even  a  major, 
cause  of  the  present  high  level  of 
unemployment  in the Union, which, 
it  is  commonly  accepted,  is  due 
largely  to  macro-economic  and 
structural factors. Nevertheless, it is 
possible that they have contributed to 
the problem  and made it more  diffi 
cult to resolve by effectively  prevent 
ing wages from falling to a level low 
enough to stimulate demand for rela 
tively low skilled labour. 

scale,  principally  by  reducing  the 
costs of employing  young people or 
those  with  comparatively  low  skill 
levels, who make up a large propor 
tion  of  the  unemployed,  has  given 
governments  added  reason  for reas 
sessing  the  relationship  between 
wage and benefit levels. 

The  task  facing  governments  in  the 
Union  is  to  balance  the  conflicting 
concerns,  on  the  one  side,  about 
spending  too much and on the other 
of spending too litde. Thus the objec 
tives on the former  side consist  of: 

• 

restraining  the  growth  of  social 
protection expenditure within the 
capacity  of the economy  to  fund 
it; 

•  maintaining  adequate  incentives 
for  those out of work to look for 
jobs; 

•  preventing  abuse  of  the  system, 
which  is  important  not  only  to 
keep  expenditure  down  but  also 
to maintain  society's  willingness 
to  fund  pubhc  spending  on  in 
come support. 

On the other side, they consist  of: 

The  fact  that  a  growing  concern  of 
pohcy has been to help stimulate job 
creation at the lower end of the pay-

•  ensuring  that  those  who  cannot 
find  a job  have an adequate, and 

81  -

Chapter 4 -  Unemployment compensation and Incentives to look for work 

The data and method used 

The analysis in this chapter is based heavily on a model ofthe tax and social protection 
system developed by the Central Planning Bureau in the Hague for the Commission 
Services. It enables the social contribution and taxes payable by a single person, a 
married couple and a couplé with two children to be estimated at different levels of 
gross earnings. It also enables the unemployment benefit or social assistance receiv 
able by such a person to be estimated, taking account of their age, employment record 
and how long they have been unemployed. The new Member States were not included 
in the exercise and, therefore, are not incorporated in the analysis here. The exercise 
did include, however) three selected US States, and the calculations for New York 
have been used to represent the US here, though it should be emphasised that taxes 
and benefits vary somewhat across States, as do, therefore, replacement rates. For 
Italy, where social  assistance  (as  opposed to  social insurance) is organised  on a 
regional basis and varies across the country in terms of amount and the conditions 
attached to payment, the estimates for a person not entitled to social insurance benefits 
(or whose entitlement has expired) relate to Liguria, a region with GDP per head 
somewhat below the .average for Northern Italy and unemployment above the average, 
but with a well-developed social assistance scheme. As such, they may be indicative 
of other parts of Northern Italy but may well differ significantly from the position in 
the  South  of  the  country.. For  Spain,  where  social  assistance  is  also regionally 
organised, the estimates relate to Aragon, a region with above average GDP per head 
and below average unemployment. 

The calculations include the effects  of housing benefits on the replacement rate by 
assuming that the individual concerned pays an average rent (though estimates of what 
constitutes an average are very approximate because of lack of reliable data). The 
replacement rate is, therefore, defined,as disposable income when in work relative to 
disposable income when unemployed, including housing benefits as part of disposable 
income which is defined before deducting housing costs (see the section on housing 
costs for more details). Other costs, such as the cost of child care, travel to and from 
work (as opposed to travel undertaken to look for a job) or working expenses are not 
included in the calculations, partly because ofthe difficulties of estimating them and 
the wide variation between  individuals in otherwise similar circumstances, but in 
some cases  they  may  have a significant  effect  on replacement rates (where, for 
example, women have to pay for child care in order to take up a job). 

The average gross wage of a manual worker in industry, as estimated by OECD, has 
been taken as the benchmark against which to compare rates in the different Member 
States and to assess the way that these change as earnings and family circumstances 
vary. Although other figures for the average could have been used instead, it should 
be emphasised that the results depend only to a minor extent on the precise figure used 
for  the benchmark.  It does not mean, in particular,  that the results  apply only to 
workers in industry or even only to full-time workers. Indeed when interpreting the 
results  for those on low earnings, it should be borne in mind that a large number of 
workers, especially women, are employed part-time and, therefore, may earn a wage 
which represents only a small proportion of the average as defined here. 

It should also be borne in mind, however, that the tax and benefit position of a married 
women living with her husband may be different  from  a single person so that the 
calculations cannot necessarily be assumed to apply in this case. 

82-

Chapter 4-  Unemployment  compensation  and incentives  to  look  for work 

acceptable,  level  of  income  to 
support  both 
themselves  and 
their dependants; 

•  giving  those  unemployed  suffi 
cient  time  to  look  for  employ 
ment which  suits their  particular 
skills  and  abilities,  which  is  im 
portant for the efficient  function 
ing  of  the labour market and  the 
overall  efficiency  of  the  econ 
omy; 

•  providing  access 

to  effective 
support  and  advice  for  those 
searching  for  jobs,  through  de 
veloping  efficient  employment 
services  and  placement  agencies 
(in the private as well as the pub 
lic sector); 

• 

improving  the  employability  of 
the  unemployed  and  the  incen 
tive  for  employers  to  take  them 
on  through  providing  access  to 
training  and  other  active  labour 
market measures. 

The  concern  of  this  chapter  is  with 
the  income  support  measures  avail 
able  to  those  who  are  unemployed 
across  the  Union  and,  specifically, 
with how the scale of unemployment 
benefit  or social assistance provided 
relates to income when in work — in 
other  words,  with  the  replacement 
rate  as  it  is  technically  termed.  As 
such, its focus is both oh the potential 
incentive for those in employment to 
stop working and be supported by the 
state  and  the  potential  disincentive 
for  those out of  work,  whether  offi 
cially  recorded  as  unemployed  or 
economically  inactive,  actively  to 
look  for  a  job.  Because  the  major 
pohcy  issue concerns those on  rela 
tively low rates of pay when in work, 

the  analysis  concentrates  on  this 
group of people, without ignoring the 
relationship  between  social  benefits 
and earnings for those further  up the 
pay-scale. 

Methodology 
The. analysis  is  based  on  the re 

sults  of  a  simulation  model  of 
the  social  protection  and  fiscal  sys 
tem  in  each  of  the  Member  States 
developed for the Commission by the 
Central  Planning  Bureau  in  the 
Netherlands. This is designed to en 
able the amounts  payable to the un 
employed  with given  characteristics 
in  terms  of  their  previous  level  of 
earnings, their age, employment rec 
ord and number of dependants to be 
calculated  and  compared  with  their 
disposable income when in work. It 
also enables such features as housing 
benefits  or  social  assistance  to  be 
taken into account. Other than hous 
ing costs, however,  it stops short of 
including  tax concessions or benefit 
payments, in cash  or in kind, which 
are  specific  to  individual  circum 
stances, such as allowances for work 
ing expenses  or relief  from  medical 
costs,  such  as  prescriptions  charges 
(see Box). 

Although  these kinds  of  calculation 
are  useful  in  throwing  light  on  the 
scale  of  the  transfers  of  income  re 
ceivable  by  those  who  are  out  of 
work,  it  should  be  emphasised  that 
they  reveal  only  part  of  the picture. 
While  they  indicate  the  theoretical 
amounts  payable  in  hypothetical 
cases, they cannot  by their very na 
ture show how much  those who are 
unemployed  receive  in  reahty.  The 

only  way  of  discovering  this  is 
through a survey of the unemployed 
themselves, such as through the new 
Household  Panel  Survey  set  up  by 
Eurostat to investigate income, living 
conditions  and  other  household  cir 
cumstances across the Union. 

Differences  between  theoretical  and 
actual  payments  will  arise  particu 
larly  in  cases  where  benefits  vary 
with  individual  circumstances  and 
are  subject  to  various  regulations 
restricting entidement or are means-
tested. In particular, a common tend 
ency in many Member States as high 
unemployment  has  persisted  has 
been  to  tighten  up  the  regulations 
governing  continued  entitlement  to 
benefit  as  people  remain  unem 
ployed  (in  terms  of  both  actively 
looking  for  work  and  having  to  ac 
cept  suitable jobs  when  they are  of 
fered).  The  way  in  which  such 
regulations are applied in practice in 
different  Member  States  is  difficult 
to judge  from  the way  that they  are 
worded and can only really be deter 
mined by examining actual cases. 

This  point  should  be  borne  in  mind 
throughout  the  analysis  and  is  a 
potentially  important  factor  qualif 
ying the results  which  are  obtained, 
especially  comparisons  between 
Member  States  which  might  have 
similar regulations governing entitle 
ment  to  benefit  but  very  different 
degrees of  enforcement. 

An additional qualification is that the 
model  and  analysis  relate  to  a  spe 
cific  period  of  time,  July  1993, and 
while the results ought to be broadly 
valid  for  later  periods, especially  in 
terms of comparisons between coun 
tries, it should also be borne in mind 

83-

Chapter 4 -  Unemployment compensation and incentives to look for work 

that changes in tax rates and benefits 
have been introduced in a number of 
Member  States  since  then  which 
might  alter  the  findings.  Moreover, 
the model is confined to the 12 coun 
tries  of  the  Union  as  they  were  in 
1993  and  does  not  as  yet  cover  the 
three  new  Member  States.  It  does, 
however, for purposes of comparison 
cover three US States, and the results 
for  New  York  are  included  here 
(though the results for the other two 
States are broadly similar). 

A  further  qualification  is  that  the 
cases  incorporated  in  the  model  are 
confined to a single person, a couple, 
one  of  whom  is  working,  and  a 
couple  with  two children.  Although 
this  enables  most cases  to be exam 
ined,  it  excludes  a  couple  who  are 
both working and, specifically,  mar 
ried women  who  are  working, who 

are  treated  in  different  ways  by  the 
tax  and  benefit  system  in  different 
countries.  These  have  often  been 
found by research studies to be espe 
cially hkely to be influenced  in their 
decision  of  whether  or  not  to  seek 
employment  by  the  amount  they 
would have to pay in tax, on the one 
hand, and the amount they receive in 
benefit,  on the other. While in many 
cases,  they  might  be  subject  to  the 
same tax rates and be entitled to the 
same rates of benefit as single people, 
this  is  not  invariably  so  and  their 
exclusion  represents  an  important 
limitation  of  the  analysis  (as  noted 
below, some 25% ofthe unemployed 
in the Union were married women). 

While the main part of the analysis is 
concerned  with estimating and com 
paring disposable income from work 
and when unemployed  in hypotheti-

31 

Proportion of men and women unemployed  in 
Member States, 1994 

% total unemployed 

E12  B  DK  D  GR  E 

F 

IRL 

L  NL  P  UK 

-84-

cal cases, an important  starting-point 
is  to  examine  the  actual  charac 
teristics  of  the  unemployed  in  the 
Union in order to determine the cases 
which are typical in practice. This is 
one  way,  at  least,  of  narrowing  the 
gap  between  the  simulation  model 
and reality. 

The characteristics 
of the unemployed 
In  1994, the latest  year  for  which 

detailed  data  are  available  (from 
the  Community  Labour  Force  Sur 
vey),  almost  17.7  million  people 
were unemployed in the Union (of 12 
Member  States).  Of  these just  over 
half were men (52%), just under half 
women, of whom almost half  (49%) 
were married. These figures  vary in 
some  degree  between  Member 
States. The proportion of men ranged 
from  63% in Ireland and 67% in the 
UK to 47% in Denmark and 43% in 
Greece,  with  the  proportion  being 
more  than  half  in  seven  of  the  12 
countries, the exceptions,  as well as 
Ireland  and  the  UK,  being  Spain, 
Luxembourg  and  the  Netherlands, 
though  in  each  case  the  figure  was 
only slightly above 50% (Graph 31). 

It should  be noted, however,  that so 
far as women are concerned, a signi 
ficant  proportion  of  those  who  are 
making  the  decision  of  whether  to 
work or not, who are not in education 
or  initial  training,  are  not  officially 
recorded as unemployed, in the sense 
that  they  are  actively  looking  for 
jobs, but as economically inactive. In 
other  words,  many  of  the  women 
who  enter  employment  each  year 
have  spent  a period  of time  looking 

Chapter 4 -Unemployment compensation and Incentives to look for work 

after young children or taking care of 
other  family  responsibilities.  As 
such, in most cases they  will not be 
in  receipt  of  social  benefits,  other 
than  perhaps,  maternity  benefits 
which in all Member States are only 
payable  for  a  limited  (relatively 
short) period of time (see Chapter 7 
of this Report). They  are,  therefore, 
in many cases, not subject to the in 
fluence ofthe scale of unemployment 
benefits  relative  to  the  income  they 
could receive by working. They are, 
however,  hkely  to be  influenced  by 
the taxes and social charges they and, 
in some cases, their  husbands,  need 
to pay  out  of  the gross  wage  which 
they  can  obtain.  This  is  an  issue 
which  is not  examined  here, but  its 
importance  should  be  borne  in  as 
sessing the potential effect  of the so 
cial protection  system  on  incentives 
to find work. (The scale of deduction 
from gross earnings across the Union 
is  examined  in  Employment 
in 
Europe, 1995, Part ffl, Section  1.) 

Almost  28%  of  the  unemployed  in 
Member  States  taken  together  were 
under 25, the proportion being much 
the same for men and women. Under 
8% of these, however, were under 20. 
Again,  the  proportion  of  the  under 
25 s  in  total  unemployment  varied 
across the Union, from  around 40% 
in  Greece  and  Italy  to  23%  in 
Denmark and only  13% in Germany. 
Of these, some 43% in the Union as 
a  whole were  seeking  their first job 
— ie they had no employment record 
which  in  most  Member  States  is  a 
requirement in order to be eligible for 
unemployment  benefit  —  the  figure 
varying from over 70% in Greece and 
Italy (which means that around 30% 
of the total unemployed in these two 
countries were both under 25 and had 

never had a job before)  to only  14% 
in  Germany  and  10%  in  Denmark 
(Graph 32). 

Of the unemployed of 25 and over, a 
significant proportion are in the 25 to 
34 age group. Across the Union as a 
whole, these accounted for just over 
30% of the total people unemployed 
in 1994, the figure varying relatively 
little  between  Member  States.  This 
means, in practice, therefore, that on 
average  60%  of  the  unemployed 
were under 35 years old in the Union, 
though in general, more in the South 
ern Member States than in the North 
ern  ones.  A  further  20%  were 
between 35 and 44, in this case more 
in  most  Northern  countries  (just 
under  a  quarter),  less  in  the  South 
(just under  15% in Greece and  Italy 
and  17% in Spain). 

In consequence, only around 20% of 
the unemployed in the Union were 45 
or over in  1994. In this case, there is 
a marked variation between Member 
States,  the  Union  average  being 
boosted  by  relatively  high  numbers 
in  two  of  the  larger  countries,  Ger 
many and the UK, whereas in all but 
these  two  countries  and  Denmark, 
the  proportion  was  under  20%.  In 
Germany,  the figure  was  as high as 
35%, in the UK, 26%. 

In sum, therefore, there is a good deal 
of  variation  across the Union  in the 
age composition of the unemployed, 
though  in  most  Member  States,  a 
substantial proportion were under 25, 
well  over  half  under  35  and  only  a 
comparatively  small number 45 and 
over.  This  has  implications  for  the 
level  of  benefit  typically  receivable 
by those out of work, which in some 

32 

Share of people under 25 and under 35 in total 
unemployment in Member States, 1994 

g0  %of total unemployed men 

% of total unemployed women^ 

I-  •  25-34 

•  Under 25 

70 

60 

50 

40 

30 

20 

10 

E12  3  DK  D  Q R .E 

F 

IRL 

i  NL  P  UK 

E12  B  DK  O  GR  E  F 

IRL 

I  NL  P  UK 

No data for L 

80 

70 

60 

50 

40 

30 

20 

10 

85 

Chapter 4 -  Unemployment  compensation and incentives to look for work 

countries  varies  with  age  and  em 
ployment record. 

unemployed of 25 and aver received 
benefits)  (Graph 34). 

to  be  more  restrictive  (see  Employ 
ment in Europe, 1994, Chapter 1). 

A substantial proportion of the unem 
ployed in all age groups in the Union 
have  been  out  of  work  for  a  long 
period of time. Of the total numbers 
unemployed  in  1994,  almost  half 
(48%) had been out of work for one 
year or more and around half of these 
for  two  years  or  more.  The  former 
figure varied from  over 60% in Italy 
and just  under  60% in  Belgium  and 
Ireland  to under 40% in France and 
around  30%  in  Denmark  and 
Luxembourg (Graph 33). 

Perhaps  most  importantly  from  the 
perspective  of  this  analysis,  well 
under half (42%) of those recorded as 
being unemployed,  according  to the 
ILO international standard  definition 
of being  available  for  work  and ac 
tively seeking  work, were  in receipt 
of  benefit  or  assistance  in  1994, 
around  70%  or  more  in  Belgium, 
Denmark, Germany  and  Ireland and 
under  10% in Greece and Italy, only 
partly because of the high proportion 
under  25  (in  Italy,  only  11 % of  the 

Moreover, only  23% of those under 
25 across  the  Union  were  receiving 
benefit,  two-thirds  or  more  in 
Belgium, Germany  and  Ireland, but 
under  15% in  Spain,  under  10% in 
Portugal  and  only  2-3%  in  Greece 
and Italy. 

At the same time, it should be noted 
that the evidence shows that many of 
those  in  receipt  of  unemployment 
benefit across the Union are not offi 
cially  recorded  as  unemployed  ac 
cording to the international  standard 
definition. Some have already found 
jobs to start at some later date, others 
may not be available for work in the 
immediate future  as required  by the 
ILO definition and yet others may not 
be actively seeking work in the sense 
of doing something tangible to find a 
job.  The  evidence  also  shows  that 
this is more likely  to be  the case in 
the  North  of  the  Union  than  in  the 
South  where  eligibility  for  unem 
ployment benefit or assistance seems 

At the same time, those out of work 
in  a  number  of  Southern  Member 
States  may  be  in  receipt  of  other 
kinds of income support, such as the 
Cassa  Integrazione  in  Italy  or  aid 
from  regional  authorities  in  Spain, 
which are not necessarily reported in 
the  LFS  as  unemployment  assist 
ance.  These  are  not  taken  into  ac 
count in the analysis here. 

Nevertheless, the comparatively few 
people who are recorded as being in 
receipt  of income  support  when un 
employed  in  a  number  of  Member 
States is an important point to bear in 
mind when interpreting the estimates 
of  the  amounts  of  benefit  which 
people  are  theoretically  entitled  to 
receive according to prevailing regu 
lations. In the South ofthe  Union, in 
particular, therefore, the calculations 
of  benefit  and  of  replacement  rates 
would seem not be relevant for most 
people. 

33 

Proportion of unemployed out of work for 1 
year or more, 1994 

34 

Proportion  of unemployed  in receipt  of 
unemployment benefit  or assistance,  1994 

70  Jfc of total unemployed 

1 0 0%  total  unemployed 

100 

E12  B  DK  D  GR 

E 

F 

IRL 

I 

L  NL  P  UK 

86-

Chapter 4 -  Unemployment compensation and incentives to look for work 

The earnings 
potential of 
the unemployed 
A further  point  to  clarify  is  the 

typical pay levels of the unem 
ployed when in work or the earnings 
which  they  are  hkely  to  be  able  to 
command  if  they  find  a job.  Again, 
this question can only be satisfactor 
ily answered by means of a survey of 
those concerned.  Unfortunately,  the 
Community  LFS  does  not  contain 
details  of  income.  The  Community 
Household  Panel  Survey  does  in 
clude such information,  but the  first 
results  are  not  yet  available  at  the 
time of writing. 

Nevertheless, some indication of the 
potential  earnings  which  the  unem 
ployed  might  command  can  be  ob 
tained  from  their level  of  education 
attainment,  details  of  which  are  in 
cluded in the Community LFS. These 
indicate,  as  is  well  known,  that  the 
unemployed  are more hkely to have 
fewer  educational  qualification  and 
less  years  schooling  and  vocational 
training  than  those  in  employment. 
Nevertheless, it also indicates that a 
significant  proportion  of  the  unem 
ployed have educational and training 
qualifications  beyond  basic  school 
ing, some with university degrees. 

In  1994, half of the unemployed had 
completed  only  basic education  and 
had  no  further  education  or  voca 
tional training qualifications  beyond 
this. This compares with 36% in the 
case  of  those  in  employment.  The 
figure, however, was in general much 
higher  in  the  Southern  parts  of  the 
Union, together with Ireland, than in 
the North. In Portugal, it was as high 

as  80%,  in  Ireland,  only  slightly 
lower, in Spain over 70% and in Italy 
over  60%,  though  only  47%  in 
Greece. In  all  these countries,  how 
ever, the relative numbers in employ 
ment with only basic education were 
also  comparatively  high,  though 
lower than for the unemployed (over 
70% in Portugal, over 60% in Spain 
and over half in Italy, but under 45% 
in Ireland). By contrast, in Denmark 
and  the  Netherlands,  it  was  under 
30% and in Germany, only just over 
20%, in each case reflecting the rela 
tively  high  numbers  who  go  on  to 
further  education courses after  com 
pulsory  schooling,  while  in  most 
other Northern Member States, with 
the  exception  of  Belgium  and  the 
UK,  the  proportion  was  under  half 
(Graph 35). 

An  average  of around  a third  of  the 
unemployed in the Union in 1994 had 
completed  an  education  or  training 
course  beyond  basic  schooling  but 
below  university  level,  over  half  in 
Denmark  and  the  Netherlands  and 
over 60% in Germany, but less than 
20%  in  Ireland  and  under  15%  in 
Spain, Portugal and Italy. 

In  the  Union  as  a  whole,  therefore, 
some  16%  of  the  unemployed  in 
1994 had university degrees or equi 
valent  qualifications  (as  compared 
with 26% of those in work). As such, 
they may well have been capable of 
commanding  relatively high rates of 
pay.  Nevertheless,  in  general,  the 
average  level  of  earnings  in  the 
Union  for  the  unemployed  when  in 
work  is  likely  to bé below  average, 
though  perhaps  not  so  much  below 
average  as  is  sometimes  suggested 

35 

Proportion of unemployed and employed  with 
various levels of educational  attainment  in 
Member States, 1994 
% total unemployed 

. 

% total employed 

100 

80 

60 

40 

20 

•  Basic level  BUpper secondary level 

•University level 

n  D  D D 

m 

ninr  100 

80 

60 

40 

20 

-87 

El?  B  DK  D  QR  E  F 

IRL 

I  NL  P  UK 

E12  B  DK  O  GR  6  F 

IF*. 

I  NL  P  UK 

No data for  I 

Chapter 4 -  Unemployment compensation and incentives to look for work 

—  except  in  the  case  of  women 
whose  average  earnings  are signifi 
cantly  below  those  of men  in most 
Member States. 

Replacement rates 
at average earnings 
From the above, it would seem that 

the  typical  person  who in the 
Union is unemployed is under  35 as 
hkely  to be a woman as a man  and 
whose earnings when in work are less 
than  the  average,  perhaps  signifi 
cantly  so. As a starting-point for the 
analysis of levels of income  support 
available  to the unemployed  in dif 
ferent parts of the Union, however, it 
is useful to examine the level of trans 
fers  payable to someone on average 
earnings.  This  provides  in  some 

sense  a  benchmark  against  which 
payments at lower wage levels can be 
assessed.  (The average  earnings 
figures used relate to the gross wage 
for a production worker in manufac 
turing in the different  Member States 
in 1993 and come from OECD—see 
earlier Box.) 

The basic assumption is that the per 
son  concerned  is ehgible for unem 
ployment  benefit  for the maximum 
period allowed by their employment 
record  and that  where  benefits  are 
fixed in relation to prt-'.ous earnings, 
the  figure  used  is  the average  for 
1993 as defined above. This will tend 
to bias upwards  the estimates of the 
amount  received  because  of  infla 
tion, though in most cases the extent 
of  bias  is  hkely  to be small,  both 
because of the relatively low rate of 
inflationin  1993 — except in Greece, 

36 

Replacement  rate at average earnings for a single 
person* 

Replacement  rate (%) 

100 

6 months unemployed 

2 years unemployed 

80 

60 

40 

20 

100 

H  80 

A  60 

40 

20 

B  DK  D  GR  E  F  IRL 

I  L  NL  P  UK  US 

B  DK  D  OR  E  F  IRL 

I  L  NL  P  UK  US 

*35 year old person with 10 ysart employment  record; tie  estimais lor 2 yeans unemployed relates lo Llgurta tor I 

1 

88 

where it was over  14%, wage  infla 
tion in the Union was around 4% — 
and because the previous earnings in 
question are usually for the preceding 
three  or six months  rather  than the 
preceding  year (only in Portugal are 
they  the  average  for  the  previous 
year;  in  Greece,  where  inflation  is 
much  higher  than  anywhere  else, 
they are for the previous month). As 
the period of unemployment goes on, 
however,  the upward  bias  will in 
crease since the amount of benefit or 
allowance received will increasingly 
be based on a level of earnings which 
because  of inflation  will  decline in 
relation  to the wage  that  the person 
concerned would receive if they went 
back into precisely the same kind of 
job.  The replacement  rate  calcula 
tions, therefore, are most relevant for 
the initial spell of unemployment and 
become  less  meaningful  for  long 
periods out of work. 

In  1993, the replacement  rate — or 
the disposable  income receivable in 
benefits  and  assistance  when unem 
ployed  in  relation  to  that  when in 
work — for a 35 year-old single per 
son  who has become  unemployed 
and  who was on  average  earnings 
when in work with 10 years' employ 
ment record (the precise age, so long 
as the person concerned is 25 or over, 
and the exact number of years in em 
ployment,  so long as they  are more 
than one or two, tend in most coun 
tries to have relatively littie effect on 
the results, as described below) var 
ied  from  85% in  Luxembourg, 
around 80% in France and Spain and 
just  below  in  Portugal  (though the 
above  discussion  of  the  relatively 
small  numbers  of benefit  recipients 
should be borne in mind) to around 
48%  in Greece, 44% in Ireland  and 

Chapter 4 -  Unemployment compensation and incentives to look for work 

only just over 41 % in the UK (Graph 
36). 

In the latter two countries, in contrast 
to  elsewhere  in the Union,  unem 
ployment benefits  are wholly (in the 
UK) or mainly (in Ireland) calculated 
as  a  flat-rate  sum rather  than  as a 
percentage  of  previous  earnings 
when in work. As such, they are  fixed 
in order to meet the basic needs ofthe 
individuals  — or families  — con 
cerned rather than, in some sense, to 
replace  previous  earnings  as is the 
case in other Member States. 

For the remaining Member States, in 
two  cases  —  Denmark  and the 
Netherlands  — the net amount re 
ceived  by  the  person  in  question 
when unemployed amounted to over 
70-75% of disposable income when 
in work, in Belgium and Germany to 
over 60% and in Italy to 55% (though 
in this case, a range of different in 
come support mechanisms  exist and 
only one — the  'mobility benefit' to 
be eligible for which the person con 
cerned has to have been laid off due 
to  industrial  restructuring  — has 
been chosen for the calculation). 

For comparison, the replacement rate 
in the US (here  represented  by  the 
State  of  New  York)  was just  over 
50% for the same person, below the 
rate  in  all  Member  States  except 
Ireland and the UK. 

In all the Member States, the amount 
received  in the form  of  unemploy 
ment benefit  remains the same for at 
least  six  months  after  the spell of 
unemployment  begins  and in all, 
apart  from  Spain,  it remains  at this 
level for at least the first  year. 

In  Spain,  the amount  declined  after 
180 days by 10% in relation to pre 
vious earnings and then remained at 
this  reduced  rate  for  another  18 
months  for the person  in  question 
(though  less for those with  employ 
ment records of less than six years or 
so, the duration of benefit  being re 
duced  by two months  for each 180 
fewer days of employment. 

After-a  year,  however,  when  insur 
ance-based benefits tend to come to an 
end, the amount received  declines in 
half  of the countries but remains the 
same as initially in Denmark, France, 
the Netherlands and Portugal as well 
as in Ireland and the UK. In the other 
countries, it is lower as people moved 
from social insurance benefits to social 
assistance or basic income support. In 
Greece,  where  there is no minimum 
income  guarantee,  the  insurance 

benefit was reduced by 50% for three 
months for the person in question and 
was then replaced by a very low flat-
rate  which  amounted  to only  around 
7%  of  disposable  income  when in 
work for the person concerned (though 
it was higher for first-time job seekers). 
In Italy, the position varies between the 
North and South ofthe country as well 
as between older and younger workers, 
those  living  in assisted  areas  in  the 
South or those aged 40 or more being 
able  to  receive  social  insurance 
benefits for a further year, while others 
have to fall  back on social assistance 
which is organised on a regional basis. 
The  conditions  attached  to the latter 
and the amount payable vary from re 
gion to region, but in general the un 
employed  receive  substantially  less 
once they move from  unemployment 
benefit to social assistance (in Liguria, 
the region chosen as an example—see 

37 

Replacement rate at average earnings for a 
couple with 2 children* 

Replacement rate (%) 

100 

6 months unemployed 

2 years unemployed 

80 

60 

40 

20 

B  DK  O  GR  E  F  IRL 

I  L  NL  P  UK  US 

I 

B  DK  D  QR  E  F  IRL 

I  L  NL  P  UK  US 

*35 year old person wtth 10 years employment record; the estimate tor 2 years tnemployed relates to Uguria for I 

100 

80 

60 

40 

20 

89-

Chapter 4 -  Unemployment compensation and incentives to look for work 

Box  above  —  the  replacement  rate 
halved for the person examined). 

The reduction  in  income  support  at 
the end of one year was also particu 
larly marked in Luxembourg, where 
the  replacement  rate  declined  from 
85% to 45% and in Belgium, where 
it fell by around 20 percentage points. 
By  contrast  in  both  Germany  and 
France, the reduction  was  compara 
tively small — only around 6-7 per 
centage  points  —  signifying  that 
there  was  littie  difference  between 
the amounts payable from the unem 
ployment insurance system and from 
assistance schemes. 

After a further six months ( 18 months 
of  unemployment  in  total),  the  re 
placement  rate  in  the  Netherlands 
was  reduced  by  17V2  percentage 
points  for  the  person  concerned 
(though  if  contributions  had  been 
paid for  15 years rather than  10, the 
reduction  would  have  been  post 
poned for six months and by an addi 
tional six months for each extra five 
years  of contributions).  In  Portugal, 
where  the  duration  of  insurance-
based benefits is related to age rather 
than  contributions,  the  rate  was  re 
duced  from  79%  to  42%  after  18 
months  for  someone  aged  35  (for 
someone  aged  40,  the  reduction 
would  have  come  after  21  months, 
for someone of 45 or over, after  two 
years).  In  France,  the  rate  was  re 
duced after 20 months of unemploy 
ment by 7 percentage points. 

At the end of two years of unemploy 
ment, for the person in question, on the 
average wage when working, the net 
income  support  received  was  under 
half  disposable  income  when  in em 
ployment in 7 Member States, though 

above 40% in all except  Greece and 
Italy,  and  55-60%  in  two  others  — 
Germany and the Netherlands. In three 
countries,  however,  Denmark,  Spain 
and France, it was  still  over 70% of 
disposable  income  even  after  this 
period of time (Graph 36). 

Beyond two years of unemployment, 
however,  the  replacement  rate  in 
France declined to 64%, followed by 
a  further  reduction  to 55% after  an 
other four months, while in Spain, the 
person concerned had to fall back on 
regionally-based  social  assistance, 
involving  a  substantial  fall  in  the 
amount  received  (in the  Aragon re 
gion, taken as an example in the ana 
lysis,  the  replacement  rate  declined 
to only 23% in this case). In Portugal, 
where as in Greece, there is no mini 
mum  income  guarantee  for  those 
without work, the rate fell to zero. 

By comparison, in the US, after  two 
years of unemployment,  the rate for 
a  person  with  the  same  charac 
teristics was only 30% of disposable 
income  when  in work,  significantly 
below  the  level  in  the  North  of  the 
Union countries, except those in the 
South. 

The effect of 
dependants 

In Member  States where  the amount 
initially  receivable  when  becoming 
unemployed  is  related  to  previous 
earnings,  it  tends  to  be  invariant  to 
family  circumstances —: except inso 
far as the latter affects other benefits or 
allowances  which  might  be  payable, 
such as housing benefits  in particular 
as  described  below.  Indeed,  since 

disposable income when in work tends 
to be higher for people with  depend 
ants  than  without  because  of  lower 
effective tax rates, the replacement rate 
can be lower for the former  than the 
latter. The effect  of tax on disposable 
income,  however,  is  offset  to  some 
extent by the fact that where there are 
children,  the  allowances  payable  for 
these are usually the same whether the 
person is working or not (the addition 
of a flat-rate  sum to both amounts, in 
other words, pushes up the ratio). 

For  someone  who  became  unem 
ployed  in  1993,  therefore,  the  re 
placement rate was lower if they had 
dependent  spouses  or  children  in 
Belgium, Spain, France and Portugal 
(Graph  37).  In  the  majority  of  the 
other  countries,  it  was  significantly 
higher. —  10  percentage  points  or 
more. This was particularly the case 
in Ireland and the UK, reflecting  the 
perceived  greater  need  for  income 
support  for  those with families  than 
for those without. Thus in both coun 
tries,  the  replacement  rate  in  1993 
was  around  30  percentage  points 
higher (over 70% higher in terms of 
the  amount  received)  for  a  married 
person  with  two  children  than  a 
single person. 

In the UK, however, the higher sum 
payable  in  such  circumstances  also 
reflects  the fact  that transfers  to the 
unemployed  cover  housing  costs 
which,  in  turn,  are  assumed  in  the 
analysis to increase with family  size 
for any given level of earnings when 
in  work.  As  described  more  fully 
below, such transfers can account for 
a significant proportion ofthe dispos 
able  income  received  by  someone 
unemployed in the UK and can radi 
cally change the comparative picture 

-90 

Chapter 4-  Unemployment compensation and Incentives to look for work 

of  replacement  rates.  Housing 
benefits  are also an important  factor 
in  particular  cases  in  Denmark, 
Germany,  France,  Ireland  and  the 
Netherlands. 

Taking  family  circumstances  into 
account  narrows  the  difference  in 
relative benefit levels between Mem 
ber States. In all countries, apart from 
Belgium,  Greece  and  Italy,  dispos 
able income when becoming  unem 
ployed  for  someone  on  average 
earnings  with  a  family  of  two  de 
pendent children was 70% or more of 
disposable income when in work. In 
Denmark and Luxembourg, it was as 
high  as  90%  (in  the  former  partly 
because  of  housing  benefits).  In 
Belgium  and  Italy,  it  was  only 
slightly below 70% (66% in both) so 
that Greece was the only country in 
the Union where the replacement rate 
was substantially below 70% (55%). 

By  contrast,  in  the  US  the  replace 
ment  rate  for  a  person  with  these 
characteristics  was  under  50%  in 
1993, lower than all the countries in 
the  European  Union,  including 
Greece. 

The  level  of  income  support  in  this 
case does not tend to change much as 
the  period  ofunemployment  in 
creases. Only in Greece and Portugal, 
was  the  net  amount  receivable  re 
duced  by  more  than  10% after  two 
years of unemployment, in the latter 
by around 25% to just under 40% of 
disposable  income  when  in  work. 
These  are the  only  two  countries  in 
the  Union,  however,  where  the  re 
placement rate after two years  ofun 
employment  was  less  than  66%  in 
1993.  By  comparison,  in  the  US, 
though  the  net  amount  of  income 

support  receivable by a family  with 
two children was higher if they were 
long-term  unemployed  rather  than 
out  of  work  for  a  relatively  short 
period of time, this still amounted to 
only  57% of  disposable  income  for 
someone on average earnings. 

Longer periods 
of unemployment 
In the US, the net amount received 

remained unchanged if unemploy 
ment  went  on  for  longer  than  two 
years. This was also the case in most 
European countries, the only excep 
tions  being  Spain  and  France,  as 
noted above and Portugal (Graphs 38 
to 49, which illustrate for each Mem 
ber  State  the  change  in  the  net 
amount  of  assistance  receivable  by 
people with different  family  circum 
stances at various length of time un 
employed;  in  these  cases,  the 
earnings when in work are assumed 
to  be  75%  of  the  average  wage  as 
defined  above, which is more repre 
sentative  of  reality,  though  the  pat 
tern of change in the amount received 
would be much the same at  different 
wage levels). 

In  Portugal,  the  most  extreme case, 
the  amount  receivable  by  both  a 
single  person  and  a  married  couple 
out of work fell to nothing after  two 
years  of  unemployment,  while  for 
someone  with two  dependent  child 
ren  it  was  reduced  to  under  7%  of 
disposable income when in work for 
someone on 75% of average earnings 
(the only transfer  being child allow 
ances). In Spain, the sum payable fell 
by  almost  60%  for  a  single  person 
after  on this level  of earnings  when 

in  work  this  length  of  time  had 
elapsed, though for a couple with two 
children,  the  reduction  was  only 
around 25%. In Italy, the reduction in 
the  latter  case was  only  very  small, 
but for a single person it was almost 
50%,  while  in  France,  it  was  also 
very  small  for  a  family  with  two 
children  and  only  20% for  a  single 
person. 

Replacement rates 
on earnings below 
the average 
As  indicated  above, a large pro 

portion of  the unemployed  are 
hkely  to earn wages below the aver 
age  when  in  work. This  is not  only 
because of the lower levels, on aver 
age, of educational attainment of the 
unemployed, but also because of the 
higher  representation  of  young 
people  among  those  out  of  work  as 
compared with those in employment. 
Moreover,  a  further  factor  is  that 
almost  half  of  the  unemployed  are 
women who, again on average, earn 
only around 75% ofthe average wage 
of men in the Union (only 70% in the 
UK  and  Ireland,  75%  in  Germany, 
Belgium  and  Portugal, over 75% in 
Greece,  Spain  and  the  Netherlands, 
80% in France and 85% in Denmark 
— figures based on Eurostat data on 
average gross hourly earnings of ma 
nual workers in industry for October 
1993). 

At  80%  of  average  earnings,  the 
replacement  rate  in  1993  for  the 
single  person  of  35  with  10  years 
employment  record  used  in  the cal 
culations  presented  above  who  has 
just  become  unemployed  ranged 

91 

Chapter 4 -  Unemployment compensation and incentives to look for work 

Replacement rates at varying lengths of time unemployed 
(35 year old, at 75% of average earnings with 10 years employment  record) 

38  Belgium 

Replacement rate 

120  r 

100 

80 

60 

40 

20 

0 

v. 

• 

Single 
Married 
Married w in cMWten 

• 

6 

' 

* 

i 

. .. 

i  • 

« 

. 

i 

18 

12 

24 
Spel of unemployment (months) 

36 

30 

42 

40  Germany 

Replacement rate 

120 

100 

80  Y 

-Sine* 
-Married 
• Married with chBdren 

_J 

1 

_! 

, 

l_ 

120 

100 

1  80 

60 

40 

20 

: 

0 
-i8 

120 

100 

H  80 

60 

40 

H  20 

39  Denmark. 

Replacement rate 

6 

18 

12 

24 
Speft of unemployment (months) 

30 

36 

42 

48 

41  Greece 

Replacement rate 

120 

100 

80  h 

60 

40  t-

20 

-1 

-Slngl**curriad 
•Married with chadren 

120 

100 

H  80 

60 

40 

20 

6 

18 

12 

24 
Spell of unemployment (months) 

30 

36 

42 

48 

6 

18 

12 

24 
Spefl of unemployment (months) 

30 

36 

42 

Spain 

Replacement rate 

120 

100 

80 

60 

40  -

20  • 

Single 
Married 
Married with children 

-I  120 

100 

-\  80 

60 

40 

H  20 

43 

France 

Replacement rate 

120 

100  K 

80 

60 

40 

20 

Single 
-Married 
Married with chfldren 

18 

12 

24 
Spell of unemployment (months) 

30 

36 

0 
48 

42 

0 

6 

18 

12 

24 
Spell of unemployment (months) 

36 

30 

0 

0 

6 

-92 

42 

48 

120 

100 

—  --i"  80 

1 _:  60 

-  40 

•  20 

42 

48 

Chapter 4 -  Unemployment compensation and Incentives to look for work 

Replacement rates at varying lengths of time unemployed 
(35 year old, at 75% of average earnings with 10 years employment record) 

1  120 

100 

80 

60 

40 

20 

48 

120 

100 

80 

-i  60 

40 

20 

44 

Ireland 

Replacement rate 

120 

100 

80 

60 K 

40 

20 

SlngW 

Married» 

120 

100 

H 80 

•i  60 

-  40 

•  20 

45 

Italy 

Replacement rata 
_ - _. 

120  r.. 

100 

80  h-

60 

40 

20 

-Single 
-Married 
•Married «Hi chadren 

* 
6 

18 

12 

24 
Spefl of unemployment (months) 

36 

30 

42 

48 

6 

18 

12 

24 
SpeS of unemployment (months) 

30 

36 

42 

46  Luxembourg 

Replacement rate 

120  r 

100 

80 

60  -

40  -

20 

—Single 
-•Married 
• -  Married win children 

1  120 

100 

A  80 

60 

40 

20 

47  Netherlands 

Replacement rate 

•120 

100 

80 

60 

40 

2Q  L  " 
' 

-Single 
Married 
• Married «Rh children 

0 

6 

12 

18 

24 
Spell of unemployment (months) 

30 

36 

42 

48 

6 

12 

.18 

24 
Spell of unemployment (months) 

30 

36 

48 

Portugal 

Replacement rate 

120 

100 

80 

j-_ 

60  -

40 

-8lngle 
20  L  ••••••Married 

• Married with children 

120 

100 

80 

60 

40 

20 

49  United  Kingdom 

Replacement rate 

120  r 

100 

80  r-

60  h 

40  h 

20 

—Single 
•••Married 
--Married with children 

0 

6 

18 

12 

24 
Spell of unemployment (months) 

36 

30 

42 

48 

6 

18 

12 

24 
Spell of unemployment (months) 

36 

30 

42 

48 

120 

100 

80 

60 

40 

20 

42 

48 

93-

Chapter 4 -  Unemployment compensation and incentives to look for work 

from  85%  of  disposable  income 
when  in  work  or  just  above  in 
Denmark,  France  and  Luxembourg, 
just  under  80%  in  Belgium  and 
around  75% in  the Netherlands  and 
Portugal to just under 60% in Greece 
and 50% or slighdy below in Ireland 
and the UK (Graphs 50 to 61, which 
show the variation in the replacement 
rate with  gross  earnings  for  each of 
the Member States). 

For a married couple with two child 
ren, the replacement rate was 80% or 
above at this level of earnings in six 
Member  States  (almost  100%  in 
Luxembourg) and around 75% in an 
other  four.  Only  in  two  countries, 
therefore, Greece and Spain, was the 
rate below  this  (66% in the  former, 
70% in the latter). 

By contrast,  in  the US, the replace 
ment  rate  for  a  single  person  with 
these  characteristics  was  only  just 
over  a  half,  lower  than  in  all Euro 
pean countries apart from Ireland and 
the  UK,  and  for  a couple  with  two 
children,  it  was  even  lower  at  only 
47% —  well below  the level  in any 
European country. 

Comparing  the  replacement  rate  at 
80% of average earnings with that at 
the average, in five Member States — 
Germany,  Spain,  Luxembourg,  the 
Netherlands  and  Portugal  —  it  was 
much  the  same  for  a  single  person, 
reflecting  the linking of benefit  levels 
to previous earnings, while in the other 
7 countries, it was higher, reflecting the 
effect  of the flat-rate element payable 
(in Ireland and the UK, especially) or 
of  the  ceiling  imposed  on  benefit 
amounts  (in the other five countries). 
Such ceilings can effectively mean that 
an earnings-related system is much the 

same as a flat-rate one at wage levels 
above  the  ceiling  (which  is  set  at  a 
relatively low level relative to average 
earnings in the latter five countries). 

As  earnings  fall  below  80%  of  the 
average,  replacement  rates  in  most 
cases tend to  increase further.  For a 
single person with the characteristics 
defined  above,  the  rate  in  1993  at 
65% of average earnings was 80% or 
above in six Member States and 75% 
or above in another two. Only in Ire 
land and the UK, was it under 60%. 
For a couple with two children, it was 
around  85% or  above  in  9 Member 
States  and  in the other three around 
80% or just below. 

For  a  single  person  earning  half  the 
average wage when working, the re 
placement rate was 90% or above in 7 
countries — and above  100% in Por 
tugal  (where  the  minimum  benefit 
payable  was  equal  to  the  minimum 
wage  before  deductions,  which,  in 
practice, was higher than the net wage 
received  at this  level of  earnings) —-
and between  70  and  77% in another 
four. Only in the UK, was it below 70% 
and  then  only  slighdy.  For  a  couple 
with two children in the same circum 
stances, the rate was above 100% in six 
countries and 90% or above in all the 
others except for the UK (where it was 
85%). 

In the US, even at half average earn 
ings,  a  single  person  who  became 
unemployed  received  under  half  of 
their disposable income when work 
ing,  though  for  a  couple  with  two 
children,  the  rate  increased  to  just 
over 80%. 

As  the  period  of  unemployment 
lengthens  for  someone  on  half 

average earnings, so the replacement 
rate falls  in 7 of  the Member  States 
—  Belgium,  Germany,  Greece, 
France,  Italy,  Luxembourg  and 
Portugal,  though  by  10  percentage 
points  or  less  in  all  except  Greece 
(where  the  rate declined  in  1993  to 
only 16% of disposable income when 
in  work  after  15  months  of  unem 
ployment)  and  Portugal,  and  in  all 
except  Greece  and  Luxembourg, 
only for single people—but remains 
the much the same in the other five. 

Replacement rates 
at earnings above 
the average 
For  those  who  become  unem 

ployed  after  earning  a  higher 
wage  than  the  average,  the  amount 
they can expect in the way of income 
support is generally lower relative to 
their  former  disposable  income,  as 
might be expected, than for someone 
on  average  earnings.  For  a  person 
earning  150%  of  the  average  wage 
when  working  (but  with  the  same 
characteristics  as  used  in  previous 
examples),  there  were  only  two 
countries for  which this was not the 
case  in  1993  —  the  Netherlands, 
where the relative amount receivable 
was  much  the  same  and  Portugal 
where it was higher (as high as 84% 
of previous disposable income, much 
higher  than  anywhere  else  in  the 
Union,  reflecting  the  linking  of 
benefits  to  earnings  before  deduc 
tions  which  results  in  benefits  in 
creasing relative to net earnings up to 
three  times  the  minimum  wage). 
For  four  Member  States,  including 
these  two  together  with  France  and 
Luxembourg, the replacement rate at 

94 

Chapter 4 -  Unemployment compensation and Incentives to look for work 

this  level  of  earnings  was  around 
75% or more. In four others, Greece, 
Ireland,  Italy  and  the  UK,  it  was 
under 40% (only just over 30% in the 
last). 

For a couple with two children at the 
same level of earnings when in work, 
the replacement rate was around 80% 
or more in the former  four  countries 
and  around  70%  or  more  in  an 
other  three  —  Germany,  Spain  and 
Luxembourg. In Ireland, Italy and the 
UK, by contrast, it was only  around 
50% and in Greece, under 40%. 

At  twice  average  earnings,  the  re 
placement rate in Portugal was even 
higher  at  88% of  former  disposable 
income  and  still  around  75%  in 
France,  though  elsewhere  in  the 
Union, in five Member States, it was 
30% or less. 

In the US, the replacement rate for a 
single person at both 150% and twice 
average  earnings was  higher,  at just 
under  50%  in  the  former  case  and 
40% in the latter, than in four Euro 
pean Union countries. 

Replacement rates 
for people without 
employment records 
The example used above for esti 

mating  the  replacement  rate, 
however, is not necessarily typical of 
all  those  who  are  unemployed  in 
Union  countries.  As  noted  above, a 
relatively  high proportion  are young 
and may be looking for their first job 
and, therefore,  without any previous 
employment record — usually a con 
dition  for  receiving  insurance-based 

benefits.  Alternatively,  they may be 
women returning to work who have 
lost  their  entitiement  to  unemploy 
ment  benefit.  In  these  cases,  the 
people  concerned  may  have  to  rely 
on some form of social assistance or 
minimum income guarantee. 

To  illustrate  the  position  of  such 
people in different Member States, a 
person  aged 24 with  potential  earn 
ings  of  only  half  the  average  of  a 
production worker in  manufacturing 
is taken as an example (it makes rela 
tively  litde  difference  to  the  com 
parative  results  in  most  cases  if 
someone  older  or with  higher  earn 
ings is taken instead). 

In the first place, for someone of this 
age  with  a two  years'  employment 
record, the replacement rate, whether 
they  were  single  or  married  with 
children,  was precisely  the  same  in 
all Member States, except in the UK, 
as for the 35 year old with  10 years 
employment  record  used  in the ear 
lier examples. In the UK, the overall 
amount  of  assistance  received  was 
slightly lower for someone under 25, 
because of a reduction in their hous 
ing benefit entitlement, resulting in a 
replacement  rate  of  around  65V2% 
instead of 68V2%. 

Without an employment record at all, 
the position was somewhat  different. 
In two countries, Greece  and  Portu 
gal,  the  person  concerned  was  not 
entitied to any assistance. In Ireland, 
they received only 15% ofthe dispos 
able income they would have earned 
at  half  the  average  wage  and  in 
France, only 30% (which consists of 
housing benefit alone, since someone 
under  25  is  not  ehgible  for  social 
assistance  —  minimum  d'insertion', 

for someone of 25 or over in the same 
circumstances,  the replacement  rate 
increases to 65%) (Graph 62). In two 
other countries, moreover, Spain and 
Italy,  where  social  assistance  is  ad 
ministered at regional rather than na 
tional level and so varies in  amount 
across  the  country,  the  amount 
payable was typically under 50% of 
what they would have received at this 
level  of  earnings  and  only  in  three 
countries,  Denmark,  Luxembourg 
and  the  Netherlands,  was  it  higher 
than 70%. 

In  all  Member  States,  apart  from 
France and the UK, the replacement 
rate  was  the  same  for  someone  in 
similar  circumstances  over  25  as 
under 25. In France, as already noted, 
the rate for the former was over twice 
as high as for the latter, while in the 
UK,  it  was  8  percentage  points 
higher. 

In the US, by comparison, the income 
support  receivable  in  this  case  was 
52% of disposable income at half the 
average  wage, higher  than  in  six of 
the European countries. 

For  the  same person  with  a  family, 
the position is markedly different.  In 
five  Member  States,  they  received 
the same amount as if they had had a 
previous  employment  record  and  in 
two  others  only  slightiy  less.  The 
only  two  countries  where  they  re 
ceived  small  amounts  were  Greece 
and  Ireland,  just  4%  of  disposable 
income  at  half  average  earnings  in 
the  former,  21% in  the  latter.  Else 
where in the Union, the replacement 
rate for such families was below 85% 
only  in  Belgium  (79%)  and  Spain 
(73%) (Graph 63). 

95-

Chapter 4-  Unemployment compensation and incentives to look for work 

Replacement rates at varying levels of earnings 
(35 year old unemployed for 6 months with 10 years employment record) 

50  Belgium (6 months  unemployment) 

51  Denmark  (6 months  unemployment) 

Replacement  rate 

120  r 

Replacement rate 

120 

100  t 

80  -

60 

40 

20 

Single 
Married 
Married, with 8 dtfdten 

120 

100 

60 

60 

•\  40 

20 

50 

tS 

» 

tO  100110 

125 

150 
200 
Wage a» % average wage 

50 

«S 

SO  90  100110  125 

150 
200 
Wage aa % average «age 

52  Germany  (6 m o n t hs  unemployment) 

53  Greece  (6 months  unemployment) 

Replacement rate 

120 

r 

Replacement rate 

120  r 

100  K 

50 

66  SO  90 100110  125 

200 
150 
Wage aa % average wage 

50  68 

80  90 100110  125 

200 
150 
Wage aa % average wage 

54  Spain  (6 months  unempl,) 

55  France  (6 months  unemployment) 

Replacement rate 

120  r 

Replacement rate 

120  > 

-,  120 

50 

65 

60  90  100110  125 

150 
200 
Wage a» % average wage 

50 

68 

80  90  100  110  125 

150 
200 
Wage aa % average wege 

-96 

Chapter 4 -  Unemployment compensation and Incentives to look for work 

Replacement rates at varying levels of earnings 
(35 year old unemployed for 6 months with 10 years employment record) 

56 

Ireland (6 months  unemployment) 

57 

Italy (6 months  unemployment) 

Replacement rate 

120 

100  |- 

\ 

81ngte 

-•—Married 

- Married. w«h 2 

60 

60 

40 

20 

120 

100 

80 

60 

40 

20 

Replacement rate 

120 

100 

80 

60  |-

40 

20 

-,  120 

— " S i n g le 

'Married 

-"—Married, win 2 children 

20 

50 

66 

80  90  100110  125 

160 
200 
Wage aa % avenge wage 

50 

65 

80  «0  100110 

125 

150 

200 

Wage a» % avenge wage 

58  Luxembourg  (6 months 

unemployment) 
Replacement rate 

120  r 

Single 

•-.-•Married 

i  120 

•jpg  t ' * ~ "V 

. 

> Married.win2 children  J 

IQQ.': 

80 

60 

40  -

20  -

80 

60 

40 

20 

59  The Netherlands (6 months 

unemployment) 
Replacement rate 

120  r 

< 
'Single 
"•"•Married 

Married. wW» 2 chadren 

100 

80 

60 

40 

20 

120 

100 

80 

60 

40 

20 

50 

65 

60  00  100110 

125 

150 

200 

Wage aa % average wage 

50 

65 

60  90  100110  125 

ISO 

200 
Wage aa % average wage 

60  Portugal  (6 months  unemployment) 

61  The UK (6 months  unemployment) 

Replacement rate 

Replacement rate 

120 

100 

80 

60 

40 

20 

r Single 
Married 

.  Married, with 2 children 

120 

100 

80 

60 

40 

20 

50 

65  80  90 100110  125 

150 
Wage aa % average wage 

200 

50 

65  80  90 100 110  125 

ISO 

200 

Wage aa % average wage 

97-

Chapter 4 -  Unemployment compensation and incentives to look for work 

62 

Replacement rate for 24 year old single person at 
50%  of average wage* 

120  Jtepk0 6 0 1 8 0* f810 (%) 

No employment record 

2 years employment record 

1 00  1-

80 

60 

40 

2Ô1 

120 

100 

80 

60 

40 

20 

B  DK  D 3R  E  F IM.  I  -1  NL.  P  UK US 

8  DK  D SR  E  F IRL  I 

I  NL P  UK US 

•With 6 month» unemployment; the estimate far no employment record relates a? Uguria for ) 

63 

Replacement rate for 24 year old married person 
with 2 children at 50%  of average wage* 

Replacement  rate (%) 

120  r 

No employment record 

2 years employment record 

-j  1 20 

100 

80 

60 

40 

20 

B DK  0  GR  E  F  IRL  I  L NL  P  UK US 

I 

B  DK  D GR  E  F IRL  I  L  NL P UK US 

'With 6 months unemployment; the estimate for no employment  record relates to Uguria 

100 

80 

60 

40 

20 

98 

Housing benefits 
In  5  Member  States,  Denmark, 

Germany, France, the Netherlands 
and  the  UK,  housing  benefits  or 
allowances  are  payable  to  those  on 
low incomes — and in some cases, to 
those  on  not  so  low  incomes  —  to 
help cover  housing  expenses.  In  all 
cases, benefits are available irrespec 
tive of whether the head ofthe house 
hold is in work or is unemployed. In 
a  sixth  country,  Ireland,  a  housing 
allowance is paid only to those who 
are out of work. 

Except in the UK,  however, they only 
apply  to  rent.  In  the UK,  this is  the 
case for those in work, but for  those 
who  become  unemployed,  housing 
benefits also cover the cost of servic 
ing  mortgages  if  the  person  con 
cerned  owns  their  own  house.  (The 
unemployed  in  the UK also  receive 
an  allowance  to  cover  local  taxes 
linked  to  housing  but  these  are  not 
included  in  the  calculation  which 
means  that  the replacement  rate  for 
the UK is a slight underestimate.) 

Housing benefits have been included 
in the calculations reported above — 
specifically, they have been added to 
disposable income—the assumption 
being  that  the person for  whom  the 
estimates  are  made  lives  in  rented 
accommodation and pays an average 
rent. (An alternative basis for calcu 
lating  the replacement  rate, adopted 
in a recent OECD study, is to  define 
disposable  income to exclude hous 
ing costs — see Box for a discussion 
of the two methods.) Since, however, 
housing  costs  can vary  significantly 
between people with similar levels of 
income and  sizes of family,  accord 
ing to where they live or the size of 

Chapter 4 -  Unemployment compensation and incentives to look for work 

house they have, how much they re 
ceive in housing benefit  is not fixed 
and can  affect  the replacement  rate. 
(Concessions  in  respect  of  housing 
costs also exist in three other Mem 
ber States. In Belgium, those who are 
unemployed  are  in  some  cases  en 
titled  to  a reduction  in  the rent  they 
pay, which means that their housing 
costs  are  effectively  subsidised  by 
the local authority, though it is  diffi 
cult  to  take  this  into  account  in  the 
calculation  of  replacement  rates. In 
Greece  and  Spain,  a  proportion  of 
housing costs is allowed as a deduc 
tion  against  income  tax,  though  in 
these  cases,  the  replacement  rate  is 
not  affected.) 

The  effect  of  including  housing 
benefits in the calculation varies con 
siderably between Member States re 
flecting  the  scale  of  assistance 
available and the regulations govern 
ing  eligibility  (see  Table  9).  In 
Denmark, it has relatively little effect 
for those on low earnings (increasing 
the replacement rate by only lV2 per 
centage  points  for  a  couple  on  half 
the average wage — all the estimates 
in  this  section  relating  to  a  couple 
with one person earning), but is more 
significant  for  those on higher earn 
ings (increasing  the rate by 4V2 per 
centage  points  for  those  on  average 
earnings), especially if their rents are 
above  average.  In  France  also  the 
effect  is  greater  at  higher  earnings 
levels, though the level of rent makes 
comparatively little difference  to the 
calculation. 

In  the  other  Member  States,  on  the 
other  hand,  the  effect  tends  to  be 
greater  for  those  on  low  earnings, 
though in the Netherlands, the  effect 
depends  on  the  precise  level  of 

Housing benefits and the calculation 
of the replacement rate 

The  regulations  in  place  concerning  housing  benefits  and, 
therefore,  their potential effect  on incentives to work,  differ 
markedly  from  country  to  country.  In  those,  like  the UK 
especially, where they are an integral  part of the means of 
support  and  granted  almost  automatically  when  a  person 
becomes unemployed, there is a case for defining the replace 
ment rate to be net of housing costs entirely — more precisely, 
to measure disposable income either when in work or unem 
ployed after deducting housing costs net of housing benefit. 
The rationale is that housing costs are a fixed liability which 
has to be met whether a person is working or not and since 
housing  benefits  are tied  to  a particular  level  of  cost, they 
should arguably be excluded completely from the calculation 
of the replacement rate. The effect  of doing this is generally, 
but not invariably (in particular, where the replacement rate is 
over 100%), to reduce the replacement rate as compared with 
the calculations reported here, simply because a fixed amount 
is deducted from both numerator and denominator, though in 
many cases the difference  is relatively  small  (see Table 9). 
Where there are no housing  benefits  payable to cover rent, 
however, which is the case in six Member States, the effect is 
larger (if,  for example, housing costs are 25% of disposable 
income when in work, and the replacement rate on the method 
adopted here is 70%, the rate calculated after deducting hous 
ing costs would be 60%; the higher the rent and the lower the 
replacement  rate  as  defined  here,  the  greater  the effect  of 
deducting housing costs). 

Whether this approach or the one adopted here is preferable is 
hard to judge — clearly there is no ideal measure. However, it 
is open to question how far housing costs are fixed in practice. 
In particular,  those renting  accommodation  might decide to 
move to somewhere less costly if they lose their job and have 
difficulty finding  another or postpone payment for a time if 
unemployment  is  expected  to be of  short duration. To this 
extent, they are not so different from other items of expenditure 
out of disposable income which could also be deducted when 
calculating the replacement rate. Moreover, housing costs can 
vary  significantly  between  individuals  in  otherwise  similar 
circumstances — a reason for not deducting other expenses 
from  disposable income — which affects the interpretation of 
the replacement  rates  calculated  on  the  alternative method 
more than it does  for  the method adopted  here. Whichever 
approach is adopted, given the difficulties surrounding housing 
benefits, it is important to distinguish them from other kinds 
of income support when assessing the replacement rate and its 
potential effect on work incentives. 

-99 

Chapter 4 -  Unemployment  compensation and incentives to look for work 

Table 9 — Effect of housing costs at different rent levels on replacement rates 
— couple with head of household aged 35 unemployed for 6 months 
and 10 years employment record (% of disposable income when in work) 

50% average 
earnings 

75% average 
earnings 

average earnings 

150% average 
earnings 

average 
rent 

50% 
higher 

average 
rent 

50% 
higher 

average 
rent 

50% 
higher 

average 
rent 

50% 
higher 

;  Denmark 

Replacement rate 
After housing costs 
Housing benefit effect 

Germany 

Replacement rate 
After housing costs 
Housing benefit effect 

France 

Replacement rate 
After housing costs 
Housing benefit effect 

Ireland 

Replacement rate 
After housing costs 
Housing benefit effect 

The  Netherlands 
Replacement rate 
After housing costs 
Housing benefit effect 

UK* 

Replacement rate 
After housing costs 
Housing benefit effect 

US 

I 

Replacement rate 
After housing costs 
Housing benefit effect 

96.4 
95.1 
1.5 

81.3 
73.8 
16.3 

94.7 
92.6 
1.8 

91.7 
90.0 
13.5 

96.8 
94.8 
1.4 

89.9 
83.1 
22.8 

95.2 
92.0 
1.9 

99.7 
99.6 
21.6 

109.5 
112.6 

108.7 
113.1 

83.3 
77.3 
21.0 

38.4 
18.8 
9.6 

85.3 
77.3 
18.5 

42.0 
9.2 
13.2 

92.8 
90.4 
3.4 

68.1 
57.0 
5.9 

83.7 
78.9 
4.1 

73.2 
68.9 
2.4 

88.7 
85.6 
7.0 

66.1 
56.3 
22.5 

42.9 
27.6 
0.4 

94.7 
91.8 
4.5 

80.4 
68.0 
18.2 

84.5 
76.7 
4.3 

80.1 
74.9 
9.4 

89.5 
84.9 
6.5 

77.4 
65.9 
33.8 

44.8 
19.1 
2.2 

81.5 
76.0 
4.6 

63.2 
52.6 
1.2 

77.7 
72.1 
4.8 

58.5 
53.0 
1.2 

78.5 
73.2 
3.1 

53.6 
42.5 
19.3 

48.7 
36.8 

89.1 
83.5 
11.9 

66.1 
49.1 
4.1 

78.2 
69.0 
5.1 

64.4 
56.8 
7.1 

84.5 
78.1 
9.1 

63.3 
48.3 
28.9 

48.7 
28.4 

66.5 
49.6 
6.3 

59.8 
50.7 

76.4 
71.6 
3.2 

42.3 
33.9 
2.1 

76.0 
71.1 

39.8 
9.9 
15.7 

42.5 
31.8 

79.1 
48.7 
14.2 

60.1 
44.4 
0.4 

76.4 
68.4 
3.2 

47.1 
30.2 
6.9 

76.0 
67.8 

47.7 
0.6 
23.6 

42.5 
24.9 

Notes:  Average rent is an estimate  of the mean rent paid by a household on each level of income in the country in question. 50% higher 

means rent 50% higher  than the mean. 
The replacement rate is calculated  to include housing benefits in disposable income when in work and unemployed. 
Housing benefit effect indicates  the percentage point difference in the replacement rate betwen including and excluding housing 
benefits. 
* Housing costs assumed  to be rent. An owner-occupier servicing a mortgage is eligible for housing benefits only when 
unemployed. In this case at 50% of average earnings, the replacement rate is 88.3% if mortgage payments  equal the average 
rent and  102.5% if they are 50% higher than this. 

-  100 

Chapter 4 -  Unemployment compensation and incentives to look for work 

earnings. At very low rates of pay — 
half the average, for example — the 
effect  is  very  small  since  much  the 
same  amount  of  housing  benefit  is 
payable whether the person is work 
ing or not. As pay increases, benefit 
is  withdrawn  from  those  in  work, 
while  those  who  become  unem 
ployed have a sizeable proportion of 
their rent covered, so the effect on the 
replacement rate is greater (adding 7 
percentage points at 75% ofthe aver 
age  wage).  But  as  pay  approaches 
average earnings, housing benefit for 
those out of work is reduced, because 
of  a  ceiling  being  imposed  on  the 
overall  amount  of  unemployment 
benefit  receivable, and the effect  on 
he  replacement  rate  declines  corre 
spondingly. 

In  Germany,  where  benefit  covers 
not  only  housing  costs  but  heating 
and  light,  the  effect  on  the replace 
ment  rate is  substantial  at  very  low 
earnings  and  declines  markedly  as 
earnings  increase  (16V2  percentage 
points  at  half  the  average  wage,  6 
percentage points at 75% ofthe aver 
age), becoming very small at average 
earnings (except where rents are well 
above average) and disappearing al 
together  at earnings  above the aver 
age, the reason for this pattern being 
the same as in the Netherlands. This 
is  also  the  case  in  Ireland,  where 
housing allowances increase benefits 
receivable by the unemployed signi-
ficantiy at very low earnings (adding 
13 72 percentage points to the replace 
ment rate at half  the average wage), 
but  by  relatively  little  at  earnings 
only slightly higher than this (by 2'/2 
percentage points at 75% ofthe aver 
age  wage),  except  if  above  average 
rents are paid. 

The effect of housing benefits is most 
pronounced  in the UK since, for the 
unemployed  at  least,  the  scheme  in 
operation  is  much  more  generous 
than  anywhere  else  in  the  Union. 
Here, for all those aged 25 or over, all 
housing  costs,  whatever  form  they 
take  and  however  large, are  met  by 
the State if a person becomes unem 
ployed  (though  those  under  25 
receive  a  reduced  amount,  some 
8-9%  less  than  the  rent  they  pay). 
(Measures  are  being  introduced, 
however, under which only 'average' 
rents will be covered in full for those 
aged 25 and over, with local authority 
discretion  to pay more in individual 
cases.) 

For  someone  (with  a  dependent 
spouse) on half average earnings and 
paying  around  the  average  rent, 
housing benefits  added  32% to their 
disposable income when out of work 
and  21  percentage  points  to  the  re 
placement  rate  (26V2  percentage 
points in the case of someone paying 
a  mortgage instead  of rent  who was 
not entitled to housing benefit  when 
working).  If  their  housing  costs  are 
higher than average, then the effect is 
even greater. 

Although in the US, housing benefits 
do  not  exist  as  such,  housing  ex 
penses are partly covered through the 
system  of  food  stamps, designed  to 
help  pay  for  basic  living  costs.  For 
someone  on  half  average  earnings 
and  with  average  rent,  food  stamps 
accounted  for  around  25%  of  the 
benefit received as against nothing at 
all if they  had been in work  and in 
creased  thé  replacement  rate  by 
972%. 

However,  though  housing  benefits 
are  included  in  the  estimates  of  the 
replacement  rate  here  —  and  they 
cannot justifiably  be  left  out  of  ac 
count  since  in  the  countries  where 
they exist they are an important part 
of the income support  given when a 
person becomes unemployed—their 
effect  on individual behaviour  is ar 
guably  hkely  to  differ  from  that  of 
other forms  of assistance, especially 
those which  are paid  automatically. 
Whereas  in these cases, the  amount 
that any individual can expect to re 
ceive and the timing of payments are 
largely known, neither is necessarily 
the case for housing benefits, except 
in the UK where total housing costs 
are covered.  The  amount  of  entitle 
ment  usually  depends  on  a  compli 
cated  calculation  and  the  actual 
payment  can  often  take  some  time 
before  it is  received.  (In  the UK,  to 
help  overcome  this  problem,  from 
January  1996, prospective recipients 
will be able to apply for details ofthe 
hkely  amount  of  rent  which  will  be 
used  to  calculate  their  Housing 
Benefit  entitlement before  taking on 
a tenancy.) Nor is the calculation that 
much simpler when a person  moves 
from  being unemployed to taking up 
a job  if  the  pay  they  will  earn  still 
makes them eligible for  benefit. 

How  far  housing  benefits  are  hkely 
to be taken into account in decisions 
about  whether  to  work  or  not  is, 
therefore, difficult  to assess. 

Concluding remarks 
The above analysis indicates that 

the level of  income  support re 
ceivable  when  out  of  work  can  be 

-  101 

Chapter  4 -  Unemployment  compensation  and incentives  to look  for work 

high in  most  countries  of the Union 
in certain cases relative to take-home 
pay  when  in  employment.  This  is 
especially  so  for  those  on  low  pay 
and  particularly  for  people  with de 
pendants.  However,  even  for  those 
earning  only  half  the  average  wage 
when  in  employment,  the  replace 
ment  rate  in  1993, even  during  the 
early  stages  of  unemployment,  was 
below  100%  in  all  Member  States 
except  Portugal  and  below  80%  in 
five  of  them  in  the case of  a  single 
person  with  an  adequate  record  of 
employment.  For  someone  with  no 
employment record, the replacement 
rate  was  under  60%  in  7  Member 
States and under 70% in another two. 

Such  rates  do  not  seem  overly 
generous  in  terms  of  ensuring  that 
those out of work can avoid living in 
poverty, especially in a relative sense 
(usually  taken  as  half  the  average 
household  income  in the country  in 
question) though many of the unem 
ployed  live  in  households  where 
there is more than one potential wage 
earner.  Whether,  on the other  hand, 
they  are high  enough  to represent a 
serious  discouragement  to  look  for 
work  is  an  open  question.  Survey 
evidence  and  observation  seem  to 
suggest  that a substantial number of 
people would  prefer  to work  and be 
earning  rather  than  to  receive  the 
same  amount  of  income  for  doing 
nothing. This can be explained in part 
by  the  fact  that  participation  in  so 
ciety  as  well  as  personal  fulfilment 
for  many  people  is  linked  very 
closely with the job of work that; they 
do.  In  addition,  future job  prospects 
tend  to  depend  very  much  on  being 
in work. 

The  results,  moreover,  need  to  be 
quahfied by two important consider 
ations. In the first place, far from  all 
the  unemployed  are  ehgible  for  the 
benefits  estimated  here, as  noted  at 
the outset. Indeed, in Portugal, where 
replacement  rates  of  over  100% are 
estimated for a single person on half 
average earnings, under 10% of those 
recorded as unemployed  on the ILO 
standard definition were in receipt of 
benefits  or assistance in  1994 and in 
Spain, where rates were also high, the 
proportion was under  15%. 

In the second place, to an increasing 
extent in most countries, those draw 
ing  unemployment  benefit  have  to 
satisfy  the  officials  concerned  that 
they are actively and seriously look 
ing for work, nor can they easily turn 
down jobs  if  they  are  offered,  irre 
spective of the level of wage. 

A further point to bear in mind is that 
even  if benefit  levels  were to be re 
duced,  there  is  no  certainty  that 
wages  at the lower end of pay  scale 
would  correspondingly  decline  as 
well. The constraint  on wage reduc 
tions  does  not  come  only,  or  even 
perhaps  mainly,  from  the  level  at 
which  unemployment  benefits  are 
set. Other  factors,  such  as  obstacles 
to  geographical  and  occupational 
mobility, the actions of trade unions, 
the imposition  of social charges and 
taxes  on  labour,  minimum  wage 
legislation  and  social  attitudes  to 
wards  what  constitutes  acceptable 
pay levels, are equally important. 

replacement  rates  represent  a  disin 
centive for those out of work actively 
to  seek  employment,  then  the prob 
lem can equally be tackled from  the 
other side — in other words, by rais 
ing take-home pay rather than by re 
ducing unemployment benefits. One 
means of doing this without revising 
the  cost  of  labour  to  employers  is 
through in-work benefits, such as the 
Family  Credit  scheme  in  the  UK, 
which  increases  disposable  income 
in relation to the gross wage paid by 
employers  but  is  only  available  to 
those in work. It is also, on the other 
hand,  only  available  to  those  with 
families (except for a relatively small 
number  of  disabled),  which  repre 
sents  a  significant  limitation  on  its 
potential  effectiveness  (a  limitation 
which is in the process of being reas 
sessed  by  the UK  authorities  with a 
view possibly to broadening its appli 
cability). 

One  inherent  problem  of  in-work 
benefits, however, is that they tend to 
be associated with high implicit mar 
ginal  tax  rates,  in  the  sense  that,  if 
targeted  on  the  lowest  paid,  the 
amount  receivable  usually  declines 
significantly  as  wages  increase,  so 
effectively  reducing  the  extent  to 
which  take-home  pay  rises  in  re 
sponse  to  higher  wages. In  the  UK, 
this  results  in  marginal  tax  rates  of 
over  90%  for  some  recipients  of 
Family  Credit  (see  Employment  in 
Europe,  1995, Part HI, Section  1, for 
a  fuller  discussion  of  this  issue  and 
for  estimates  of  marginal  deduction 
rates in Member States). 

Moreover,  replacement  rates are not 
only  determined  by  the  level  of  in 
come  support  for  the  unemployed. 
They are also affected  by the level of 
take-home pay when in work. If high 

In  this  way,  there  is a danger  of re 
placing  one  disincentive  effect  — 
that of discouraging job search — by 
another — that of discouraging work 

102 

Chapter 4 -  Unemployment compensation and incentives to look for work 

Two-earner families and disincentive effects 

The analysis in this chapter is confined to one person 
earning whether they  are  single or married (or coha 
biting).  In  reality,  a  high  proportion  of  households 
consist of  at least two  wage-earners,  or  at least,  two 
people who are economically active. This is an import 
ant limitation, though in terms of disincentive  effects 
it is perhaps  more  important  to  consider  the  general 
position  of  women  contemplating  seeking  a  job 
whether they are receiving unemployment compensa 
tion in any form or not (and, indeed, whether they are 
registered  as  unemployed  or  not).  As  such,  it  is  a 
broader and slighdy different issue than the one exam 
ined here which concerns the potential effect  of social 
transfers to the unemployed on their incentive to be in 
employment 

Research recently sponsored by the Commission (Pro 
tection sociale et activité  économique  des femmes  en 
Europe, CERC) indicates that the position of married 
women  contemplating  taking  a job  varies  markedly 
across  the Union  in  terms  of  the  level of deductions 
from  gross  earnings  and  the  costs  associated  with 
working, such as the costs of child care if she has small 
children.  The  extent  to  which  she  is  able  to  add  to 
household income by working, therefore, also  differs 
considerably. 

For example, in Belgium,  someone with a dependent 
wife  and two  young  children  on  a relatively  modest 
wage  (75%  of  the  average)  and  paying  an  average 
amount of rent typically has a disposable income, after 
social contributions, payroll tax and housing costs and 
including child benefits, of around 58% of gross earn 
ings (ie net deductions  amount to some 42% of earn 
ings). If the wife takes a job (at a shghtiy lower level 
of wages), the amount  which  she adds to  household 
disposable  income  will  be  under  half  (47%)  of  her 
gross earnings because  of  a higher effective  tax  rate 
and the costs of child care. Net deductions in her case, 
therefore,  are  around  53% of  earnings.  At  the  same 
time, she is able through  working  to increase house 
hold disposable income significandy — by some 80% 
of the increase in household  gross earnings  (ie if she 
earns 90% of what her husband earns she will be able 
to increase household disposable income by just over 
70%). Whether the relatively high deduction rate from 

earnings or the relatively large extent to which she can 
add to household disposable  income is the more im 
portant factor  determining whether or not she takes a 
job is a question  for debate,and investigation. 

In  France,  where  taxes  on  payroll  are  lower,  the 
amount which a sole wage earner with the same level 
of pay and in the same family circumstances keeps out 
of gross earnings tends to be correspondingly  higher 
and net deductions are under 30% of earnings. If the 
wife takes a job, net deductions from her earnings are 
much the same as in Belgium (54%), largely because 
of  the  costs  of  child  care,  so  that again  the  amount 
which  she  adds  to  household  disposable  income  is 
under  half  of  her  gross  wage. In this case,  however, 
because of the relatively high initial level, household 
disposable  income  is  increased  by  less  than  in  Bel 
gium, by 65% of the increase in combined gross earn 
ings. 

In the UK, where payroll  taxes are higher but  social 
contributions lower, the disposable income ofthe same 
household with a sole wage earner is much higher in 
relation to gross earnings than in Belgium but slightly 
lower  than  in  France,  net  deductions  amounting  to 
31%  of  earnings. On  the  other  hand, because  of  the 
high costs of child care, if the wife takes a job, a higher 
proportion of her earnings is liable to be absorbed by 
deductions of one kind or another than in the other two 
countries. Net deductions  amount to over 75% of her 
earnings and she is able to increase household dispos 
able income by only 23%  of the percentage by which 
she raises combined gross earnings. 

Additional  problems  can  arise  in  certain  cases,  as 
noted in Chapter  2, when  one of the wage earners in 
the  household  is  unemployed  and  begins  to  claim 
social  assistance  (when  entidement  to  insurance 
benefits expires, for example), which may, in fact, not 
be payable if the other person is still in employment. 
The incentive  then  for  the  latter  to  stop working — 
which has much more to do with the regulations gov 
erning social assistance and the application of means-
testing  than  the  level  of  transfers  or'the  interaction 
between  the  tax  and benefit  system —  may  well  be 
significant. 

103-

Chapter 4 -  Unemployment  compensation  and incentives  to look for work 

effort.  By  the  same  token,  there  is 
also a danger of replacing  an unem 
ployment  trap, in  the  form  of  those 
out of work being unable to find jobs 
which  pay  significantly  more  than 
they receive from  social benefits, by 
a poverty trap, in the form of those in 
low-paid jobs having difficulty  in in 
creasing their take-home pay signifi 
cantly, because  a substantial  part of 
any additional pay they earn is effec 
tively taken away as their benefits are 
reduced. 

An  analogous  problem  applies  to 
married women, in particular, and the 
second wage earner in a  household, 
in general. As emphasised above, the 
analysis  in  this  chapter  has  not  in 
cluded  examination  of  replacement 
rates for couples where both partners 
are  working.  This  is  an  important 
limitation  since  a  large  number  of 
studies  suggest  that  disincentive  ef 
fects  are  particularly  important  in 
respect  of  married  women.  Never 
theless,  the  major  disincentive  to 
married  women  seeking  employ 
ment, in addition to family  responsi 
bilities,  almost  certainly  stems  not 
from  high  levels  of  unemployment 
benefit  which  most  will  not  be 
eligible  to receive  in  any  event,  but 
from the potentially high level of de 
ductions from household income and 
the  additional  costs,  especially  of 
child  care,  which  can  result  if  they 
take  up  paid  employment.  Further 
difficulties  can also arise in the event 
of  her  husband  being  unemployed 
and receiving means-tested social as 
sistance  assessed  in relation  to  total 
household  income,  including  her 
earnings  (see Box). This  is  an  issue 
meriting further  research. 

104 

Chapter 5 -  Reforms in healthcare 

Chapter 5  Reforms in health care 

Introduction 
In recent years, a major concern of 

policy  throughout  the  Union  has 
been  to  contain  the  costs  of  health 
care provision against a background, 
on the one side, of the increased de 
mands imposed by an ageing popula 
tion,  and  rising  real  income  levels, 
and,  on  the  other,  of  the  increased 
costs  resulting  from  new  develop 
ments in treatment, technological ad 
vances and the inherent tendency for 
those  responsible  to seek  to  expand 
their budgets. In all Member States, 
expenditure on the health service has 
grown  significantly  in  real  terms 
since  1980  (see  Box).  With  a  few 
exceptions,  however,  governments 
have succeeded in preventing expen 
diture from absorbing a substantially 
larger  share  of  GDP, though  inevit 
ably few were able to avoid spending 
expanding  in relation to a falling  or 
stagnant level of GDP during the re 
cession years ofthe early 1990s. This 
experience  combined  with  the  evi 
dent  long-term  pressures  for  growth 
has intensified the search for ways of 
keeping  down  expenditure  without 
jeopardising  the  maintenance  of  a 
high quality service, accessible to all 
who have a need of treatment. 

The  search  has  led,  in  particular,  to 
detailed consideration  of the organi 
sation of systems and ofthe means of 
allocating resources and deciding the 

pattern of care, with the primary aim 
of increasing the effectiveness  of ex 
penditure.  A  common  focus  in  this 
regard has been on the possibilities of 
introducing elements of competition 
with a view to improving  efficiency. 
As a result, in a number of Member 
States,  major  reforms  have  either 
been  introduced  over  the  past  few 
years  or  are  being  currently  con 
sidered. 

The purpose of this chapter is to re 
view  the  changes  which  have  been 
made in each of the countries  in the 
light of both their institutional  char 
acteristics, which differ from country 
to country and which are a key deter 
mining factor ofthe kind of measures 
hkely to prove effective, and of basic 
principles. 

Basic principles 
and problems 

While all countries in the Union 

face  common  general  prob 
lems  in  respect  of  methods  of  con 
taining  health costs  and ensuring  an 
adequate extent and level of service, 
the methods of organising the provi 
sion of care and the means of financ 
ing differ  between them. As a result, 
the detailed  nature  of  problems  and 
their  manifestation  also  vary,  as  do 

the measures likely to prove effective 
in resolving them. 

A  principal  difference  which  has 
major  implications  for  the appropri 
ate  response  to  demand  and  cost 
pressures  is between national  health 
systems which are financed predomi 
nantly  through  general  taxation, 
where services are provided  directly 
by the State and for the most part are 
freely  accessible  to  all,  and  insur 
ance-based systems where a number 
of insurance funds are responsible for 
providing  services  to  various  occu 
pational  groups  and  which  are  fin 
anced  mainly  by  contributions.  In 
this  case,  therefore,  the  State  exer 
cises only indirect control over what 
is  spent.  The  majority  of  Member 
States  have  the former  type  of  sys 
tem;  the  Benelux  countries  plus 
Germany,  France  and  Austria  have 
the second, though in some Southern 
European countries where the devel 
opment  of  national  health  systems 
has not yet been fully completed, es 
pecially  in  Greece,  elements  of  an 
insurance-based  occupational  sys 
tem remain. 

A second important difference  is be 
tween  a  centralised  organisation  of 
health  care  and  a  decentralised  one 
where  regional  and  local  authorities 
have more autonomy, though this is 
essentially a question of degree since 
in countries  with a more  centralised 

-  105-

Chapter 5 -  Reforms in health care 

Trends in health expenditure 

Total  expenditure  on  health  care  averaged  872%  of  GDP  in  the  Union  in  1993 
(according to OECD figures). The scale of spending, however, varies  significantly 
between Member States from almost  10% of GDP in France to only 472% of GDP 
in Greece (Graph BRU927). In general, the level tends to be higher in countries with 
insurance-based schemes — the Benelux countries, Germany and Austria as well as 
France — than in those with tax-financed  national health systems (though Italy and 
Finland are major exceptions). This partly reflects  the relatively high level of real 
income per head ofthe  former group as compared with the latter and, therefore, the 
higher demand for health care. 

Expenditure throughout the Union has tended to expand over time in relation to GDP, 
the only exceptions being Ireland and Sweden, where it declined between 1980 and 
1993 (though for the latter, it seems likely that there is a break in the OECD figures ), 
and Denmark, where it remained unchanged. In all other Member States, spending 
was higher relative to GDP in  1993 than in  1980. This was especially so in France 
and Finland,  where  it rose  by  2 percentage  points  over  this ]>eriod and  Belgium, 
Spain, Italy, Portugal and the UK, where the increase was  172 percentage points or 
more. Much ofthe rise in these countries, however, occurred between 1990 and 1993 
when GDP either grew slowly or not at all (in Finland and the UK, it declined). 

Nevertheless, the experience during the 1980s, when expenditure increased at much 
the same rate relative to GDP during the period of comparatively high growth in the 
second half as in the first when growth was depressed, suggests; that a higher rate of 
economic growth is no guarantee against the rising absorption  of resources by the 
health care sector. In such periods, it is likely that there is less pressure on govern 
ments to depress expenditure and, therefore, that its growth more closely reflects the 
rising demand for services which seems to be a feature of economic development. 

The growth in health care expenditure during the period of economic upturn between 
1985 and 1990 averaged 3 72% a year in real terms (ie deflated by a health price index) 
in the Union as a whole, significantly  more than in either the preceding five years 
or the subsequent  three  (Graph BRU928). In Spain and Portugal, where universail 
systems were being developed it was 8% and  1072% a year, respectively. Between 
1990 and  1993, average growth  in the Union  fell  to 2% a year, and only in Spain, 
France and Portugal was it more than 3% a year. In Finland and Sweden, where GDP 
fell significantly, health expenditure also declined markedly. 

Public expenditure on health has tended to grow less rapidly than overall spending 
in  most  countries.  Only  in  Belgium  and  the  Netherlands  was  the  proportion  of 
expenditure accounted for by the public sector higher in  1993 than in 1980, though 
in  Finland  it  was  much  the  same.  In  a  number  of  countries,  including  Italy  and 
Portugal, where national  health services were being developed over this period, the 
fall in the relative importance of public spending was substantial. This was particu 
larly the case in the period  1990 to 1993, reflecting  the budgetary constraints which 
prevailed  over  this  period.  Overall,  therefore,  private  involvement  in  health  care 
provision and, partly as a corollary, the charges levied on individuals for  treatment 
have expanded in virtually all parts of the Union in the past few years. 

-  106 

approach  the lower level  authorities 
responsible for actually providing the 
services  have  some  discretion  over 
the expenditure. A more  centralised 
form  of  organisation  is  used  in 
France, the UK, Portugal and Spain. 
In  the  Scandinavian  countries,  as 
well  as  Germany,  there  is  a  more 
decentralised system. There is, there 
fore, no close correlation between the 
method of financing  and the form of 
organisation. 

Under a tax-financed  system, central 
government,  in principle,  has  direct 
control over total expenditure in the 
sense  that  it  sets  an  overall  budget 
each year, or for a specific  period of 
time, which is then distributed to the 
authorities  actually  responsible  for 
providing care and services. In prac 
tice,  however,  given  the  pressures 
which can arise for additional expen 
diture, especially in situations where 
the regional or local authorities over-
commit themselves to spending, con 
trol can be difficult  to exercise unless 
central government is prepared to see 
services  withdrawn  or  rationed. 
Problems  experienced  by  national 
health services of this kind typically 
take the form of inflexibility  (insofar 
as changing local and patients needs 
are not necessarily transmitted  effec 
tively to the central authorities which 
may be reluctant to expand budgets), 
waiting-lists (which are an inevitable 
consequence of controlling expendi 
ture so that it is kept below the level 
of  effective  demand),  and  potential 
waste (which results from inadequate 
incentives to increase efficiency  and 
use  budgets  more  effectively). 
Though they do not necessarily need 
to  arise  in  practice,  these  problems 
are  in  some  degree  inherent  in  this 
kind  of  system  and  have  been  an 

Chapter 5 ~ Reforms  In health  care 

64  Total and public expenditure on health in  relation 

to GDP, 1980,1990 and 1993 

% GDP 

-i  12 

4 10 

GR  I 

D excludes new Lander; left ba/1980, middle bar 1990, right bar 1993 

66  Growth in health expenditure per head, 1980-85, 

1985-90 and 1990-93 

Annual change at 1965  (health care)  prices 

B  DK  D  GR  E 

F 

IRL 

I 

L  NL  A 

P 

SF 

S  UK  E15 

D  excludes new Lander 

107 

Chapter 5 -  Reforms in health care 

increasing  focus  of  pohcy  in  recent 
years as governments have sought to 
maintain or improve health care ser 
vices  without  expanding  expendi 
ture. A common  approach  has  been 
to  try  to  increase  incentives  to  im 
prove efficiency  in the way resources 
are  allocated  and  achieve  cost  sav 
ings, partly through the introduction 
of  competition  or  pseudo-market 
mechanisms. 

In  countries  with  insurance-based 
systems, the major problem tends not 
to be long waiting-lists or inadequate 
levels  of  service and care, but  more 
control  over  expenditure.  Since,  in 
general,  the  insurance  funds  which 
manage the system do not supply ser 
vices  directly  but contract  these out 
to  health  care  providers  (general 
practitioners,  consultants,  hospitals 
and so on), they are potentially able, 
through  the  incorporation  of  effec 
tive  sanctions  and  incentives  in  the 
contractual arrangements, to ensure, a 
sufficient quality and level of service. 
The focus of policy in these countries 
has,  therefore,  tended  to  be  on  the 
design of contracts as well as on the 
means  of  exercising  control  over 
overall expenditure and the resources 
absorbed by the system. 

Differences  in the degree of centrali 
sation  or  decentralisation  also  give 
rise to some difference  in the nature 
of problems, in that more centralised 
systems ought, again in principle, to 
be  able  to  distribute  budgets  more 
equitably  between  regional  or  local 
providers  than  more  decentralised 
systems, though less able to exercise 
detailed control over what is spent. In 
practice,  determining  an  equitable 
budget  allocation  is  by  no  means 
straight-forward  since  this  will  de 

pend  on  being  able  to  identify  dif 
ferences in the need for expenditure, 
which in turn will depend on a range 
of  characteristics  of  the  population 
potentially requiring care. 

Nevertheless,  whatever  the  prevail 
ing  method  of  organisation  or  of 
funding,  because  of  the  common 
need  for  cost  containment,  in  all 
countries  governments  have  faced 
the problem  of increasing  the  effec 
tiveness of expenditure and of trying 
to ensure that what is spent and how 
it is allocated between different  treat 
ments  and  different  types  of  care, 
adequately  reflects  the  needs  of  so 
ciety. In other words, given that the 
provision of health care  needs to be 
'rationed'  in  some  sense  (or,  more 
precisely, given that all governments 
accept the need to limit what is pro 
vided, not only to contain public ex 
penditure growth as such but also to 
avoid  the  seemingly  insatiable  de 
mand  for  health  care  leading  to ex 
cessive  absorption  of  resources  by 
this  sector  even  in  a  market-based 
system), the key question is how this 
can best be achieved in practice. 

Belgium 

In Belgium the main issue in respect 
of  health  care  concerns  the  cost  of 
medical  treatment  which  have  ex 
panded  markedly  year  after  year. 
This is especially the case for labor 
atory tests, pharmaceuticals, hospital 
care  and  home  care  for  elderly 
people. 

fixed ex ante in relation to a standard 
charge based on the expected costs of 
treatment or care. A global budgetary 
objective  is  set  each  year for  health 
care  as  a  whole  as  well  as  for  each 
subsector.  Provision  for  the  im 
plementation of corrective measures 
is  included  in  agreements  and  con 
ventions in the event of  expenditure 
exceeding these amounts. 

In  general,  increased  efforts  have 
been made to reduce the provision of 
medical  care  without  jeopardising 
the  quality  of  service,  to  make  all 
those  involved  in  the  sector  (health 
professionals,  mutualities,  pharma 
ceutical companies  and so on) more 
responsible for the expendimre they 
incur or initiate and to put more em 
phasis on primary health care in rela 
tion  to  specialised  care  and  highly 
technical treatment. 

In  order  to expand  finance,  charges 
were increased significantly in 1994, 
continuing  the pohcy  of  imposing  a 
greater  share  of  the  cost  of  care  on 
patients. This is tempered, however, 
by fixing a ceiling on the amount any 
individual pays for treatment (though 
not drugs) during a year. At the same 
time,  certain  obligations  have  been 
placed  on  general  practitioners  to 
avoid prescribing expensive drugs of 
doubtful  effectiveness,  with  sanc 
tions being  available  in  the form  of 
fee  reductions  if they ignore this. In 
addition, awareness campaigns have 
been  introduced  to  inform  doctors 
when  their  prescription  rate  per  pa 
tient exceeds the average. 

Over time, the system has been pro-
gessively  modified  from  being  one 
where payment is determined ex post 
in relation to costs to one where it is 

A  long-standing  problem  inherent 
in  an  insurance-based  system  of  the 
Belgian kind is imposing effective re 
sponsibility on the mutual funds which 

108 

Chapter $ -  Reforms In health care 

manage the system for the expenditure 
they  incur.  From  1995,  part  of  the 
revenue  of  each mutual  fund  will be 
determined not by the actual medical 
expenditure of their members but by a 
fixed amount per member  which de 
pends on their characteristics (age, sex, 
income  and  so  on).  This  part  will 
amount to 10% of the health insurance 
budget in the period 1995 to 1997,20% 
between  1998  and  2001  and  30% 
thereafter. If the expenditure of a mu 
tuality exceeds its revenue, then it will 
have to use its reserves to cover part of 
the deficit and if necessary increase its 
members'  contributions.  This  new 
system is intended to give an incentive 
to  the  mutualities  to  moderate  their 
expenditure. 

Denmark 

The health  care system  in  Denmark 
as in other Scandinavian countries is 
financed  by  taxes  and  has  a  decen 
tralised  organisation.  Though  the 
system  seems  to operate  with  fewer 
problems  than  elsewhere  in  the 
Union,  a  number  of  reforms  have 
been introduced in the last few years. 

In particular, to introduce some com 
petition  between  health  care  pro 
viders  especially  in  the  hospital 
sector,  in  1993, people  were  given 
free choice of which hospital to go to 
and the right to demand and  receive 
health care where they wished. As a 
result, the role of the general practi 
tioner in advising  the  patient  where 
to go was increased. 

Tax-financed,  national  health  sys 
tems like that  in Denmark  also tend 
to have an inherent problem of wait 
ing  lists.  An  experimental  measure 

has,  therefore,  been  introduced  of 
guaranteeing  a  maximum  waiting 
time of three months with incentives 
for  hospitals to comply  and an obli 
gation on the counties which admin 
ister the system to meet this target. 

In addition, there are moves to intro 
duce  a system  of  contracts  between 
counties and individual hospitals. 

Germany 

In  Germany,  a  major  reform  of  the 
health  insurance  system  became  ef 
fective at the beginning of 1993. Fol 
lowing  the  reforms  introduced  in 
1988, expenditure increased  sharply 
in  1991  and  new  measures  of  cost 
containment  had to be  implemented 
immediately.  The  approach  was  to 
introduce a system of budget control 
under which increases in expenditure 
between  1993 and 1995 have to be in 
line  with  the  increase  in  income  of 
the sickness funds from the contribu 
tions  of  the  people  insured.  In  the 
hospital  sector,  differentiated 
charges were introduced which vary 
according to the kind and intensity of 
care. The  system  of federal  funding 
is also being changed in order to re 
duce  the  number  of  beds.  Budget 
control has also been applied to doc 
tors and  dentists  in private  practice. 
From 1999, new doctors and dentists 
will only be allowed  to provide ser 
vices under the health insurance sys 
tem  if  there  is  need.  In  addition,  a 
freeze on drug prices was introduced. 

There is a general consensus that the 
measures taken in  1993 were only a 
first  emergency  step  in  a  more 
general reform ofthe health care sys 
tem,  the  aim  being  to  maintain  the 

high standard of health care, to avoid 
imposing  additional  costs  on  con 
sumers and to contain costs. It is also 
considered  that rates of contribution 
which  now  differ  between  sickness 
funds  should  be  more  similar.  An 
other idea is to give more  flexibility 
to sickness funds for contracting with 
health  care  providers.  At  the  same 
time, there are moves to give general 
practitioners à greater role in order to 
avoid  expensive  diagnoses  by  sev 
eral  specialists  and  to  encourage 
them to work as coordinators. In ad 
dition, it is planned that there should 
be greater competition between sick 
ness funds  in terms  of both  benefits 
services  they  provide  and  the  con 
tributions they charge. 

The latter will become effective  from 
the beginning of 1996 while the other 
proposals  are  still  being  discussed. 
The  latest  proposal  of  the  Federal 
Ministry  of  Health  is  generally  to 
give the self-governing institutions in 
the  sector  more  autonomy,  though, 
according to a number of experts, the 
incentives  and  disincentives  incor 
porated in the system are not power 
ful enough for such a move. 

Greece 

In  Greece,  there  is  a  commonly 
perceived  need  to  modernise  the 
National Health system. In  1992 and 
1994, amendments  were  introduced 
to modify  administrative and organi 
sational  aspects  and  to  improve 
primary health care, emergency pre 
hospital  services  and  the  manage 
ment of hospitals. 

A  report proposing  a radical  reform 
of  the  health  care  system  was 

109 

Chapter 5 -  Reforms In health care 

presented in 1994 by an International 
Committee  of  experts  appointed  by 
the  government  and  is  now  under 
discussion.  A  central  recommenda 
tion is the estabhshment of a Unified 
National  Health  Insurance  Fund  in 
corporating  existing  sickness  bran 
ches of social insurance funds  which 
would  negotiate  health  services  on 
behalf  of  the  insured.  Other  propo 
sals are the development  of  preven 
tive pohcies on a decentrahsed basis, 
the  participation  of  family  doctors 
and general practitioners  in the pro 
vision  of  primary  health  care  servi 
ces, the introduction of management 
techniques  in  the  administration  of 
pubhc  hospitals  and  the  application 
of  cost  containment  arrangements, 
especially  in  respect  of  drugs  and 
diagnostic centres. 

Spain 

For  many  years,  the  main  issue  as 
regards  the  health  care  system  in 
Spain  was  achieving  full  coverage. 
At the same time, the  system  as es 
tablished tended to exhibit the typical 
weaknesses of centralised budget, in 
that there were inadequate incentives 
for  those  providing  care  to  take ac 
count of costs. 

In recent years, there has been a tend 
ency  to  increase  the  role  of  private 
providers of care and of more  effec 
tive  management  techniques.  This 
was first evident in the changes intro 
duced  in  Catalonia  in  1990  under 
the  Health  Reform  Law,  which  in 
itiated  a national  discussion  leading 
to the Abril Committee report which 
suggested  deep-seated  structural  re 
forms  to introduce managed compe 
tition, a proposal which was reflected 

in  the  changes  made between  1992 
and 1994. 

In 1993, a proscribed list of pharma 
ceuticals too expensive for the pubhc 
system  to  supply  was  produced  for 
the first time. In  1994 a compromise 
was reached between the central gov 
ernment  and  the  regional  autono 
mous authorities over a more realistic 
budgeting.  Since  1993,  an  explicit 
contract with public non-profit  mak 
ing hospitals has been introduced on 
an  experimental  basis,  which  spe 
cifies  levels  of  activity  and  the  ex 
pected  costs  for  each  kind  of 
treatment, with the aim of achieving 
forward  budgeting  of  hospital  care. 
An  additional  medium-term  aim  in 
the same direction is to separate fin 
ancing from the provision ofcare and 
to contract out part of the public ser 
vice  to  private  non-profit  making 
hospitals. 

A further issue under discussion is the 
extent to which the system should be 
regionalised in Une with the division of 
government in Spain. In practice, there 
is some tendency towards the develop 
ment of  17 different  and separate re 
gional health care systems. 

France 

In the French system, the health bud 
get is centralised and health care pro-
viders,  in  general,  work  on  a 
contractual  basis;  public  hospital 
budgets  are  paid  by  the  insurance 
funds but have to be approved by the 
Ministry of Health. 

budgetary  system, under  which  it is 
difficult  to  forecast  the  actual  need 
and create incentives for efficient use 
of available resources when the bud 
get  is  provided  on  the  basis  of  the 
planned supply of services. Oversup-
ply and waste are potential results. To 
avoid  this,  there  is  a  trend  towards 
agreements being drawn up between 
the  insurance  funds  providing  bud 
gets  and  the  pubhc  hospitals.  Bud 
gets  tend  to  include  incentives  for 
efficient  management and the avoid 
ance of oversupply. 

Ireland 

Partly  because  of  its  high  rate  of 
economic  growth,  public  expendi 
ture  on  health  in  Ireland  remained 
broadly  unchanged  between  1988 
and  1993  in  relation  to  GDP  at 
around  5%,  which  is  low  as  com 
pared  with  other  countries  in  the 
Union. 

Measures  of  reform  are,  therefore, 
aimed at increasing equity, quality of 
service and accountability  and there 
is  less  urgent  need  to  improve  effi 
ciency or to control costs. There are, 
nevertheless,  efforts  to  improve  the 
organisation  and  integration  of 
general  practitioner  services  and  to 
encourage health promotion. 

Italy 

Measures were introduced in Italy in 
1992  aimed  at  containing  costs  and 
improving efficiency,  which took  ef 
fect from  1994. 

A major  concern is the efficiency  of 
the  pubhc  hospital sector  as well as 
the  drawbacks  of  a  centralised 

Under  these  measures,  the  USL 
(local  health  units  which  form  the 

110 

Chapter 5 -  Reforms In health care 

basic structure of the national health 
service) were transformed into public 
enterprises  with  significant  auton 
omy and local responsibihty. Instead 
of  being  administered  by  a  political 
committee, these are now under the 
control of a professional manager ap 
pointed by the region, with a contract 
renewable  every  five  years.  Larger 
hospitals,  formerly  acting  as  bran 
ches of the USL, are able to become 
independent pubhc hospital agencies 
with  autonomous  organisation  and 
administration,  which  have to oper 
ate with balanced budgets. 

This reform  also brought changes in 
financing  regulations,  with  central 
government  maintaining  overall 
planning  responsibility  and  effec 
tively  paying  for  a  standard  set  of 
services  that  must  be  guaranteed  to 
each  citizen  in  each  region.  Each 
region  continues  to  receive  a  pre 
determined  sum  from  the centre ac 
cording  to  its  population,  but  any 
expenditure in addition to this has to 
be covered from its own resources. In 
this way, it is intended  to encourage 
regions  and  USL  managers  to  co 
operate  in  containing  costs  and 
achieving  an  efficient  use  of  re 
sources. 

Luxembourg 

In Luxembourg a major reform  ofthe 
health  care sector occurred  in  1992, 
which as elsewhere was aimed at in 
creasing  efficiency.  The  main  as 
pects  were  a  reorganisation  of  the 
administration  of  the  health  insur 
ance system, a new system of  financ-
ing  health  i n s u r a n c e,  a  new 
procedure  for  negotiations  between 
insurance  funds  and  providers  of 

health care and a new financing sys 
tem for hospitals. Of these, the latter 
two measures are the most important 
as regards improving  efficiency. 

Since the former  negotiation  system 
was  virtually  unregulated  and  there 
were  inadequate  mechanisms  for 
controlling  expenses,  more  detailed 
rules  for  negotiating  agreements 
were introduced  together  with  a list 
of  services  to  be  provided  and  the 
relative  value  compared  with  other 
services. In the hospital sector, a sys 
tem of individual budgets negotiated 
between each hospital and the health 
insurance  funds  will  replace  the 
existing system after  1995. 

The Netherlands 

As described in Social Protection in 
Europe 1993, the reforms introduced 
in the early 1990s in the Netherlands 
were  a  radical  attempt  to  introduce 
market  forces  into  the  health  care 
system.  In  essence,  the  aim  was  to 
bring  about  competition  between 
both  providers  ofcare  and insurers. 
An  important  aspect  was  that  the 
sickness  funds  were  no  longer  ob 
liged to contract with all institutions 
offering  health  care  services,  while 
individuals  became  free  to  choose 
which  sickness  fund  to  belong  to. 
This  was to be  accompanied  by  the 
integration  of all the different  insur 
ance  schemes  into  a  single  scheme 
for all residents. 

The  experience  of  the  Netherlands, 
however, demonstrates how difficult it 
is  to  introduce  fundamental  reform. 
The  market  approach  succeeded  in 
bringing about market-type behaviour, 
but  this did not always achieve what 

the initiators of the reform had in mind. 
New  cost  containment  measures 
turned  out to be necessary,  requiring 
intervention by the State, in a situation 
where, as a consequence ofthe reform, 
the acceptance of the dominant role of 
government had been eroded. The  ef 
fects of the reform were at best mixed 
and  have  prompted  opposition  from 
several sides. 

Following  a  change  of  government, 
the  more  far-reaching  aspects  of  the 
reform have been abandoned. There is 
no longer to be a basic health insurance 
scheme covering all residents and the 
changes being made to the system are 
tending to increase the degree of gov 
ernment intervention and impose stric 
ter  budgetary  control,  though  whilst 
retaining  the  market  elements  which 
have been established. 

Austria 

The  health  care  system  in  Austria 
incorporates  insufficient  means  of 
preventing  overconsumption  on  the 
demand side and excessive provision 
of  service  on  the  supply  side  and 
tends  to  encourage  expensive  in 
patient  treatment,  which  in turn  has 
led to the overexpansion of hospitals. 

The  reforms  which  are  now  under 
discussion  attempt  to  address  these 
problems  in  detail,  by  for  example 
expanding  forms  of  care  between 
hospitalisation  on  the one hand  and 
outpatient visits on the other hand or 
by  replacing  the  present  system  of 
hospital  funding  based  on  a  daily 
lump-sum  rate  by  a  system  that  is 
related  to  the  costs  of  each  case  of 
treatment. 

-  111 

Chapter 5 -  Reforms in health care 

Portugal 

The  problems  experienced  by  the 
National  Health  Service  in  Portugal 
in the late  1980s included  a maldis 
tribution  of  resources  between  re 
gions, dissatisfaction with the quality 
of  the  pubhc  service, inefficient  or 
ganisation  and  management  of  the 
system  and  so inadequate  means  of 
containing costs. 

Since  1993, the approach has been to 
increase the extent of regional decen 
tralisation and within each of the five 
health regions, to group together health 
centres and hospitals as 'units of heal 
th'.  In  addition,  the  National  Health 
Service is now allowed to provide ser 
vices  directly,  while there  is  a move 
away from pubhc to private insurance, 
the main aspect being that private in 
surers receive payment from  the gov 
ernment  for  each  member  at  a  rate 
below the average cost per head of the 
National Health Service. They are then 
free to contract with providers ofcare. 
The  system  thus  contains  incentives 
for insurers to contain costs. 

organise  the  provision  of  services 
and,  in  general, regulations  control 
ling  the  activities  of  municipalities 
were  relaxed  significantly.  In  addi 
tion, municipalities were given effec 
tive control over the hospital  sector, 
since  they  became  essentially  the 
customers for their services. 

Sweden 

The health care system in Sweden — 
hospitals as well as most  out-patient 
clinics  —  is  mainly  run  by  the  re 
gional county councils and primarily 
financed through local income taxes. 
During  the  1980s, health  care  costs 
were contained and output was sim 
ultaneously  raised.  Nevertheless, 
there were significant differences be 
tween the county councils in  perfor 
mance  on both  fronts.  In  particular, 
in  the large cities  long  waiting  lists 
built  up  for  certain  treatments 
thereby  causing  unnecessary  costs 
for sickness insurance  funds. 

Finland 

As  in  the  other Scandinavian  coun 
tries,  the  health  care  system  in  Fin 
land  is  based  on  municipalities 
having  responsibility  for  providing 
services. The main problems concern 
inadequate  coordination  of  infra 
structure and a lack of  incentives  to 
increase productivity. 

Instead  of  increasing  the  degree 
of centrahsation,  the reforms  which 
became  effective  in  early  1993  in 
creased  the  freedom  of  the  munici 
palities  to decide  on charges  and  to 

A series of reforms during the 1990s 
have aimed at combining the advant 
ages of budget-controlled health care 
systems in terms of democratic trans 
parency  and  financial  control  with 
the flexibility,  freedom  of choice for 
patients and cost efficiency  of decen 
trahsed management and market-like 
mechanisms,  such  as  reimbursing 
doctors  through capitation  fees. Re 
sponsibility for caring for the elderly 
(in  1992) and the mentally  disturbed 
(in  1995)  has  been  transferred  from 
county  councils  to local  authorities. 
In addition, a number of experiments 
have been  carried  out  on  coordinat 
ing social insurance and health care. 

The reform of the general practitioner 
system  in  1994 was  aimed  at giving 
everyone the freedom  to choose their 
family doctor in order to strengthen the 
position  of  the  patient  as  well  as  to 
improve  primary  care.  After  the 
general  election  in  1994,  however, 
parts  of  the  legislation  relating  to 
general  practitioners  will  cease  to 
apply  at the end of  1995, though the 
provisions for strengthening the posi 
tion of the patient will remain 

The UK 

In the UK, the national health service 
with centralised decision-making has 
existed since 1948. Since 1991, how 
ever, fundamental reforms have been 
introduced aimed at containing costs 
and increasing efficiency.  Partly be 
cause  of  the  UK  system  being  the 
model for national health services de 
veloped  elsewhere  and  partly  be 
cause  of  the  market-oriented 
approach  adopted,  these  reforms 
have attracted  a good  deal  of  atten 
tion in other Member States (and are, 
therefore,  described  in  somewhat 
greater  detail  here  than  develop 
ments elsewhere). 

The basic philosophy underlying the 
reforms  was  to distinguish  between 
purchasers and providers of care and 
to  encourage  providers  to  compete 
with each other and supply their ser 
vices on the basis of contracts nego 
tiated with the purchasers. The latter 
consists of two kind. The largest are 
the district health authorities  (DHA) 
whose role is that of both organising 
and  supplying  hospital  care  and  to 
select  the  services  needed  and  con 
tract  with  providers. The  other  type 
of purchaser are general  practitioner 

112 

Chapter 5 ~ Reforms In health care 

fundholders  (GP  fundholder),  self-
employed  doctors  responsible  for 
primary  care  who  manage  a  budget 
(based on the number registered with 
them)  to  be  used  for  securing  a 
defined range of hospital and primary 
care services for their patients. These 
have incentives to make good use of 
their budget in order to attract  more 
patients and so raise their income. On 
the provider's  side, competition  be 
tween  hospitals  and  between  com 
munity services has been estabhshed, 
at least in principle. 

Such fundamental  reforms  are hkely 
to take some time before having their 
full  effect.  Nevertheless,  four  years 
after they were initiated some evalu 
ation of  their impact  is  possible. So 
far  it seems that the effect  is mixed. 
Evaluations  by  the  Kings  Fund  in 
1994 and  the National  Audit  Office 
in  1995  concluded  that  the  conse 
quences were limited, though with a 
greater  impact  on  GP  fundholders 
whose  performance  seemed  to  be 
better than the DHAs. It appears that 
in  practice  only  a  relatively  limited 
amount of competition  has been es 
tablished in the system, primarily be 
cause  under  the  old  arrangements 
local  monopolies  had  been  created 
among  providers  (local  or  regional 
hospitals,  in  particular)  so  that  the 
DHAs  do  not  have  much  effective 
choice  over the  supply  of  particular 
types of care or treatment. 

At the same time, DHAs  themselves 
are  effectively  in  a  monopoly  posi 
tion  and  management  is  liable  to 
possess neither the skills (since they 
were  trained  under  the  old  system) 
nor  the  motivation  to  change  their 
behaviour  substantially. 

An  essential  requirement  for  a mar 
ket  to  work  effectively  is  sufficient 
information  about  the cost  implica 
tions of particular kinds of action and 
details  about  the  actual  costs  of 
carrying  out  various  kinds  of  treat 
ment  remain  inadequate;  even 
though  the  situation  is  improving, 
progress is slow. This lack of detailed 
information  makes  it  difficult  for 
purchasers to assess the offers  made 
by  providers  —  or  indeed  for  the 
latter  to  fix  'prices'  in line with  the 
costs of provision — and for market 
mechanisms  to  bring  about  an  im 
proved allocation of resources. 

This  does  not  mean,  however,  that 
the attempts to introduce market ele 
ments and more choice into the sys 
tem,  to  obtain  better  information 
about  costs  and  to  take  these  more 
into account when deciding patterns 
of  expenditure  is  necessarly  mis 
placed. 

Comparative 
developments 
The  review  of  developments  in 

Member States indicates that the 
reform  of  health  care  systems  is  a 
topical issue and an objective of pol 
icy  throughout  the  Union,  since  all 
countries have to grapple with prob 
lems  of  rising  costs,  inefficiency, 
waste,  distorted  incentives  and  in 
flexibility.  A major  focus is on rela 
tions  between  financers  of  services 
and providers of care and on the es 
tablishment  of  effective  incentives 
for achieving a better use ofthe avail 
able resources. The quality of medi 
cal  care  is  not  a  common  issue  of 
concern. All of the systems have the 

ostensible aim,of combining cost  ef 
fectiveness with a high quality of ser 
vice and, though there is a good deal 
of  variation  in  the  mechanisms  of 
quality  control  in place, all  govern 
ments  claim  that  their  system  pro 
vides a high standard. 

Despite  the broad  similarity  of  sys 
tems,  of  the  problems  faced  and  of 
the  approaches  followed,  reforms 
differ  in  detail  and  can  only  be as 
sessed  in  terms  of  the  specific  fea 
tures  of  the  arrangements  for 
providing  and financing health  care 
in the individual Member States. 

In nearly all countries, there is some 
tendency  to  adopt  what  might  be 
termed  a  'contractual'  approach, 
though  the  way  in  which  this  has 
been  used  differs  significantiy  be 
tween  Member  States.  In  broad 
terms, this is simply  a way of  orga 
nising  the  provision  of  care.  In 
France and in some degree in Spain, 
contracts  are  essentially  being  used 
to contain costs by limiting budgets, 
though under centralist systems they 
can  also  incorporate  provisions  re 
garding quality and standards as well 
as serving to give incentives. 

Contracts can also be established be 
tween the different bodies providing 
the finance (the State and/or sickness 
funds) and those providing care. This 
has strong similarities with collective 
bargaining. There is rarely  effective 
competition on either side and nego 
tiations  tend  to  take  place  between 
two  monopolistic  organisations.  A 
tendency here is to constrain the out 
come  of  negotiations  to avoid  them 
being  at the expense of third  parties 
— in practice, either governments or 
patients.  This  can  sometimes  be  a 

113 

Chapter 5-  Reforms  in health  care 

problem, of contracts  made  between 
insurance funds  and health care pro 
viders.  In  Belgium,  therefore,  re 
forms  are  aimed  at  imposing  more 
responsibility on the mutual funds to 
moderate their expenditure by intro 
ducing a system of incentives. Much 
the same is the case in Luxembourg. 
In both countries, therefore, the con 
tractual approach has been  modified 
to incorporate additional  regulations 
in  order  to  control  the  implications 
for  public  spending.  On  the  other 
hand, in Germany, the expectation is 
that giving more flexibility  to1 insur 
ance  funds  to  contract  with  health 
care providers might help to increase 
the effectiveness  of the system. 

The way in which contracts are used, 
the potential outcome and the need for 
constraints tend to differ  according to 
whether insurance funds are obliged to 
contract with any health care provider 
fulfilling  certain  requirements  or  are 
free to choose between them as in tjie 
Netherlands. At the same time, the out 
come may not be desirable if there is a 
monopoly on one side and a number of 
providers  offering  services  on  the 
other. The reforms in the Netherlands, 
therefore,  are  aimed  at  introducing 
competition between insurers as well 
as between providers. The latest pro 
posals in Germany go in the same di 
rection  but  remain  to  be  defined  in 
detail. 

A third major  aspect of  the contrac 
tual  approach  is  its potential  for  in 
creasing  competition  (or  more 
precisely  managed  competition), 
both  between  health  care  providers 
and also between insurance funds  or 
budget holders, as in the Netherlands. 
As in the case of the latter, a  further 
means of increasing competition is to 

incorporate  private  insurers  into the 
public system, as happened in Portu 
gal.  A  managed  competition  ap 
proach  has  also, been  suggested  by 
the Abril Committee for Spain. 

The possibility  of  introducing  more 
competition is not confined to social 
insurance systems but also applies to 
those  financed  by  general  taxation. 
The  major  example  is  the  1991 re 
form  in the UK, which especially in 
terms  of  the  creation  of  GP  fund-
holders seems to have had some suc 
cess.  There  are  certain  parallels  in 
this  regard  with  'the  family  doctor 
reform'  in Sweden, though the latter 
is  paralysed  at  present  by  political 
factors.  More  generally,  a  wide 
spread  tendency  towards  increasing 
the  role  of  primary  care  doctors  is 
evident across the Union. 

A fourth aspect of a 'contractual' ap 
proach  is that  of  decentralisation  in 
tax-financed  systems  as  well  as  in 
insurance-based  ones.  A  decen 
trahsed  form  of  organisation  is  an 
important  feature  of  the  Scandina 
vian countries and here problems of 
growing  waiting  lists  have  been 
tackled by allowing patients to seek 
treatment  outside  their  county  of 
residence,  so  creating  competition 
between  regional  authorities.  This 
has been coupled with a tendency to 
give  regions  greater  freedom  in  the 
way they provide and organise health 
care services. A further  aspect of the 
arrangements  in  these  countries  is 
that the central government allocates 
a fixed budget amount to each of the 
counties  which  then  have  to  cover 
deficits  from  their  own  resources. 
Since patients can exercise  influence 
in local elections, the counties  have 
an incentive to contain costs. A simi 

lar approach  has been  introduced  in 
Italy and to some extent in Portugal. 

Increased  decentralisation  is also an 
aspect ofthe UK reforms, in this case 
the district health authorities  (DHA) 
being  given  responsibility  for  pur 
chasing health care services and hav 
ing  to  manage  on  fixed-amount 
budgets;  though  this  example  illus 
trates the hmitations  of  what can be 
expected to be achieved where local 
monopoly elements predominate. 

A particular kind of decentralisation is 
being  pursued  in  Spain,  where  in 
creased autonomy is being given to the 
regions to develop their own systems. 

A  contrary  tendency  is  evident  in 
Greece,  where  unfortunate  experi 
ences  with  a very  diversified  system 
has  led  to moves  to  develop  a  more 
uniform  one  with  a  single  sickness 
fund. A further part ofthe reform, how 
ever, is to extend the role ofthe general 
practitioner and improve management 
of health care provision. 

Recent  political  developments  in 
Sweden and the Netherlands demon 
strate,  at  the  same  time,  that  ambi 
tious reforms  programmes are liable 
to provoke a good deal of opposition 
since they are attempting to change a 
system with long-standing  traditions 
and  specific  institutional  structures 
developed over the years with exten 
sive vested interests. 

The developments over the past few 
years described above can be broadly 
interpreted as moves in similar direc 
tions,  insofar  as  there  is  a  common 
tendency to place increased  reliance 
on contracts between the main parties 
involved,  to  introduce  elements  of 

114-

Chapter 5 -  Reforms in health care 

the market and to increase competi 
tion both between providers of care 
and those responsible for managing 
the  finance.  The  detailed  measures 
taken,  however,  differ  a  good  deal 
between  countries  reflecting  the 
diversity  of  institutional  arrange 
ments. In this regard, substantial dif 
ferences  remain  between  Member 
States and are likely to do so for many 
years to come. 

115-

Chapter 5 -  Reforms in health care 

- 116 

Chapter 6 -  Social protection and the self-employed 

Chapter 6  Social protection 

and the self-employed 

The self-employed 
labour force 

supplemented  by  information  from 
independent experts from each ofthe 
Member States.) 

In 1994, there were around 22 mil 

lion  people  who  were  self-
employed  in  the  European  Union, 
including  the  three  new  Member 
States.  Many  governments  in  the 
Union have a policy of encouraging 
self-employment, in part to boost job 
creation,  in  part  to  offer  people  a 
route out of unemployment. The con 
cern of this chapter is with the social 
protection arrangements for the self-
employed  across  the  Union.  (This 
is based  on results  of  studies  spon 
sored by the European  Commission 
in  1989  and  1991, updated  and 

The scale of self-employment  in the 
Union  in  1994 ranged  from  around 
8% of the total number of employed 
in Denmark  and 9% in Germany to 
25% in Portugal and 34% in Greece 
(Graph 66). In most Member States, 
the  proportion  of  self-employed  in 
the  work  force  has remained  fairly 
constant over time, though it has fal 
len  somewhat  in the less  developed 
countries as a result of the decline in 
employment  in  agriculture  where a 
high  proportion  of  self-employed 
work (Graph 67). 

The  great  majority  of  the  self-
employed  work  full-time.  In 1994, 
only  10% in  the Union  as  a  whole 
worked part-time as opposed to  16% 
in  the case  of  employees  and  only 
in  three  Member  S t a t e s,  the 
Netherlands  (35%),  the  UK (18%) 
and Portugal (17%), was the propor 
tion significantly  more than 10%. 

As in the case of waged employment, 
part-time working is much more pre 
valent among women than men in all 
Member  States,  with  70% of  self-
employed women working part-time 
in  .the  Netherlands  in  1994 and 
almost 50% in the UK, though in the 
rest  of the Union,  only  in Germany 

66 

Self-employment in Member States,  1994 

35  % total employment 

67 

Self-employed by sector of activity in the 
Member States, 1994 

g0  % total self-employed 

•  Agriculture 

DK  D 

L 

S  NL  F  UK  A  E 15  B  SF 

IRL  E 

I 

P  GR 

8  DK  D  GR  E 

F 

IRL 

I 

L  NL  A 

P  UK  SF  S  E 15 

0  Include» new Lander; A and S 1983 

0  include* new Lander; A, SF and S Include tamfly workers; A and S 1993 

117-

Chapter 6 -  Social protection and the self-employed 

did  the  figure  exceed  25% (Graph 
68). 

Only  around  a  quarter  of  the  self-
employed in the Union in 1994, how 
ever,  were  women  and  only  in 
Finland,  Sweden  and Portugal  (just 
over 40% in each case) was the pro 
portion  much  higher  than  this— in 
Greece,  it  was  below  20% and in 
Ireland, just under 15%. 

From the viewpoint of social protec 
tion,  three  groups  of  self-employed 
can be distinguished: 

•  people  whose  principal  earnings 
come  from  self-employment  — 
the main focus of this chapter; 

•  part-time 

self-employed  who 
work mainly as an employee and 
the  social 
who  come  under 
protection 
for 
employees  or  have  combined 
employee/self-employed cover; 

arrangements 

•  unpaid  family  workers  who to 
talled around 3V2 million in 1994 
and who in most Member  States 

are  outside  the social  protection 
arrangements  except  to  the ex 
tent  that  as  wives  they  have 
derived  rights  or  pay  contribu 
tions voluntarily. 

It should be emphasised at the outset 
that the concern here is with the po 
sition ofthe self-employed in relation 
to  the social  protection  available to 
employees  in  different  parts  of the 
Union rather than with evaluating the 
overall  level  of protection  provided 
in the Member States as such (which 
has  been  discussed  in  earlier  chap 
ters). 

A  further  point  to  note  is  that  the 
sectoral  groups  which  are  used  to 
classify  the self-employed  for social 
protection purposes are not the same 
as those normally used in labour mar 
ket analysis. For example, the occu 
pations  grouped  in  labour  market 
data  under  'services'  are  spread 
across more than one classification in 
the  social  protection  arrangements, 
where  these  are  occupationally 
based.  Though  groupings  vary 
between  countries,  four  categories 

can  be  distinguished  for  present 
purposes: 

• 

• 

those  working  in  agriculture in 
cluding  both  owners  or  tenant 
farmers  and  those  with  self-
employed  status  (in  the  sense 
that they are not employees); 

those  working  in  industry  and 
commerce 
'traders', 
including 
and as such both those  manufac 
turing  goods  and those in retail 
ing (ie shopkeepers); 

•  craftsmen  or  artisans  and  those 
with  particular  skills,  including 
construction workers; 

• 

those  in  the  liberal  professions, 
such as doctors and lawyers. 

The incomes of 
the self-employed 
Reliable  information  on  the in 

come of the self-employed and 
on  disparities  in  its  distribution  is 

68 

Part-time  self-employed  women  in the Member 
States, 1994 

69 

Self-employed  without any employees in Member 
States, 1994 

70  Jt women self-employed 

lOO'V5'total  self-employed 

100 

&  DK  D  GR  E  F 

IRL 

I 

L  NL  A  P  UK  SF  E14 

D Includes new Under, E14 excludes S (no data available); A, SF Include family workers; A 

-  118-

0  Liam_a™_^am-^a»_^«_BM_s™_iM_a»m_ia»m_i»_a»«»La»«mj  o 

D  DK 

IRL  UK  P 
0  Includes new Lander, DK, IRL and L  1993; A, SF and S no data 

F  E12  NL 

L 

I 

E  GR  B 

Chapter 6 -  Social protection and the self-employed 

virtually  non-existent,  largely  be 
cause of the difficulties  of obtaining 
such details. The limited data which 
do exist, such as those based on fin 
ancial  accounts  or  tax  returns  are 
known to give misleading  indicators 
ofthe standard of living of those con 
cerned.  There  is  some  indication, 
however,  from  household  expendi 
ture  surveys, for example,  that  self-
employed  income  is  less  equally 
distributed than that of wage and sa 
lary earners. 

Moreover, a marked characteristic of 
the self-employed is the high propor 
tion  operating  one-person  busi 
nesses, often assisted only by unpaid 
family members (Graph 69). Though 
this does not necessarily indicate low 
levels of income, it does illustrate the 
generally  small  scale  of  the  busi 
nesses  concerned.  In agriculture, in 
particular,  especially  in the less de 
veloped  parts  of the Union,  such as 
Greece  or  Portugal,.small  size and 
low incomes are hkely to go together, 
as  they  might  in the service  sector, 
where in Southern Member States a 
significant proportion ofthe  self-em 
ployed outside retailing  are engaged 
in irregular or seasonal work. 

More  detailed  data  from  the  UK 
show that, in 1991, whereas  average 
earnings  of  the  self-employed  was 
higher  than  for  employees,  the dis 
persion  of  their  income  was  much 
wider, so that the self-employed were 
over represented  in both the top and 
the  bottom  10% of  the  distribution 
(see  Table  10).  While  the  self-
employed  represented  9%  of  the 
total,  they  accounted  for  12'/2%  of 
those in the bottom  10% and 15% of 
those  in  the  top  10%, the  pattern 
being  much  the same  for  both men 

Table 10 — Distribution of usual net monthly earnings 
in the UK 

Lowest Decile 
(£<186) 

Highest  Decile 
(£>1297) 

Mean 

87.8 
12.2 

61.3 
38.7 

91.5 
8.5 

84.4 
15.2 

85.6 
14.4 

72.1 
27.9 

91.2 
8.8 

91.2 
8.8 

91.5 
8.5 

All 

Employees 

Self-employed 

Full-time 

Employees 

Self-employed 

Part-time 

Employees 
Self-employed 

Source:  BPHS  1991  (weighted data) in Meager, N et al, Self-employment and the 

distribution of income, IRF,  York  1994 

and women. Full-time self-employed 
were  significantly  overrepresented 
both in the top 10% and, most espe 
cially, in the bottom  10%, part-time 
self-employed  particularly in the top 
10%, reflecting perhaps a capacity in 
many cases to command high fees for 
short hours. 

More  information  about the income 
of the self-employed  is important for 
the development of an effective  sys 
tem of social protection in this area. 
Nevertheless,  a  few  points  can al 
ready be made: 

•  sole operators are inherently vul 
nerable,  whatever  their  level  of 
income,  insofar  as  they  are re 
liant  on their own labour for the 
themselves  and 
support  of 
dependants.  In  this  respect  they 
are 
from  em 
ployees  and  are  likely  to  have 
much  the  same  need  for  access 
to social protection; 

little  different 

the  self-employed  almost  cer 
tainly vary greatly in terms of in 
come,  and  include  people  with 
very  low  earnings  as  well  as 
very  high  ones.  In  a  number of 
however, 
States, 
Member 
policies  are  based  on  the  as 
the  self-
that  all 
sumption 
employed 
sufficient 
have 
resources  to  provide  their  own 
protection to a significant  extent 
through  savings or private insur 
ance; 

access  to  social  protection  for 
the self-employed  in a number of 
cases  differs  by  occupation 
which does not necessarily relate 
to 
income.  The  liberal  pro 
fessions,  for  example,  which 
probably generate relatively high 
incomes,  tend  to  be  well  or 
ganised  and  articulate,  and  so 
have often  succeeded in securing 
better  State  provision,  at an ear 
lier  date,  than  others  in  greater 

119 

Chapter 6 -  Social protection and the self-employed 

Table 11.— Social Insurance cover for the self-employed in the European Union 

Invalidity  Health  Sickness  Industrial  Maternity  Unem-  Children's 
ployment Allowance 
injury 

Benefit 

care 

Large 
risks  only 

No 

No 

Lower for 
1st child 

+ 

Minority 
only 

Yes, but  Yes if in  Farmers 
craftsmen 
public 
some 
rest 
health 
voluntary 

insurance  voluntary 

No 

No 

No 

No 

Only 
those in 
IKA 

+ 

+ 

No 

+ 

+ 

+ 

+ 

+ 

Farmers 

No 

Farmers 

+ 

+ 

Large 
risks  only 

No 

No 

+ 

No 

No 

No 

Manual 
workers 

Yes all 

+ 

+ 

No 

Voluntary 

Voluntary  Yes all 

+ 

only 

+ 

+ 

+ 

+ 

Occ 
illness 
only 

Farmers 
rest 
voluntary 

Yes all 

No 

+ 

+ 

+ 

Farmers 

+ 

+ 

+ 

No 

No 

No 

No 

+ 

No 

No 

No 

No, but 
flat-rate 
scheme 

+ 

No 

Pension  Widow's 

Yes for 
the 
majority, 
but some 
voluntary 

+ 

+ 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxembourg 

Netherlands 

Austria 

Portugal 

Finland 

Sweden 

UK 

+ 

Cover provided 

120-

need.  In  some  countries,  how 
ever,  specific  steps  have  been 
taken  to  protect  the  most  econ 
omically  vulnerable  by,  for 
example,  including  them  in em 
ployee  schemes,  while  leaving 
others  of  the  self-employed  to 
organise their own protection. 

The structure of 
provision 
Social  protection  arrangements 

for the self-employed  differ  in a 
number  of  ways  between  the  15 
Member  States. At one extreme are 
systems  —  in  Denmark,  Sweden, 
Ireland, Luxembourg and the UK — 
in which the self-employed belong to 
the same social insurance  scheme(s) 
as employees, at the other are those 
with  separate provision  for the self-
employed through a number of occu 
pational  schemes  —  as  in  Austria, 
France,  Italy,  Spain  and Greece. In 
between are systems in which all or 
most of the self-employed  are in the 
same schemes as employees — as in 
Finland,  Germany  and  Portugal — 
but where there are separate schemes 
for  some  occupational  groups  (the 
liberal professions, in particular) and 
others in which there is either a sep 
arate  scheme  for the  self-employed 
(as in Belgium) or a common scheme 
with  the  self-employed  excluded 
from  certain  provisions  (as  in the 
Netherlands). 

Chapter 6 -  Social protection and the self-employed 

Supplementary pensions and the self-employed 

Sweden: employees  can add a further  10% to their  pensions  through 
employer based supplementary schemes, but this does not extend to the 
self-employed. 

Denmark: in 1994, around 75% of employees  over 22 years old were 
covered  by a  supplementary  scheme, financed by  employer/employee 
contributions. Those becoming self-employed, so long as they meet certain 
criteria and pay the whole contribution, can opt to remain in the scheme. 
In 1990, there were only 2,000 taking advantage of this provision, possibly 
because of the high contribution in relation to the modest pension. 

The Netherlands: employees  are obliged  to participate  in a company 
supplementary pension scheme. Compulsory membership of supplemen 
tary pension schemes also applies to some self-employed in construction 
and related industries and there are a number of schemes for the liberal 
professions. A sizeable proportion ofthe self-employed, however, do not 
have access to a supplementary pension. 

UK: employees are obliged either to belong to the State earnings-related 
pension scheme or a company scheme or to contribute to a personal pension 
scheme. The self-employed have access to neither the State nor a company 
scheme, though they are encouraged, but not compelled, to make their own 
arrangements to acquire a personal pension. In 1992,62% of men and 35% 
of women self-employed had a personal pension scheme. 

employee  scheme  (as  in  Austria, 
Greece and Germany). Second, even 
where  there  are  separate  schemes, 
some provisions may be common to 
employees and the self-employed or 
to all residents — such as a national 
health  service,  child  allowances  or 
social  assistance  scheme  arrange 
ments  (except  in  the  Netherlands 
which  has  special  schemes  for the 
self-employed).  Third,  systems can 
c h a n ge  over 
time  —  as  in 
Luxembourg,  where  provision  used 
to be on an occupational basis. 

only 
(since 
in  Luxembourg 
1994)  are  the  self-employed 
covered  against  all  the  same 
risks as employees; 

while  social  insurance  for  em 
ployees  is  almost  always  com 
pulsory,  it may be voluntary  for 
the self-employed  and,  therefore, 
far  from  complete  for  certain 
risks; 

while  provision  may  appear 
similar,  benefits  for  the  self-
employed  may be  only  flat-rate 
rather  than  earnings-related and, 
lower  on  average, 
therefore, 
qualifying  criteria more stringent 
and waiting periods longer; 

121 -

There are three further complications 
to  note.  First,  in a number  of coun 
tries where for the most part there is 
separate  provision  for  the  self-
employed,  certain  groups  among 
them  are  included  in  the  general 

Apart  from  these  structural  dif 
ferences,  provision  for  the  self-
employed may be different, and often 
less  favourable,  than  for  employees 
(see Table  11): 

Chapter 6 -  Social protection and the self-employed 

Providing basic pensions for the self-employed 

Spain:  most  of  the  self-employed  were  brought  into  the compulsory 
pension  scheme in  1970 and those in agriculture were added in  1975. 
Entitlement to a full pension requires 35 years of contributions, 60% ofthe 
full entitiement being acquired after 15 years and an additional 2% for each 
year of contributions above this. The self-employed can choose to pay a 
lower or higher rate of contribution with a corresponding reduction in the 
pension, though it is possible to switch from a lower to a higher rate before 
the age of 50. 

Portugal: pension provision for the self-employed became compulsory in 
1977. A minimum of 10 years of contributions is required to qualify for 
any pension at all, but for a full  pension 40 years are needed. The self-
employed, therefore, were entitied to a pension from 1987 on, but initially 
to a low one (of a minimum of 30% of earnings and a maximum of 80%) 
A minimum pension was introduced for those who had paid contributions 
for a specified number of years. 

Ireland: a compulsory Pay Related Social Insurance scheme was estab 
lished for employees in 1981 but the self-employed were not admitted until 
1988. Ten years' membership of the scheme and a minimum number of 
contributions are required to qualify for a flat-rate pension, payable at the 
age of 66, so that the self-employed will not become eligible until  1998. 
Those on low incomes must rely on means tested assistance. 

Belgium:  compulsory  pension  provision  was  extended  to  the  self-
employed as early as 1956, but they were entitied only to a relatively low, 
flat-rate benefit while employees' pensions were earnings-related. In 1984, 
the method of calculating pensions for employees and self-employed was 
harmonised, but only in respect of insurance years from 1985 on.  Ix>w 
self-employed contributions, however, mean that the basis for calculating 
pensions is also low. Contributions are being gradually increased and this 
will raise pension entitlements over time, but it is estimated that they are 
still significantly  below those for employees with the same earnings. In 
1994, the minimum was set at the level of the social assistance guarantee 
for the elderly. 

• 

the often  extensive  benefits  pro 
vided  by  employers  do  not, of 
the  self-
course,  apply 
employed. 

to 

Changes, however, have taken place 
in  many  Member  States  in  recent 
years  to  the  benefit  of  the  self-
employed. These are described in the 
following  sections  which  will 
examine  the  position  in  each  main 
area of social protection. 

Retirement pensions 

In  almost  all Member  States,  insur 
ance for old-age  and survivors pen-
sions  is  c o m p u l s o ry  for  all 
self-employed  who earn  enough  to 
pay contributions or who are covered 
along  with  others  under  a universal 
pension  scheme  financed  by  taxes. 
Only in Germany is there a voluntary 
element  for  the  self-employed, 

122 

though  even  here,  almost  all  are 
covered.  Nevertheless,  the  level  of 
pensions  for  the  self-employed  is 
often  lower  than  for  employees. 
'While in many Member States steps 
have been taken to change this, these 
will  inevitably  take  time  to  have  a 
significant  effect. 

In  five  Member  States,  there  is  a 
basic, flat-rate  pension for both em 
ployees  and  the  self-employed, 
which  is  financed  by  taxes  in 
Denmark,  Finland and Sweden, and 
by  contributions  in the Netherlands 
and the UK and is usually  relatively 
low. In addition, in both Finland and 
Sweden  there  are  parallel  earnings 
-related  schemes  with  the  same 
method  of  calculating  pensions  for 
both  employees  and  self-employed. 
The efforts  which have been made to 
improve  retirement  income  by de 
veloping  supplementary  pension 
schemes, however, do not always ex 
tend to the self-employed  (see Box). 
Moreover, the development of these 
raises  the possibility  that  the  basic 
pension will be regarded as of lesser 
importance and so not be upgraded, 
which  will tend to disadvantage the 
self-employed  who are more  reliant 
on this. 

In  four  other  countries  —  Spain, 
Portugal,  Ireland  and  Belgium  — 
where  pensions  are  insurance  based 
and,  except  in  Ireland,  earnings-
related, the development of State sup 
plementary pensions is not considered 
necessary. There are problems, how 
ever,  arising  from  the relatively  late 
dates  at  which  the  self-employed 
schemes were developed or reformed 
and various steps have been taken to 
try to ensure a minimum  pension in 
come for the self-employed (see Box). 

Chapter $ -Social protection and the self-employed 

Unlike  elsewhere,  however,  direct 
State subsidies have not been used to 
boost the level of pensions in the short-
term. In the longer term these problems 
will resolve themselves, but until then, 
the self-employed  will tend to receive 
relatively low pensions. 

In  the  other  Member  States, 
earnings-related  pensions  were  es 
tablished  on  an  occupational  basis, 
though  in  Luxembourg  there  has 
been a shift to a more unitary scheme. 
This approach has also given rise to 
problems and a number of attempted 
solutions. 

In  France,  financial  problems  and 
low  pensions  in  the  different  self-
employed schemes - - except the one 
for  liberal  professions  — led to the 
schemes  for  craftsmen  and  com 
merce  and  industry  being  aligned 
with  the main  employee  scheme to 
give  equal  (earnings-related)  pen 
sions  for  equal  contributions,  while 
the  farmers'  scheme  was  also  im 
proved,  but  still  lags  behind  the 
others. These changes were achieved 
in  part  through  solidarity  measures 
—  a  State  subsidy  for  a  period  of 
years  plus  the transfer  of  resources 
from  the main employee  scheme — 
and  in  part  through  increased  con 
tributions from the self-employed. In 
France,  in  addition,  there  are  well 
developed  supplementary  pension 
schemes  for  the  self-employed  as 
well as employees, which are mostly 
compulsory. 

In  Italy,  the  compulsory  pension 
schemes for the self-employed  were 
also  established  on an  occupational 
basis.  In  1995, the  organisations 
managing  the  schemes  for  liberal 
professions  were  privatised,  though 

they remain under the control of the 
Ministry of Labour. As a result, they 
became solely responsible for ensur 
ing  that  funds  match  pension  lia 
bilities and the State no longer has an 
obligation to cover deficits. A reform 
under active consideration will bring 
into  compulsory  insurance  self-
employed  outside the traditional oc 
cupations  who  are  not covered  — 
such as freelance workers or consult 
ants. It also envisage the possibility 
of  establishing  supplementary 
schemes  for  the  self-employed.  In 
1988,  pensions  received  by  those 
who  were  formerly  self-employed 
were  on  average  only  55-60%  of 
those  who had been  employees. In 
1990,  reforms  designed  to end this 
disparity introduced earnings-related 
pensions  for  the  self-employed  as 
well  as  new  contribution  arrange 
ments, but inevitably these will take 
a number of years to take full  effect. 
Supplementary  pensions  are  not  a 
feature of the Italian system. 

In  Greece,  all  workers  in  agricul 
ture,  whether  employees  or  self-
employed,  are in the same  scheme 
(OGA),  while  the self-employed  in 
urban  areas  who  are  regarded  as 
economically  vulnerable  (no  fixed 
work  base,  lone  operators  working 
for  only one enterprise) are covered 
by the other major employee scheme 
(IKA). The other self-employed oc 
cupational  groups  have  their  own 
schemes  providing  pensions  of  dif 
fering  levels.  Whereas  supplemen 
tary pensions  are compulsory  in the 
schemes for employees, in those for 
the self-employed, they are voluntary 
or non-existent in many cases. Provi 
sion  for  the self-employed  has his 
torically  been  inferior  to  that  for 
employees  in many  respects, but in 

1992,  legislation  was introduced  to 
rationalise  and  improve  arrange 
ments  for both  employees  and self-
employed  (excluding  rural  workers 
and  seamen). Though  separate  self-
employed schemes remain, for those 
entering  the  labour  market  from 
1993,  there  are  common  arrange 
ments for contributions  and the cal 
culation of benefits, aligned with the 
general  scheme  (IKA).  The impact 
on  pensions  will  not be  felt  for 15 
years (the minimum period to acquire 
pension rights), but should be benefi 
cial to the self-employed  in the long-
term. For existing  scheme  members 
there will be a staged  process of ra 
tionalisation which should ultimately 
raise the level of pensions. 

In Germany there is compulsory pen 
sion insurance for all employees but 
not  for  all  self-employed,  though 
supplementary pensions are not com 
pulsory for either group. The liberal 
professions  largely  organise  their 
own scheme which usually provides 
a  higher  level  of  pension  than  the 
State  schemes,  while  for  farmers, 
there is a compulsory scheme, subsi 
dised  by  the  State,  which  pays 
flat-rate  pensions  only.  Some  self-
employed groups — artists, journal 
ists and craftsmen—are, on the other 
hand, integrated into the employees' 
scheme and receive an equal pension 
for  lower  contributions  (craftsmen, 
including  construction  workers, are 
compulsory  members  of  the em 
ployees'  scheme  for  18  years  and 
then  can  retain  membership  volun 
tarily  or  apply  to  leave).  Self-
employed  in  other  occupations,  as 
well  as  those  who  become  self-
employed after being employees, can 
apply to join or remain in the compul 
sory insurance scheme and acquire a 

123 

Chapters -  Social protection and the self-employed 

schemes  for  the self-employed,  the 
liberal  professions  were  integrated 
into an employee scheme in 1964 and 
for  other  groups,  a  single  pension 
scheme  for  employed  and  self-
employed  was established  in 1987. 
Though in Luxembourg  supplemen 
tary  schemes  have  not  been  de 
veloped, in a recent move a pension 
can be deferred until the age of 68 and 
three  extra  years  of  contributions 
paid to provide a higher pension. This 
change is particularly  useful  for the 
self-employed. 

Early retirement 
pensions 

Provisions for early retirement  exist 
in 9 Member States, which except in 
Luxembourg,  are  open  to  the  self-
employed  as well  as employees on 
much the same basis. 

Survivors 

pension provision, the level received 
will largely depend on the level ofthe 
latter. 

Invalidity  benefits 

In all but one Member State, the self-
employed  are included in the provi 
sions  for  invalidity  benefits.  In 
Ireland,  exceptionally,  the  self-
employed are excluded (the National 
Pensions Board reviewed this pohcy 
in  1994,  but  recommended  no 
change). 

In  ten  countries,  the  provision  for 
invalidity forms  part of, or is linked 
to, pension  arrangements.  Since the 
various  formula  for  calculating 
benefit are complicated, it is  difficult 
to  assess  the  position  of  the  self-
employed  relative  to employees. In 
most cases, benefits  are earnings re 
lated,  though  in Denmark,  they are 
flat-rate amounts based on the retire 
ment pension. 

With  certain  exceptions  (such  as 
some schemes for farmers where the 
widow takes over the running of the 
farm), widows (and some widowers) 
of self-employed who were members 
of  a pension  scheme are treated the 
same as those of employees (even in 
Ireland  where  the  self-employed 
scheme did not start until  1988 since 
only three years of contributions are 
required  to  qualify  for  a  survivor's 
pension). 

In  most  Member  States,  however, 
widows ofthe self-employed are less 
hkely  than  widows  of employees to 
have supplementary  pensions. Since 
survivors' pensions are usually fixed 
in  relation  to  the  main  retirement 

In four countries — Spain, Belgium, 
the Netherlands and the UK — inva 
lidity benefits  are not linked to pen 
sions. In Belgium,  they  are payable 
for  total  and  permanent  incapacity 
only  and  to  the  self-employed,  in 
contrast to employees, at a flat-rate, 
which,  until  it was increased  to the 
same  level  in  1994, was below the 
social assistance rate. In Spain, on the 
other  hand,  benefits  are  earnings-
related.  In the Netherlands,  benefits 
for  employees  are related  to normal 
earnings, but for the self-employed to 
the  minimum  wage, though  in both 
cases, the level  is related  to the  de 
gree  of  incapacity  (from  15%  up 
wards in the case of employees, from 
25% upwards for the self-employed). 

Two examples 
of early retirement 
schemes 

Sweden:  a  partial  pension 
scheme  exists  which  after 
the  age  of  61  allows  the 
time  spent  in a job or self-
employment  to  be  scaled 
down  with  compensation 
given for 55% of the income 
lost, up to a maximum sum. 
The self-employed are treated 
on  the  same  basis  as em 
ployees  and  encouraged  to 
take  up  this  provision, The' 
scheme,  however,  will  be 
phased out by the year 2000, 
when a new pension system 
comes into force 

Finland: farmers between the 
ages of 55 and 64 who perma 
nently  stop  working  -and 
transfer the farm to someone 
younger qualify for an early 
retirement pension under the 
generation' 
'change 
scheme. If the farm ceases to 
be  worked,  a  farm  closure 
benefit 
is  payable.  Both 
schemes also cover wives (or 
husbands). 

of 

pension  on  an  equal  basis  to  other 
members.  Any other  self-employed 
may join a scheme voluntarily. 

In  Austria,  apart  from  certain  small 
groups  of  self-employed  integrated 
into  the  general  scheme,  there  are 
occupationally-based  pension 
schemes for the self-employed. Sup 
plementary pensions are of minor im 
portance. 

In  Luxembourg,  where  there  were 
originally  separate  occupational 

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Chapter 6 - Social protection and the self-employed 

In the UK, the self-employed  are in 
cluded in the new flat-rate Incapacity 
Benefit  introduced in April  1995 on 
the same basis as employees. 

In most Member States, benefits are 
paid  for  total  incapacity  where the 
self-employed  have  ceased  trading 
and  are  incapable  of  any  form  of 
work.  In  Austria,  a  recent  change 
(1994) enables an incapacity  benefit 
to  be  paid  where  someone  self-
employed over 50 is incapable of fur 
ther work in their business, provided 
that  such  work  was  necessary  to 
maintain  the  business.  In  the UK, 
Germany  and Luxembourg, there is 
no provision for partial incapacity for 
either  employees  or  the  self-
employed. In Sweden, Italy, Portugal 
and  Belgium, earnings  capacity has 
to be reduced to one third or less of 
what  it  was previously  (a  common 
definition of total incapacity) to qual 
ify for benefit. 

In  France  and  Spain,  provision  for 
partial incapacity exists but does not 
extend  to  the  self-employed.  In 
Denmark,  Finland,  Greece,  Sweden 
and  the  Netherlands,  on  the  other 
hand,  partial  incapacity  benefits  are 
payable to the self-employed  as well 
as employees. 

Occupational 
accidents and illnesses 

In  the case of accidents  or diseases 
relating  to work, the position of the 
self-employed  varies  greatly  across 
the  Union.  In Austria,  Sweden and, 
recently, Luxembourg, there is com 
pulsory  insurance  against  occupa 
tional  injury  for  all,  or  nearly  all 
(Austria), the self-employed  as well 

as employees. At the other extreme, 
in Greece and the Netherlands, there 
is  no  specific  scheme  for  occupa 
tional injuries  which are covered by 
the general invalidity provisions, and 
in cases of short-term  incapacity by 
sickness  benefits.  The  latter,  how 
ever,  do  not  apply  to  the  self-
employed  in  the  Netherlands  and 
only  to  a  minority  of  the  self-
employed in Greece (those included 
in  the  general  (IKA)  employee 
scheme, though the scheme for craft 
smen does offer  some cover — four 
months  —  for  occupational  acci 
dents. In three countries where there 
are  occupational  injury  schemes — 
Ireland,  Belgium  and  the  UK  — 
these do not cover the self-employed, 
and, in a fourth — Denmark — they 
are covered but only when  working 
in the same way as employees. In all 
of these countries, apart from Ireland, 
however,  the  self-employed  are 
eligible for sickness  benefits  during 
short-term  incapacity  for  work 
(though  after  a  waiting  period,  as 
noted below). 

In other parts of the Union, a variety 
of arrangements exist. In Italy, provi 
sion is focused  on those most  hkely 
to be at occupational risk — manual 
workers  —  and  the  self-employed 
as  well  as  employees  are  covered. 
In  several  other  countries,  self-
employed in agriculture are included: 
in Spain, Finland and Germany, there 
is  compulsory  cover  for  injuries  at 
work  and in. France,  for  any health 
costs resulting, but insurance is vol 
untary for cash benefits  during inca 
pacity.  In  Germany,  there  is  also 
compulsory  insurance  for  many 
craftsmen  and for a number of those 
in  fishing  and  here  as  well  as  in 
Finland,  voluntary  cover  for  those 

not  included  in  other  schemes.  In 
Portugal, the self-employed  have the 
option  of paying.a  higher  contribu 
tion  giving  entitlement  to  benefits 
for  occupational  illness,  but  not 
accidents. In general, where occupa 
tional  injury  is covered,  it is on the 
same basis as for employees, except 
in  France  where  compulsory  insur 
ance for employees  covers  both the 
costs of health care and cash benefits 
and Portugal where accidents at work 
are excluded, as noted. 

Health care and 
sickness benefits 

It is accepted in most Member States 
that  the  self-employed  need  to  be 
covered  against  the costs  of  health 
care as much  as employees. This is 
achieved  either  through  a  national 
health service open to all residents or 
through  compulsory  health  insur 
ance.  Germany,  however,  is an ex 
ception  in  that  there  is  a  mix  of 
compulsory and voluntary public and 
private  health  insurance  which  in 
combination  covers  almost  every 
one. 

In  most  Member  States,  cover  for 
health  costs  is available to the self-
employed  on  the  same  basis  as to 
employees.  There  are  three  excep 
tions — the Netherlands,  where the 
self-employed  are expected  to  take 
out  private  health  insurance,  but 
where exceptional medical costs are 
covered  by  the universal  insurance 
scheme  for  all  residents,  and  in 
Belgium  and  France,  where  small 
risks  (typically  visits  to the doctor) 
are  excluded  for the  self-employed. 
(In  Belgium,  there  is a  State  subsi 
dised voluntary small risks insurance 

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Chapter 6 -  Social protection and the self-employed 

scheme  but  it  is  not  used  much, 
especially  by  the  younger  self-
employed.)  A  change  in  policy  to 
bring provision for the self-employed 
into  line  with  that for employees  is 
under  discussion  in all  three  coun 
tries. 

Policy on sickness benefit  is subject 
to  more  variation.  In four  countries 
—  France,  Ireland,  Italy  and  the 
Netherlands  —  the  self-employed 
are  excluded  from  the social  insur 
ance  schemes  for  this  benefit.  In 
Greece,  only  the  self-employed 
covered  by  the  general  employee 
scheme  (IKA) are eligible  for  sick 
ness  benefit,  while  in Austria,  only 
voluntary  insurance  cover  is  avail 
able.  Elsewhere,  the  self-employed 
to a large extent are covered for short-
term  incapacity  by  compulsory  so 
cial insurance schemes. In Germany, 
farmers who are ill receive an opera 
ting  allowance  to cover  the cost of 
replacement labour, while other self-
employed  covered  by pubhc  health 
insurance  are  entitled  to  earnings-
related benefits  on the same basis as 
employees.  In  Spain,  Finland  and 
Luxembourg,  sickness  benefits  are 
also  payable  from  social  health 
insurance and in Denmark, Belgium, 
Portugal, Sweden and the UK, under 
separate schemes (the introduction in 
the  UK  in  1995  of  Incapacity 
Benefits  which cover both invalidity 
and  sickness  does  not  alter  the 
position  of  the  self-employed).  In 
Portugal  and  Spain,  the  self-
employed  may opt out of their right 
to sickness benefit. In Portugal, those 
paying lower rate contributions  lose 
entitlement to sickness benefit, while 
in  Spain,  entitlement  may  be  re 
nounced  for three years at a time in 
return for reduced contributions. 

There  are  differences,  however,  in 
the  rights  of  employees  and  self-
employed —though one has recently 
been removed in Luxembourg by the 
replacement of a low flat-rate  benefit 
by one related  to income. The most 
important  difference  concerns  wait 
ing  time  for benefit,  which  is typi 
cally  t h r ee  days  or  less  for 
employees, but 10 days for the self-
employed  in  Greece  in  the IKA 
scheme, 15 days in Spain, 3 weeks in 
Denmark,  60 days  in  Portugal and 
3  months  in  Luxembourg  and 
Belgium.  In  Denmark,  voluntary 
insurance  is  available  to  cover  this 
waiting period, but only  20% of the 
self-employed  paid the extra amount 
for  this  in  1991. In  the  UK and 
Sweden  (except  in  the  latter  case 
where  they  have opted  for 33 or 99 
days  in  return  for  lower  contribu 
tions), however,  waiting  time is the 
same  for  the  self-employed  as  for 
employees  (typically  three  days  in 
the UK, one day in Sweden). In addi 
tion,  in  Portugal,  the  maximum 
period of benefit  is 365 days for the 
self-employed  as against  1095 days 
(three years) for employees. 

Maternity leave 

In all Member States except Ireland, 
where  benefit  is  confined  to em 
ployees,  self-employed  women  are 
entitled to maternity benefits, though 
there  are a  number  of  marked  dif 
ferences  as compared  with the posi 
tion of employees. 

In  Finland,  Sweden,  Portugal  and 
Spain,  self-employed  women  have 
for  some  time  been  subject  to the 
same  qualifying  conditions  for 
benefit,  the same  rate and the same 

period of payment as employees (see 
Chapter 7 for details), while the same 
has  applied  in  Luxembourg  since 
1994. 

In four other countries, the period of 
maternity  leave  for  self-employed 
women is the same as for employees, 
but  there  are  differences  in  other 
regulations. In Denmark, the rate of 
benefit,  and the period over which it 
is  paid  (28 weeks),  is the same for 
both,  but  the  qualifying  period  for 
benefit  is twice as long for the self-
employed  (6  months)  as  for  em 
ployees  (13  weeks).  In  Germany, 
where  maternity  benefits  are  in 
cluded  in  health  insurance  for  the 
self-employed  women  who  are 
covered,  the  qualifying  conditions 
for  benefit  are the same  as for em 
ployees, as is the leave  entitlement. 
However,  whereas  benefits  for 
women  employees  are equal  to the 
net wage, up to a maximum amount, 
and employers normally make up the 
shortfall  if  this  is  less  than  normal 
pay,  self-employed  women  receive 
80% of previous gross earnings up to 
a maximum of previous net earnings, 
with  no  employer  to  make  up the 
difference.  A  small  (and unknown) 
proportion  of the self-employed  are 
not covered  by health  insurance. In 
Italy,  where  qualifying  conditions 
and length of leave are the same for 
employees  and  self-employed,  the 
rate of benefit  for the former is 80% 
of previous earnings, but for most of 
the  latter  is  80% of  the  minimum 
contractual  wage  of  blue  collar 
workers  in  their  sector  of  activity, 
though in the liberal professions, it is 
one twelfth  of their declared  annual 
earnings  (averaged over the last two 
years).  For  some  self-employed 
women, freelance  workers and some 

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Chapter $ -  Social protection and the self-employed 

belonging  to  newer  professions, 
however,  there  is  no  provision.  In 
Austria, there are separate maternity 
schemes  for  employees  and  self-
employed women. While employees 
receive  full  pay  for  16 weeks  (the 
costs shared between employers and 
social insurance), the self-employed 
are entitled to replacement labour for 
up to  16 weeks  or if  such  a  person 
cannot be provided, a flat-rate benefit 
is paid instead. 

In the UK, the arrangements are com 
plicated  and  changes  were  intro 
duced  in  1994 to meet  Community 
requirements (the Pregnant Workers 
Directive,  92/85/EEC)  which  apply 
only  to  employees.  The  period  of 
benefit remains unchanged and is the 
same  for  both  employees  and  self-
employed earning enough to contrib 
ute  to  social  insurance.  After  the 
changes, all women employees who 
have worked for the same employer 
for  at  least  six  months  are  entitled 
to  six  weeks  Statutory  Maternity 
Pay  (SMP) at 90% of  earnings and 
12 weeks  at a new higher  flat-rate. 
Self-employed women and other em 
ployees  receive  a  maternity  allow 
ance,  provided  they  satisfy  the 
contribution conditions (six months' 
contributions  in the past 66 weeks), 
but  whereas  this  is  paid  out at the 
new,  higher  SMP  flat-rate  to em 
ployees,  the  rate  for  the  self-
employed  has remained  unchanged 
(at  15% less). While the position of 
all  employees  has  been  improved, 
therefore, the gap between these and 
the self-employed  has widened. 

In  the  four  remaining  countries,  a 
variety of schemes are in place. In the 
Netherlands, while the main features 
and  entitlements  are  the  same  for 

both  employees  and  the  self-
employed,  the  former  are  compul-
sorily  covered  by  social  insurance, 
while  for  the latter  membership of 
pubhc or private insurance  schemes 
is voluntary. A1992 study found that 
only  1% of  self-employed  women 
and wives working unpaid under 40 
years old had taken out such  insur 
ance.  The  majority  were  not  even 
aware that it existed. In Greece, self-
employed  women  are entitled  to a 
benefit  only if they  are members of 
the  general  IKA  scheme,  with  the 
same  qualifying  conditions  as em 
ployees and the same level of benefit 
but without any topping up as in the 
case  of  employees  covered  by the 
OAED  scheme.  Women  in  other 
schemes for the self-employed may 
receive  lump  sum payments  of va 
rying  amounts, but not sufficient  to 
meet the costs of maternity leave, and 
in  some  cases  nothing  at  all.  In 
Belgium,  where  the  qualifying 
period  for  benefit  is  the  same  for 
employees and self-employed, while 
women  employees  are  entitled  to 
15  weeks  leave  and to benefits  re 
lated  to  earnings,  self-employed 
women receive only a low lump sum 
payment  and  are  expected  to  stop 
work for just 3 weeks. 

In  France,  the  scheme  for  self-
employed  women has recently  been 
reviewed and is, therefore, of special 
interest.  Women  employees  who 
qualify are entitled to 16 weeks leave 
at 84% of wages (up to a maximum 
amount), with extensions in  specific 
circumstances.  Up  to  1995,  self-
employed  women were entitled to a 
lump  sum payment  (of one week's 
mimmum  wage)  as partial  compen 
sation  for  reduced  activity.  Unlike 
employees, they were not required to 

The new long-term 
care Insurance 
scheme in Germany 

Long-term care insurance, to 
cover cafe needs arising dur 
ing infirmity or disability, in 
troduced  in  January  1994, 
became  effective  in  1995, 
Cover  for long-term  care  is 
compulsory not only for em 
ployees in the State health in 
surance  scheme but also for 
the self-employed  in private 
schemes. The great majority 
of  the  self-employed  are, 
therefore, included in the new 
provision  (see Chapter 7 for 
details of this). 

stop work, though to encourage them 
to do so, an additional payment, at the 
level of the mimmum wage, could be 
made to cover replacement labour for 
up  to  28  days,  extended  in  some 
circumstances.  Advice  from  the 
medical  profession 
favoured 
measures  to  encourage  self-
employed women to stop work for a 
longer period than the average of 15 
days  actually  taken.  Under the  new 
scheme the lump sum to compensate 
for  reduced  activity  has  been 
doubled, and a new weekly benefit is 
also payable, but only  on condition 
the woman stops working. This is at 
a  flat-rate  (rather  than  earnings-
related  as  for  employees)  with  the 
aim of favouring low earners and will 
normally  only  last  for  30  days, 
though where there are medical rea 
sons  it  can  last  for  twice  or  three 
times  as  long.  Even  at  its  longest, 
however, it is less than the mimmum 
period for employees — 16 weeks. 

127-

Chapter $-social  protection end the self-employed 

would seem that there has been little 
research  on  the  impact  of  child-
bearing  on  women  who  are  self-
employed and on their business and 
only  limited  policy  discussion  (ex 
cept in France) on the most appropri 
ate way in which the position can be 
improved. 

Unemployment  benefits 

In  11 of the 15 Member  States, the 
self-employed are not covered by so 
cial insurance against unemployment 
(though in Ireland and the UK there 
are  schemes  for  the  few  self-
employed fishermen) partly because 
of  the perceived  difficulties  of pro 
viding cover in practice. These relate, 
in particular, to problems of identif 
ying  when  someone  becomes  ge 
nuinely unemployed, in the sense of 
the business having failed rather than 
trading having ceased voluntarily or 
if  the  business  continues  to  exist, 
whether the lack of current contracts 
should be regarded as tantamount to 
unemployment  and, if  so, for how 
long a period. The latter is especially 
difficult  in cases of seasonal work. 

As  indicated  below,  in many  coun 
tries  where  social  insurance  against 
unemployment is not available to the 
self-employed,  these are ehgible for 
social assistance in certain cases. 

In  the  four  Member  States  in 
which  protection  is  available  — 
Luxembourg, Denmark, Sweden and 
Finland — these problems have had 
to be faced and somehow resolved. 

In  Luxembourg,  the scheme  for the 
self-employed  was  introduced  in 
1976 and like the parallel scheme for 

employees is financed through taxes. 
To  qualify,  contributions  have  to 
have  been  paid  to  a  pension  fund 
for  at  least  5  years  (reduced  in 
exceptional  circumstances  to  12 
months).  There  is  no  provision  for 
temporary  unemployment  in  an 
existing  business.  The person  con 
cerned must have ceased trading be 
cause  of  economic  or  financial 
difficulties  as  well  as  satisfying  all 
the normal rules for receipt of unem 
ployment benefit, the object being to 
ensure that benefit is not paid to those 
who are voluntarily unemployed. 

In Denmark  (where the scheme also 
dates  from  1976), there were  initial 
regulations to counter voluntary un 
employment,  but  those  were  with 
drawn  to  avoid  putting  pressure on 
claimants to persevere in a business 
which was not economically  viable. 
Equally,  to  avoid  propping  up un 
economic  businesses,  a  narrow de 
finition  of  unemployment  has been 
adopted where businesses remain in 
existence. 

Provision  for  unemployment  in 
Denmark  is through  unemployment 
insurance  funds,  membership  of 
which  is  voluntary,  financed  in the 
case  of  the  self-employed  by  their 
contributions with a subsidy from the 
State (as for employees). To receive 
benefit,  the person  concerned  must 
have paid contributions to a fund for 
at least  12 months, in the same way 
as employees, or undergone a period 
of  relevant  training  and  must  nor 
mally  have  ceased  trading.  Since 
1990,  temporary  interruptions  to 
businesses  have been  covered,  such 
as when there has been a fire or  flood 
or because of bad weather. Benefit is 
then payable for 13 weeks only, com-

Child allowances 
and the 
self-employed 

Belgium:  there  has  been  a 
gradual  move  since  1976 
towards  equal 
treatment 
of  employees  and  self-
employed,  first  by  giving 
the  self-employed  entitle 
ment to allowances, but at a 
lower rate, and then by stages 
increasing  this  to  that  ap 
plying to employees. A dif 
ference  now exists  only in 
respect of the first child, the 
self*employed  receiving  a 
much lower amount, though 
changes  to  rectify  this  are 
now under consideration. 

Italy: the great majority ofthe 
self-employed  are  excluded 
from  the  general  scheme, 
are 
though 
payable  in  some  cases  to 
farmers  and to the self-em 
ployed who have retired. 

allowances 

Greece:  the  self-employed 
are not included in the general 
scheme, but under a separate 
scheme  can  qualify  for  an 
allowance  for  a  third  child 
and for assistance to mothers 
who have four or more child 
ren 

In summary, working women around 
the  time  of  childbirth  have  three 
needs — sufficient time off to protect 
the  health  of  mother  and  baby, 
sufficient replacement of lost income 
and the sufficient  protection of their 
job.  For employees,  these  needs  in 
large measure have been  recognised 
and catered for in all Member States, 
for  self-employed  women  this  is 
much  less  the  case.  Moreover,  it 

-128 

Chapter 6 -  Social protection and the self-employed 

pared  with  a  possible  30  months 
when trading has ceased  completely 
(or for an out-of-work  employee). A 
more  recent  reform  (1994)  also en 
ables  someone  who  is  combining 
employment and self-employment to 
qualify for benefit, so filling an awk 
ward gap in the provisions. By 1991, 
around  half  the  self-employed  had 
joined an unemployment  fund. 

In  Sweden,  where  the  scheme was 
established  in the  1960s  and where 
there  are also  voluntary  unemploy 
ment insurance funds  financed  as in 
Denmark,  some  140,000  self-
employed are members of a fund. To 
qualify  for benefit,  the person  con 
cerned must have paid  contributions 
for 24 months (as against  12 months 
for an employee), comply with rules 
on seeking employment and, in most 
cases, to have ceased trading, though 
there is some provision for payment 
of benefit during temporary interrup 
tions to business. 

In Finland, unemployment insurance 
funds are confined to employees, but 
a separate scheme provides flat-rate 
benefits to the self-employed  as well 
as new entrants to the labour market. 
The  estabhshment  of  an  insurance 
fund  for  the  self-employed  which 
would  pay earnings-related  benefits 
as in the case of employees is under 
active consideration. 

Child allowances 

Child  allowances  are paid  to all or 
nearly  all  families  with  dependent 
children  in  the  Union.  Though  the 
self-employed  were  initially  often 
excluded,  in  all  but  three  Member 
States they now receive  payment in 

the same way and at the same rate as 
families  of  employees.  In  one of 
these three countries — Belgium — 
however,  most  of  the  differences 
have been eliminated and a policy for 
full  equahty  of  treatment  is  under 
consideration.  In  the  other  two, 
Greece and Italy (where only farmers 
receive  allowances), however,  there 
is  little  pubhc  debate on  improving 
the position ofthe self-employed (see 
Box). 

Social assistance 
The self-employed whose income 

falls  below  a  basic  level  have 
recourse to social assistance in most 
Member States, the main exceptions 
being  Greece  and  Portugal  where 
there are no national or local provi 
sions for support. Since provision for 
unemployment  and short-term  inca 
pacity due to illness are the two most 
common gaps in social insurance for 
the self-employed, their access to so 
cial  assistance  in these two circum 
stances is of special interest. 

Unemployment 

In  11 Member States,  self-employed 
people  whose  businesses  fail  are 
eligible for social  assistance  if they 
have  insufficient  means  and if  they 
comply with the conditions  attached 
to  unemployment  compensation, 
while in Spain and Italy, they may be 
able  to  attain  income  support  from 
the regions. 

If  the  self-employed,  however,  ex 
perience a temporary  interruption to 
earnings  from  an  ongoing  business 

which  reduces  income  below  the 
social  assistance  level  or  if  their 
earnings  normally  are  lower  then 
this,  there  is  no certainty  that  they 
will receive social assistance The po 
sition is even less clear in Spain and 
Italy,  where  regional  schemes  have 
their own rules or in Sweden, where 
assistance  is  locally  administered 
(though  it  appears  that  the  self-
employed would not normally expect 
to receive assistance in these circum 
stances).  In  Finland,  on  the  other 
hand,  where  social assistance  is ad 
ministered  by  the  municipalities, 
which  have considerable  discretion, 
support  is  available  for  the  self-
employed  during  periods  of  low 
earnings  or  interruptions  to  trade, 
each  case  being  considered  on  its 
merits,  current  income  being  the 
most important criterion  (though in 
come  in  the previous  year  may be 
also taken into account). Only in the 
recent  economic  recession  has the 
treatment  of  the  self-employed 
emerged as an issue for social assist 
ance. 

In  Belgium,  Ireland,  Luxembourg 
and  the Netherlands,  assistance  for 
short-term  unemployment  is  also 
usually  available  if  current  income 
falls below a mimmum level, though 
in  Belgium,  assistance  (Minimex) 
cannot  be paid  to  support  a  failing 
business and in the Netherlands, as 
sistance in some cases is repayable. 

In  Denmark,  social  assistance  will 
not usually be available unless there 
is a clear-cut  reason for interruption 
of earnings — such as in the case of 
a fisherman  whose boat is being re 
paired.  If businesses  suffer  a  short-
term  set  back  or  are  subject  to 
cyclical or structural falls in income, 

-129-

Chapter 6-  Social protection and the self-employed 

no benefit  will be paid  until  trading 
has ceased altogether. 

In  France,  the  self-employed  are 
e l i g i b le  for  Revenu  Minimum 
d'Insertion  (RMI)  —  the  principal 
social assistance for the unemployed 
—  as  long  as  they  do  not  employ 
people. Assessment  is based  not on 
current income, but for those in agri 
culture,  on the area  cultivated and, 
for others, on past business turnover. 
The RMI is, therefore,  not designed 
to  meet  short-term  interruptions  in 
earnings. 

In the UK, no assistance is provided 
where the interruption to earnings is 
regarded as part ofthe normal pattern 
of trade — where business is seaso 
nal, based  on a succession  of short-
term  contracts  or  subject  to  a 
temporary  downturn.  Those  whose 
work is interrupted  by external  fac 
tors, such as bad weather, could qual 
ify for benefit, though the means test 
will usually be based on earnings for 
the  last  12 months,  which  tends  to 
exclude  many  self-employed  from 
receiving benefit  assistance to cover 
short-term needs. 

In  Austria,  social  assistance  is 
payable  only  to people  without any 
income  or  assets,  so  that  the  self-
employed  experiencing  short-term 
unemployment  in  an  existing  busi 
ness do not qualify  for support. 

Short-term incapacity 
for work 

As  indicated  above,  there  are many 
gaps  in  social  insurance  protection 
against  short-term  incapacity  for 
work, with no provision at all in some 

Member  States  and  long  waiting 
periods in others. There are also vari 
ations  between  countries  in  social 
assistance  entitlement  in  these  cir 
cumstances.  Again  the  position  in 
Italy  and Spain  where  assistance is 
regional, is both different  from else 
where and unclear. 

In France, the self-employed  are not 
ehgible  for social  assistance  if they 
are unable to work for short periods, 
but are expected  to take out private 
insurance  to  cover  this  risk.  In 
Austria, the position is similar. 

In Belgium, Denmark, Luxembourg, 
Sweden" and the Netherlands,  how 
ever,  during  any waiting  period  for 
social  insurance  for  incapacity  for 
work, social assistance, based on an 
assessment  of  current  income,  is 
payable.  This  is  also  the  case  in 
Germany,  where  not  all  the  self-
employed  are  entitled  to  sickness 
benefit.  In  Finland,  if  the  self-
employed have no income then they 
can claim a mimmum daily sickness 
allowance,  supplemented  possibly 
by  social assistance if, for example, 
there  are extra  expenses  associated 
with the illness. 

In Ireland, there is little  information 
on how claims for  social  assistance 
by the self-employed are treated. Ac 
cording  to  a  1991  report,  this  is 
'something  of a  grey  area,  with no 
specific cover and no certainty about 
entitlements'. In 1994, The National 
Pensions Board recommended a new 
means-tested allowance for the self-
employed  both  for  short-term  inca 
pacity and longer-term invahdity and 
this  is at present  under  government 
consideration. 

In the UK, the person claiming assist 
ance has to demonstrate not only that 
their current income is below a mini 
mum level, but that there is a break 
in the normal pattern of earnings as a 
result of incapacity,  which,  in prac 
tise,  means  that  they  have  worked 
less  than  16 hours  a  week,  usually 
averaged over the past year, and that 
the business is no longer a going con 
cern.  This  effectively  excludes  the 
self-employed  from receiving assist 
ance for short periods of incapacity. 

Unpaid family 
workers 
Unpaid  family  workers  include 

wives, children and other rela 
tives  of  the self-employed  who re 
ceive no pay for their  work as such 
but may be supported by the person 
concerned. 

In  1994,  there were  3.3 million un 
paid  family  workers  in  the  Union, 
excluding  the new Member  States, 
down  from  3.7 million  in  1990 and 
4.4  million  in  1986. Their  relative 
numbers, however, are much  higher 
in the Southern Member  States than 
in the North of the Union. Well over 
half (56%) in 1994 lived in just three 
Member States — Greece, Spain and 
Italy — and 43% worked in agricul 
ture.  Some  70% in the  Union  as a 
whole  were  women,  though  in Ire 
land (53%) and most Southern Mem 
ber States  (the exception  is Greece) 
as  proportion  was  lower  (around 
60%). 

These people are covered by systems 
of social protection, though in a more 
limited way than other workers: 

130 

Chapter 6 -  Social protection and the self-employed 

their  health  care  costs  are 
in  countries  with  a 
covered 
national 
service  — 
health 
Denmark,  Finland,  Sweden, 
Italy,  Spain,  Portugal,  Ireland 
and  the  UK,  while  elsewhere 
wives  will  be  covered  through 
their husband's  health insurance, 
and  possibly  other  family  mem 
bers may similarly be covered; 

they are entitled to pensions, sur 
vivors  and 
invalidity  benefit 
(and,  in  some  areas,  sickness 
benefits) 
in  countries  where 
these  cover  all  residents  — 
Denmark,  Netherlands,  Finland 
and Sweden. Typically payments 
will  be  at  a  minimum  level, 
they  are 
in  Finland, 
though 
eligible  to  be  members  of  the 
self-employed  schemes; 

in the UK for invalidity there is a 
Severe  Disablement  Allowance 
which  is  non-contributory  and 
paid  at  a  lower  rate  than  the 
main Incapacity  Benefit; 

in  Luxembourg  and  Germany 
they  may  qualify  for  occupa 
tional 
(though 
injury  benefit 
coverage  is  not  always  compul 
sory); 

in  Luxembourg  and  Finland, 
they  are  entitled  to  maternity 
benefits  (which  are paid through 
a  general  community  scheme), 
as  well  as 
in  Denmark  and 
France, if  they  are  unpaid  work 
ing wives; 

except  in  Greece  and  Portugal, 
they are eligible for social assist 
ance  in  the  same  way  as  other 
residents,  though  in  the  case  of 

wives, only if the joint income of 
herself  and  her  husband  fell 
below a minimum level. 

In other cases, unpaid working wives 
have to rely on derived rights and no 
benefits  are  available  for  the  other 
unpaid  workers (though see Box for 
two  recent  developments  in  France 
and Italy). 

The role of 
private insurance 
If  the  self-employed  are  not 

covered  by  State  schemes  then 
their  only  recourse  is  private  insur 
ance  if  they  wish  to  be  protected 
against  certain  risks.  Indeed,  it  is 
sometimes  argued  that lack of  State 
protection  is  not  of  great  conse 
quence  because  the  self-employed 
can  always  take  out  private  insur 
ance.  Unfortunately,  discussion  of 
this  issue is handicapped  by lack of 
data on the numbers insured, the cost 
of premiums, the level of benefits, as 
well as an extent of the tax relief. At 
most, therefore, it is only possible to 
make  general  comments  on  the 
issues involved. 

In the first place, not all social security 
risks can be covered by private insur 
ance in practice. This is particularly so 
for unemployment, where even in the 
11 Member States in which there is no 
social insurance cover for the self-em 
ployed and/or where social assistance 
is not always available, few if any pri 
vate  insurance  schemes  have  de 
veloped to fill the gap. Similarly, for 
maternity,  where  again  social  insur 
ance provision for the self-employed is 
often  Umited  or non-existent,  private 

Policy 
developments in 
respect of unpaid 
family workers in 
France and Italy 

in  1994, 

legislation 
the 

France:  under 
introduced 
conjoint  collaborateur  of  a 
self-employed  craftsman  or 
worker  in  commerce,  who 
had part-time job with an em 
ployer  other  than  her  hus 
band,  could  make  voluntary 
contributions  to a retirement 
pension  fund  in order to top 
up  her  pension  entitlement 
under  the  Régime général 
(acquired  through  her  part-
time job). 

Italy: in  1995, the Constitu 
tional Court ruled that 'work 
carried out within the family, 
given its social and also econ 
omic value, may be included 
within the scope of Art. 35 of 
the Constitution which guar 
antees protection  to work in 
all its forms.' This ruling has 
been  acclaimed  as  a  formal 
recognition of housewives as 
workers, so providing a legal 
basis for the claims advanced 
by  housewives  associations 
for social insurance benefits. 
It may equally be regarded as 
offering  the potential for im 
proving the position of unpaid 
working wives. 

insurance has generally not developed 
to provide cover except where it forms 
part of private health and sickness in 
surance,  as  in  Germany  and  the 
Netherlands. 

In other areas where social protection 
is lacking, however, private insurance 

-  131 

Chapter 6-  Social protection and the self-employed 

Self-employment and social contributions 

A  common  problem  in  most  Member  States, since the  tax  and  social 
contribution liabilities are generally less, is identifying  those people who 
are genuinely self-employed  and distinguishing them from those who in 
effect  are employees. The problem tends to be particularly prevalent in 
countries where employers'  contributions are relatively high and where 
there  is  a  correspondingly  strong  incentive  to  avoid  paying  these  by 
contracting  out  work  to  'independent'  workers  rather  than  employing 
(often  the  same) people in-house. While this  is a means effectively  of 
reducing labour costs to the employer and increasing take-home pay to the 
worker, at the same time it restricts entitlement to social protection or in 
some cases excludes the people concerned from social insurance benefits 
completely. 

France:  a concern  of pohcy has been with people who falsely  declare 
themselves to be self-employed and who pay lower contributions accord 
ingly when in reahty they are working for a single employer. Legislation 
was introduced in 1994 to tackle this problem. 

Germany: a major issue for policy concerns a new group of self-employed 
who in practice are really employees without a formal contract of employ 
ment. Because self-employed  occupations are defined  by law and these 
people are not covered by existing definitions, they escape paying social 
contributions entirely. In a number of the Lander, steps are being taken to 
address the problem. 

Italy:  measures  were  introduced  in  1994 to  deal  with  the  problem of 
self-employed working in fringe activities who avoid paying contributions. 

schemes  have  been  created  to  cover 
health care costs, loss of earnings due 
to short-term and longer-term incapac 
ity for work, pensions for old-age and 
pensions for survivors. 

What  is  not  known  in  sufficient 
detail, however,.is: 

the  extent  of  coverage  and 
whether  private  insurance  pro 
vides  the  same degree of protec 
tion  as 
the  equivalent  State 
schemes; 

the comparative  cost  of  cover in 
relation  to  the  contributions  to 

State  schemes  which  the  self-
employed would otherwise pay; 

the  effect  of  tax  concessions 
intended  to  reduce  the  costs  of 
private  provision,  which  are 
available  in  varying  degrees  in 
most Member States, and the ex 
tent to which they offset  the dis 
advantages  of  being  excluded 
from  States  schemes  (especially 
in  the  case  of  low  earners  who 
pay  little  tax)  and  how  far  they 
are  taken  up  (since  to  qualify, 
significant  sums  may  have  to be 
paid in insurance premiums). 

132 

For  self-employed  with  high  earn 
ings,  private  insurance  may  be  the 
preferred  option  since  it  enables 
protection  to be  tailored  to  specific 
individual and/or professional needs. 
It  cannot  necessarly  be  assumed, 
however, that private insurance is al 
ways a satisfactory  alternative to so 
cial insurance for those with lower or 
fluctuating  incomes. 

The level of 
contributions 
In a number of countries — France, 

Belgium,  Italy,  Portugal  and 
Spain, in particular —  contributions 
paid by the self-employed  have been 
increased  over recent years to cover 
deficits in self-employed  schemes or 
to provide higher or more  extensive 
benefits. In Greece, rates of contribu 
tion  were  standardised  for  new  em 
ployees  and  the  self-employed  in 
1992  and  aligned  with  the  general 
scheme for employees, IKA. 

On the other hand, in several  Mem 
ber States the self-employed  can opt 
to  pay  lower  contributions  and  re 
ceive  lower,  later or fewer  benefits. 
While  some  of  these  arrangements 
are  long  standing,  others  have  been 
introduced  in  the  past  few  years. In 
Portugal,  opting  for  the  lower  con 
tribution  rate  means  forgoing  sick 
illness 
ness  and  occupational 
benefits  and child allowances. Simi 
larly in Spain, the self-employed  can 
choose  to  pay  lower  contributions 
and forgo sickness benefits  for three 
years at a time, as well as lower pen 
sion contributions  (and a lower pen 
sion),  which  is  also  the  case  in 
Germany. In Sweden, they can opt to 

Chapter $ -  Social protection and the self-employed 

wait  33 or 99 days before  receiving 
certain  benefits  in  return  for  lower 
contributions.  In  addition,  those  on 
very low earnings are excluded  from 
paying  contributions  at  all,  in  Ger 
many  and  Ireland  though  also  from 
entitlement to benefit. This is also the 
case in the UK, though here they can 
pay  contributions  on  a  voluntary 
basis  and  receive  entitlement  to  all 
social  insurance  benefits  except  un 
employment. 

In most Member States, governments 
have sought progressively to improve 
the  social  protection  coverage  of  the 
self-employed  and  considerable  ad 
vances  have  been  made  in  the  past 
20 years or so. As indicated here, how 
ever, there are still gaps in many parts 
of the Union and a number of issues 
which require more information, more 
detailed  examination  and  further  de 
bate. 

The burden  of  paying  contributions 
can  also  be  alleviated,  and  benefits 
improved in other ways. In Italy and 
France, a number  of  measures  have 
been  taken  to  upgrade  schemes  for 
the  self-employed,  with  the  aid  of 
State subsidies and/or the transfer of 
resources  from  employee  schemes. 
In  Germany  and  France,  pension 
schemes  are  subsidised  for  farmers 
and in Finland for the  self-employed 
generally. In Luxembourg, the State 
recently took over the costs of paying 
maternity  benefits  and  extended 
these to the  self-employed. 

Information  on  the  effect  of  these 
various  provisions,  however,  is 
limited. Little is known about which 
groups  among  the  self-employed 
take up social insurance when this is 
voluntary  or  opt  to  pay  lower  con 
tributions and whether, in particular, 
they are typically  high  earners, who 
prefer  to  make  their  own  arrange 
ments,  or  those  with  low  earnings 
who cannot afford  alternative private 
insurance  and  have  little  savings  to 
fall back on. Without  such  basic in 
formation  it  is  difficult  for  govern 
ments to formulate effective  pohcies 
in this area. 

133 

Chapter 6 -  Social protection and the self-employed 

134 

Chapter 7-  Social protection and caring responsibilities 

Chapter 7  Social protection 

and caring responsibilities 

Many  key  social  protection 

rights are acquired and main 
tained only through regular paid em 
ployment.  Caring  for  a  child  or 
someone who  is disabled  or elderly 
and  infirm,  usually  a  relative,  may 
well mean that the person concerned 
has  either  to  give up  their job  for  a 
time or work less. Where social pro 
tection schemes are contributory, this 
adversely  affects  entitlement  to 
benefit. Where benefits are earnings-
related,  working  less  or  damaging 
career  prospects  by  stopping  work 
temporarily  will  clearly  reduce  the 
amount  receivable.  This  has  tradi 
tionally  typically  affected  women 
more than men and, despite changing 
attitudes and policies, continues to do 
so. 

To  generalise  about  15  Member 
States with diverse cultural features, 
family characteristics and social pro 
tection arrangements is hazardous. A 
common assumption in most parts of 
the  Union  in  the  past  was  that  the 
responsibility for looking after child 
ren and adults in need of special care, 
lay  with  women  and  that,  for  them, 
paid  employment  had  a  secondary 
role. The social security  system was 
developed  on  the  basis  of  this  as 
sumption. For their social protection 
needs  (except  where  benefits  were 
based  on  residency),  women  were 

expected to rely on their husbands for 
financial  support  during  both  their 
working  and  retirement  years. 
Should her husband die first, the wife 
had rights to a widow's pension, and 
support  for  dependent  children, 
derived  from  her  h u s b a n d 's 
work/contribution  and  employment 
record. Where men had to undertake 
caring  responsibilities  —  as  lone 
fathers or when caring for disabled or 
infirm wives — social protection was 
often  deficient. 

Social  change  has  undermined  the 
basis of these typical arrangements: 

• 

• 

• 

the role of  women,  in the home, 
in society and in the labour  force 
has  undergone  marked  changes 
since European  social  protection 
systems were established  in their 
post-war  form,  changes  which 
have  varied  in  scale  but  which 
have been universal; 

the  incidence  of  divorce  has  in 
creased  and  the  proportion  of 
one  parent  families  has  grown, 
while  cohabitation  has  become 
more prevalent; 

the  relative  number  of  elderly 
and  infirm  has  grown  as  more 
people  live  into  old  age,  so 
bringing  the  issue  of  their  care 

there 
into  prominence,  while 
is  greater  emphasis  on  the  right 
of  disabled  people 
to  non-
institutional care. 

These changes have led to a reassess 
ment of the appropriateness of a num 
ber  of  features  of  social  protection 
systems, particularly the extensive re 
liance  on  derived  rights.  In  recent 
years, there has been greater recogni 
tion of the importance of caring, both 
for children and adults, not only to the 
individuals involved but to the nation 
— and economy — as a whole. At the 
same  time,  there  has  been  a  general 
aim of increasing equahty of men and 
women in society, including introduc 
ing means to help reconcile family and 
professional  responsibilities.  These 
measures  include  active  pohcies  to 
safeguard  the  social protection rights 
of carers. 

In broad  terms, there have been two 
main  approaches.  The  first  focuses 
on  removing  obstacles  to  employ 
ment by  providing  social  support  in 
the  form  of  free  or  subsidised  per 
sonal  social  services  such  as  child 
care facilities  and home care for dis 
abled and elderly people. The second 
approach is to provide social benefits 
to family  carers and/or  to  safeguard 
their  social  protection  rights  during 
periods when they are not employed 

135-

Chapter 7-  Social protection and caring responsibilities 

Table 12 — Maternity benefits (1 January 1995) 

% earnings 

duration 

Austria 

Belgium 

Denmark 

Finland 

France 

Germany 

Greece 

Ireland 

Italy 

Luxembourg 

Netherlands 

Portugal 

Spain 

Sweden 

UK 

Notes: 

100 

110/117 

73 

113 

100 

100 

93 

86 

111 

100 

124 

100 

16 weeks 

15 weeks 

28 weeks 

263 days 

16/26 weeks 

14 weeks 

16 weeks 

14 weeks 

5 months 

16 weeks 

16 weeks 

98 days 

16 weeks 

80/90 

25/90 

up to 18 months 

18 weeks 

In Belgium benefit of117%  is paid for the first 30 days and 110% thereafter. 
In France, the duration is 16 weeks in the case of the first two children and 
26  weeks for further children. In Sweden, the maternity period forms part of 
the extended parental  leave period (see Box 1). In the UK, benefit of 90% 
may be paid for the first 6 weeks and a flat rate equivalent of around 25% of 
women's average earnings thereafter. In Finland, rates are based on a daily 
allowance  equal to sickness insurance. A minimum (64.95 FMK — around 
111/2ECU) 
is paid  to those who have no income,  while those whose annual income is 
less than 37,930 FMK (around 6,800 ECU) are paid  the minimum plus 30% 
of earnings.  This addition increases to 68% for annual earnings up to 
114,290 FMK (20,450 ECU), 40% up to 190,480 FMK (34,100 ECU) and 
25%  over 190,480. 

or are working  less. These  two  ap 
proaches are, of course, not mutually 
exclusive and, there is increasing em 
phasis  on the need  to give  people a 
real  choice  between  being  in  paid 
employment  or caring  for  someone 
and on ways of combining  the two. 

The  concern  of  this  chapter  is not 
with  the social  services  which  exist 

in  the  Member  States  to  provide 
social  support,  important  though 
these  are, but  with  the  provisions 
within  systems  of  social  protection 
relating  to periods off work for car 
ing. In particular, it examines the im 
plications  for  entitlement  to  both 
short-term and long-term benefits of 
leaving a job to look after children or 
caring for elderly or disabled people, 

136-

the difficulties  arising from  attempts 
to  combine  caring  and  part-time 
work  and the consequences  for the 
pension rights of carers of divorce or 
cohabitation breakdown. 

Social protection 
during periods 
of caring 

Early child care 

Each  year  there  are over  4  million 
live  births  in  the European  Union. 
Where the women concerned  are in 
work, they will in most cases be en 
titled  to  maternity  benefits  in the 
weeks before and after  the birth and 
their  other  social  protection  rights 
will be preserved. Some women not 
in  paid  employment  will  neverthe 
less,  receive  benefit  either  because 
they still satisfy the eligibility condi 
tions  or  because  there  is  a  general 
community  scheme  which  covers 
them (see Table  12 for details of en 
titlement  for  employees).  General 
community  schemes may pay lower 
benefits  and, as noted  in Chapter 6, 
benefits  for  self-employed  women 
may  be lower  and leave  shorter. A 
minority of women will receive noth 
ing at all. 

The  need  for care  arrangements  for 
small  children,  however,  extends 
well  beyond  the  period  of  basic 
maternity  leave,  which,  in the past, 
meant  that there were  only two op 
tions for parents: either one of them, 
usually the mother, would stop work 
ing to care for the child or they would 
find  someone  else  to  do  this.  This 
is  still  the  position  in  Ireland  and 

Chapter 7 -  Social protection and caring responsibilities 

Luxembourg (where leave is limited 
to 14 and 16 weeks, respectively, and 
in  Ireland  even  this  is  not  open  to 
self-employed  women). But in other 
Member  States,  it  may  be  possible 
under  a  variety  of  auspices  to  take 
extended  leave,  the  aim  being  to 
allow  women  more  easily  to  recon 
cile work and family  life,  to  protect 
their  working  careers  and  to  enable 
men  to  play  a  greater  role  in  early 
child  care.  In  most  countries,  how 
ever, these provisions  apply  only  to 
employees. 

In 8 Member States, extended  leave 
with  benefits  is  available,  usually 
combined  with  job  protection 
(which,  depending  on  the  country, 
may  mean  a  guarantee  of  reinstate 
ment  in  the  previous  job  or  one  of 
equivalent  status  or  merely  the 
pledge of a job with the former  em 
ployer). This may or may not include 
the  safeguarding  of  seniority  rights 
and/or  rights  in  company  pension, 
health  care  and  other  schemes.  In 
some countries, job  protection  typi 
cally applies only to those who work 
for companies above a certain size, in 
others,  it  does  not  cover  the  entire 
period of possible leave. 

In  these  Members  States,  future 
benefit rights are safeguarded and the 
right to  leave  and  benefit  are  avail 
able to either parent, though in some 
cases the mother is given first choice. 
The  great  majority  of  those  taking 
advantage of these schemes continue 
to be women. 

In Italy, maternity benefit  is payable 
only  to  the  mother  for  two  months 
before  the  birth  and  three  months 
after  at  80%  of  previous  earnings 
(though  if  she  dies,  the  father  can 

claim  the benefits  for  the  post-birth 
period). A further three months leave 
at 30% of  earnings can, in addition, 
be  taken  by  either  parent.  Jobs  are 
protected for up to one year after the 
birth  of  the  child.  Moreover,  either 
parent is able to take paid leave if a 
child  under  three  years  fall  ill.  In 
Denmark,  maternity  benefit  (at  a 
flat-rate  of  80%  of  unemployment 
benefit)  is  paid  for  28  weeks,  after 
which,  since  1994,  each  parent  is 
entitled  to  six  months  additional 
leave and a further  six months if the 
employer  agrees. Jobs  are protected 
during  this  period.  This  leave  can 
also  be  taken  to  look  after  children 
when  they  are  older.  Parents  also 
have a right to take time off  for  the 
first day of a child's illness. 

In Belgium, after  15 weeks of mater 
nity  benefit,  under  the Career  Inter 
ruption  scheme, parents  are  entitled 
to  an additional  3 to  12 months  off 
work, with their jobs being protected, 
though  career  interruption  during  a 
person's working life may not exceed 
60  months.  There  is  a  flat-rate 
benefit,  payable  during  each  period 
of around 300 ECU a month (around 
20%  of  the average  industrial  wage 
in  1995),  which  is  paid  at  a  higher 
rate if the interruption is for a second 
or  subsequent  child.  An  added 
benefit  is paid in the Flemish region 
if the child is under three. 

In  Finland  maternity  benefit  is 
payable at the same rate as  sickness 
benefit,  for  263 days (105 days  as a 
maternity  allowance,  part  of  which 
can be transferred  to the father,  fol 
lowed  by  158  days  parental  allow 
ance,  which  can  be  taken  by  either 
parent). After this, a further 26 weeks 
parental leave can be taken  (at 68% 

of  earnings), followed  by child  care 
leave  until  the  child  is  3  years  old, 
with  benefits  payable  at  a  low  flat-
rate (under 20% of average earnings) 
with  supplements  where  there  are 
two or more children  under 7 years, 
not being cared for by the pubhc child 
care  service, plus  an  income-related 
addition. Where both parents are em 
ployed, one or the other may  stay at 
home  on full  pay for  up to 4 days a 
year to look after  a sick child  under 
10 years of age, while a special care 
allowance is also payable where care 
is needed  by  a child  under  16 years 
who is seriously ill. 

In  Sweden  maternity  leave  is  avail 
able for  up to  18 months, most of it 
open to either parent, and benefits are 
payable  to  either  parent  during  the 
first year (at 90% of earnings for one 
month  and  80%  for  the  rest  of  the 
time  or  at  a  minimum  flat-rate  for 
those  who do not qualify  —  though 
from  January  1996, these  rates  will 
be reduced to 85% and 25%, respec 
tively). Leave can  also be  taken  for 
half  or  quarter  time,  with  benefits 
adjusted  accordingly.  Benefits  are 
also payable for up to 60 days a year 
for the care of a sick child under  12 
years. 

In Germany, after  14 weeks of benefit, 
either parent can take up to three years 
child  care  leave,  with  the job  being 
protected for the whole period, with a 
flat-rate  allowance  (of  around  300 
ECU a month) for 6 months and for a 
further  18 months, if income is below 
a  certain  level.  Similarly  in  Austria, 
after  14  weeks  of  maternity  benefit, 
leave is available for either parent for 
a  period  of  2  years,  with  a flat-rate 
allowance payable (at some 15 ECU a 
day or 20 ECU for single parents) and 

137-

Chapter 7-  Social protection and caring responsibilities 

Countries providing for unpaid leave 
for early child care 

UK:  in addition  to 14 weeks  maternity  leave available  to all female  employees, 
those  with  at  least  two years'  service  with  the  same  employer  (five  years  for 
part-time  workers)  are  entitled  to  leave  of  up  to  40  weeks  in  total.  Statutory 
Maternity  Pay or Maternity  Allowance  is  payable  for up to  18 weeks  to  those 
qualifying.  Employers  may  provide  enhanced  maternity  rights  on  a  voluntary 
contractual basis. 

Portugal: after 98 days of benefit, between 6 and 24 months unpaid leave is allowed 
if employer and employee agree; the job is protected. 

Greece:  maternity  benefits  last  for  103 days  and  social  insurance  rights  are 
protected. Where there is a contract of employment of at least  12 months, unpaid 
leave can be taken for up to 3 months by each parent, 6 months where the parent is 
divorced or widowed. In all cases, the job is protected. 

Spain: after  16 weeks of benefit, there can be up to 3 years unpaid leave to care for 
a newborn child, taken by either the mother or the father, Jobs are protected for the 
first  year but not beyond. 

Netherlands: after  16 weeks maternity benefits, a parent (male or female) who has 
worked at least one year with the same employer can take unpaid part-time leave, 
working half time for up to 6 months. Full-time leave for 3 months and one day a 
week  for the subsequent  9 months  is also  possible under  collective  agreements. 
Some employers pay up to 75% of earnings for days of leave, but this is not a legal 
requirement 

jobs being protected during this period. 
In addition, parents can work part-time 
with benefits reduced pro rata, for an 
other 2 years. It is also possible for both 
parents to take leave together, in which 
case benefits are shared between them. 

In France, unpaid  leave can be taken 
after  16 weeks maternity benefit, but 
only if the employer agrees and with 
no  guarantee  of job  protection. The 
main State scheme (APE) entitles the 
parent (usually the mother) so long as 
they  have been  employed  two of the 
previous  five  years,  to  a  flat-rate 
benefit  (of around 450 ECU a month 
for  the second  child  —  before  July 
1994, the third) until the child is 3 years 
old,  payable  pro  rata  if  the  parent 
works  part-time.  Jobs,  however,  are 
not always protected. 

In five other Member States, there are 
provisions for periods of leave usually 
with job protection but without benefit 
(see  Box). In  addition,  in  Greece, 
Portugal and Spain, parents with a dis 
abled child can reduce working hours, 
but without being compensated for lost 
earnings. 

Although unpaid leave is less attractive 
than paid leave, the regulations on job 
protection  are  important,  especially 
where  they  counter  some  of the ad 
verse  effects  on  career  progression, 
and  therefore,  on  future  wages and 
longer  term  pension  entitlement.  In 
these five countries, the length of un 
paid  leave covered  by job protection 
varies from  3-6 months in Greece to 
one year in Spain. 

138-

In the Netherlands, there is provision 
for a mix of full and part-time unpaid 
leave and social protection rights are 
safeguarded  for  the  full  period.  In 
Spain  and  Portugal,  on  the  other 
hand, there are no special  safeguards 
and  in the UK, rights are protected 
only  during  the 14 weeks  maternity 
leave period (though employers may 
continue to make national  insurance 
and  pension  contributions  if  em 
ployees  are  receiving  contractual 
maternity  pay after  the statutory  18 
weeks).  In  Greece,  to  retain  social 
protection rights, including coverage 
for  health  insurance,  contributions 
(both  employers'  and  employees') 
must be paid during unpaid leave. 

Caring for disabled 
and elderly  people 

Although  there  is  little  information 
available  on  the  number  of  people 
looking after a disabled or infirm per 
son for a significant part of their time, 
indications  are that  it  is  substantial 
(see Box). 

Studies which have been undertaken 
highlight  the  predominance  of 
women  among  carers  under  the age 
of  65, especially  those  in  their 40s 
and  50s. Older  carers,  on the other 
hand,  are  frequently  men,  usually 
caring  for disabled  or infirm  wives. 
In  addition,  there  are  many  single 
men  and  women,  usually  sons  or 
daughters ofthe person needing care. 

Much  less  pohcy  attention  has been 
focused on this kind of caring respon 
sibility,  either  in  terms  of  income 
support  for carers  who have  to stop 
working or the protection of social se 
curity  rights.  Schemes  providing 

Chapter 7-  Social protection and caring responsibilities 

benefits to carers for extended periods 
exist only in four Member States. The 
longest  standing  one  is  in  the  UK 
where  a  (non-contributory)  Invalid 
Care Allowance (IC A) was introduced 
in  1975,  though  it  was  extended  to 
married  women  only  in  1986. Eligi 
bility  for benefit  is dependent  on the 
person  being  cared  for  receiving  an 
allowance  for  attendance  (for  care 
needs)  and  is set at two-thirds  of the 
long-term  flat-rate  Incapacity  Benefit 
(formerly  Invalidity  Benefit).  Care 
must be  given for at least 35 hours a 
week,  but  earnings  of  up  to  some 
60 ECU a week are permitted without 
loss of benefit and receipt of ICA gives 
the right to credits for the category B 
(lower) rate retirement pension. 

In two other Member States provision 
of benefit  is relatively recent In Ire 
land, a means tested carer's allowance 
was  introduced  in  1990,  payable  to 
someone over  18 who lives with and 
cares full-time  for a person  receiving 
specified social security payments and 
who needs full-time care and attention. 
The means-test  is a strict one, which 
limits  eligibility. Social  contributions 
are  credited,  and  the  full  range  of 
benefits  payable,  only  to  those  who 
were  paying  contributions,  or  had 
these  credited  before.  In  Germany, 
allowances  designed  for  carers  were 
introduced  in  April  1995  under  the 
new  Long-Term  Nursing  Insurance, 
and are payable to both relatives and 
professionals,  (in the former  case the 
amount varying with the level of need 
for care—from 200 ECU to 650 ECU 
a  month). If care is given for  at least 
14 hours  per  week,  social  protection 
rights  are safeguarded, though no sep 
arate arrangements are made for health 
insurance, where it is assumed that that 

Studies of informal caring 

UK: according to the General Household Survey in 1985 in Great Britain (excluding 
Northern Ireland) there were 2.5 million men and 3.5 million women carers. Of 
these, 1.4 million were providing care for more that 20 hours a week, including 
850 thousand for 50 hours a week or more. The chances of becoming a carer were 
highest among women in their late 40s and early 50s. Single men and single women 
were much more likely to be heavily involved in caring than their married counter 
parts. Once oyer 65 years, men were more likely to be carers man women. 

Ireland: data from a number of studies in die late  1980s suggests that some 
100 thousand people were caring for adult relatives who were elderly, sick or 
disabled. Some 70% of those receiving care were looked after by members of the 
same household and 78% of these carers were women. Two-thirds of carers of 
elderly people were married' and nearly one quarter were single. Hie majority of 
carers were of working age. 
Germany: a study by Infratest in 1992 found 1.1 million people needing regular 
care, including 190,000 needing constant care. Around 77% of-those with regular 
care needs had a main carer, in nearly all cases a close family member. Some 83% 
of carers were female. Male carers usually looked after a disabled wife. 
Italy: in 1991 it was estimated that around 17% of Italian families were affected by 
the need to take care of an invalid, someone with a major disability or a non-self-
sufficient elderly person. 

held by the head of household will, as 
normal, cover all family members. 

In  Finland,  there  was  originally  a 
strong  emphasis  on  providing  home 
care  services  to  elderly  and  disabled 
people,  but  from  1989  the  existing 
scheme  for  Home  Care  Allowances 
paid  directly  to  the  carer  was  ex 
panded. These are paid by local gov 
ernment, but subsidised by the centre, 
and the rate paid varies between areas, 
though always related to the severity of 
need  for  care.  Pension  rights  of  the 
carer are maintained at the same level 
as for local government employees. 

More limited provision is available in 
five other Member States. In Sweden, 
the main emphasis is still on providing 
home care services, but paid leave of 
absence for up to 30 days at the sick 
ness  benefit  rate  can  be  taken  by  a 
relative, friend or neighbour caring for 

someone in need with social protection 
rights being safeguarded.  In addition, 
local authorities can pay a home care 
allowance  to  a  carer,  though  in  this 
case, other rights are not protected. In 
Denmark  —  which  places  a  similar 
emphasis on publicly-provided care— 
someone caring  at home for a termi 
nally ill relative can be reimbursed for 
lost  earnings  at the level of  pay  of  a 
municipal  home  helper,  with  their 
rights being protected. In Belgium, a 
career interruption scheme was intro 
duced in  1995 providing leave for up 
to two months to care for someone who 
is  terminally  ill, together  with  a  flat-
rate  benefit  (of  around  300  ECU  a 
month)  and  protection  of  social  se 
curity rights. Local  arrangements  for 
, paying  benefits  to  carers  also  exist, 
though  the  provision  is  discretionary 
and the benefit amounts are relatively 
low (25 to 125 ECU a month). 

- 139 

Chapter 7-  Social protection and caring responsibilities 

People in employment 
not eligible for social insurance 

Spain: people who work for less than 12 hours a week, or 48 hours a month in all, 
are excluded  from  some benefits  —  for  occupational  accidents or illness, health 
care, cash  benefits  during  maternity  leave and  the Fond de Garantie Salariale, In 
1994, most people working a small number of hours a week were women. 

Austria: people who earn  less than  13 ECU  a day, 40 ECU a week, 260 ECU a 
month,  are  excluded  from  compulsory  insurance,  though  they  are  able  to  pay 
voluntary contributions. 

Ireland: in 1993,12,000 employees were estimated to be outside the scope of social 
insurance, mosdy women. In addition, some 16,500 self-employed were excluded: 
13,000 farmers  receiving unemployment assistance as a supplement to poor farm 
earnings,  and  3,500 others  with  incomes  below  the threshold  for  self-employed 
contributions — around 3,000 ECU a year. 

Germany:  people are excluded  from  social insurance if  they work  for less than 
15 hours a week and earn less than around 300 ECU a month in the Western part 
or 250 ECU in the East In addition, those working for less than two months or 50 
working  days  a year  are generally  excluded.  Figures for  1992 show that  almost 
3 million people were excluded  by these various rules, of which 68% (2 million) 
were women. 

UK: people who earn less than around 70 ECU  a week  are excluded. In  1994, it 
was  estimated  that  2.2  million  female  and  0.8  million  male  employees  were 
excluded. Figures for the self-employed  are not available. 

with  low  pay  and/or  short  hours. In 
such  cases,  however,  they  may  no 
longer be eligible to belong to a social 
insurance scheme and so not be able 
to accumulate social protection right-
s. This is not the case in Luxembourg, 
Portugal,  France,  Greece,  Italy, 
Netherlands  or  Sweden,  where  all 
those in employment are compulsor-
ily insured. The same is also true in 
Denmark, except that membership of 
an  unemployment  fund  requires  a 
minimum  number  of  hours  work, 
while in Belgium, those excluded are 
only those who do domestic work for 
others for  less than 24 hours a week 
or other household work for less than 
8 hours a week. There are, however, 
a number of Member States where a 
significant  number is excluded  from 
social insurance. 

Figures  for  the  total  number  ine 
ligible  for  insured  status  for  these 
reasons  (see  Box)  are  not  available 
for all countries, but they are substan 
tial in the UK  and  Germany.  By no 
means all of these people are carers, 
but  those  whose  working  life  is re 
stricted by caring responsibilities are 
particularly at risk of non-ehgibihty. 
These  women  and  men  are  not  en 
titled  to  benefits  during  sickness  or 
unemployment,  and unless there are 
provisions based on residence or spe 
cial  measures  are  taken  (described 
below)  will  not  be  building  entitle 
ments  to  long-term  benefits  for 
retirement or invahdity. 

Portugal,  Netherlands  and  Austria 
there is no provision  at all for  either 
leave or benefits for carers. Except in 
Austria, where there is some protection 
of  pensions  for  those caring  for  dis 
abled  children,  as  discussed  below, 
stopping  work  to  provide  care  for 
someone  means  loss of both income 
and social protection rights, except as 
regards  health  care  where  there  is  a 
national health service. 

In Italy, Greece and France, under the 
national  schemes  in  operation,  extra 
benefits  are  paid  to  those  needing 
extensive  care,  in  Italy  the  amount 
being around double the means-tested 
disability  allowance,  in  Greece, 
around  50% of  the  invahdity  benefit 
for total incapacity, and in France, the 
same as minimum wage. These allow 
ances can be passed on to the carer, but 
need  not necessarily be. In France, if 
the carer receives  an allowance, they 
are regarded as an insured person with 
normal social protection entitlements, 
but  to encourage  home care,  without 
being  liable  to  pay  contributions.  In 
other  cases,  as  in  Italy  and  Greece, 
social  protection rights are not main 
tained,  as  is  also  true  of  French  and 
Italian  local  schemes  paying  allow 
ances to carers. In Spain, Luxembourg, 

-  140 

Low earnings and 
social protection 

People  returning  to  the  labour 

force or trying to continue work 
ing  while  caring  for  someone  can 
often find it necessary to accept a job 

These exclusions are at present under 
debate,  with  those  on  the  one  side 
who want to increase labour  market 
flexibility  by reducing  contributions 
and the cost to employers — as well 
as to encourage more part-time jobs, 
and those on the other, who wish to 

Chapter 7 - Social protection and caring responsibilities 

see improved social protection cover 
(as in Spain). At the same time, ex 
clusions  are  seen  as  an  issue  of 
inequahty,  given  the  predominance 
of women among those excluded (in 
the UK and Germany), while poten 
tial impact  of  contributions  on  low 
incomes  is  used  as  an  argument 
against  their  inclusion  (in  the UK). 
The low level of contributions which 
they would be able to pay is also an 
issue in that they would build rights 
only  to  very  low  earnings-related 
benefits  (which,  in  practice,  might 
not be any greater than means-tested 
allowances, assuming that they qual 
ify  for  these  which  many  married 
women will not) or they would qual 
ify  for  cover  well in  excess  of  their 
payments  into  the  schemes  —  for 
health  insurance,  for  example  (in 
Germany).  Equally,  if  (flat-rate) 
benefits were increased to too high a 
level  relative  to  earnings  when  in 
work, this could adversely affect  in 
centives to be employed. 

Part-time work and 
social protection 

There are also specific  issues related 
to  part-time  employment  which  is 
widespread  in  the  European  Union. 
In the Union  as  a whole  there were 
nearly 21 million people in part-time 
work in 1994, almost  18 million em 
ployees and 3 million  self-employed. 
They  are  predominantly  women  — 
around  15 million  ofthe  employees 
and 2 million ofthe self-employed — 
the  largest  numbers  being  in  the 
UK and Germany  (around  5 million 
in each),  but  the  highest  proportion 
of  the  work  force  being  in  the 
Netherlands (66%). 

If the working patterns of women are 
examined,  it  is evident  that  in  most 
Member  States,  women  with  child 
ren are much more likely not to work 
or to work part-time than those with 
out (Graphs 70 to 75). Although there 
are no comparable  figures  for  those 
who care for adults it may well be that 
the  pattern  is  similar  because  the 
constraints on working full-time  are 
much the same. 

Decisions  about  whether  and  how 
many  hours  to  work  are, of  course, 
not  wholly  determined  by  caring 
responsibilities.  A  social  policy 
which  provides  high  levels  of  child 
care and home care for  the disabled 
or  infirm,  the  availability  of  family 
and  the  financial  circumstances  as 
well  as  other  factors  can  all  be  im 
portant. For lone parents, in particu 
lar,  financial  necessity  may  dictate 
full-time  work  in  cases  where 
benefits  are  conditional  on  the 
mother  seeking  employment  once 
the children pass a specified age. It is 
interesting  to note, however,  that  in 
the  1993 Eurobarometer report (The 
Europeans  and  the  Family)  around 
55%  of  respondents  considered  that 
having  children  was  an  obstacle  to 
the  working  life  of  women,  though 
under  10% thought  the  same  as  re 
gards  men.  Nevertheless  there  are 
men whose employment choices are 
affected  by caring responsibilities — 
lone  fathers,  for  instance  or  those 
looking  after  disabled  adults  (see 
Box  on  studies  of  informal  caring). 
Moreover  there  may  be  more  men 
looking  after  children  in  the  future 
as  parental  leave  schemes  are 
developed and extended. 

Problems  may  arise  for  part-time 
workers  under  the  social  protection 

arrangements, even where they are in 
jobs  which  entitle  them  to  social 
insurance  (though  see  below  for 
measures  which  may  offset  these 
problems): 

•  while contributions may give en 
titlement  to  long-term  benefits 
for  retirement  and  invalidity  the 
earnings-related  amounts  con 
cerned  are  likely  to  be  low  un 
less there  are specific  provisions 
to overcome this; 

• 

taking  up  part-time  work  late  in 
a  working  career,  because  of 
the  need  to  care  for  an  elderly 
parent,  for  example,  can  adver 
sely affect  pension rights if these 
are  calculated  on  final  salary  or 
the  last  few  years  before  retire 
ment age; 

•  part-time  workers  may  be  ex 
cluded  from  occupational  pen 
sion  schemes  which  provide 
supplements  to  retirement  pen 
sions  or 
ill-health 
long-term 
benefits. 

Part-time workers may also find that, 
though they are paying contributions, 
they  are  ineligible  to  receive  unem 
ployment  or  sickness  benefits  be 
cause  they  work  too  few  hours  a 
week  or  too  tittle  over  a  specified 
period of time. 

Returning to work 
after caring 
Returning  carers  may  encounter 

other problems in qualifying  for 
short-term  benefits,  in  particular  if 
sickness  or  unemployment  strikes 

141 

Chapter 7-  Social protection and caring responsibilities 

70  Women aged 25-49 working part-time  because 

71  Women aged 25-49 who are  inactive because  of 

they  did not want  a full  time job, 1993 

family responsibilities,  1993 

1 0Q  % part-time women 25-49 

O Single 
O Single wtth chidren 
•  Married 
•  Married with chidren 

80  h 

60 

40 

20  t 

Uru 

B  DK  D  GR  E 

I 

L  NL  P  UK  E12 

F 

IRL 

I 

1 00  % Inactive women 25-49 

O Single 

-  a  Single with children 

•Married 
I  Married with children 

100 

100 

80 

60 

40 

20 

0  exclude» new Under 

72 

Single women working full-time  and  part-time 
by age of youngest  child» 1993 

73  Married women  working full-time  and part-

time by age of youngest child,  1993 

100  r"  «Full-time  •  Part-time 

100 

100% 

•  Full-time  •Part-time 

100 

80  1-

60  Y 

40  Y 

20  Y 

B 

DK 

0 

OR 

E 

F 

I f lL 

1 

L 

NL 

P 

UK  E 12 

Left bar  no children: middle bar. chid < 5; right bar child '0-18 

0  exclude» new Lander 

Left ban ho children; middle bar. child < 5; right bar: chHd 10-15 

0  exclude» new Lander 

74 

Single  women  working full-time  and part-time, 
1993 

100% 

•  Part-time 
•  Full-time 

75  Married women  working full-time  and part-

time, 1993 
I Part-time 

100% 

Lett bar with no children; right bar  with children 

O exclude» new Lander 

Lett bar  with no children; right bar  with children 

0  exclude» new Lander 

B 

DK 

D  GR 

E 

F 

IRL 

I 

L 

NL 

P 

UK  E 12 

-  142 

Chapter 7 ~ Social protection and caring responsibilities 

before  they  have  sufficient  time  to 
satisfy  qualifying  conditions.  Such 
problems will not apply if the health 
care system  is designed  to serve the 
whole population or there is no qual 
ifying  period for sickness benefits or 
provisions  which  take  into  account 
contributions  before  the  period  of 
caring began. But where the system 
is  less  'open'  or  where  qualifying 
conditions fo: particular benefits  are 
more stringent, problems may arise. 

The development of schemes for ex 
tended leave with benefits  for taking 
care of young children (in 8 Member 
States) has improved the position of 
those  caring  for  children  not  only 
while  they  are  not  working,  but  on 
return to work as well. But where, at 
best, unpaid leave is all that is avail 
able,  then  —  with  the  exception  of 
the Netherlands where social protec 
tion  rights  are  safeguarded  during 
unpaid  leave  —  the  position  of  re 
turning  carers  is much  weaker.  It is 
also the case that where leave provi 
sions are for relatively short periods, 
some parents may feel it necessary to 
spend longer with their children and 
so lose their right to job  protection. 

As noted above, in only a minority of 
Member  States  are social  protection 
rights safeguarded for those who care 
for adults for extended periods. 

Health care costs 

In  12 of the  15 Member States caring 
gives no problems so far  as access to 
health care is concerned, while in the 
other  three,  problems  are  of  varying 
severity. In France, two groups retain 
their health insurance rights —  those 
with  two or more children  who have 

Qualifying for cash sickness benefits 
— returning carers in Ireland and the UK 

Ireland: the benefit has two conditions—at least 39 weekly contributions over the 
entire working life must have been paid and 39 contributions paid or credited in the 
year prior to the illness. To meet the second condition, there have to be at least 13 
paid contributions, but these can have been paid in any of the 3 years prior to the 
claim. Any credits during receipt of the means-tested Carer's Allowance, would be 
beneficial to carers, as would those gained during oie 14 weeks maternity benefit 

UK: the situation is complex. Most employees, provided they had an employment 
contract which lasted at least 3 months and provided they earned enough to to pay 
contributions in the 8 weeks prior to the illness, would get Statutory Sick Pay (SSP). 
Credits do not count for SSP. Employees who do not quality and the self-employed, 
have to meet two qualifying conditions for National Insurance benefit; contributions 
must have been paid on earnings of at least 25 times the lower earnings limit in any 
tax year and contributions paid or credited on earnings of SO times the lower 
earnings limit in the two tax years preceding the claim. Credits given while on the 
18 weeks benefit  for maternity absence and while receiving the Invalid Care 
Allowance will assist with the second of these conditions. 

received  benefits  under  the  parental 
leave  scheme  and  those  caring  for 
adults who are paid by the person con 
cerned  from  their  disability  benefits 
and  so  qualify  for  insured  status. 
Everyone else has to have worked at 
least 60 hours or earned 60 times the 
hourly  minimum wage over a period 
of a month. In Belgium, those covered 
by a Career Interruption  arrangement 
similarly retain their health insurance, 
but others, including those who had to 
continue  caring  after  the  period  of 
Career  Interruption  expired,  need  to 
have worked at least  120 days (for at 
least three hours a day) during a period 
of 6 months. In Greece, those on un 
paid leave to take care of young child 
ren can remain insured as noted above 
only  if  they  pay  their  own  plus  the 
employer's contribution, while others 
need  to  have worked  for  at  least  50 
days (two months) in the year preced 
ing  the illness. In all  three countries, 
those caring for adults are more hkely 
to be affected adversely than those car 
ing for children. 

Sickness benefits 

In a number of Member States, there 
is  no  qualifying  period  for  entitle 
ment  to  sickness  benefit.  These  are 
Sweden,  Austria,  Luxembourg, 
Germany,  Finland,  Italy  and  the 
Netherlands. In Portugal  and  Spain, 
carers  are  treated  the  same  way 
as  everyone  else,  which  means  in 
Portugal, 6 months in insurance and 
12 days work during the four months 
prior to the illness and, in Spain, 180 
days work in the previous five years. 
In both these countries, many carers 
are,  therefore,  likely  to  quahfy  for 
benefit, even if they fall ill soon after 
returning  to work. In Denmark,  em 
ployees  must  have  worked  at  least 
120 hours  in the  13 weeks  immedi 
ately preceding the illness. 

In France, Belgium  and  Greece, the 
rules  governing  eligibility  are  the 
same as for health care which are not 
so  difficult  to  fulfil  in  France,  but 

143-

Chapter 7-  Social protection and caring responsibilities 

Carers and unemployment benefits 
in Germany and Netherlands 

Germany:  the widely  available  period of  extended  leave  for  early child  care  is 
counted as if it is paid employment and so will give benefit rights when these are 
needed. But carers covered by the new long term care insurance have to meet the 
normal qualifying conditions for unemployment benefit —12 months insured work 
in the past three years for the insurance benefit and ISO days in the last year for the 
assistance  benefit.  They  are, however,  eligible  for  vocational  training  without  a 
qualifying  period in employment — a useful provision for someone who had been 
out of the labour force for a long period. 

The Netherlands: for the basic unemployment benefit lasting for 6 months, carers 
have to meet the same rules as anyone else, that is, 6 months work  immediately 
preceding the unemployment For the extended benefit which follows (lasting from 
3 months to 4.5 years, depending on age and other factors), the normal requirement 
is that the employee must have received a wage for at least 52 days during at least 
3  of  the 5 years immediately  preceding  the unemployment, though  special  rules 
apply to those who have been caring for children. In calculating the 3 in 5 rule, all 
the period when caring for a child under 6 and half the period caring for a 6-12 year 
old are counted as employment However, there is no similar rule for carers of adult 
disabled/infirm people. 

present  more  difficulties  in  Greece 
and Belgium. 

are  not  available  to  those  caring  for 
adults (see Box). 

In Ireland and the UK the regulations 
are both more complicated and so may 
be more difficult  to satisfy  (see Box). 
In both countries it may be easier for 
those  who  have  cared  for  adults  to 
satisfy  the  requirements,  than  those 
caring for children. 

Unemployment  benefit 

Qualifying  conditions  for  receipt  of 
unemployment  benefit  of  a  person 
loses a job soon after returning to work 
tend to present more of a problem. 

This is not the case in Finland, where 
unemployment  benefit  is  paid  after 
five  days of registered unemployment. 
In Germany and the Netherlands, there 
are special provisions for those return 
ing from caring for children, but these 

In Belgium and Greece, some of the 
provisions  for  leave  from  work  en 
able the carer to remain insured and 
so  qualify  for  unemployment 
benefits  where  provisions  do  not 
apply, however, — which is hkely to 
be  in  most  cases  for  those  looking 
after  adults — carers must meet  the 
normal  qualifying  conditions  —  in 
Greece,  300  days  of  work,  in 
Belgium,  312-624  days,  depending 
on age. 

In  Luxembourg,  Sweden,  Italy  and 
Spain,  the  normal  conditions  for 
receipt of benefits  have to be met in 
full — ie contributions need to have 
been  paid  for  a  minimum  period, 
ranging  from  6 months  to a year  or 
more.  In  Sweden,  the  person  con 
cerned needs also to have worked for 
five  months  in  the  previous  12, 

144 

though  there  is  a  minimum  unem 
ployment assistance benefit for those 
who are not members of a voluntary 
unemployment  fund. 

In  Spain, receipt of  earnings-related 
benefit requires contributions to have 
been  paid  for  12  months  over  the 
preceding  6  years  and  in  Denmark, 
full  members  of  an  unemployment 
fund  need  to  have  worked  for  26 
weeks  in  the  last  3  years.  In  both 
cases,  many  carers  are  hkely  to  be 
able  to  meet  these  conditions.  In 
Austria,  there is a waiting  period of 
20  weeks  to  establish  eligibility  for 
benefit, while in Portugal, there must 
have been  540 days of earnings and 
contributions  in the 24 months prior 
to  unemployment.  In  Ireland  the 
rules  are  the  same  as  for  sickness 
benefit. In the UK, a minimum num 
ber of contributions  must have been 
paid,  and  any  additional  credits 
needed, must have been acquired, in 
the last two tax years. In both coun 
tries,  credits  relating  to  caring  for 
children  accrue  only  over  the  basic 
period of maternity leave (14 and 18 
weeks,  respectively),  but  there  is  a 
greater opportunity to acquire credits 
for  longer  periods  of  caring  for 
adults. 

Protecting the 
retirement pension 
Leaving  aside  pensions  based  on 

rights as  a  resident  national, ac 
quisition  of  a  full  pension  in  most 
countries  requires  payment  of  con 
tributions over the whole of a working 
career. Breaks in employment do not 
usually  lead  to  total  loss  of  pension 
rights,  but to a reduction in the amount. 

Chapter 7 - Social protection and caring responsibilities 

Where  pensions  are  earnings-related 
and calculated on a lifetime's earnings, 
the amount receivable will be reduced 
not only if fewer years are worked but 
also  perhaps  if  part-time  hours  are 
worked.  In  some countries, there are 
provisions for voluntary contributions 
to be paid to cover career breaks, but if 
these have to be paid during periods of 
non-earning,  they  may  not  be  affor 
dable. 

There  are,  however,  two  features  of 
pension  provision  in  Member  States 
which moderate the effect of caring on 
pensions. The first is the existence of a 
basic  pension  receivable  by  right 
through citizenship. The second is the 
existence of measures aimed at reduc 
ing the disadvantage carers are likely 
to  suffer. 

Pensions paid by right 

In  four  Member  States,  Sweden, 
Netherlands, Finland and Denmark, a 
basic pension is payable to all resident 
nationals, irrespective of whether and 
how long they have worked. The pen 
sion,  however,  is  set  at  a  minimum 
level, even if  sufficient  to meet basic 
needs.  In  all  four  countries,  sup 
plementary  earnings-related  pensions 
exist  to  increase  retirement  income, 
but  missed  years  of  contributions  or 
periods  of working part-time will re 
duce the  amount  payable, and provi 
sions to offset these adverse effects are 
limited. 

In Sweden where an  earnings-related 
benefit is payable during parental leave 
and  for  short  periods  of  caring  for 
adults, this is counted as pensionable 
income  and  so  helps  to  increase 
earnings-related  amounts.  In January 

Improvements of pension rights for carers in Italy 

Starting from January 1994, employees with at least five years of contributions can: 

• 

• 

• 

gain a pension credit of five months for children bom prior to employment; 

gain  a  pension  credit,  with  voluntary  contributions,  for  6  further  months 
(equivalent to the normal additional maternity, leave) for children'bora prior to 
employment; 

gain a maximum credit of 5 years, with voluntary contributions, for periods of 
care for adult disabled people, including periods outside the labour force. 

From  1995, it will be possible: 

• 

• 

• 

to claim notional credits towards pensions in respect of absences from work for 
caring for a child of under 6, of 6 months for each child up to a maximum of 
24 months in all; 

to claim pension credits for up to 28 months, for absence from work for periods 
of care for children over 6, a spouse or an invalid parent living at home; 

for working mothers to receive a concession on the age of retirement of 4 months 
for each child up to a maximum of 12 months or, alternatively, if she retires at 
the normal age, a higher pension; 

• 

for housewives to belong to a new voluntary but subsidised pension scheme. 

1997, rules are due to come into effect 
under  which  married couples will be 
able to elect to divide annual pension 
credits between each other. In Finland 
also, leave for early child care does not 
serve  to  reduce  the  earnings  used  to 
calculate  pensions  and  the  pension 
rights  of  those  receiving  the  Home 
Care allowance are protected. A long 
period of absence from work over and 
above  the  parental  leave  period  can 
however,  lead  to  a  break  in  pension 
insurance for both employees and the 
self-employed (though as noted below 
there are other rules which help those 
who have been caring for children). 

Differences in 
pension calculations 

In  some  Member  States  retirement 
pensions of carers may be much less 

affected than in others by caring, sim 
ply because of the way pension entit 
lement  is  calculated.  In  Spain,  the 
pension  is  calculated  on  earnings 
over the last 8 years of work, which 
is beneficial for those who took time 
off for caring responsibilities early in 
their working life, but detrimental for 
those  who  were  not  employed  or 
worked part-time, late in their work 
ing careers. In Portugal, pensions are 
calculated on the basis ofthe best 10 
years earnings in the last  15 years of 
work,  a rule which by enabling  low 
years  to  be  dropped  tends  to  help 
carers  who have had to spend  some 
time  in  part-time  work,  though 
missed  contribution  years  remain  a 
problem (see below). 

In Finland, the earnings-related pen 
sions  are calculated  on the four  last 
years of employment and if these in 
clude  a  year  in  which  maternity, 

145-

Chapter 7-  Social protection and caring responsibilities 

Home Responsibilities Protection in the UK 

Home Responsibilities Protection was introduced in 1978 for those not earning or 
earning below the level of liability for National Insurance contributions, provided 
that 

• 

• 

• 

throughout a full tax year they are the main payee for Child Benefit drawn in 
respect of a child under 16 years, or 

throughout a full tax year they are receiving Income Support without being 
required to be available for employment because they are caring for a sick or 
disabled person in receipt of the highest or middle rate of the Disability Living 
Allowance care component Attendance Allowance or Constant Attendance 
Allowance, or 

they are regularly caring for at least 35 hours a week for a person receiving for 
a minimum of 48 weeks in a year the highest or middle rate of the Disability 
Living Allowance care component, the Attendance Allowance or Constant 
Attendance Allowance. 

For each year of HRP, the number of qualifying years for a full basic retirement 
pension are reduced but not below 20 qualifying years. At present the maximum 
number of HRP years for a woman is 19 and for a man 24, but when pension ages 
are equalised at 65, HRP rights will be equalised at 22 years. The years of HRP 
count towards the requirements for .a widow's pension. 

paternity or child care leave has been 
taken, it is dropped from the calcula 
tion. In Italy, the pension calculations 
are based on the number of pension 
able  years  (with  no  distinction  be 
tween  full  and  part-time  work)  and 
on average earnings over the last ten 
years of work. These rules, together 
with the fact that pension rights con 
tinue  to  mature  while  maternity 
benefits are paid, serve to protect the 
pension of those who have been look 
ing  after  children,  but  they  are  less 
helpful to those who'have had to care 
for  adults  in  later  years.  For  those 
entering  the  labour  force  from 
January  1993,  however,  pensions 
will  be  calculated  on  lifetime  earn 
ings. A new set of rules, taking  effect 
from  1992, strengthens  the  position 
of carers of both children and adults, 
in  part  by  allowing  voluntary  con 
tributions  which  can  be  paid  when 
earning has resumed (see Box). 

Dropping caring years 
from the pension 
calculation 

In the UK, under the Home Respon 
sibilities  Protection  (HRP)  provi 
sions,  and  more  recently  in  Ireland, 
carers can drop the years spent look 
ing  after  someone from  the calcula 
tion  of  pension  entitlement  and  can 
also  acquire' contribution  credits 
where receiving benefit for caring for 
a disabled or infirm adult (see Box). 

In Ireland, since 1994, those of 65 and 
under not in paid work, or in low paid 
work not covered by social insurance, 
are entitled to drop from the calculation 
of  the old-age (contributory)  pension 
for years after  1994 (up to a maximum 
of  20)  complete  contribution  years 
spent caring either for a child under 6 
(soon to be 12) on a full time basis or 
for an adult requiring full time care and 

attention, so long as, in both cases, they 
reside with the person in question. 

In addition, in the UK, where as from 
1999, the  State  supplementary  pen 
sion  will  be  calculated  on  lifetime 
earnings instead of the best 20 years, 
carers  will  be  entitled  to  exclude 
years of HRP from the calculation, so 
long  as  20 years  of actual  contribu 
tions  after  1978  have  been  made. 
Moreover  after  1999,  the  means-
tested  benefits  for  low  earners  — 
Family  Credit and Disability  Living 
Allowance  —  will  be  counted  as 
earnings  in  the  calculation  of  pen 
sions  which  could  help  low-paid 
part-time  workers,  especially  lone 
parents. 

Maintenance of 
contributions during 
periods of caring 

In a number of Member States, con 
tributions  are  maintained  during 
periods of time off  work for  caring. 
In  Luxembourg,  where  the  basic 
qualification for a pension is 10 years 
of contributions, the State pays con 
tributions on behalf of a parent caring 
for  a  young  child  for  a  period  of 
24 months — 48 months where there 
are at least two children or the child 
is  handicapped,  provided  that  the 
person  concerned  has  been  insured 
for at least 12 of the 36 months before 
the birth. In addition  periods  during 
which one of the parents was caring 
for  one  or  more  children  under 
6 years, or under  18 if the child is at 
least 50% disabled, or, in some cases, 
years  spent  looking  after  an  adult 
who need care can be counted as part 
of  the  40  years  required  for  a  full 
pension. 

146 

Chapter 7 -  Social protection and caring responsibilities 

In Germany, compulsory pension in 
surance is maintained for three years 
for a parent who is caring for a child" 
bom after January 1992 (one year for 
those born earlier) based on earnings 
of 75% of the average of all insured. 
In general, caring for a child of up to 
10 does not significantly  affect  pen 
sion  entitlements.  Under  the  new 
Long  Term  Care  Insurance,  people 
caring  for  disabled  persons  for  at 
least 14 hours a week are covered by 
pension  insurance  (earnings  of  be 
tween  35% and  80% of the average 
of  all  insured,  depending  on  the 
weekly  hours  spent  in caring, being 
used for the calculation  of pension). 
In  Austria,  each  year  of  parental 
leave  for  which  a benefit  is  paid  is 
treated  as  equivalent  to  one  year of 
pension  contributions  (see  Box). 
Someone caring for  a disabled child 
can pay voluntary contributions  at a 
reduced  rate,  but  no  provision  is 
made for those caring for an adult. 

In Belgium  also, the period of leave 
—  the  Career  Interruption  —  is 
counted as a period of  contributions 
for  pension  purposes  for  up  to 
36  months  where  a  child  under 
6 years is being cared for, and other 
wise  for  12 months.  In  the  case  of 
care  for  terminally  ill  people,  only 
two months are counted. Carers who 
stop  work  for  longer  and  those  on 
unpaid leave outside the scheme can 
pay voluntary contributions, but only 
if they are caring  for children  under 
6, and contributions  have been  paid 
for  at  least  12 months  before  hand 
and work is later resumed. In France, 
there  are  a  range  of  provisions, 
mainly for bringing up children  (see 
Box). 

Provisions to protect pensions 
in Austria and France 

Austria: The 48 months after a child's birth are treated as 'substitutional'  periods 
in pension  insurance. To calculate the pension, a notional income of 446 ECU is 
set as a base and revalued every year. If the parent concerned is earning during any 
of this period, the notional and actual wages are added for the purpose of the pension 
calculation, in order to compensate for the double work-load of child care and paid 
work. If a second child  is bom within the 48 months, the original period will end 
and a new period of 48 months will begin. 

France: A parent receiving any ofthe family  benefits  while remaining at home to 
care for a child under 3 is entitled to pension insurance in the Régime general, based 
- on a notional wage equal to the monthly minimum wage, the contributions for this 
being paid by the Caisse d'allocations familiales. In addition: 

• 

there is a right  to two years free  pension  insurance  for every child  cared  for 
during 9 years before their 16th birthday; 

•  workers who have brought up three children are entitled to a full  pension  after 

30 years of insurance; 

• 

the  fact  of  having  brought  up  three children,  entitles  both  parents  to  a  10% 
increase in their retirement pension. 

In a further provision — to encourage part-time work in this case, but beneficial to 
carers — where a full-time job is converted into a part-time job, then by agreement 
with the employer,  pension contributions can continue to be calculated  as if they 
were based on me full-time wage for a period of 5 years. 

The use of voluntary 
contributions 

In  Italy,  carers  can  pay  voluntary 
contributions  under  new  rules  as 
noted above. In Portugal, where pro 
visions for those who interrupt work 
ing  careers  are  limited,  there  is  a 
voluntary  insurance  scheme,  im 
plying  an  assumption  that  someone 
not in work can afford  to contribute 
or can find someone to pay on their 
behalf.  However,  a  supplementary 
social  pension  is payable  where  the 
final  contributory  pension  falls 
below  a  minimum  amount.  In 
Greece, where provisions  for  carers 
are  limited,  retention  of  insurance 
rights depends on paying voluntarily 
contributions  and if these cannot be 

afforded,  pensions  will  be  reduced 
accordingly.  (There  are,  however, 
provisions  beneficial  to  mothers  of 
young or disabled children, who can 
retire on a full  pension at 55 — or a 
reduced  pension  at  50 -— if  she has 
completed  insured  employment  of 
18 years  and 4  months.)  In the UK, 
there  is  also  some  use  of  voluntary 
contributions, where earnings in a tax 
year  are  not  enough  to  qualify  for 
pension  purposes.  In  this  case,  the 
person  concerned  can  make  up  the 
difference  in voluntary contributions 
any time over the following six years, 
which means that they can be paid on 
return to work (in  1993, only 69,000 
people  made  such  contributions, 
59,000 of whom were men). 

147 

Chapter 7-  Social protection and caring responsibilities 

Private supplementary 
pensions 

There  do  not  appear  to  be  any 
examples of private pension schemes 
in  any  Member  State,  which  make 
allowance  for  periods  of  caring. 
Indeed,  until  recently  (before  the 
European Court judgement, Vroeger 
v  NCIV  and  Fisscher  v  Voorhuis 
Hengelo,  1994)  occupational 
schemes  often  excluded  many 
part-time  workers.  Where  the  State 
pension  provision  relies  on  sup 
plementary  pensions  to bring retire 
ment  income  up  to  a  reasonable 
(rather than minimum) level, people 
who have been involved in caring can 
be significantly  disadvantaged. 

Invalidity benefits 
There  has  been  less  pohcy  con 

cern with protecting entitlement 
to  invalidity  or  disability  benefits. 
However,  provisions  which  protect 
retirement pensions will sometimes, 
but  not  always, also  apply  to these. 
Where there are few measures to pro 
tect  retirement  income  the  same  is 
likely  to be  true  in  respect  of  inva 
hdity support. 

In  the  countries  in  which  there  are 
basic provisiorrfor resident nationals 
—Sweden, Denmark and Finland — 
no problems arise in any case. In the 
Netherlands,  where  access  to  the 
General  Disability  Benefit  which 
covers  both  short  and  long  term 
needs  is  relatively  open,  there  are 
also  few  problems.  Moreover,  in 
Luxembourg, Austria and Germany, 
where  the  State  pays  contributions 
during  years  of  caring  and  where 

these  are  credited  while  on  other 
benefits, these provisions also apply 
to  invalidity  benefits  (though  in 
Austria,  they  do  not  cover  absence 
from  work  to  look  after  adults).  In 
France,  although  the  normal  eligi 
bility requirement for invalidity pen 
sion is 800 hours work or earnings of 
2030  times  the  hourly  minimum 
wage in the last  12 months, there are 
retrospective  provisions  to  assist 
someone entitled to parental leave to 
obtain an invahdity  benefit. 

In  Portugal  and  Spain  and  Greece, 
however,  protection  of  rights  to 
invalidity  benefits  is limited, as it is 
in  Ireland,  where  provisions  in  re 
spect of pensions do not fully  extend 
to  invalidity.  In  these  countries, 
much will depend on when invalidity 
occur,  in  relation  to  the  period  of 
caring, since eligibility conditions re 
late  to  specified  periods  of  insured 
work prior to the onset of incapacity 
— such as two years work in the past 
five. 

In Belgium, the qualifying period for 
insurance  is  relatively  short  for  pri 
vate  sector  employees  —  120  days 
work during the six months  prior to 
the incapacity — which most people 
who stop work because of responsi 
bilities  ought  to  be  able  to  comply 
with.  Those  who  do  not  satisfy  the 
conditions in full receive a lower rate 
of benefit. For pubhc servants, inva 
hdity benefits are part of general pen 
sion arrangements  and unpaid  leave 
for caring results in a lower benefit. 

In  Italy,  contributions  need  to  have 
been  paid  for five years at least and 
three years during the last five. Years 
working part-time count as full years, 
though they affect the level of benefit 

which  is  earnings  related.  The  re 
cently introduced rules giving credits 
for early child care will help, though 
these require that contributions  have 
been  paid  for  five  years.  Voluntary 
contributions are required from those 
caring  for  adults.  Despite  the  latest 
proposals  noted  above,  it  is  likely 
that for  many  years carers will con 
tinue to fail  to qualify  for  insurance 
benefits  and will be ehgible only for 
lower non-contributory allowances. 

In the UK, eligibility for a long-term 
Incapacity  Benefit  depends  on  hav 
ing  quahfied  for  short-term  benefit 
for  12  months.  Home  Responsi 
bilities Protection does not extend to 
benefits  for  incapacity,  though  re 
ceipt of Invalid Care Allowance does 
include  credits  for  Incapacity 
Benefit.  Those  not  qualifying  for 
Incapacity Benefit may be entitled to 
a  lower  non-contributory  allowance 
of  two-thirds  the  rate  of  the  main 
benefit,  where  they  have  become 
80% or more disabled after the age of 
20. 

Divorce and 
marriage breakdown 
It is also relevant here to examine 

what happens to the pension pro 
vision of carers when their marriage 
or cohabitation  breaks up. Although 
this  is  an  issue  for  both  men  and 
women,  in  practice,  it  is  still  pre 
dominantly  the  latter  whose  future 
pension  income  needs  to  be  pro 
tected. 

So  far  as  divorce  is  concerned,  a 
number of problems may arise for a 
woman  who  has  had  an  interrupted 

148 

working career because of caring re 
sponsibilities and particularly  as she 
can  no longer rely on rights derived 
from  her ex-husband: 

•  she  may  not  have  been  able  to 
build  a  full  independent  basic 
State  pension,  either  because  of 
the absence  of  safeguards  or be 
cause many of the provisions de 
scribed  above  are 
relatively 
recent  and  tend  not  to  be  retro 
spective, 

•  where 

the  main  pension 

is 
earnings-related,  her  period  off 
work  or  in  part-time  work  and 
lost  career  opportunities  may 
have reduced her pension entitle 
ment; 

•  her  supplementary  pension  will 
tend to be less for  the same rea 
sons  and  if  she  worked  part-
time,  she  may  not  have  been 
eligible at all. 

Unless  arrangements  are in place to 
overcome  these  problems  or  unless 
specific  steps were taken at the time 
of  the  divorce, the wife  may be  left 
with  a  pension  provision  which  is 
much  less  than  that  of  her  ex-
husband.  This  has  come  to  be  re 
garded  as  unjust  given  that  caring 
which is at the root of the problem is 
the responsability of both of them. 

Some  of  the  measures  that  can  be 
applied after  divorce are administra 
tive, in the sense they involve incor 
porating  appropriate  rules  into  the 
relevant schemes. Others involve in 
troducing  legislation  so  that  courts 
can take direct action to divide future 
pension rights (which is additional to 
dividing  current  assets,  which  may 

Chapter 7 -  Social protection and caring responsibilities 

not be sufficient  to provide a suitable 
pension  for  the  wife).  Existing 
measures in Member States in some 
cases benefit  one spouse without re 
ducing  the rights of the other, while 
in  others  pension  rights  are  shared 
between the divorcing couple. 

Protecting one spouse 
without affecting 
the other 

Divorce  does  not  affect  basic  State 
pensions if these are paid to all resi 
dent  nationals,  as  in  Netherlands, 
Denmark,  Finland  and  Sweden, 
though  in  the  latter,  the  rate  for  a 
couple  is  lower  than  for  two  single 
people. If a divorce takes place  after 
retirement, pensions are upgraded to 
two single rates six months later. 

In  some countries, there are rules in 
respect of widows pensions. In Aus 
tria, a divorced widow is entitled to a 
pension provided the marriage lasted 
10 years and the dead husband  paid 
maintenance, though this right ceases 
if  she  re-marries.  In  Luxembourg, 
a widow's pension is also payable to 
a  divorced  woman  who  has  not  re 
married, at a rate related to the num 
ber of years the couple lived together 
and the contributions paid. 

In the UK, there is provision for the 
contributions  made  by  the  husband 
(or wife) to provide a pension for the 
wife  (or  husband),  to  which  further 
contributions can be added  after  the 
divorce  so  as  to  build  a better  pen 
sion. In Ireland, where divorce is not 
legal,  past  contributions  affect  the 
Deserted Wives Allowance (see Box 
for  details  on  this  and  on  the  UK 
provisions). 

Dividing the pension 

A second type of provision involves 
splitting  the  retirement  or  widows 
pension  or  reallocating  rights  from 
one  partner  to  another,  either  by 
administrative  or  legal  action.  In 
France, the divorced wife is entitled 
to a widow's pension on the death of 
her former husband. If he re-married, 
the pension is shared in proportion to 
the  duration  of  each  marriage.  In 
Italy,  there  are  no  administrative 
regulations  and  the  courts  do  not 
have  the  power  to  split  pensions  at 
the time of divorce. Where a husband 
who has remarried dies, however, the 
courts may rule that the widow's pen 
sion be split between the two wives. 

Provisions for splitting the retirement 
pension  exist  in  several  Member 
States  (see  Box)  some  of  these  are 
administrative, others require action 
by  the  courts.  The  most  prominent 
country in this respect is Germany, in 
which  legislation  was  introduced  in 
1977  providing  for  a systematic  re 
allocation  of  all forms  of  retirement 
income  at the time of divorce. Sub 
stantive provisions also exist in Spain 
and Belgium. 

In general, there are fewer provisions 
relating to the splitting of supplemen 
tary  pensions  and  this  can  be  a 
serious loss to the divorced wife, es 
pecially in countries where the basic 
pension is relatively low. In the UK, 
where  this  was  the  case,  changes 
have  been  introduced  in  1995  in  a 
new Pensions Act which requires the 
courts to take pensions into account 
in  divorce  settlements.  Courts  are 
empowered  to  oblige  schemes  to 
make payments to a divorced spouse 
when the pension matures. The court 

149-

Chapter 7-  Social protection and caring responsibilities 

Two approaches to State pensions 
after divorce/separation 

UK: for the basic National Insurance pension, the divorced person (man or woman) 
can substitute their former spouse's contribution record for their own — either for 
all their working  life  up to divorce or for the duration  of  the marriage — if this 
improves  the amount  receivable. To  this can be added  contributions  made  after 
divorce to achieve a full  pension at the single flat-rate  (but no more). The benefit 
authorities use the most advantageous  method for calculation. Remarriage  before 
pensionable age (but not cohabitation)  removes this right. A woman  would  then 
have  to  rely  on  rights  derived  from  her new husband  or on her  own accrued 
independent rights, while a man must rely on his own pension rights. Remarriage 
after pensionable leaves both parties with their own single pension rights. 

Ireland: the 'Deserted Wife's Benefit'  is payable on the insurance record of either 
the husband or the wife,  whichever is most  advantageous. To qualify  for benefit, 
the woman must show that she has been deserted by her husband and that she has 
made appropriate efforts to obtain maintenance from him. A referendum on divorce 
is planned and proposals for the treatment of pensions and other rights are being 
prepared. 

order,  however,  ceases  to  apply  as 
soon as one of the parties concerned 
dies,  which  potentially  leaves  a di 
vorced  widow  in  much  the  same 
position  as before  the Act. Legisla 
tion  is  also  being  considered  in 
Luxembourg to divide the pension on 
divorce and enable the person divorc 
ing to build up a larger pension when 
they have had to stop work or work 
fewer.  In  Portugal,  there  are  some 
(implicit)  arrangements  for  sharing 
the  widow's  pension  between  the 
present  and  former  wife,  while  in 
Greece,  there  are no  special  provi 
sions, though the rise in the divorce 
rate has led to some  debate  on this 
issue. 

Cohabitation 
breakdown 

Cohabitation  is  an  important  and 
growing  feature  in  most  Member 
States, though it is more prevalent in 

some (such as Sweden and Denmark 
where  it  rose  from  the  1960s  on 
wards)  than  others  (Greece,  Italy, 
Spain, Portugal and Ireland) where it 
is only beginning to emerge in urban 
areas. 

Social  protection  issues  relating  to 
cohabitation  and  its  breakdown, 
however,  have  received  relatively 
little pohcy attention. The provisions 
for  safeguarding  social  protection 
rights  during  periods  of early  child 
care  and caring for adults, as far as 
they go, are usually open to cohabit 
ing  women  and  men on  the  same 
basis  as  married  couples.  On the 
other hand, cohabiting women whose 
partner  dies  and  who  have  been 
prevented  by caring  responsibilities 
from  building  adequate  independent 
rights, will not usually have derived 
rights to fall  back on. Where the re 
lationship  has broken  down,  similar 
problems  of unequal  pension  rights 
arise as with divorce. 

150-

There  are legal  provisions  on  pen 
sions  for cohabitees  in a number of 
Member  States. In the Netherlands, 
certain  categories  of  unmarried 
couples  have  equivalent  pension 
rights  to  those  who are married. In 
Sweden,  marriage  and long  periods 
of  cohabitation  have  equal  status 
under  law, the basic principle being 
that joint property is divided equally 
if  the cohabitation  breaks  down. In 
Finland,  married  and  cohabiting 
couples are also treated on a broadly 
equal basis. 

In a few other countries, the pension 
implications  of  cohabitation  break 
down are beginning to be recognised 
as  an issue,  though  not yet a  major 
one. In Belgium, the courts have, in 
some  cases,  obliged  ex-partners  to 
pay  compensation  to  partners  with 
caring responsibilities during the co 
habitation. In the UK, the trustees of 
occupational  pension  schemes  in 
some cases, exercise their discretion 
to pay lump sums to cohabitees or to 
divide  them  between  the  cohabitee 
and the legal widow, but there is no 
requirement  for  them  to  do  so. In 
most Member States, however, there 
appears to have been as yet little pub 
hc pohcy debate on this issue. 

Concluding remarks 
The need  to safeguard  the social 

protection  rights  of  people 
whose working  career is interrupted 
because they need to bring up child 
ren  or  care  for  disabled  or  infirm 
adults  is  now firmly  on  the  pohcy 
agenda  of  all  Member  States. 
Throughout  the Union, it is increas 
ingly recognised  that people need to 

be given a genuine chance of recon 
ciling  caring  responsibilities  with  a 
working career. Support services and 
facilities to assist with child care and 
with  the  care  of  the  disabled  or el 
derly who need looking after remain 
of  great  importance  in  order  for 
people with caring responsibilities to 
be able to pursue a working career, if 
they so wish, but people also need to 
have the option of giving  priority at 
times  to  personal  caring  without 
suffering  major  disadvantages  and 
effectively  paying  a  high  cost. 
Measures  to  safeguard  the  interests 
of  those  bringing  up  children  are 
generally  well  advanced,  but  some 
gaps  still  remain.  Safeguards  for 
those  caring  for  disabled/infirm 
adults are beginning to receive more 
attention, but much more remains to 
be done, as indicated in this chapter. 
Because  each  country's  social  pro 
tection  system  is  different,  the 
measures  taken  must  also  differ,  at 
least  in  detail, but  it  is  useful  to be 
aware  of  the  range  of  possibilities 
which are open. 

Although 'fall back' provisions exist 
in most Member  States  to ensure at 
least a minimum level of income for 
carers. Such provisions  are essential 
at the present stage of  pohcy  devel 
opment,  but  it  is  widely  accepted, 
given  the  importance  of  caring  re 
sponsibilities,  that  these  are  not 
enough and, in the long-term, further 
improvements need to be made. 

Chapter 7 -  Social protection and caring responsibilities 

Dividing pensions 
on divorce 

Germany: all pension rights acquired dur 
ing  marriage  are  added  and  the  marriage 
partner with more rights has to transfer part 
to the other so that both have the same level 
of benefit rights from the period of the mar 
riage. This system is applicable to the social 
insurance  pension,  occupational  pensions, 
the special system for civil servants and life 
insurance. 

Sweden: a recent proposed  revision of  the 
Marital  Code  requires  the  inclusion,  in 
whole or in part, of certain forms of pension 
from  private  insurance  in  the  division  of 
assets  between  husband  and  wife,  if  it  is 
unreasonable to exclude them in view ofthe 
duration  of  the  marriage  and  the  financial 
situation. If there is no voluntary agreement 
between husband and wife on this, the court 
may  make  the  necessary  order.  From 
January  1997,  married  couples  (bom  in 
1954 or after) will be able to divide annual 
pension credits between each other. 

Spain: courts have power to divide the pen 
sion at the time of the divorce, in favour of 
the partner with less or no pension rights. In 
the  case  of  the  widow's  pension,  where 
there  are  two  survivors  (a  divorced  and  a 
current wife) there is provision to share the 
pension between them proportionally to the 
time each" lived with the deceased husband. 

Belgium:  after  divorce,  pension  entitle 
ments  built  up  during  the  marriage  are 
shared for periods for which  the other per 
son  concerned  had  no  personal  pension 
entitlement so as to provide a 'divorce pen 
sion'  payable  when  retirement  age  is 
reached, so becoming  the personal  right of 
the partner (usually  the wife)  who was not 
working during part of the marriage. How 
ever,  it  is  not  paid  if  they  remarry.  These 
rules  do  not  apply  to  the  public  service 
scheme,  where  a  survivor's  pension  is 
payable on the death of the ex-husband  (or 
wife) except in cases of remarriage, though 
a  court  can  decide  that  a  retired  public 
servant  should  share  his  pension  with  his 
ex-wife. 

151 

Chapter 7- Social protection and caring responsibilities 

152 

Notes and Sources 

Notes and Sources 

This report has been prepared with the collaboration of Eurostat (Statistical Office  of the European Communities). 

The data on social protection expenditure and receipts presented and analysed in this report (in Chapter 3, in particular) 
are classified  according to the European System of Integrated Social Protection Statistics (ESSPROS), which breaks 
down expenditure into three main categories: social benefits, administration costs and other current expenditure. 

Social benefits consist of transfers, in cash or in kind, to households and individuals to relieve them of the burden of a 
number of distinct risks or needs, specifically: old age, survivors, disability, occupational accidents and diseases, family, 
maternity, sickness, unemployment, placement and vocational guidance, housing and miscellaneous. 

'Old age'  covers the provision of social protection against the risks linked to old age, such as the loss of an adequate 
income, the loss of independence in carrying out daily tasks, reduced participation  on social life, and so on.  Benefits 
covered are all pensions and allowances paid after  retirement or on account of old age, early retirement benefits  paid 
to older workers, goods and services specifically  required by the personal or social circumstances of the elderly. 

Survivors benefits are normally granted on the basis of a derived right, ie one derived from another person whose death 
is a condition for  granting  the benefit.  In some social protection systems however, this right is a direct one, with no 
connection between the benefit received and any benefit that the deceased would have been able to claim. All pensions, 
allowances and cash payments paid out to survivors, as well as the reimbursement of funeral  expenses are covered. 

'Disability' covers: 

•  pensions,  allowances  and  other  cash  benefits  granted  to  disabled  persons  whose  ability  to  work  and  earn  is 

impaired beyond a minimum level laid down by legislation; 

•  allowances  paid  to  the  disabled  when  they  undertake  work  adapted  to  their  condition,  normally  in  a  sheltered 

workshop, or undergo vocational training; 

•  specific medical care granted to disabled persons as a result of their condition; 

• 

functional,  occupational and social rehabilitation; 

•  other forms of assistance, such as home help. 

Occupational accidents and professional  diseases cover benefits  paid to those injured  or contracting illnesses at work 
and are excluded from  disabihty benefits  to the extent that they can be distinguished or are separately treated in social 
protection systems. 

153 

Notes  and  Sources 

'Family' covers benefits  which: 

•  provide financial  support to households for bringing up children, such as family  allowances; 

• 

financial assistance to people who support relatives other than children, notably spouses; 

•  social services specifically  designed to assist and protect the family,  such as the provision of accommodation and 
family  planning  services. All  supplements  to cash benefits  paid for other reasons  (disabihty,  old age and  so on) 
are also included. 

'Maternity'  covers maternity  allowances, childbirth allowances and health care associated with maternity. 

'Sickness' covers: 

•  medical  care  of  either  a  preventative  or  therapeutic  nature,  prevention  encompassing  medical  check-ups, 

vaccination campaigns, health education and so on. 

•  benefits  that  compensate  wholly  or  partially  for  the loss  of  earnings  during  temporary  inability  to work  due to 
sickness  or injury.  Medical  care  given to a disabled person or a victim  of an occupational  accident or disease is 
excluded and included as part of expenditure under these heads. 

'Unemployment'  covers all forms  of cash benefits  paid to the unemployed,  including, in addition  to  unemployment 
benefits  and  assistance,  redundancy  payments  and  special  assistance  to  various  groups  of  workers  in  cases  of 
interruption or temporary reduction in business activity. 

'Placement, vocational guidance and resettlement' covers vocational training allowances, removal grants, job-creation 
allowances and so on. 

'Housing'  covers payments made by general government to certain categories of household — especially those with 
limited means — to help them meet the costs of accommodation. 

'Miscellaneous' covers all benefits that can not be classified under other functions, in particular, benefits paid because 
of a lack of resources. Guaranteed minimum income schemes therefore come under this heading. 

EUROSTAT has recently carried out a revision of ESSPROS and has redefined  the functional  structure, by creating a 
new health care function  to include all medical  services and by combining occupational  accidents  and diseases with 
'disability' and 'maternity' with 'family'. In addition, placement, vocational guidance and resettlement will be renamed 
'promotion  of  employment'  and will  be excluded  from  the core part of ESSPROS  and  developed  as a separate, but 
parallel, set of statistics. 

For Germany, it is indicated on each graph whether data relate to the whole of Germany  (including the new Lander) 
or to the former West Germany; in most cases, when the figures refer to 1993 or 1994, they relate to the former, when 
they show changes over time or comparisons between years, they refer to the latter. 

PPS: relates to Purchasing Power Standard which is a measure of GDP reflecting the real purchasing power of a currency 
within the country concerned, providing a better indication than the exchange rate ofthe volume and structure of goods 

-154-

Notes and Sources 

and services and the relative level of GDP as compared with other Community countries. See Purchasing power Parities 
and GDP in real terms, Results 1985, Eurostat  1985, and National Accounts ESA, Aggregates, Eurostat annually. 

Chapters 1,2,6 and 7: The analysis in these chapters is based on information collected from a network of correspondents 
in the 15 Member States. 

Chapter 4: This chapter is based on Replacement rates, A transatlantic view, Central Planning Bureau, the Netherlands. 

Chapter 5: The data come from OECD, Health Data, Version #3.6 (1995). The analysis is based partly on OECD, The 
Reform  of Health Care Systems - A Review of Seventeen OECD Countries,  Health Policy Studies No. 5, Paris  1994, 
OECD, Internal Market  in the Making - Health Systems in Canada, Iceland and the United Kingdom, Health Policy 
Studies No. 6, Paris  1995 and A.Letourmy/M. Berthod-Wurmser, Effectiveness and regulation of health protection, in 
van Ginneken (éd.), Social Protection in Europe: financing and coverage, Geneva (ILO). 

Graph sources 

1  OECD, New Orientations for Social Pohcy, Paris, 1994, pp. 59-61 

2-3  International Social Survey Program,  1990 and  1992 

4  National sources 

5-6  Eurostat, Demographic statistics and latest forecasts  of population 

7-8  Eurostat, Community Labour Force Survey; ILO, Yearbook of Labour Statistics 

9 

Eurostat, comparable unemployment statistics (employment = active population minus unemployment) 

10  Eurostat, Community Labour Force Survey 

11-12 Eurostat, ESSPROS database, National Accounts 

13-15 Eurostat, ESSPROS database, National Accounts; national sources for Austria, Finland and Sweden 

16-17 Eurostat, Community Labour Force Survey 

18  Eurostat, ESSPROS database, Demographic statistics and Community Labour Force Survey 

19-20, 23, 25,27 Eurostat, Digest of statistics on social protection in Europe 

21-22, 26, 28 Eurostat, ESSPROS database and Demographic  statistics 

24  Eurostat, ESSPROS database, Community Labour Force Survey, SOCI database and National Accounts 

(see Table 6 for more details) 

29-30 Eurostat, ESSPROS database, National Accounts. 

31-35 Eurostat, Community Labour Force Survey 

36-63 Central Planning Bureau, the Netherlands 

64-65 OECD, Health Data and Eurostat, National Accounts 

66-68 Eurostat, Labour Force Survey; national sources for Austria, Finland and Sweden 

69-75 Eurostat, Community Labour Force Survey 

-155-

Notes and Sources 

Graph List 

1 

Social protection expenditure in relation to GDP, 1990 

2  Attitudes on the social role of government: basic income, 1992 

3  Attitudes on the social role of government: care for the sick, the elderly and the unemployed,  1990 

4  Retirement ages and number of years of contributions required for full pension by sex in Member States, 

January 1995 

'. 

5  Population 65+ as a ratio of population 15-64 in the Union, 1970-2025 (average projections) 

23 

24 

24 

39 

40 

6 

Population 65+ as a ratio of population 15-64 in Member States, 1995,2015 and 2025 (average projections).. 40 

7  Active population 15-24 as a ratio of total population 15-24 in Member States, 1980 and 1994 

8  Active population 50-64 as a ratio of total population 50-64 in Member States, 1980 and 1994 

9  Employment as a ratio of active population in Member States, 1980 and 1994 

10  Disabled people aged 45-54 and 55-64 in Member States, 1987 and 1994 

11  Social protection expenditure per head and in relation to GDP, 1993 

12  Social protection expenditure and GDP per head, 1993 

13  Growth in expenditure on social protection benefits per head, 1980-93 

14  Growth of social expenditure per head and growth of GDP per head, 1980-93 

15  Growth in expenditure on social protection benefits per head, 1980-85,1985-90 and 1990-93 

18  Expenditure on old-age pensions per person above retirement age in relation to GDP per head, 1980,1990 

and 1993 

, 

...... 

: 

'. 

19  Old-age pensions: the extent of means-testirifof basic pensions (first pillar), 1980,1988 and 1993 

20  Old-age pensions: importance and structure of supplementary pensions, 1980,1988 and 1993 

16  Inactive and retired men aged 55-59 as a proportion of the male population aged 55-59 in the Member 

States, 1985 and 1994 

17  Inactive and retired men aged 60-64 as a proportion of male population aged 60-64 in the Member States, 
'. 

1985 and 1994 

., 

21  Expenditure on sickness per resident in relation to GDP per head, 1980,1990 and 1993 

41 

41 

42 

54 

57 

58 

63 

63 

64 

66 

67 

67 

69 

69 

71 

22  Expenditure on invalidity benefit per person aged 15-64 in relation to GDP per head, 1980,1990 and 1993.... 71 

23  Invahdity: structure of benefits,  1980 and 1990 

24  Expendimre on unemployment per registered unemployed in relation to GDP per head, 1980, 1990 and 

1993 

25  Unemployment: structure of benefits,  1980 and 1992 

26  Expenditure on family benefit per child in relation to GDP per head,  1980,1990 and 1993 

27  Family: structure of benefits,  1980 and 1990 

28  Expenditure on maternity benefit per live birth in relation to GDP per head, 1980,1990 and 1993 

73 

73 

75 

77 

77 

78 

-156 

Notes and Sources 

29  Financing of social protection expenditure by source, 1980,1990,1993 

30  Employers' and protected person's contributions in relation to labour costs, 1980, 1990 and 1993 

31  Proportion of men and women unemployed in Member States, 1994 

32  Share of people under 25 and under 35 in total unemployment in Member States, 1994 

33  Proportion of unemployed out of work for 1  year or more, 1994 

34  Proportion of unemployed in receipt of unemployment benefit or assistance,  1994 

35  Proportion of unemployed and employed with various levels of educational attainment in Member States, 

1994 

36  Replacement rate at average earnings for a single person* 

37  Replacement rate at average earnings for a couple with 2 children* 

38-49 Replacement rates at varying lengths of time unemployed.in Member States 

50-61 Replacement rates at varying levels of earnings in Member States 

62  Replacement rate for 24 year old single person at 50% of average wage* 

63  Replacement rate for 24 year old married person with 2 children at 50% of average wage* '. 

64  Total and pubhc expenditure on health in relation to GDP, 1980,1990 and 1993 

65  Growth in health expenditure per head, 1980-85,1985-90 and 1990-93 

66  Self-employment in Member States, 1994 

67  Self-employed by sector of activity in Member States, 1994 

68  Part-time self-employed women in the Member States, 1994 

69  Self-employed without any employees in Member States, 1994 : 

70  Women aged 25-49 working part-time because they did not want a full time job, 1993 

71  Women aged 25-49 who are inactive because of family responsibilities,  1993 

72  Single women working full-time and part-time by age of youngest child,  1993 

73  Married women working full-time and part-time by age of youngest child,  1993 

74  Single women working full-time and part-time, 1993 

75  Married women working full-time and part-time, 1993 

Tables 

1  Current social protection expenditure,  1970-1993 

2  Growth of expenditure on social benefits at constant prices by function,  1980-85,  1985-90 and 1990-93 

(annual % change) 

3  Division of social protection expenditure by function,  1993 

78 

80 

84 

85 

86 

86 

87 

88 

89 

92-93 

96-97 

98 

98 

107 

107 

117 

117 

118 

118 

142 

142 

142 

142 

142 

142 

60 

62 

65 

157 

Notes and Sources 

4  Decomposition of expenditure on old-age pensions 

5  Decomposition of expenditure on invalidity, disabihty, occupational accidents and diseases 

6  Decomposition of expenditure on unemployment benefits 

7  Decomposition of expenditure on family allowances 

8  Decomposition of expenditure on maternity benefits 

9  Effect of housing costs at different rent levels on replacement 

rates 

10  Distribution of usual net monthly earnings in the UK 

11  Social insurance cover for the self-employed in the European Union 

12  Maternity benefits (1 January 1995) 

70 

72 

74 

76 

80 

100 

119 

120 

136 

158 

ISSN 0254-1475 

COM(95) 457  final 

DOCUMENTS 

EN 

05 

Catalogue number  :  CB-CO-95-557-EN-C 

ISBN 92-77-95264-4 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg