Communication from the Commission - Modernising and improving social protection in the European Union
Date: 1997-03-12
Institutions: European Commission
Subjects: European social policy, employment policy, social change, social security, social-security harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.03.1997 
COM(97) 102  final 

COMMUNICATION FROM THE COMMISSION 

MODERNISING AND IMPROVING SOCIAL PROTECTION 
IN THE EUROPEAN UNION 

TABLE OF CONTENTS 

EXECUTIVE SUMMARY 

1.  A EUROPEAN DEBATE ABOUT THE FUTURE OF SOCIAL PROTECTION 

1.1 The contributions to the  debate 

Ml 

1 

1 

1.2  The challenge: The need to  modernise and improve  European social protection systems  2 

1.2.1 The changing nature of work 

1.2.2 The ageing of the population  in Europe 

1.2.3 The new gender  balance 

1.2.4 The need to  reform the co-ordination of  national social security schemes 

2.  THE KEY ISSUES FOR MODERNISATION 

2.1 Social protection  as a productive factor 

2.2  Making  social protection  more employment-friendly 

2.2.1 Making tax and social benefit systems more employment-friendly 

2.2.2 Turning unemployment  insurance into an employability insurance 

2.2.3 The funding  arrangements for  social protection need to  be thought  afresh 

2.2.4 Implementing flexible systems for  managing the transition from work to  retirement 

2.2.5 Social protection to  promote  inclusion 

2.3  Adapting  social protection to the demographic  ageing of  European societies 

2.3.1 Making public pension schemes sustainable 

2.3.2 Providing a secure environment for supplementary  pension schemes 

2.3.3 Meeting new care needs for  older people 

2.3.4 Improving health services 

2.4 Adapting  social protection to the change in the  gender  balance: 

towards  an individualisation  of  rights 

2.5  Improving  social protection for  people  moving within the Union 

2 

3 

3 

4 

5 

5 

5 

5 

6 

7 

8 

9 

10 

10 

12 

13 

13 

15 

16 

3.  SUPPORTING THE ADAPTATION PROCESS THROUGH ACTION AT EUROPEAN LEVEL 

18 

Appendix 

19 

M 

EXECUTIVE SUMMARY 

Publicly  funded  social  protection  systems  provide  the  bulk  of  expenditure  on  social  support,  health 
care  and  pensions  in  the  Member  States  of  the  European  Union. They  have  played  a  fundamental 
role  in  ensuring  income  redistribution  and  cohesion,  and  in  maintaining  political  stability  and  eco 
nomic  progress  over  the  life  of  the  Union. 

These systems now  account for  28 per cent of total  EU GDP, although that  proportion varies  between 
Member  States  - from  16 to  35  per  cent  - depending  on  differences  in  levels  of  provision  and  diffe 
rences  in the  balance  of  public  and  private  funding. 

The objectives and the financial  and operational structures of  most systems were established  decades 
ago. While  the  basic  needs to  which  they  respond  remain, the  economic  and social conditions  under 
which  they  operate  have  changed,  and  will  continue  to  do  so.  In  order  to  ensure  their  continued 
effectiveness,  and  in  order  to  meet  evolving  needs, there  is  an  urgent  need  for  modernisation.  In 
particular,  social  protection  systems  need to  be  adapted  to: 

• 

the  changing  nature  of  work,  where  a  new  interplay  is called  for  between  policies  designed  to 
improve  flexibility  and  those  designed to  provide  security; 

•  change  in  the  gender  balance  in  working  life, where  equal  opportunities  bring  new  issues  and 

• 

• 

requirements  in terms  of  social  protection; 
the  ageing  of  the  population  in  Europe, where the  rapid  growth  of  the  dependent  population  is 
creating  new  needs  as well  as forcing  the  pace of  pension  reform; 
the  need  to  reform  the  co-ordination  of  national  social  security  schemes  for  people  moving 
within  the  EU. 

To support  the  Member  States  in meeting these challenges, the  Commission  presented, at the  end  of 
1995, a 'Framework  for  a European  Debate  on the  Future  of  Social Protection' that  triggered  a  lively 
and  interactive  discussion. It  is now  time  to  take  stock. This Communication  has a dual  purpose: 

• 

• 

to  indicate  the  routes  along  which  modernisation  can  be  pursued 

to  present  some  specific  proposals  for  European  level  support. 

This approach is built on the common understanding that 

•  Each Member State is responsible for the organisation and financing of its own social protection system. 

•  The  EU is responsible  for  the  co-ordination  of  national  social security  schemes  in cases where  citi 

zens  exercise their  rights  of  free  movement  within  the  Union. 

•  The  EU also  serves  as a forum  for  promoting  better  mutual  understanding  of  long-term  perspec 

tives,  and  for  identifying  common  challenges  facing  Member  States. 

In  the  light  of  this,  the  Commission  proposes  the  following  agenda  of  issues  for  further  analysis, 
debate  and  action: 

1.  Social protection as a productive factor: Building  on the discussions which took place at the  Dutch 
Presidency  Conference  on  «Social  Policy  and  Economic  Performance»  held  in  January  1997,  the 
Commission will study during  1997 the overall costs and benefits of social protection  systems - in  par 
ticular,  their  impact  on  social  cohesion,  political  stability  and  economic  progress. 

2.  M o re  employment-friendly  social  protection  systems:  As  mandated  by  the  Dublin 
European  Council, the  Commission  will,  in  its contribution  to  the  1997 Joint  Employment  Report, 
focus  on  how  social  protection 
active  employment  policy.  This  will  be  based  on  the  examination  of  best  practices  in  the  field  of 
active  policies. 

reforms  and  taxation  can  be  developed  as an  integral  part  of  an 

The  Commission  will  examine  how  reactive  unemployment 
active  employability 

insurance. 

insurance  can be  turned  into  a  pro 

I 

wi 

The  Commission  will  deepen  the  analysis  of  measures  taken  to  reduce  non-wage  biour 
costs as 
a contribution  to  the  interim  report  to  be presented  at the  Amsterdam  European  Council  in  June 
1997 and to  the  Joint  Employment  Report  to  be  prepared  for  the  Luxembourg  European  Council 
in  December  1997. The  effect  of  taxation  on  employment  will  also  be  an  important  part  of  the 
discussion  in the  new  Taxation  Policy  Group  as endorsed  by the  Dublin  European  Council. 

The  Commission  will  present  the  potential  and  problems  of  a  gradual 
in the  Employment  in  Europe  report, to  be published  in September  1997 and will  consider  appro 
priate  follow-up. 

transition 

retirement 

to 

In  the  first  half  of  1997,  the  Commission  will  present  a  Communication  on  the  promotion 
of 
social  inclusion  and, in the  second  half  of  1997, a report  assessing the  mechanisms  of  guaranteed 
minimum  income  schemes  in the  social  protection  systems  of  the  Member  States. 

the  population 

3.  Adapting  social  protection  to  the  demographic  ageing  of  European  societies: The  ageing 
in  the  Member  States  is  putting  pension  systems  under  considerable 
of 
pressure. The  Commission  will  develop  methods  for  forecasting  pension  expenditure,  and  assess 
the  elements  of  reform  which  seem to  be  most  adapted  to  ensuring  the  sustainability  of  public 
pension  schemes  while  preserving  their  core  aspects  of  solidarity. 

In the  first  half  of  1997, the  Commission will  also issue a Green  Paper  on supplementary  pensions, 
aimed  at  identifying  the  main  elements  of  a  framework  at  European  level  in  order  to  provide  a 
secure  environment  for  supplementary  pension  schemes. 

In  order  to  meet  the  long  term  needs  of  dependent  older  people,  Member  States  are  underta 
king  a number  of  reforms. The  Commission will  study  ongoing  reforms  and  provide  the  Member 
States w i th  an  overview. 

In  order  to  improve 
the  efficiency  and  cost  effectiveness  of  health  systems, the  Commission  will, 
in  1997,  carry  out  an  assessment  of  the  potential  impact  of  prevention  on  the  reduction  of  health 
care costs and clarify to what  extent  and under what  conditions,  introducing  market  forces  within 
health  care  systems  can  help  save  costs while  fostering  a  better  quality  of  services  and  ensuring 
access for  all  to  health  care. 

4.  Adapting  social  protection  to  the  new  gender  balance:  The  changing  gender  balance 
requires  both  new  arrangements 
life,  and  new 
initiatives  to  strengthen  individual  rights. At  the  end  of  1997, the  Commission  will  present  initia 
tives  aimed  at  setting  higher  standards  for  the  care  of  children  and  other  dependants.  The  1997 
Annual  Report  on  Equal  Opportunities  will  assess  the  attempts  made  by  the  Member  States  to 
make  progress 

towards  individualisation  without  jeopardising  the  economic  situation  of  women. 

reconciling  w o r k i ng  and 

family 

for 

5.  Improving  social  protection  for  people  moving  w i t h in  the  Union:  The  Commission  will 
for  migrant  wor 

develop  a strategy  to  reform  and  simplify  the  co-ordination  of  social  protection 
kers  and  to  find  specific  solutions  to  cope  with  the  cross-border  problems  in  relation  to  occupa 
tional  schemes,  including,  as a first  step,  during  1997, a proposal  for  a directive  tackling  some  of 
these  problems. 

The  Commission  invites  all  Member  States  and  the  European  institutions  to  engage  in  a conti 
nuing  dialogue  on  strategies  for  the  modernisation  of  social  protection  systems, as presented  in  this 
Communication.  The  presentation  of  the  Joint  Employment  Report  for  the  Luxembourg  European 
Council  in  December  1997 will  offer  an  appropriate  opportunity  to  scrutinise  this  strategy. 

The  Commission  also  invites  the  social  partners,  at  all  appropriate  levels,  to  contribute  to  this 
work.  The  Social  Dialogue  Committee  and  the  Standing  Committee  for  Employment  are  invited  to 
play  a leading  role. The  Commission  intends  to  put  social  protection  reform  at  the  top  of  the  agen 
da  for  the  civil  dialogue  at  the  1998  European  Social  Policy  Forum,  which  will  involve  the 
Member  States, the  social  partners,  NGOs, as well  as the  European  institutions. 

Finally,  the  Social  Protection 
in  Europe  report,  to  be  published  at  the  end  of  1997, will  bring  toge 
ther  more  evidence  and  analysis  on  recent  developments  in  Member  States, as a contribution  to  the 
process  of  joint  reflection. 

AL 

1.  A EUROPEAN DEBATE ABOUT 

THE FUTURE OF SOCIAL PROTECTION 

Maintaining  a  high  level  of  employment  and 
social  protection  is one  of  the  Community's  fun 
damental  objectives  and  is  explicitly  included  in 
the  tasks  listed  in  Article  2  of  the  Treaty  on 
European  Union.  Social  protection  represents  a 
fundamental  component  and  a  distinguishing 
feature  of  the  European  model  of  society. 

The  Council  adopted 
in  July  1992  a  Recom 
mendation  on  the  convergence  of  social  protec 
tion  objectives  and  policies1  .  The  aim  of  this 
convergence  strategy  was  to  fix  common  objec 
tives to  guide  Member  States' policies  in order  to 
permit  the  co-existence  of  different  national 
social  protection  systems  and  to  enable  them  to 
progress  in  harmony  towards  the  fundamental 
objectives  of  the  Community.  The  strategy  of 
bringing  about  a  convergence  of  policies  while 
respecting  the  autonomy  of  systems  is  a  direct 
application  of  the  principle  of  subsidiarity. 

Each Member  State  is responsible  for  the  organi 
sation  and  financing  of  its  own  social  protection 
system.  However,  given  the  common  challenges 
facing  Member  States  in this  area, there  is consi 
issues  at 
derable  value 
in  discussing 
European 
the  European 
level.  Throughout 
Union,  significant  reforms  of  social  protection 
systems  are  now  under  consideration  and,  in  a 
number  of  cases,  are  being  introduced  in  res 
ponse  to  rapidly  changing  social  and  economic 
conditions2. 

these 

In the  light  of  this, the  Commission  presented  at 
the  end  of  1995  a  "Framework  for  a  European 
Debate  on the  Future  of  Social  Protection3"  . The 
Commission  proposed  that  the  Community  insti 
tutions  and  the  Member  States  should  examine 
jointly  the  measures  to  be  taken  in  order  to 
make  social  protection  more  employment-
friendly  and  more  efficient.  The  social  partners 
to 
and  all  concerned  have  been  called  upon 
make  their  contributions.  The  European  Par 
liament  and  the  Economic  and  Social  Committee 
have  also  been  associated  in  this  reflection  and 
delivered  opinions.  The  Confidence  Pact 
for 
Employment  has  highlighted  the  importance  of 

this  debate". 

1.1  The  contributions 
to the  debate 

The  Framework  for  Debate5 triggered  an  extreme 
ly lively and interactive discussion throughout  1996 
in the  form  of  written  exchanges, conferences,  ad 
hoc  meetings  with  scientific  experts  and  policy 
makers  .  A  summary  of  the  contributions  from 
Member  States, the  European  institutions  and  the 
is being  published  separately  as a 
social  partners 
Commission  services  working  document.  There  is 
much common ground  in these  reactions: 

•  The European social model is valued and should 
be  consolidated.  This  model  is  based  both  on 
common  values  and  the  understanding  that 
social policy and economic performance are  not 
contradictory  but  mutually  reinforcing.  Highly 
developed social protection systems are a major 
component  of  this social model. 

•  To preserve  social protection  implies  adapting 
European systems in their  various forms,  since 
the  context  in  which  they  were  established 
has  changed.  The  challenge  is to  align  social 
protection 
the  new  situation  w i t h o ut 
abandoning  its  core  values  of  solidarity  and 
cohesion. 

to 

•  This task  is complex  and the  means to  achieve 
it  are  uncertain.  Each  Member  State  has  to 
find  solutions that  are adapted to  its own  par 
ticular  system. Member  States should  continue 
to  pursue  the  convergence  strategy  as  outli 
ned  in the  1992 Council  Recommendation. 

•  The  means  of  adapting  social  protection  sys 
tems  have  to  be  in  line  w i th  the  process  of 
European  integration,  and  in  particular  the 
single  market,  moves  towards  EMU  and  pro 
gress towards  European  citizenship. 

•  The  ability  to 

learn  from  each  other  and 
adapt  quickly  is  a  key  factor  for  success.  The 
European  Union  should  act  as  a  catalyst  to 
enable  Member  States to  learn from  one  ano 
ther's  experience  and  adapt  to  changed  cir 
cumstances. 

Council Recommendation 92/442/EEC of 27 July 1992 on the convergence of social protection  objectives and policies, 
OJ L  245 of 26 August  1992. 
See reports  "Social protection  in Europe • 1993" (COM(93) 531) and  "Social Protection in Europe -  1995" (COM(95) 457). 
Communication from  the  Commission  COM(95) 466 of 31 October 1995  "The Future of Social Protection: A Framework 
for  a European Debate". 
Action  for  Employment in Europe: a Confidence Pact,  SEC(96)1093 of  6.5.1996,  in particular  points  3.11. and 3.16. 
In November 1996,  the French  delegation  submitted  to  the Council a specific statement  in  favour  of  this initiative,  as a 
follow-up  of  the  Turin European Council and the French memorandum on the European social model. 

1 

il 

Drawing  on  the  results  of  this  joint  reflection 
process, the  Commission  undertook  to  take  stock 
of  the  reactions  to  the  debate  it  had  launched 
and  to  propose  appropriate  follow-up.  The  pur 
pose  of  this  communication  is t w o f o l d: 

- 

- 

to  map  out  some  avenues 
improving 
European  social  protection  systems  on  the 
basis  of  the  contributions  to  this  debate  and 
identify  key  actions  in  each  field; 

for 

to  present  some  proposals 
concerned  in  this  adaptation  process. 

to 

involve  all 

1.2  The challenge: The  need  to 
modernise  and  improve 
European  social  protection 
systems 

Social  protection  expenditure  now  accounts  for 
28  per  cent  of  the  European  Union's  GDP,  w i th 
national  variations  that  range  f r om  16 to  35  per 
cent.  It plays  a fundamental  role  in  income  redis 
tribution  and  social  cohesion,  political  stability 
and  economic  progress.  The  more  working  life 
becomes  flexible,  the  more  citizens  will  demand 
security  f r om 
their  social  protection  systems. 
Good  social  protection  and  successful  business 
are  therefore  mutually  supporting. 

This  view  on  social  protection  is  underpinned  by 
detailed 
international  comparison,  suggesting 
that,  when  account  is taken  of  private  as well  as 
public  spending,  total  household  expenditure  on 
social  protection,  health  care  and  pensions  is  at 
relatively  similar  levels  across  a  range  of  develo 
ped,  industrialised  countries6.  Moreover,  Member 
States with  a strong  safety  net  often  perform  bet 
ter  in terms  of  GDP per  capita  or  external  balance 
than  Member  States with  a weaker  safety  net.  On 
the  other  hand,  only  countries  w i th  a  sound  eco 
nomy  are  able  to  maintain  a  high  level  of  social 
protection.  For  this  reason,  the  completion  and 
reinforcement  of  the  European  single  market  will 
become  increasingly  important. 

It  is  important  to  realise  that  the  reasons  for  a 
reform  of  social  protection  systems is not  compe 
tition  from  third  countries.  Free  trade  and  glo 
balisation  should  not  be  seen  as a threat  to  the 
European  social  model. 

The  reasons  for  a  reform  are  internal.  The  real 
threat  against  the  European  social  model  would 
be  our  inability  to  cope  w i th  the  existing  pro 

blems.  First  of  all,  there  is  an  urgent  need  to 
consolidate  public 
in  most  Member 
finances 
States  in  order  to  avoid  growing  deficits  and 
heavy  debt  services  in  the  future,  crowding  out 
expenditure  on  social  protection.  This  is  not  in 
contradiction  w i th  a  high  degree  of  social  pro 
tection  nor  does it dismantle the  principle  of  soli 
darity.  On  the  contrary,  it  strengthens  solidarity 
between  different  generations,  since  it  reduces 
the  burden  on  future  generations. 

Secondly,  the  system  needs  to  be  reformed  in 
order  to  promote  economic  and  social  integra 
tion.  One  key  function  of  social  protection  sys 
tems  is to  provide  the  categories  of  people  who 
income  security. 
cannot  w o rk  w i th  some 
However, 
to 
this  has  simultaneously 
deter  from  economic  integration.  Social  protec 
tion  systems  have  been  both  a  success,  in  terms 
of  alleviating  poverty,  and  a  failure,  in  terms  of 
promoting  full  integration  w i t h in  society. 

tended 

The  magnitude  of  transfers  necessary  to  pay 
income  compensation  for  people  out  of  work  is 
growing  fast  and  leads  to  higher  levies  on  wor 
kers'  income  while  the  people  concerned  w o u ld 
prefer  to  be  offered  new  opportunities  to  take 
an  active  part  in  economic  life. 

These  problems  -  big  public  deficits  and  the  lack 
of  success in social integration  - are the  real  threat 
to  the  European  social  model.  Their  seriousness 
can,  to  a  large  extent,  be  explained  by 
the 
changes  in  the  basic  conditions  for  social  protec 
tion.  Four  dominant  factors  underpin  the  reform 
of  social  protection  systems: the  changing  nature 
of  work,  the  ageing  of  the  European  population, 
the  new  gender  balance  and  the  need  to  reform 
the  coordination  of  national  social  security 
schemes for  people  moving  within  the  EU. 

1.2.1  The changing nature of work 

The  patterns  of  working  life  on  which  income 
maintenance  programmes  were  built  are  under 
going  fundamental  change.  New  jobs  are  emer 
ging  in the  service  sector,  while  jobs  in  manufac 
turing  industry  are  decreasing.  Skill  structures 
are  also  changing:  we  are  moving  from  simple, 
low-skilled  jobs  to  jobs  demanding  new,  broader 
and  higher  skills.  The  nature  of  employment  is 
changing:  there  are  more  part-time  and  t e m p o 
rary  jobs  than  ever  before.  Finally,  our  w o r k i ng 
life  has  become  shorter:  we  spend  more  time  in 
education  and  training  and  start  w o r k i ng  later, 
but  we  leave  working  life  earlier  and  the  avera 
ge  actual  pension  age  is below  60. 

See for  instance G. Esping-Andersen:  "The Double Problem of  Co-ordination  in  Contemporary  Welfare  States",  paper 
prepared  for  the  Conference on Social Policy and Economic Performance, Amsterdam,  23-25 January 1997. 

These changes are analysed in  the  White Paper on Education and Training: «Teaching and Learning:  towards  a Learning 
Society».  COM (95) 590, which  developed the  concept of  life-long  learning,  which  was equally  the  theme  of  the 
European Year of  1996.  These changes are also highlighted 
Society:  People First."  COM (96)389. Bulletin  of  the  European Union - Supplement 3196. Furthermore,  the Commission 
is preparing  a Green Paper on  "Partnership for  a New Organisation  of  Work"  to  be published  in 1997. 

in  the  Green Paper "Living  and  Working  in  the 

Information 

New  forms  of  work  organisation  are  emerging. 
The  20th  century  linear  career  concept  will  gra 
dually  be replaced by a new  pattern  of varied  and 
variable  working  life.  This  implies  that,  at  any 
given  moment,  an  individual  could  have  several 
paid  activities 
in  progress.  Most  workers  will 
experience  non-working  spells  during  their  wor 
king  life. These will  be part  of  a regular  transition 
from  one  activity  to  the  other,  during  which  they 
will  adapt  their  skills  or  prepare  for  a new  j o b7. 

The main  lesson from the  last 20 years is that  inco 
me  maintenance  programmes  will  not  provide 
adequate  security.  The  huge  resources  in 
the 
benefit  systems  need  to  be  made  more  employ 
ment  oriented.  Unemployment  benefit  schemes 
must become  more effective: increasing  incentives 
for the  unemployed to  look for  a job  (see 2.2.1) by 
giving  them  opportunities 
to  upgrade  their  skills, 
so  as to  create  progressively  a  real  employability 
insurance  instead of  a simple unemployment  com 
pensation  (see 2.2.2).  As far  as possible, the  finan 
cing  structures  of  social  protection  systems  should 
be  reformed  to  allow  for  efficient 
reductions  of 
non-wage 
labour  costs, especially  w i th  respect  to 
tran 
low wages  (see 2.2.3). A  gradual  and  flexible 
sition  to  retirement  needs to  be fostered  in  order 
to  maintain  opportunities  for  older  workers  to 
stay  in  the  labour  market  (see 2.2.4).  At  the  same 
time,  the  role  of  social  protection  in  promoting 
social cohesion  must  be  maintained, and  Member 
States are also looking  at ways of  integrating  eve 
ryone  fully  into  society,  including those  categories 
threatened  by  exclusion  (see  2.2.5). 

1.2.2  The  ageing  of  the  population 

in  Europe 

Social  protection  is also  confronted  with  the  chal 
lenge of  ageing  European societies. Between  1995 
and 2025, the  number  of  people aged 60 and  over, 
which  amounted  to  77 million  in  1995, will  increa 
se  by  at  least  29  million  and  at  most,  44  million. 
The  proportion  of  older  people  in the  total  popu 
lation will  rise from  21 to  approximately  30%. The 
transfers  from  workers  to  pensioners 
through 
state  pension  schemes  are  running  at  such  a  level 
that  they  are  in  danger  of  becoming  unsustai 
nable. A  number  of  Member  States have begun  to 
initiate  reforms  of  their  pension  schemes (see 2.3.1 
and  2.3.2).  The  ever-growing  numbers  of  very  old 
persons  will  lead  to  a  rising  demand  for  health 
care  and  social  services,  and  Member  States  will 
find  it  difficult  to  finance  increasing  health  care 
expenditure.  The  search  for  efficiency 
in  health 
care  systems  will  become  a priority 
(see 2.3.4).  At 
the  same time,  the  care needs  of  dependent  older 
people  (see 2.3.3) are  growing  and  lead to  a  new 
kind  of  demand  on  social  protection  systems,  the 
satisfaction  of  which  has  a  great  employment 
potential.  The  challenge  is  to  reconcile  the  satis 
faction  of  these new care needs with  the  imperati 
ve of  containing  the  relevant  care costs. 

Population growth between 1995 and 2015 
for three age groups 
European Union (15) 

People (in millions) 

0-19 

20-59 

60+ 

Source: EUROSTAT 

1.2.3  The  new  gender  balance 

the 

towards  equal  opportunities 

for 
The  move 
women  and  men  has a strong  impact  on  working 
life  and  on  society  as a whole.  Women's  employ 
ment  has  increased  in  the  Union  f r om  46  to  61 
last  20  years,  while  men's 
million  over 
employment  has remained  remarkably  stable  (86 
million). The trend  of  increased female  participa 
tion  in  employment  will  continue  during 
the 
years  to  come  and  will  make  a  valuable  contri 
bution  to  countering  an  impact  of  the  ageing 
workforce. 

Activity  rates of  men and women in the Union , 
1970 to 1995 European  Union (15) 

%  OF POPULATION BY SEX AGED 15-64 

•  Men 

Women 

Source: EUROSTAT 

The  new  gender  balance  renders  the  traditional 
concept  of  social protection,  based on  a family  in 

Co-ordination  is a dynamic  process reflecting  the 
evolution  of  the  national  schemes  of  social  pro 
tection  and changing  requirements. There  is  now 
a  need  to  simplify  and  reform  the  co-ordination 
system  to  adapt  it  to  new  needs  derived  from 
new  forms  of  social  protection  and  patterns  of 
migration.  Migration  consists 
increasingly  of 
highly  skilled workers10, for  whom  supplementa 
ry  schemes  of  social  protection,  lacking  any  co 
ordination  at  European  level,  are  of  particular 
importance  (see  2.5). 

which  the  husband  is the  breadwinner  while  the 
wife  has  no  paid  work,  outdated.  There  is  a 
conflict  between  this  new  balance  and the  tradi 
tional  family  policy  that  expects  women  to  take 
the  whole  responsibility  for  housework  and  child 
and  elder  care  at  home. 

The  low  and  falling  birth  rates  in  many  Member 
States  are  strong  signals  of  the  need  to  rethink 
social  protection  systems.  The  challenge 
for 
social  protection  is  not  only  to  achieve  equal 
treatment  for  women  and  men,  but  also  to  find 
ways  of  individualising  rights  w i t h o ut  penalising 
women  w ho  have  not  taken  up  paid  employ 
ment  in  order  to  look  after  their  families,  as well 
as  new  arrangements  to  facilitate  care  for  chil 
dren  and  for  older  people  (see  2.4). 

Total fertility rate, 1960 -1995 
European Union (15) 

1960  1965  1970 

1975  1980  1985  1990  1995 

Source: EUROSTAT 

1.2.4  The need to reform 

the co-ordination of national 
social security schemes 

Since  19598,  the  Union  has  had  a  European  sys 
tem  for  co-ordinating  the  social security  schemes 
of  Member  States  which  protects  the  rights  of 
people  moving  w i t h in  the  Union.  This  means 
that  the  social  protection  of  a considerable  num 
ber  of  people  depends,  wholly  or  partially,  on  a 
well  functioning  co-ordination  system9. 

Regulations  3  &  4  co-ordinating 
These  were  replaced  on  1 October  1972  by  Regulations  1408/71  and  574172 which  are  still  in  force  and  have  since  been  amended 
many  times.  These  Regulations  have  been  updated 

the  social  security  schemes  of  the  then  six  Member  States,  came  into  force  on  1 January  1959. 

in  OJ L28  of  30  January  1997. 

In  fact,  it  determines 
Member  State  but  also  for  the  millions  of  European  citizens  who  have  in  the  past,  during  a period  of  their  career,  been  working 
in  more  than  one  Member  State,  or  who  will  do  so  in  the  future.  The  successive  enlargements  of  the  Union  have  increased 
numbers  considerably  and  so  will  any  future  enlargement 

the  social  security  rights  not  only  for  the  2.8  million  EU nationals  who  are  at  present  working 

(EUROSTAT,  Labour  Force  Survey,  1995). 

in  another 

these 

10 

"Social  Security  in  Europe  - Equality  between  nationals  and  non-nationals" 
migrant  workers.  Oporto,  November  1994. 

First  European  Conference  on  social  security 

for 

2  THE KEY ISSUES FOR MODERNISATION 

2.1  Social protection as 
a  productive  factor 

2.2  Making social  protection 

more  employment-friendly 

The capacity to create jobs for  an increasing part 
of the working population, thereby reducing the 
dependency  ratio, is of fundamental  importance 
for the sustainability  of the social protection sys 
tems. The creation  of jobs and the fight  against 
unemployment  is  the  highest  priority  of  the 
European  Union,  as recently  emphasised  by  the 
Dublin  European Council. 

The reforms of  social protection  systems have to 
be seen in the  context  of the  European  employ 
ment  strategy.  The  "Broad  Economic  Policy 
Guidelines",  agreed  at  the  Florence  European 
Council, call for  a restructuring  of  public expen 
diture  in order to  make more room for  expendi 
ture  that  can promote  employment,  including a 
redistribution  from  passive to  active labour  mar 
ket  policies  and  investment  in  human  resources. 
A  central  question  arising  from  the  efforts  to 
modernise  social  protection  systems  is  how  to 
combine  obligations  and  opportunities.  More 
opportunities  for  individuals  to  get  into  or  go 
back  to  work  is  a  prerequisite  for  all  the  mea 
sures that  put  more  responsibility  on the  indivi 
dual through cuts in social security  provisions. 

The  links  between  social  policy  and  economic 
performance  have  recently  been  highlighted  by 
the  Dutch  Presidency  at  a  conference  in  Ams 
terdam'1  . The  Commission  has  gathered  infor 
mation  and  initiated further  studies on the  links 
between  social  and  economic  policies.  The 
ongoing work  will  be brought  together  in order 
to  stimulate the debate on the  mutually  reinfor 
cing effects of good social and economic policies. 

Objective: 

Increase awareness of social policy 
as a productive  factor. 

Key action:  Building  on  the  discussions  which 
took place at the Dutch Presidency 
Conference  on  «Social  Policy  and 
Economic Performance», the Com 
mission will  study during  1997 the 
overall costs and benefits of social 
protection  systems  -  in  particular, 
their  impact  on  social  cohesion, 
political  stability  and  economic 
progress. 

Today,  employment  is the  first  priority  and  the 
greatest  challenge  for  the  European  Union. 
Building on the Confidence Pact for  Employment, 
and particularly the plea to  speed up the  reform 
of  employment  systems, the  'Dublin  Declaration 
on  Employment'  adopted  at  the  European 
Council  on  13-14  December  1996  stressed  the 
need for taxation and social protection systems to 
be  more  employment-friendly.  Furthermore,  the 
Council  Resolution  of  2  December  1996  on  the 
role  of  social  protection  systems  in  the  fight 
against  unemployment12  specified  the  way  this 
could be achieved and urged the Commission and 
the  Member  States,  working  in  partnership,  to 
strengthen  the  exchange  of  information  and 
experience  and  to  deepen  the  level  of  joint 
reflection  among  Member  States  on  techniques 
and  policies  aimed  at  making  social  protection 
more conducive to  employment. 

It is becoming increasingly clear that as the  natu 
re of  work  changes,  the span of social  protection 
systems must provide  more stability  and security. 
In  tomorrow's  working  world, the  balance  bet 
ween flexibility  and security  must  offer  recogni 
tion  and régularisation of  new forms of  employ 
ment  relationships.  However,  it  must  also  offer 
the  security  which  can  result  from  greater 
influence  over  one's  work  and  from  having  the 
scope  and  opportunity  to  enhance  skills  and 
employability. 

In order to  make social protection  more  employ 
ment-friendly,  the  following  issues  should  be 
addressed: 

2.2.1  Making tax  and social  benefit 

systems  more 
employment-friendly 

Taxation  and  social  protection  systems  need  to 
be made more employment-friendly,  by ensuring 
that they  provide clear incentives for  job-seekers 
to  take jobs  or  participate  in  other  employment 
enhancing  activities, while  still  providing  a safe 
ty  net for  the jobless. Improving the  articulation 
between tax  and social  benefit  systems  is there 
fore  essential.  Dependency  on  social  protection 
is likely to grow for as long as the net gain expec 
ted from  return to work  is small. 

11  Dutch Presidency Conference "Social policy  and Economic Performance: employment,  activating  the  welfare  state and 

economic competitiveness"  - Amsterdam  23-25 January  1997. 

12  Resolution of  the  Council and of  the  representatives of  the governments of  the  Member  States,  meeting  within 

the  Council of 2 December 1996,  on  the  role  of  social protection  systems in  the  fight  against unemployment,  OJ  C386 of 
20 December  1996. 

It  may  occur  that  an  unemployed  person  gets  a 
disposable  income  from  benefits  which  is  higher 
than  the  one  he/she  could  expect  when  back  in 
work.  A l t h o u gh  administrative  controls  and 
social  pressures  may  lead  people  to  look  actively 
for  a job  despite  high  replacement  rates,  in  the 
long  run  such  a  situation  is  not  conducive  to 
employment.  Financial  incentives  are  necessary 
to  reinforce  work  incentives. 

Those facing the  greatest  disincentive  effects  are 
those  caught  in  the  unemployment  trap:  loss  of 
benefits,  in  conjunction  w i th  the  impact  of  taxa 
tion,  can wipe  out  any  advantage  expected  from 
bringing  an  earned  income  into  a family.  Benefit 
recipients  are  then  truly  caught  in  a  trap,  from 
which  they  have  no  economic  motivation 
to 
escape. 

In  particular,  social  protection  should  seek  to  be 
as  neutral  as  possible  in  relation  to  any  second 
paid  activity  w i t h in  a couple,  and  even  encoura 
ge  it.  It  is  becoming  rare  for  social  protection 
benefits  - especially  family  benefits  - to  be  gran 
ted  on  condition  that  one  family  member  does 
not  have  an  earned  income.  Nevertheless,  in  cer 
tain  Member  States, additional  benefits  still  exist 
-  especially  additional  unemployment  benefits  -
which  are  granted  only  if  the  unemployed  per 
son  lives w i th  a partner  w ho  has no  paid  activity. 
The  disincentive  effect  of  these  measures  is clear. 

A  further  problem  is  the  setting  of  income  cei 
lings  to  qualify  for  benefit.  All  Member  States, 
w i th  the  exception  of  Spain,  pay  family  allo 
wances  to  all  families,  although  Germany,  Italy 
and  Greece  reduce  the  amount  when 
family 
income  exceeds a certain  sum. Where  other  kinds 
of  family  and  housing  benefits  exist,  however, 
they  are  usually  means-tested.  It  is  important  in 
this  situation  to  avoid the  poverty  trap. This  dan 
ger  can  be  avoided  in  t wo  ways:  by  only  partly 
reducing  benefits  w h en  household 
income 
increases  or  by  introducing  a  specific,  higher 
income  ceiling  if  t wo  wages  are  coming  into  the 
household.  In  most  Member  States,  no  special 
provision  has  been  introduced  to  deal  w i th  this 
problem. 

Making  social  protection  more  employment-
indirect, 
friendly  could  also  take  the  form  of 
non-wage  income  support.  The  failure  of  many 
previous  programmes  to  provide  incentives  to 
the 
long-term  dependent,  especially  women 
w i th  care  responsibilities,  was  in  part  a  conse 
quence  of  a  failure  to  compensate  sufficiently 
for 
the  most  vulnerable 
often  face  in  combining  family  responsibilities 
and  work.  The  particular  vulnerability  of  single-

the  difficulties 

that 

parent  households  or  households  w i th  only  one 
low  income  is to  a considerable  extent  due to  an 
inability  to  combine  work  and  care.  Therefore, 
indirect  income  support  through  public  or  subsi 
dised  child  care  provision  can  influence  labour 
supply  significantly. 

Objective:  Make  social  protection  more 
employment-friendly  by  impro 
ving the articulation between tax 
and benefit systems witfc a view to 
increasing employment incentives. 

Key action:  The Commission will assess, in line 
with the Conclusions of the Dublin 
European Council whether recent 
changes  in  policies  and  systems 
have strengthened  incentives  for 
Job seekers to  take up work  and 
wilt identify the obstacles to achie 
ving these objectives* 

2.2.2  Turning  unemployment 
insurance  into  an 
employability  insurance 

Incentives  to  look  for  employment  are  necessary. 
However,  incentives  need  to  be  boosted  by  offe 
ring  better  opportunities  to  find  jobs.  In  the 
Union  as  a  whole,  only  7%  of  the  unemployed 
are currently  offered  the  possibility  of  retraining. 
The vast majority  is expected to  find a new job  in 
a  more  knowledge-based  economy  w i th  often 
outdated  skills. 

income 

Most  unemployment  schemes were  designed  ori 
ginally  to  provide  a  replacement 
for 
people who  found themselves temporarily  out  of 
work  but  expected  to  find  work  again  soon.  In 
most  cases, this  new job  would  require  skills  simi 
lar  or  identical  to  those  needed  for  the  previous 
one.  Today,  however,  w i th  the  labour  market 
rapidly  evolving  to  respond  to  changing  needs 
and  demands  and  becoming  increasingly  skills-
based,  it  has become  essential that  those  seeking 
employment  are  prepared  to  acquire  new  and 
different  skills. Life-long  learning  has become  an 
integral  part  of  a full  and successful  participation 
in  the  labour  market.  Some  of  the  unemployed, 
in  addition  to  financial  support,  now  require  tai 
lored  measures  and  programmes  to  help them  to 
improve  and  acquire  work  skills,  training  or 
increase their  employability  if they  are to  stand a 
realistic  chance  of  finding  new  employment. 

Furthermore,  figures  show  that  the  longer  those 
out  of  work  remain  in  unemployment  the  grea 
ter  their  difficulty  in  regaining  a foothold  in  the 
labour  market.  Financial  constraints  have  led  a 

number of  Member States to  reduce the average 
duration of unemployment  insurance benefits by 
linking  this  duration  to  previous  employment 
records.  A  growing  number  of  unemployed 
people  find  themselves  caught  in  a  process 
which, as their  rights to  unemployment  insuran 
ce are  exhausted, can lead to  eventual  withdra 
wal  from  the  labour  market  and  an  erosion  of 
their  work  skills. The combined  effect  of  unem 
ployment  insurance schemes, which pay benefits 
for  a  limited  period,  and  assistance  schemes, 
whether  for  unemployment  or as part of a mini 
mum income guarantee, can be inappropriate  to 
current  labour  market  conditions. 

The task, therefore  is to provide measures which 
help  the  unemployed  to  acquire  new  skills  and 
upgrade  existing  ones,  within  a  framework  of 
social protection that prevents a drift  into  pover 
ty  and  exclusion  from  the  labour  market  and 
society in general. More attention must be given 
to  a  review  of  unemployment  benefit  schemes 
aimed  at  seeking to  assist and  guide  the  unem 
ployed from unemployment through the acquisi 
tion  of  skills  and  qualifications  to  enter  and  re 
enter  the 
labour  market.  Social  protection 
should  support  reforms  aimed  at  improving  the 
provision  of  training  and  general  education.  A 
number  of  Member  States  have  undertaken 
reforms in their  unemployment  benefit schemes, 
with  the  aim  of  providing  active  support  to  the 
unemployed  at  an early  stage  in the  unemploy 
ment spell, and to  remove disincentives to  active 
job  search.  The  balance  must  be  shifted  from 
passive  to  active  policies  that  involve  participa 
tion  in  training  and  education  and  assisting  in 
the  finance  of  schemes  to  provide  work  expe 
rience. 

Objective:  Make  social  protection  more 
employment-friendly  by  develo 
ping  unemployment  compensa 
tion  schemes  into  employabtHty 
insurance,  in  line  with  the  move 
towards  life-long learning. 

Key action:  The  Commission  will  examine  the 
changes  in  the  existing  structure 
and  organisation  of  unemploy 
ment 
schemes 
necessary  to  implement  the  agre 
from  passive 
ed  restructuring 
to active policies. 

compensation 

2.2.3  The funding  arrangements  for 

social protection  need to  be 
thought  afresh 

The fight against unemployment  is not just about 
increasing  incentives  and  opportunities  for  the 
unemployed to get a job. Arrangements  for  fun 
ding  social  protection  also  affect  employment  -
especially the employment of low-skilled workers 
- through their  impact on total  labour costs. 

The  1993  White  Paper  on  Growth,  Compe 
titiveness  and  Employment13 
recommended  a 
reduction  in  non-wage  labour  costs,  ranging 
from  1  to 2%  of GDP for the  EU as a whole. This 
recommendation  was further  emphasised  in the 
Essen  European  Council  in  1994, where  one  of 
the  five  priorities  in fighting  against  unemploy 
ment  was  identified  as  the  reduction  in  non-
wage  labour  costs,  in  particular  targeted  at 
unqualified  employees.  This  reduction  has  not 
yet  been fully  achieved. The  main  reason  is the 
difficulty  experienced  by  Member  States  in  fin 
ding  suitable  and  sufficient  budgetary  compen 
sation to  offset the revenue loss. 

The  long-term  trends  in  taxation  have  been 
unfavourable to  labour. Between  1980 and 1994, 
the  implicit tax  rate on employed  labour  increa 
sed steadily from  34.7% to 40.5% on average  in 
the Member States. Over the same period the tax 
rate  decreased  from  44.1% to  35.2%  for  other 
factors  of  production  (capital,  self-employed 
labour, energy, natural  resources). 

Several  Member  States  have  introduced  various 
measures  to  reduce  non-wage  labour  costs. 
Some studies have shown that they  have not  led 
to  significant  effects  on  overall  employment 
levels  because  they  trigger  substitution  effects 
between  subsidised  and  non-subsidised  labour 
and  dead-weight  losses14  .  At  the  same  time, 
these  studies  show  that  the  positive  effects  will 
be  greater  if  measures  are  carefully  designed 
and linked to job  creation. Provided these speci 
fic  reductions  of  non-wage  labour  costs  are 
stable  enough  over  time,  new job  opportunities 
can  be  offered  to  those  categories  which  face 
the  biggest  difficulties  in  integrating  into  the 
labour  market.  In general,  a clear  signal  should 
be given that  the  long  term  trend  to  increasing 
taxes on labour will  be reversed. 

The key gap to narrow is that between, on the one 
hand, total salary cost and, on the other, net take-
home pay for  low-skilled workers. There has been 
little  progress  over  recent  years  in  this  respect. 
There  are  various  reasons  for  this  impasse.  It  is 

13  "Growth,  Competitiveness  and  Employment:  A  White  Paper",  COM(93)700,  December  1993. 

14  See for  instance  "L'allégement  des  charges  sociales  sur  les  bas  salaires", 

rapport  au  premier  ministre,  Conseil  supérieur 

de  l'emploi,  des  revenus  et  des  coûts,  Paris,  June  1996  and  "Labour  cost,  Wages,  and  Employment 
note  presented 

to  the  Economic  Policy  Committee,  September  1996 

in  the  EU", 

often difficult to reconcile changing the funding of 
social  protection  with  preservation  of  people's 
rights, especially where benefits are in replacement 
of  salary.  There  is,  however,  some  room  for 
manoeuvre  in  certain  countries:  shifting  taxation 
from labour to other production factors can enable 
a  restructuring  of  the  non-wage  labour  costs,  in 
order  to  reduce  the  burden  on  low  wages. The 
White  Paper  on  "Growth,  Competitiveness  and 
Employment" has already singled out environmen 
tal and energy taxes as one of  the ways  in which 
the compensation  revenues can be levied so as to 
permit the reduction of taxes on labour. 

2.2.4  Implementing flexible systems 

for managing the transition 
from work to retirement 

The situation  of  older workers  has changed dra 
matically  over the  past twenty  years. Firms have 
sought to make employment more flexible, both 
quantitatively  and qualitatively.  External flexibi 
lity, designed to adjust employment to  immedia 
te needs, has been as important as internal flexi 
bility.  The  result  has  been,  inter  alia,  a  steady 
decline in the employment  of older workers. 

To achieve that transformation, closer co-operation 
between Member States would be beneficial, as the 
Commission has stressed in recent communications15. 
Tax co-ordination could contribute not only to elimi 
nating  distortions  in the  single  market  but  also to 
reversing the long-term trend in taxation structures 
so as to  make them  more employment-friendly.  In 
order to counteract tax erosion on the more mobile 
tax bases, Member States have to some extent been 
driven to reduce taxes on capital and compensate by 
overcharging labour. This is turn produces unwanted 
effects on employment and income distribution. 

Objective:  Make  social  protection  more 
employment-friendly  by  narro 
wing the gap between total salary 
costs  and  net  take-home  pay  for 
low-skill workers. 

Key action:  The  Commission  will  deepen  the 
analysis  of  measures  taken 
to 
reduce non-wage labour costs as a 
contribution  to  the  interim  report 
to be presented at the Amsterdam 
European  Council  in  June  1997 
and  to  the  Joint  Employment 
Report  to  be  prepared  for  the 
Luxembourg  European  Council  in 
December  1997;  the  Commission 
will,  inter  alia,  examine  how  the 
trend  of 
levies  on 
increasing 
labour  can  be  reversed  and  what 
practical progress in tax co-ordina 
tion  between  Member  States  is 
necessary to allow for a reversal of 
that trend. 

In  addition,  the  permanent  High 
Level  tax  policy  group  set  up  by 
the  Dublin  European  Council  will 
issues, 
examine,  among  other 
ways  of  restructuring  fiscal  sys 
tems,  including  social  contribu 
tions and taxation  on  labour. 

life  of 

In order to  reduce unemployment  and especially 
to  promote  opportunities  for  the  young,  many 
European  countries  have  attempted  to  shorten 
the  working 
the  older  workforce. 
Arrangements  have been introduced  for  leaving 
work  well  in  advance  of  the  retirement  age 
through  invalidity  schemes,  special  benefits  for 
older  workers,  early  retirement  schemes  or  by 
granting  pensions  early  in  cases  of  unemploy 
ment.  The  shortening  of  working  life  was  the 
subject  of  a  broad  implicit  consensus  involving 
employers,  workers  and  the  state.  Employment 
rates for  over-55s have dropped very  significant 
ly in twenty years. The idea of  retiring on a fixed 
pre-established date is disappearing fast. 

However,  as  life  expectancy  continues  to  grow 
and  as  many  Member  States  are  introducing 
reforms  designed  to  raise  retirement  ages  in 
order  to  relieve  pressure  on  public  pension 
schemes (see 2.3.1  below),  it  is essential to  rever 
se the  trend  towards  early  exit  from  the  labour 
market.  The  transition  to  retirement  has, para 
doxically, become less flexible. Workers' expecta 
tions  have  changed  with  the  massive growth  in 
early  retirement  opportunities.  Where  firms 
have  become  less  willing  to  invest  in  training 
their  older  workers  or  in  promoting  them,  the 
individuals  concerned  have  become  less motiva 
ted and have often come to see early  retirement 
as the best - or only - option. 

Awareness  of  the  challenges  associated  with 
early  retirement  over  the  coming  ten  years  is 
poor. The changes now taking place in firms, with 
younger workers replacing older ones, are unsus 
tainable  over  time.  There  are  even  indications 
that  if  current trends continue  - i.e.  people  over 
50 or  55 being considered to  be unemployable  -
there  could  be  a  shortage  in  labour  force  in  a 
number  of  regions.  If  serious dislocations  are  to 
be avoided and if employment is to be developed 
in  Europe, greater  efforts  must be made to  keep 
these older workers in the labour  market. 

75 

In SEC(96)487 of 20.3.96 "Taxation  in the EU" 
report on evolution of tax systems". 

and in Communication  COM(96)546 of 22.10.96 "Taxation in the EU: 

This will, in part, involve much more investment in 
life-long  learning  for  workers  than  is  common 
today'6  . In particular,  the  Commission  is studying 
possible  new  fiscal  means to  promote  investment 
in human resources. It will also require a major shift 
towards  flexible  systems for  managing  the transi 
tion from work to retirement and towards systems 
of  part-time  employment  for  older  workers. 
Although the Council adopted a Recommendation 
as early as 1982 on this topic17, the  arrangements 
for  these  more  flexible  systems  are  still  largely 
undefined.  A  key  point  is to  determine  to  what 
extent creating incentives for older workers to stay 
longer  in working  life can be matched by creating 
jobs which are adapted to them. Recent initiatives 
in some Member States should be examined. 

Objective:  Make  social  protection  more 
employment-friendly  by  increa 
sing  employment 
incentives  as 
welt as employment  opportunities 
for older  workers. 

Key  action:  The  Commission  will  present  the 
potential  and  problems  of  a gra 
dual  transition  to  retirement  in 
the Employment  in Europe  report 
to  be  published  in  September 
1997 at\di will  consider  appropria 
te  follow-up; the  Commission  will 
also  invite  the  social  partners  to 
deepen the social dialogue on the 
impact of  ageing. 

2.2.5  Social protection to promote  inclusion 

The  modern  design  of  European  social  protec 
tion  systems was conceived just  after  World War 
II. They were intended to provide workers with a 
replacement  income  during  periods  of  work 
interruption,  either 
(sickness  or 
unemployment)  or  definitive  (permanent  work 
incapacity  or  retirement).  As  such,  they  were 
quite  effective  in  alleviating  poverty.  However, 
social  protection  is now  confronted  with  a new 
phenomenon: exclusion. 

temporary 

Exclusion goes beyond poverty. It  is the accumu 
lation  and  the  combination  of  several  types  of 
deprivation:  lack  of  education,  deteriorating 
health  conditions,  homelessness,  loss  of  family 
support,  non-participation  in  the  regular  life  of 
society,  and  lack of job  opportunities.  Each type 
of  deprivation  increases  the  other  types.  The 
result  is a vicious  circle,  leading  from  long-term 

unemployment  to  the  break  of  family  ties,  and 
eventually to  marginality  and  delinquency. 

Social  protection  alone  cannot  be  a  remedy  for 
every situation  of  exclusion. However,  social pro 
tection  has  a  role  to  play  not  oniy  in  providing 
excluded  people  with  an  income  enabling  them 
to  live in keeping with  human dignity, but also in 
helping  to  reintegrate  them  into  society.  Both 
unemployment  compensation schemes and social 
assistance mechanisms, and particularly the safety 
nets  designed  to  guarantee  a  minimum  level  of 
resources to all inhabitants, should become essen 
tia! tools  in an active  policy to  fight  exclusion. In 
particular,  it  is becoming  ever  clearer  that  mini 
mum  income  schemes, as defined  in  the  Council 
Recommendation  of  199218, should be fully  inte 
grated into  a global policy for  fighting exclusion. 

At  the  same time, the  role  of  minimum  income 
schemes has changed. As the  number  of  benefi 
ciaries  has  grown,  the  schemes  run  the  risk  of 
becoming a kind of  exclusion compensation  that 
the 
confirms  social  breakdown 
schemes  are  not  associated  with  active  integra 
tion  policies. There  is now  a growing  consensus 
on  the  necessity  of  moving  from  the  traditional 
social assistance approach. 

rapidly, 

if 

How  can  people  who  are  currently  excluded  be 
given  a  role  in  society?  On  the  one  hand,  the 
excluded experience  major  difficulties  in  finding 
a  job  because  they  are  unable  to  meet  firms' 
requirements  in terms  of  skills, productivity  and 
flexibility.  It  is very difficult  to  require marginali 
sed  people  to  be  as productive  and  flexible  on 
the  labour  market  as skilled and fully  integrated 
workers. In trying to  rebuild their  lives, excluded 
people  need to  be offered  integration  opportu 
nities with  a guaranteed minimum  level of stabi 
lity. This minimum  stability  is not  easy to  find  in 
the private, profit-making sector of the economy. 

On  the  other  hand,  there  are  needs  which  are 
not  currently  met  in  the  sector  of  non-market 
services, run by central Government, local autho 
rities and the NGOs. Several Member States have 
embarked  on  a  new  approach,  aiming  at  the 
activation  of  social  assistance  expenditure  and 
trying  to  achieve  long-lasting  integration  of 
excluded  people  through  meeting  social  needs 
which are currently  financially  out-of-reach. The 
same  experiments  are  made  both  by  the  coun 
tries which are most advanced  in terms of  active 
labour  market  policies  and  by  the  countries 

16  See  White  Paper on  Education and  Training:  "  Teaching and Learning: Towards a Learning Society",  COM (95) 590 
17  Council Recommendation 82I857IEEC of  10 December 1982  on the principles of a Community policy concerning  the age 

of  retirement,  OJ L 357 of  18 December  1982. 

18  Council Recommendation 92/441/EEC of  24 June 1992 on common criteria  concerning sufficient  resources and social 

assistance  in social protection  systems,  OJ L 245 of  26 August 1992. 

A  recent  study  has examined  national  projections 
of  pension expenditure  for  the  EU-15 for  the  per 
iod  1995-203020  .  Projections  are  based  on 
unchanged  policy scenarios but  take  into  account 
the  major  reforms  that  have  been  introduced in 
Member  States  since  the  mid-eighties.  Over the 
period  1995-2030, the  increase  in the  EU average 
ratio  of pension  expenditure  to GDP is likely to 
reach  3 or 4 percentage  points  (from  12% to  15 
or  16%).  By the year  2030,  in several  countries 
(Belgium,  Finland, France, Germany,  Italy  and  the 
Netherlands), the  ratio of pension  expenditure to 
GDP  might  be  in  t he  range  of  15 to  20%. 
Expenditure  would  be lower  in Denmark,  Spain, 
Sweden  (in  the  10 to 15%  range),  and  in Ireland 
and  the  United  Kingdom  (below  10%). 

Amount of annual gain in labour productivity  needed 
to compensate  the effect of ageing 
European Union (15) 

which  are  making  efforts  to  develop the  integra 
tion  part  of  their  minimum 
income  schemes. 
They  need to turn  a passive  and  precarious  soli 
darity  w i th  excluded  people,  into  a contract  that 
offers  them  real  opportunities  of both  social  and 
economic  integration,  in  return  f or a  commit 
ment  to  make  an effort  themselves.  However, 
this  boost for  non-market  activities  must  be care 
fully  monitored  and  some  links w i th  market  acti 
vities  must  be  developed  in order  to avoid a fur 
ther  segmentation  of  t he  labour  market and 
some  people  being  locked  into  subsidised  jobs. 

Objective:  Make  social  protection  more 
employment-friendly  by activa 
ting  integration  policies  associa 
ted with social minima benefits. 

Key  action:  In the first  half  of  1997, the 
Commission  will  present  a Com 
munication  on the  promotion of 
social inclusion and,  in the second 
half of 1997, a report assessing the 
mechanisms of guaranteed  mini 
mum  income  schemes  in  the 
social  protection  systems  of  the 
Member States. These documents 
wilt  examine  the  details  of inte 
gration contracts (duration, condi 
tions of transition towards regular 
jobs,  etc.)  and how such a policy 
can  be made sustainable for public 
budgets. 

2.3  Adapting  social  protection 
to the  demographic  ageing 
of  European  societies 

2.3.1  Making  public  pension 

schemes  sustainable 

The  demographic  structure of European  countries 
is changing considerably19. The old-age dependen 
cy  ratio  (i.e. the  ratio  of older  people  to working 
age population)  is increasing in most countries  and 
reaching  historically  unprecedented  levels. 

Although  the  long-term  effects  of the  ageing  pro 
cess  on public  budgets  are rather  uncertain and 
depend  on  the  way  the  economy  will  adapt to the 
process, a significant pressure towards  higher  public 
expenditure  is very  likely  to  occur  in the coming 
decades. Public  pension  schemes will  bear  much of 
the pressure since their expenditure  is highly depen 
dent  on the  age structure  of  the  population. 

O ,O 

' * " ' ' ' I • * *• •'*'•*• ''"*''*;''*•'*;t"'l'vf•  :>• '1 • 1  ••<••• *'•<'• I•!• • f• t - 1' 1  •<••»••<• • I•• •• I"t• •!• '1 • • t;• t• >••<•• (''!• • +  " H it 

o ) o > o > a i o > 5 ) 0 ) < » d ) o > o o o o o o o o o o o oo 

r

-

r

r

r

r

-

r

r

r

r

,

- N N N N N N N W M N N N« 

The  ageing  of the  population  in Europe  has  t r i g 
gered  a  debate  on t he viability  of our current 
public  pension  systems  and  on alternative  ways 
of  making  pension  systems  stable.  In  principle, 
there  are t wo  ways of funding  a pension  system. 
One  is to agree  on a mechanism  which  sets o ut 
how  workers  will  get transfers  when  they are 
retired,  in  exchange  f or t he contributions  they 
give  today  to pensioners.  This  is the  pay-as-you-
go  system  (PAYG).  Pension  benefits  are  calcula 
ted  on the basis  of a formula  fixed  in  advance 
and  are usually  dependent  on years  of  service 
and  average  or  final  salary.  They  are financed 
t h r o u gh  contributions 
f r om  employees  a nd 
employers  and  budget  transfers.  The  operation 
of  such  systems  depends  on t he  contributor's 
willingness  to pay. This  in turn  is conditioned by 
their  expectations  that  adequate  transfers  will 
continue  in the  future. 

19  The  report  on  "The democraphic situation  in the  European Union",  1996,  addressed in detail  the  medium  and  long-term 

demographic perspectives in  EU  Member States". The charts annexed to  this communication  show the  population 
growth  between  1995 and 2015 for three  age groups in the  different  EU  Member States. 

20  D. Franco and  T. Munzi,  "Public Pension Expenditure  Prospects in  the  European Union: A Survey of National 

Projections",  European Economy,  Reports and Studies N" 3,  1996. 

10 

The  other  funding  method  is to  base the  transfer 
of  income,  not  on  the  promise  that  it  will  conti 
nue  in  the  future,  but  on  property  or  financial 
assets  (funded  schemes).  Such  schemes  are,  as a 
rule,  funded  t h r o u gh  regular  contributions  and 
provide  benefits  dependent  only  on  the  return 
on  assets  invested.  Consequently,  pension  inco 
me  is subject  to  inflation  and  investment  risk. 

The  debate  and  research  on  alternative  ways  to 
f u nd  pension  schemes  has led to  some  important 
conclusions.  First  of  all, there  is  no  escaping  the 
fact  t h at  current  GDP  is  shared  every  year  bet 
ween  those  w ho  receive  income  directly  from 
their  participation  in  economic  life  and  those 
w ho  do  not.  That  goes  for  the  PAYG  as  well  as 
the  funded  schemes. 

Secondly,  a  radical  transformation  of  the  public 
schemes  f r om  PAYG  to  funded  schemes  is  not 
realistic  because  of  the  huge  transition  costs.  In 
the  case  of  a  sudden  shift,  all  members  of  the 
pension  schemes  and  their  liabilities  would  be 
transfered  to  the  funded  schemes at  once. In  this 
case,  all  liabilities  of  the  current  schemes  would 
become  explicit,  i.e.  the  stock  of  government 
debt  w o u ld  increase  at  once.  In  terms  of  cash 
flow,  expenditure  w o u ld  continue,  but  w i t h o ut 
any  incoming  contributions.  If the  outgoing  pen 
in 
sions  are  financed 
government  borrowing,  the  burden  of  the  tran 
sition  w o u ld  be  distributed  over  all  future  gene 
rations.  If 
through 
increased  government  b o r r o w i ng  and  partly 
through  increased  taxation,  the  burden  of  fiscal 
consolidation  w o u ld  fall  on  the  current  genera 
tion  which  w o u ld  pay  twice,  while  future  gene 
rations  would  benefit.  A  gradual  transition,  i.e. 
only  new  entrants  in  the  labour  market  partici 
pating 
in  the  funded  schemes,  would  create 
constant  pressure  on  primary  balances  throu 
ghout  the  transition  period.  Both  would  be  pro 
blematic  in  the  current  fiscal  environment. 

in  full  by  an 

is  only  partly 

financed 

increase 

it 

Given that  a wholesale  switch  to  funded  schemes 
appears 
to  be  an  unrealistic  solution,  most 
Member  States are focusing  on  ensuring  sustaina-
bility  of  the  public  PAYG schemes. This  will  requi 
re the  implementation  of  significant  reforms. The 
most  important  one  is  to  find  mechanisms  to 
allow  people  to  work  instead  of  taking  early  reti 
rement,  that  is to  say  to  increase  the  actual  pen 
sion  age,  now  below  60  and  falling,  while  main 
taining  the  formal  pension  age, generally  65. This 
will  both  increase  contributions  and  reduce  pay 
ments.  If this  is not  possible, the  options  available 
rates, 
in  theory,  raising  contribution 
include, 
increasing  budgetary  transfers,  reducing  benefits 
or  a combination  of  the  above. 

the 
Most  European  countries  have  changed 
indexation  of  pensions  from  income  or  wage 

increases  into  indexation  on  prices.  More  funda 
mental  reforms  carried  out  in  recent  years  by 
some  Member  States  (Belgium,  Finland,  France, 
Germany,  Italy,  Sweden)  show  certain  common 
features.  The  timing  of  retirement  is  no  longer 
determined  simply  by  a statutory  retirement  age 
but,  equally  important,  by the  number  of  contri 
bution  years  necessary  to  have  a full  pension.  A 
few  Member  States  have  adopted  the  principle 
of  flexible  retirement  within  a  given  time  span. 
In  terms  of  equity,  these  are  positive  develop 
ments. The charge  has occasionally  been  levelled 
at  European  systems that  they  are  in  effect  anti-
redistributive  (i.e.  benefiting 
the 
expense  of  the  poor)  in the  sense that  life  expec 
tancy  correlates  positively  w i th  income. The scale 
is  diminished  by 
of 
moving  to  flexible  retirement  arrangements,  in 
so far  as the  age  of  joining  the  labour  market  is 
itself  positively  correlated  w i th  income. 

this  anti-redistribution 

the  rich  at 

Another  common  trend  is  the  closer  link  being 
forged  between  pension  levels  and  total  contri 
butions  made  during  working  life.  This  concen 
tration  on  the  contributory  side  of  pension  sys 
tems  makes  sense  at  a  time  when  boosting  the 
incentive  to  work  is  a  priority.  It  does,  however, 
call  for  the  solidarity  element  in  each  pension 
system to  be  made  explicit:  by  how  much  should 
the  pension  be reduced to  take  account  of  career 
breaks  -  caused  by  unemployment,  illness,  child-
care  or  elder-care?  The  danger  is  that  women, 
whose  working  lives  are  less  linear  than  men's, 
will  be  penalised  through  this  development.  In 
term,  this  trend  could  also  work 
the 
against  the  kinds  of  changes  taking  place  in  the 
working  life-cycle, such as time taken  off  work  at 
intervals  to  update  skills. 

longer 

Objective: 

Foster  the  adaptation  of  public 
pension  schemes  to  the  ageing  of 
European  populations. 

Key  action:  Develop  comparable  projections 
of  pension  expenditure  using 
common  forecasting  methodolo 
gies  and  harmonised  economic 
and  demographic  assumptions; 
assess  t he  elements  of 
r e f o rm 
which  seem to  be most adapted  to 
ensuring 
t he  sustainability  of 
public  pension  schemes while  pre 
serving  their  core  aspects  of  soli 
darity  and  present  the  conclusions 
in  the  Social  Protection  in  Europe 
report  to  be  published  at  the  end 
of  1997. 

11 

2.3.2  Providing a secure environment 
for supplementary pension 
schemes 

In addition  to  ensuring the  sustainability  of  the 
public  pension  schemes,  it  will  be  increasingly 
important to  ensure that  current  employees and 
future  pensioners  are  in  a  position  to  maintain 
post-retirement 
income  at  a  level  that  will 
enable them to avoid a drop in their  standard of 
living. One way of  achieving this is to  encourage 
the  development  of  supplementary  pension 
schemes  operating  on  a  fully-funded  basis. 
Pension funds  can  be  expected  to  stand  side by 
side with the public PAYG schemes in those states 
where  the  development  of  such  schemes  takes 
hold. Whether such schemes do take hold will be 
a matter  to  be decided  by the  Member States. 

important 

it  becomes  more 

As  the  importance  of  supplementary  pensions 
increases, 
for 
governments  to  provide  a  secure  environment 
for  the  efficient  operation  of  supplementary 
funded schemes. All Member States have rules of 
prudential  management.  At  Community  level, 
Directives  80/987/EEC  and  77/187/EEC21  ensure 
the  safety  of  assets,  notably  in  the  event  of  an 
employer's  insolvency  or  the  transfer  of  an 
undertaking. If workers can individually choose a 
financial  institution  for  their  retirement  provi 
sion  they  should  have  access to  understandable 
information  helping  them  to  make  the  right 
choices  and  avoid  pension  levels  which  remain 
below their  expectations. 

In the  context  of  the  single  market,  there  is an 
opportunity for making the development of  fun 
ded  occupational  schemes  more  effective,  for 
the  benefit  of  scheme  members  and the  econo 
my as a whole. This can be achieved through the 
Treaty  rights  of  free  movement  of  capital  and 
free provision of services. The freedom of  capital 
movements  guaranteed  by  Article  73b  of  the 
Treaty  enables  pension  funds  in  all  Member 
States to  diversify their  assets, both  domestically 
and internationally. This should enhance returns, 
reduce  risks  arising  from  domestic  economic 
cycles  and  reduce  the  negative  impact  on  asset 
prices  during  periods  of  disinvestment,  when 
elderly  generations 
their  wealth. 
However, the freedom of  capital movements can 
be seriously restricted by currency matching rules 
imposed  by  the  Member  States  for  prudential 
reasons. 

realise 

The regulatory  framework  must also  implement 
the  principle  of  equal  treatment  for  men  and 
women. The  1996 "Post-Barber"  Directive22,  fol 
lowing  several  judgements  of  the  European 
Court  of  Justice, sets  out  the  principles  for  this 
implementation.  The  practical  application  of 
these  principles  in  the  management  of  pension 
funds  should  not  work  to  the  disadvantage  of 
women,  who  should  not  be  penalised  for  their 
greater  than  average  longevity. This could  hap 
pen through, for  example,  a  reduction  in  take-
home pay, because of a requirement to pay extra 
contributions,  or  from  a reluctance  on  the  part 
of  employers  to  recruit  women  because  they 
represent  higher  employment  costs  than  men 
performing the same work, due to higher contri 
butions. 

The  difficulty 
in  achieving  equal  treatment 
demonstrates  the  need  to  regulate  the  mecha 
nisms  of  supplementary  pension  systems. Social 
protection  -  in  contrast  to  private  insurance  -
seeks  through  a  large-scale  pooling  system  to 
separate the level of individual risk for each insu 
red person from the contributions paid by indivi 
duals  or  their  employing  organisations.  This  is 
designed  to  avoid  bad  risks  being  penalised, 
either  through  lower  net  salaries  or  through 
higher  employment  costs. This pooling  of  risks is 
more difficult to achieve in the limited context of 
supplementary  defined  benefit  schemes  and  is 
absent from defined contribution schemes. Even 
though  funded  supplementary  schemes  are  not 
grounded  in  solidarity,  it  is important  to  ensure 
that  there  is fair  treatment  of  all schemes mem 
bers,  including  those  such  as part-time  workers 
or those who take career breaks, especially given 
the  expected  increase  in  importance  of  such 
schemes. 

Innovative  approaches  will  need to  be found  if 
the  growing 
importance  of  supplementary 
schemes  is  not  to  lead  to  a  breakdown  in  the 
principle  of  solidarity.  In  particular,  it  would  be 
damaging to those in non-standard or precarious 
occupations  (part-timers,  career-breakers)  to  be 
left  without  a  fair  coverage  by  occupational 
schemes. 

21  Directive  77/187/EEC - OJ L061  of  5 March  1977 - on  the approximation  of  the laws of  the Member States relating  to 

the safegarding  of  employee's rights  in the  event of  transfer of  undertakings,  businesses and Directive 80/987/EEC -  OJ 
L283 of  20 October  1980 - on  the approximation  of  the laws of  the Member States relating  to  the protection  of 
employees in  the  event  of  the  insolvency of  their  employer. 

22  Directive 96/97/EEC of  20 December 1996 - OJ L046 of  17 February 1997 - modifying  Directive 86/378/EEC concerning 

equality  between  men and women  in occupational  social security schemes. 

12 

Objective: 

Provide  a secure environment  for 
supplementary pension schemes. 

Kay actions  In  the  first  half  of  1997.  the 
Commission  will  issue  a  Green 
Paper on supplementary pensions 
with a view to identifying, with all 
parties  concerned,  including  the 
sodaf partners, the main elements 
of a framework at European level 
to  provide  a  secure  environment 
for the efficient operation of sup 
plementary funded schemes. 

2.3.3  Meeting  n ew  care  needs  for 

older  people 

As our societies change, so do our  needs in terms 
of  social  protection.  Life  expectancy  has increa 
sed  considerably  since  the  immediate  post-war 
years,  and  old  age  can  in  general  no  longer  be 
considered as a difficult  time  in economic terms. 
However,  new  needs are emerging  in relation  to 
living  conditions  in  the  final  phase  of  people's 
lives and the  ageing  of  Europe will  have a parti 
cularly  strong  impact  on care needs. 

Advances  in  the  treatment  of  acute  illnesses as 
well  as  the  general  increase  in  life  expectancy 
means that  a growing  number  of  people  spend 
their  last  years  in  a  state  of  dependency  on 
others  for  the  day-to-day  basics  of  life.  Until 
now,  care  in  these  cases  was  often  provided 
informally  by family members. This form of  fami 
ly  solidarity  is  becoming  less  feasible,  however, 
as more  women  work  outside  the  home  and as 
greater  geographic  distances  separate  parents 
from their  adult children. All  European countries 
subscribe  to  the  objective  of  enabling  older 
people  to  stay  in  their  own  homes  if  at  all pos 
sible  rather  than  enter  a  care  institution.  The 
older  people concerned clearly share this wish. 

Amongst the enabling conditions for  dependent 
older  people to  live at home is the availability  of 
medical  and  paramedical  care  as well  as  home 
help for  day-to-day  needs. The cost of these ser 
vices, taken over  a number  of  years, can be very 
high.  In several  countries,  there  is a strong  fear 
that  voluntary  insurance  for  dependence  along 
these lines could give rise to the phenomenon  of 
adverse selection and moral  hazard. These make 
cost forecasting - and thus premium fixing - very 
difficult. The end result could well be a risky and 
therefore  unattractive  product  for  private  insu 

rance  companies.  In  the  case  of  voluntary  insu 
rance, there  is also the  fear  that  a large  part  of 
the population will underestimate the risk which 
they  face  and  will  choose  not  to  take  out  the 
necessary insurance in time. 

Thus we are witnessing the emergence of  a new 
branch of social protection. The economic as well 
as  social  interest  in  compulsory  cover  of  the 
population  against  the  risk  of  dependence 
appears well founded. However,  it  is not  easy to 
reconcile the need to  meet these new care needs 
with  the  imperative  of  containing  the  relevant 
care costs. The  main  questions  concern  the  type 
of  cover  given  by  a  system  of  compulsory  insu 
rance: services or money - the latter giving a grea 
ter  choice  to  beneficiaries;  the  way  to  evaluate 
care needs and to  manage delivery of  benefits  in 
accordance with  needs, and the  advantages  and 
disadvantages of targeting benefits and selecting 
beneficiaries based on their  income. 

in  any  case,  a  growing  need  for  social  services 
will emerge, the satisfaction of which has a great 
employment  potential, and requires careful  poli 
cy-design.  Special  attention  should  be  paid  to 
equal opportunities with respect to the new jobs 
created in the caring sector to  prevent the emer 
gence of  a gender  imbalance. Finally, the delive 
ry of services must meet  high quality standards. 

Objective:  Revisit social protection systems to 
meet the care needs of dependent 
older people 

Key action:  Analyse  in  the  1997  Social  Pro 
tection in Europe report the expe 
rience  of  Member  States  which 
have  already  implemented  care-
related  provisions with  a  view  to 
identifying the most efficient pat 
terns of a long-term cere insuran 
ce scheme. 

2.3.4 

Improving  health  services 

Each Member State's health system is different as 
it  reflects  a unique  pattern  of  historical  and  cul 
tural  developments. Nevertheless, the systems  in 
the  European  Union  fall  into  two  basic  groups: 
either  mixed systems which  make use of  services 
from  both  private  and  public  organisations 
financed mainly from compulsory health insurance 
contributions; or national  health services  in which 
provision  and  financing  is  mainly  located  within 
the public sector. 

13 

Total  expenditure  on  health  in the  Member  States 
varies from just over  5 to  nearly  10 per cent of GDP. 
Expenditure  in  absolute  terms  has  been  rising  for 
many years and all Member  States are experiencing 
mounting  pressure on their  health services. For ins 
tance,  per  capita  expenditure  for  health  care  for 
the  very  old  is five times  as high  as for  a person  of 
working  age.  As  the  age  group  75  and  over  will 
increase by nearly  50% during  the  next  20 years,  it 
will  have  a  significant  effect  on  total  health  care 
expenditure. This development  arises not only  from 
demographic  change,  but  is also  a  result  of  rising 
expectations  of  what  health  systems  can  and 
should  provide. 

The pressures on  health systems have led to  a num 
ber  of  reform  initiatives  in the  Member  States  with 
the  aim of  improving  both the  overall  effectiveness 
of  health  provision  in terms  of  health  gain  and  of 
the services' efficiency. The 1995 report on the State 
of  Health in the  European Union23 outlined some of 
the  reforms  being  undertaken  and  also  confirmed 
that  Member  States are giving more prominence  to 
disease  prevention  and  health  promotion  activities 
in the  belief that  modest investments  in these areas 
will  have  a significant  impact  on the  powerful  fac 
tors affecting the main causes of mortality and mor 
bidity.  Following  earlier  unsuccessful  attempts  to 
contain  the  costs  of  public  health  systems,  e.g. by 
increasing co-payment, a number of  Member  States 
are  now  trying  to  introduce  market  mechanisms 
into  their  health  care  systems  in  recent  years.  One 
particularly  notable reform has been the  separation 
between  the  functions  of  purchasing  services  and 
their  delivery.  Hospitals  and  other  service  providers 
enter  into contracts with  local health authorities  for 
the provision of  particular services. In this way, these 
authorities  are  forced  to  define  their  requirements 
more  clearly  and  seek the  most  cost-efficient  ways 
of  meeting them. Competition between service pro 
viders  is thus  encouraged. 

There  are  clearly  risks that  in  the  search  for  cost 
savings  both  providers  and  authorities  will  be 
tempted  to  go  for  the  cheaper  rather  than  the 
optimal  solution. Moreover,  there  have also  been 
examples  of  contracts  which  are 
imprecisely 
drawn  up  in terms  of  what  is to  be  delivered  and 
to  what  standard.  However,  it  is  still  much  too 
early  to  make  definitive  judgements  about  the 
consequences  of  these  and  other  measures. 

In  the  quest  to  improve  the  efficiency  of  health 
systems,  putting  health  care  insurers  - private  or 
public  -  in  competition  w i th  each  other,  while 
establishing  the  proper  regulatory 
framework 
and  guarantees,  is  attempted  in  some  Member 
States.  It  is essential  to  exclude  elements,  such as 
individuals 
risk  selection,  which  may  deprive 

23  COM (95) 357 of  19 July 1995. 

from  the  necessary  cover.  On  the  other  hand, 
subject  to  proper  conditions  to  avoid  distorting 
effects,  each  insurer  should  be  able  to  contract 
w i th  those  service  providers  which  will  provide 
them  w i th  the  best  services  at  affordable  prices. 
The  combination  of  these  factors  may  well  lead 
to  a  reduction  in  costs,  although  the  greater 
gains  are  bound  to  be found  in  health  care  costs 
rather  than  in the  management  of  the  insurance 
activity  itself. 

In these conditions, it is crucial that the freedom  to 
provide  health  services  and  place  relevant  pro 
ducts  on  the  internal  market  is  underpinned  by 
such  a framework  so as to  benefit  the  health  sys 
tems  and  result  in  continuity  and  affordability  of 
health  care  across  the  Community.  Such  a  frame 
work  can be constructed on the  principles of  facili 
tating the timely  sharing  of  validated  information 
on  the  comparative  merits  of  interventions,  the 
efficiency  and  cost-effectiveness  of  new  technolo 
gies, encouraging the transfer  of  know-how  in ser 
vice  organisation,  promoting  the  optimal  utilisa 
tion  of  existing  resources,  in  particular  in  border 
areas,  and  minimising  the  number  and  extent  of 
additional  administrative  arrangements  applicable 
to  users of  services from  other  Member  States. 

Objective: 

Key  action; 

Improve  t he  efficiency,  cost  effec 
tiveness  and  quality  of  health  sys 
tems  so  that  they  can  meet  the 
growing  demands arising from  the 
ageing of the  population  and  other 
factors. 

-carry  out  an  assessment  of  the 
potential 
impact  of  prevention 
on  the  reduction  of  health  care 
costs; 
-clarify  to  what  extent  and  under 
what  conditions,  introducing  mar 
ket  forces  within  health  care  sys 
tems can help save costs while  fos 
tering  a  better  quality  of  services 
and ensuring access for all to  health 
care; 
-the  Commission  will  bring  toge 
the 
ther  work  carried  out 
Member  States  on  the  efficiency 
and  cost-effectiveness  of  health 
care  systems,  and  assess  which 
taken  at 
initiatives  can  be 
Community 
assist 
to 
level 
Member  States  in  reducing  costs 
while  maximising  health  gains. 

in 

14 

2.4  Adapting social protection 

to the change in the gender 
balance: towards an 
individualisation of rights 

Female  participation  in  the  labour  market  will 
continue  to  increase  during  the  years to  come.  In 
order  to  maximise  the  potential  contribution  of 
women,  it  is essential to  adapt social protection  to 
the  new  gender  balance. This  implies: 

i) 

finding  new  arrangements 
working  and  family  life; 

for 

reconciling 

11)  implementing  progressively  an  individualisa 

tion  of  rights. 

The  changing  pattern  of  household  composition 
and family types requires new responses. Innovative 
and viable schemes need to  be developed to  recon 
cile working  life with  the  needs of  families,  house 
holds  and  individuals,  while  avoiding  putting  the 
burden for  all care on families. In line with the com 
mitments  of  the  Fourth  Action  Programme  for 
Equal  Opportunities  for  Women  and  Men(1996  -
2000)24  ,  the  Commission  is  exploring  a  range  of 
practical  initiatives  and  policy  options,  including 
consideration  of  measures aiming  at  setting  higher 
standards for the care of  children and other  depen 
dants. At the  initiative of the Commission, the social 
partners  reached  an  agreement  on  parental  leave 
giving  men  and  women  an  individual  right  to 
parental  leave with  the guarantee  of  being  able  to 
return to the former  workplace  after the  leave per 
iod.  The  agreement  was  adopted  as  a  Council 
Directive on  3 June  199625. 

In  virtually  all  Member  States,  the  social  protec 
tion  system  contains  elements  which  connect  the 
social  protection  of  an  individual  to  his  or  her 
specific  family  situation,  single,  married,  cohabi 
ting,  etc.  In  the  past,  such  derived  rights  have 
been  successful  in  protecting  many  people  from 
poverty.  They  take  account  of  family  links,  the 
value  of  work  at  home  and  care  work  and  give 
those who  have  not  participated  on  a  continuing 
basis  in  paid  work  in  order  to  serve their  families 
the  security  of  an  income  after  the  death  of  the 
breadwinner.  In  that  respect,  splitting  pension 
credits  between  partners  in  case of  divorce  could 
be seen  as a recognition  of  the  implicit  contribu 
tion  of  the  non-active  or  low-paid  partner. 

However,  derived  rights  pose  certain  problems. 
They  create  dependency  on  the  person  w ho  has 
a  direct  entitlement  to  social  security  benefits. 

Direct  social  security  rights  being,  in  most  cases, 
acquired  through  paid  employment,  the  lower 
participation  of  women  is  reflected  in  a  lack  of 
direct  rights.  Women  are  therefore  more  vulne 
rable  when  a  relationship  breaks  down,  e.g.  in 
cases of  divorce. Furthermore,  derived  rights  are, 
in  most  countries,  given  to  spouses  and  children 
only.  They  do  not  always  take  account  of  other 
forms  of  cohabitation  which  are  increasing. 

Secondly,  derived  rights  can  create  disincentives 
for  women  to  enter  the  labour  market  and  can 
lead to  incentives to  take  up jobs  in the  informal, 
unprotected  economy.  In  some  countries,  margi 
nal employment  does not  provide access to  social 
security  at  all. This  is only  tolerated  because  the 
f r om 
marginally  employed  generally  benefit 
derived  rights  and  their  work  is not  regarded  as 
an  independent  way  of  making  a  living,  but 
rather  as a supplement  to  the  family  budget,  lea 
ving  the  person  in  question  to  depend  on  the 
social  security  of  their  partners. 

Finally,  survivors'  pensions  enable  people 
to 
benefit  from  a  pension  on  the  strength  of  the 
contributions  of  his/her deceased spouse  w i t h o ut 
the  former  having  had  to  make  any  additional 
contribution.  This  can  lead  to  the  situation  whe 
reby  a spouse w ho  has never  worked  outside  the 
home  can receive a higher  pension, calculated  on 
a complete  career  and  high  income  of  the  decea 
sed  spouse,  than  a  single  person  having  worked 
all  his/her  life  w i th  a  lower  income.  As  a  result, 
derived  rights  tend  to  re-distribute  social  securi 
ty  benefits  from  the  average  income  earner  to 
the  dependants  and survivors  of  the  high  income 
earners. 

The  individualisation  of  rights  w o u ld  aim  to  halt 
the  practice  of  taking  account  of  personal  links 
when  ensuring  social  protection  of  an  individual. 
It  would  contribute  to  bringing  social  protection 
in  line  w i th  legislation  governing  employment 
contracts, which considers workers  as individuals. 
More  generally,  individualisation  is  in  line  w i th 
the  general  trend  towards  a  greater  autonomy 
of  the  individual.  In  that  sense,  it  goes  beyond 
gender  issues  and  also  concerns  the  relations 
between  parent(s)  and  children  in  the  light  of 
new  family  patterns  and  structures. 

Admittedly,  the  individualisation  of  rights  could 
lead to  hardship.  For  instance,  derived  rights  can 
give  the  unemployed 
to 
benefits 
Individua 
lisation  could  also  lead  to  specifying  the  age 

f or  dependent  children. 

indirect  entitlement 

24  COM(95)381  of  19 July  1995,  JO C306 of  17 November  1995. 
25  Council Directive 96/34/EEC of  3 June  1996 on  the  Framework Agreement  on parental  leave concluded by UNICE,  CEEP 

andtheETUC  OJ  LI45/4 of  19 June  1996. 

15 

for  entitlement 

to  benefits. 
requirements 
Nevertheless,  a  strategy  must  be  devised 
to 
encourage  all  potential  workers  to  participate  in 
the  labour  market  in  their  own  right  w i t h o ut 
putting  undue  strain  on  family  finances. 

The  individualisation  of  rights  would  have  diffe 
rent  effects  on the  individual  as well  as on  public 
budgets  depending  on  the  branch  of  social  pro 
tection  considered.  Individualising  entitlements 
to  health  care  and  unemployment  benefits 
seems to  be  relatively  straightforward  due to  the 
small  budgetary  effect  it  probably  would  have. 
The  most  important  and  the  most  difficult  bran 
ch  to 
individualise  would  be  retirement  pen 
sions,  which  is  the  area  where  the  bulk  of  deri 
ved  rights  is granted.  Not  only  w o u ld  individua 
lising  mean  abolishing  supplements  for  depen 
dants  but  it  w o u ld  also  mean  replacing  the  sur 
vivor's  pension w i th  another type  of  replacement 
retirement 
income.  For  widow(er)s  under  the 
age  a special  transitional  pension  could  be  gran 
ted  until  the  retirement  age  or  until  a  job  is 
found. 

Given  the  current  position  of  women  on  the 
labour  market,  it  is  most  probable  that  taken  as 
a  group,  they  w o u ld  lose  considerably  if  survi 
vor's  pensions  were  abolished,  and  many  could 
even  fall  below  the  poverty  line.  The  idea  of  a 
basic  old-age  pension  supplemented  by  an occu 
pational  pension  might  be  able to  accommodate 
this  very  complex  problem,  the  first  element 
assuring that  all  above the  retirement  age  would 
receive  a  sufficient  amount  to  enable  them  to 
provide  for  themselves.  But  the  current  trend  in 
Member  States'  pension  reforms  is  going  in  the 
opposite  direction,  i.e.  establishing  a  closer  link 
between  contributions  paid  through  employ 
ment  and  the  amount  of  pensions  (see  2.3.1 
above), thus  making the  solution  of  this  problem 
more  difficult.  An 
in-depth  reflection  on  the 
impact  of  career  breaks  on  pension  rights  is 
necessary  in  order  to  find  ways  of  overcoming 
this  apparent  conflict  of  objectives.  In  that  res 
pect,  Member  States should  learn from  the  diver 
sity  of  approaches  that  exist  within  the  Union. 

Objectiva:  Adapt  social  protection  to  the 
new  gender  balance  in  working 
life and to changes in family struc 
tures. 

Key action:  -the  Commission will  present  ini 
tiatives  aimed  at  setting  higher 
standards for the care of children 
and other dependants; 
-the 1997 Annual Report on Equal 
Opportunities  will  assess  the 
attempts  made  by the  Member 
States to make progress towards 
individualisation without jeopar 
dising the economic situation of 
women. 

2.5 

Improving  social  protection 
for  people moving  within 
the  Union 

Regulation  1408/71, based on Articles  51 and  235 
of 
the  EC  Treaty,  co-ordinates  social  security 
the 
arrangements 
Union.  It  is a prerequisite  for  the  free  movement 
of  workers. This  regulation  provides  a high  stan 
dard  of  protection  for  people  moving  between 
Member  States. 

for  people  moving  within 

However,  there  are  still  a  number  of  gaps  in  the 
protection  offered  by  Regulation  1408/7126. 
Moreover,  the  co-ordination  system,  as  it  cur 
rently  stands,  is in danger  of  becoming  outdated 
and  losing  touch  w i th  a  number  of  develop 
ments.  Member  States  have  recently  introduced 
new  types  of  benefit,  for  example  those  for  an 
long 
increasingly  ageing  population  requiring 
term  care,  which  cannot  be  easily  accommoda 
ted  w i t h in 
in 
Regulation  1408/71,  based  on 
the  classical 
branches  of  social  security.  The  introduction  of 
new  forms  of  social  protection  in  the  Member 
States  should  not  be  hindered  by  uncertainty 
about  the  possible  impact  of  the  co-ordination 
system  on  the  new  schemes. 

legal  concepts  contained 

the 

The  original  dimension  of  European  integration, 
i.e.  a  common  market  allowing  and  fostering 
free  movement  of  workers,  has been  enriched  by 
a  new  concept,  namely  that  of  European  citizen 
ship.  The  personal  scope  of  Regulation  1408/71 
should  be  adapted  accordingly. 

The  co-ordination  of  the  various  national  social 
security  schemes  is  inevitably  complex.  However, 
unnecessary  complexity  should  be  avoided  and 
rules should  be simplified  wherever  possible. The 
aim  should  be  to  make  the  rules  more  easily 

26  A  number  of  these gaps have been discussed in  the  Commission's  Green Paper "Education,  Training,  Research: 

The Obstacles to  Transnational Mobility"  COM (96) 462. 

16 

understandable  for  citizens  moving  w i t h in  the 
Union  and  to  overcome  practical  problems  and 
red  tape  in  the  day-to-day  application  of  the 
Regulation,  which  can  obscure  the  advantages 
which  it  aims  to  provide.  The  Commission  will 
develop  a strategy  to  simplify  and  reform the  co 
ordination  system  so  that  it  meets  current  and 
future  requirements.  The  national  authorities 
and  institutions,  the  European  Parliament  and 
the  social  partners  will  be  closely  involved  in  the 
development  of  such  a  strategy. 

The  opinion  has  been  expressed  on  many  sides 
during  the  debate  that  it  is no  longer  justifiable 
that  a worker  w ho  is insured  and  legally  residing 
in  a  Member  State,  and  therefore  covered  by 
national  social  protection  arrangements,  should 
be  completely  excluded 
the  protection 
offered  by 
the  co-ordination  system  simply 
because  he  or  she  is  not  an  EU  national.  In  the 
second  half  of  1997,  the  Commission  intends  to 
present  a  proposal 
the  Council  aimed  at 
extending,  wholly  or  partially,  the  co-ordination 
provisions  to  employed  and  self-employed  per 
sons  insured  in  a  Member  State  w ho  are  not  EU 
nationals. 

f r om 

to 

the  consequences 

The  debate  also  demonstrated  a  need  for  in-
depth  discussion  on  the  current  provisions  on 
cross-border  access to  health  care, notably  w i th  a 
view  to  permitting  greater  and  more  efficient 
in  border 
use  of  existing  facilities,  especially 
regions.  However, 
the 
financial  equilibrium  of  health  insurance  in  the 
Member  States  should  be  taken  into  considera 
tion  and  the  financial  provisions  in  the  co-ordi 
nating  Regulations 
in  relation  to  health  care 
should  also  be  re-examined.  Subject  to  the  jud 
gements  of  the  Court  in  the  Decker  and  Kohll 
cases"  ,  the  Commission  will  present  a  proposal 
to  amend  Regulation  1408/71  in  order  to  facilita 
te  cross-border  access to  health  care  services. 

for 

is  no  Com 
Furthermore,  the  fact  that  there 
munity  co-ordination  of  taxation,  while  social 
security  is  subject  to  co-ordination,  sometimes 
creates  anomalous  situations;  for  example  in  the 
case of  certain  frontier  workers  who  may  be obli 
ged to pay twice for social security - on the basis of high 
taxation in the state of residence, and via high insuran 
ce contributions  in the state of work. The Commission 
intends to  investigate these problems during  1997 and 
identify ways in which action at Community level could 
overcome them. 

the  case  in 

is  particularly 

important  role 

There  is  a  broad  consensus  that  the  absence  of 
any  co-ordination  system  at  European  level  for 
supplementary  pension  schemes  constitutes  a 
the 
real  problem  for  persons  moving  within 
Union.  This 
those 
Member  States where  occupational  schemes  play 
an 
in  social  protection.  The 
Commission's  Communication  of  July  199128iden-
tified  the  particular  obstacles  in  this  field.  Given 
the  specific  nature  of  many  of  the  schemes  in 
question  and  their  extreme  diversity  at  national 
level  as  regards  their  origin,  their  occupational 
and  material  scope,  as  well  as  their  legal  and 
technical forms, the current  co-ordination  system 
created  for  statutory  schemes  does  not  seem  to 
be  the  appropriate  instrument  to  address  the 
problems.  A  more  flexible  approach  is  required. 
The  report  of  the  High  Level  Panel  on  Free 
Movement  of  People  chaired  by  Mme  Simone 
Veil29  suggested  to  the  Commission  a  way  for 
ward  in  this  area.  The  Commission  will  consider 
all the  obstacles to  free  movement  arising  in  this 
area  in the  framework  of  a Green  Paper  on  sup 
plementary  pensions  which  will  be  published 
intends,  however,  as  a  first  step 
shortly. 
towards  dealing  w i th  these  obstacles, to  present 
a  proposal  for  a  directive  which  should  in  prin 
ciple  cover  the  aspects  highlighted  by  the  High 
Level  Panel's  report. 

It 

Objective: 

Key  action: 

Adapt the co-ordination  system  to 
new 
forms  of  social  protection 
and  new  needs  in t he  f i e l d;  avoid 
unnecessary complexity  and  remo 
ve barriers to  cross-border  mobility. 

-The  Commission  w i ll  develop  a 
strategy  b o th  to  reform  and  sim 
plify and  to  update the  co-ordina 
t i on  system,  closely 
involving 
national  authorities,  t he  Euro 
pean  Parliament  and  t he  social 
partners. 

-The  Commission  will  publish  a 
Green  Paper  on  supplementary 
pensions  in which all the  obstacles 
to  free  movement  arising  in  this 
area  will  be  considered. As a  first 
step  towards  dealing  w i th  these 
obstacles,  t he  Commission 
int 
ends  to  present  a  proposal  for  a 
Directive  which  should  in  princi 
pe  cover  the  aspects  highlighted 
by the  High  Level  Panel's  report. 

27  The  Court  of  Justice  is currently  examining 

the  extent 

to  which 

the  current  provisions  of  Regulation  1408/71,  which 

permit  access to  cross-border  health  care,  at  the  expense  of  the  competent  State,  only  under  strict  conditions,  are 
compatible  with  Article  30  EC Treaty  (free  movement  of  goods  such  as pharmaceuticals) 
(freedom 

services  such  as health  care  services):  Cases Decker  (C-120/95)  and  Kohll 

and  Article  59  EC  Treaty 

(C-158/96). 

to  provide 

28  Communication 

of  the  Commission 

to  the  Council,  "Supplementary 

social  security  schemes: 

the  place  of 

supplementary 

pension  schemes  in  the  social  protection 

of  workers  and  their  effect  on  free  movement"  SEC(91)1332. 

29  Report  on  supplementary 

pensions  adopted  at  the  meeting  of  28/29  November  1996  of  the  High-Level-Panel. 

17 

3.  SUPPORTING THE ADAPTATION PROCESS THROUGH 

ACTION AT EUROPEAN LEVEL 

ther  action at Community  level. The Commission 
will  make  a  contribution  to  this  process  in  the 
Single  Report  which  will  be  presented  to  the 
European  Council  in  Luxembourg  in  December 
1997. This  contribution  will  analyse the  reforms 
already  implemented  by  the  Member  States  to 
make  social  protection  more  employment-
friendly and will  propose further  lines of action. 
The  Group  of  Directors  General  for  Social 
Security will  be invited to  contribute to the  pre 
paration of this  report. 

This  process  of  common  reflection  must  also 
involve  a wider  range  of  participants,  including 
the  representatives  of  civil  society.  The  whole 
issue will be at the top of the agenda of the  1998 
European  Social Policy  Forum.  The  forum  will 
involve  Member  States, the  social  partners  and 
NGOs, as well as European institutions. It will dis 
cuss the  direction  of  the  reforms  of  social  pro 
tection systems for  the  next decade. More speci 
fically,  ways  of  adapting  social  protection  sys 
tems to the new needs described above will be a 
key issue for that discussion. 

Finally, the Social Protection in Europe report, to 
be published at the end of  1997, will bring toge 
ther  more evidence and analysis on recent deve 
lopments  in Member  States, as a contribution  to 
the process of joint  reflection. 

This Communication  is based on the  principle  of 
subsidiarity.  Each  Member  State  is  responsible 
for  the  organisation  and  financing  of  its  own 
social protection  system. The Union  remains res 
ponsible  for  the  co-ordination  of  social  security 
schemes as regards the protection of people who 
make  use  of  their  right  to  move  within  the 
Union.  Moreover,  the  exchange  of  experience 
between  the  Member  States  represents  impor 
tant  added value at  EU level. 

Modernising  and  improving  social  protection  in 
the Union cannot be achieved without the active 
participation  of  all  involved.  In  part  II  of  this 
Communication, the  Commission  has announced 
a  number  of  key  actions  aimed  at  setting  out 
both  orientations  for  achieving  that  goal  and 
more concrete steps for further  reflection. 

the  Council, 

The  Commission 
the 
invites 
European  Parliament,  the  Economic  and  Social 
Committee, the  Employment and Labour  Market 
Committee  and  the  Economic  Policy  Committee 
to  give  their  opinions  on  the  ideas  for  the 
modernisation  of  social  protection  systems  pre 
sented  in this Communication. 

The Commission invites the social partners, at all 
appropriate  levels, to  contribute  to  the  debate, 
to the three  following 
in particular with  regard 
points: 

• 

impact  of  the  ageing  of  the  population  on 
the transition to  retirement; 

•  details  of  a  regulatory  framework  at  Euro 
pean  level  to  provide  a  secure  environment 
for  the  efficient  operation  of  supplementary 
schemes; 

• 

implication  of  the  development  of  new  pat 
terns  of  work,  and  especially  the  impact  of 
career  breaks on social security rights. 

Social protection  issues  will  have  to  be  integra 
ted  into  the  development  of  European  employ 
ment policy.  Today, employment  is the first prio 
rity  for  the  European  Union  and  the  Member 
States and their greatest challenge. This commit 
ment creates both a need and a potential for  fur 

18 

Appendix 

Population growth between  1995 and 2015 for three age  groups 
Central  scenario 

Austria 

Belgium 

0-19 

20-59 

60+ 

0-19 

20-59 

60+ 

Denmark 

Germany 

0-19 

20-59 

60+ 

0-19 

20-59 

60+ 

Spain 

Finland 

46.4% 

0-19 

20-59 

60+ 

France 

0-19 

20-59 

0-19 

20-59 

60+ 

19 

Ireland 

51.1% 

Italy 

0-19 

20-59 

60+ 

0-19 

20-59 

60+ 

Luxembourg 

Netherlands 

0-19 

20-59 

60+ 

Portugal 

0-19 

20-59 

Sweden 

0-19 

20-59 

60+ 

0-19 

20-59 

60+ 

United  Kingdom 

European  Union 

40% 

20% 

•20% 

0-19 

20-59 

60+ 

20-59 

Source : EUROSTAT 

20 

}r 

ISSN 0254-1475 

COM(97) 102  final 

DOCUMENTS 

EN 

05  04 

Catalogue number  : CB-CO-97-104-EN-C 

ISBN 92-78-17134-4 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg