Report from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions - Social protection in Europe 1997 - Executive summary
Date: 1998-04-23
Institutions: European Commission
Subjects: European social policy, social analysis, social change, social security, social well-being

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  23.04.98 
COM( 1998) 243  final 

REPORT FROM THE  COMMISSION 

TO THE COUNCIL, THE EUROPEAN  PARLIAMENT, 
THE ECONOMIC  AND SOCIAL  COMMITTEE 
AND THE COMMITTEE  OF THE REGIONS 

Social Protection in Europe 1997 
— Executive summary 

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Social Protection in Europe 1997 —Executive  summary 

Social Protection in Europe 1997 
— Executive summary 

The political context 
This is the third report on Social Protection in Europe. 

It sets out to monitor the progress achieved in relation 
to the objectives  contained  in the Council's  Recommen 
dation on the convergence of social protection  objectives 
and policies of July  1992 (92/442/EEC) and to update the 
analysis of the  1993 and  1995 reports. 

highest  level  between  social  protection  systems  and  the 
European Employment  Strategy. 

The main quantitative findings 
The  main  points  to  emerge  from  the  analysis  of  the 

revised ESSPROS database on social protection and 

the new European Community Household Panel are: 

The Report is also intended to contribute to the debate on 
the future  of social protection in the Union, launched by 
the Commission in 1995 with its Communication Frame 
work for  Debate  on  the Future  of Social  Protection. In 
March  1997, the  Commission  published  a further  Com 
munication,  Modernising  and Improving Social Protec 
tion, which reflected  the main points  made in the debate 
and drew attention to the major implications for policy. 

The scale  of social  expenditure:  expenditure  on  social 
protection  in the  Union  amounted  to  2872%  of  GDP in 
1995. This figure, however, ranged from  20% of GDP in 
Ireland and 21-22% in Greece, Spain and Portugal to over 
30%  in  France,  the  Netherlands  and  the  three  Nordic 
countries, with Sweden having the highest level at almost 
36%. 

The  report  should  also  be  seen  in  the  context  both  of 
Member States'  efforts  to consolidate public finances  — 
as  pointed  out  in  the  1997  Broad  Economic  Guidelines 
and  the  two  Resolutions  on  macro-economic  stability, 
growth and employment, adopted at the European Council 
in  Amsterdam  —  and  of  the  European  Employment 
Strategy. At the Luxembourg Jobs Summit  in November 
1997, Member States broadly endorsed the Commission's 
proposals  for  employment  guidelines.. They  agreed  that 
benefit  as well as training systems should, where necess 
ary, be reviewed and adapted to ensure that they actively 
support  employability.  Social protection  also has an im 
portant  role  to  play  in  helping  to  achieve  other  aims 
emphasised  in  the  1998 Employment  Guidelines  which 
were subsequently  adopted  — developing  entrepreneur-
ship,  encouraging  adaptability  of  businesses  and  their 
employees and strengthening the policies for equal oppor 
tunities. A clear link has, therefore, been established at the 

The pattern of social expenditure: old-age pensions are by 
some way the largest item of social protection expenditure 
in the Union, accounting  for  42'/:%  of the total  in  1995, 
equivalent  to  12%  of  GDP,  followed  by  health  care. 
amounting to around 227c of the total in the Union, as well 
as in all Member States, except for Denmark (only 14%), 
and  to  some  6%  of  GDP. Transfers  to  the  unemployed 
accounted  for only  8% of total expenditure  in the Union 
Gust under 272% of GDP). 

The growth of social expenditure: in most Member States, 
the increase in social protection  expenditure has  slowed 
down in recent years. Although social expenditure across 
the Union increased in relation to GDP between  1990 and 
1995 (by just over 2 percentage points), this partly reflects 
the slowdown in GDP growth during the recession years. 
Between  1993  and  1995, spending  grew  no  faster  than 
GDP and in most countries rose by less. 

1 -

Social  Protection  in  Europe  1997 — Executive  summary 

Sources of finance: around 65% of the funding  for social 
protection in the Union comes from social charges levied 
on employers  and the people protected,  most  of the rest 
from  general  taxation.  Employers'  contributions  alone 
accounted for some 40% of total finance in 1995. 

Levels of unemployment benefit: a significant  proportion 
of  people  unemployed  in  a  number  of  Member  States, 
according  to  the  ECHP,  received  no  unemployment 
benefit  at  all  in  1993, even  when  out  of  work  for  three 
months or more. For those receiving benefit, the monthly 
amount  averaged just  over  half  of their  net  earnings  for 
the  months  when  they  were  working,  though  it  ranged 
from  60-65%  in  Denmark,  France  and  Ireland  to  only 
25% in Greece and the UK. 

The relief of poverty:  social  transfers  (including  private 
pensions, but  excluding  benefits  in kind,  such  as  health 
care) accounted for around 30% of net household income 
in the Union in  1993. For some 35% of households, they 
were  the  main  source  of  income  and  without  them just 
under  40%  of  households  would  have  had  a  level  of 
income  of  under  half  the national  average  (the  conven 
tional  measure  of  poverty). After  transfers,  around  17% 
of households in the Union had a level of income below 
this. 

Recent changes in policy 
The economic  and  social  context  in which  European 

social  protection  systems  operate  has changed  con 
siderably  over the past decade or two (as analysed  in the 
Commission  Communication  Modernising and Improv 
ing  Social  Protection).  Over  the  1990s,  low  economic 
growth has increased both the difficulties  of funding  so 
cial protection across the Union and, in combination with 
demographic  and  social  trends,  the  number  of  people 
being supported. While income maintenance and preven 
tion of social exclusion continue to be fundamental  objec 
tives of social protection systems, the aim of policy is to 
strengthen  incentives  to  work  and  to  improve  the  em 
ployability  and adaptability of the work force. The major 
policy developments are: 

Tightening  of  eligibility for  benefit:  in  many  Member 
States, qualifying  conditions  for benefit  have been tight-

ened  and  the contribution  record  required  for  eligibility 
has been lengthened. 

Strengthening  incentives to  work:  in  several  countries, 
measures  have  been  introduced  to  try  to  ensure  that  in 
come  from  work  is  always  higher  than  from  benefits 
through tax concessions for low-paid workers and in-work 
benefits  as well as by reducing benefit  rates. 

Shifting  towards more  active policies:  there  is  general 
recognition  that  providing  income  support  alone  is  not 
sufficient  to tackle problems of unemployment and social 
exclusion. In the 1998 Employment Guidelines agreed by 
the Council, Member  States have committed  themselves 
to bringing about a shift  from  passive to active measures 
aimed at increasing the employability of those out of work 
and helping them find a job. 

Extending job  creation schemes: in a number of Member 
States,  job  creation  has  been  encouraged  by  selective 
reductions  in  social  contributions  as  well  as  by  direct 
subsidies. Member States, moreover,  have agreed in the 
Employment Guidelines to investigate possible means of 
developing  local employment  opportunities  in the social 
economy and new activities where needs are not being met 
bv the market. 

Reducing  dependency and social  exclusion:  throughout 
the Union, social assistance guarantees a minimum level 
of income. The general tendency within Member States' 
social assistance schemes is to address underlying causes 
of  poverty  and  social  exclusion,  to  reduce  reliance  on 
benefits  and  to encourage  all  those  able  to work  to  find 
employment. 

Helping people with disabilities: efforts  have been made 
in many Member States to improve the employment op 
portunities  of  those  with  disabilities,  through  deterring 
discrimination  and removing obstacles to them working, 
while at the same tightening eligibility for  benefit. 

Reversing the trend towards early  retirement: there  has 
been a long-term trend towards early retirement across the 
Union,  pushing  up social  expenditure  and  depriving  the 
economy prematurely  of the skills which the people con 
cerned have to offer. For women, this trend has been offset 
by a more powerful  tendency  for  increased  participation 
in employment,  but for  men, it has led  to around  half of 

Social Protection in Europe 1997—Executive  summary 

Providing long-term care: there is widespread  debate on 
how  caring  needs  should  be  met  —  whether  through 
transfers  or through  the direct  provision  of  services  and 
how far the State should be involved. In the three Nordic 
EU  countries,  in  particular,  social  services  are  well  de 
veloped,  though  they  have  been  increasingly  subject  to 
budget constraints. Elsewhere, adequate arrangements for 
helping  to  cover  the  costs  of  care  as  part  of  the  social 
protection  system  exist  in few  Member  States, the  most 
notable examples being the schemes introduced in Austria 
in  1993 and  in  Germany  in  1995, the  former  funded  by 
general taxation, the latter by social contributions. 

Targeting expenditure: Targeting resources on those most 
in  need  is  of  growing  political  concern  throughout  the 
Union. This  is reflected  in both the extension  of means-
testing — though  so far  in most cases  this remains  very 
limited  in  scale  —  and  the  imposition  of  taxes  and/or 
social  charges  on benefit  recipients,  which  can  serve  to 
spread  the cost  of  funding  social  protection  more  equit 
ably, given the increasing prosperity of many pensioners. 

men aged between 55 and 64 (ie below the official  retire 
ment age in most countries) no longer being in work. In a 
number  of  Member  States,  measures  have  been  intro 
duced  to  discourage  early  retirement,  by  tightening  the 
conditions  for  eligibility  and/or  reducing  the  amount 
payable. 

Encouraging partial retirement: attempts have been made 
(in Germany, France, Austria and Finland, especially) to 
encourage  partial  retirement  by  making  it  possible  for 
people  to  receive  a  partial  pension  if  they  reduce  their 
hours of work. So far, however, except in France, very few 
people have opted to take advantage of the possibility. 

Adapting to population ageing: reform of pension systems 
continues to be the focus of political attention to limit the 
costs implied by an ageing population. In many Member 
States, the official  retirement  age has  been  raised, espe 
cially for women, and for both sexes is in most cases being 
standardised  at 65, while measures have been introduced 
in a number of countries to reduce the pensions payable. 
A further tendency has been to link the pension receivable 
more  closely  to  the  contributions  paid  over  a  person's 
lifetime, so reinforcing the insurance aspect of the system. 
So far,  there has been no general tendency  to shift  away 
from  pay-as-you-go  to  funded  schemes  (from  contribu 
tions  covering  current  pensions  to  covering  future  lia 
bilities),  though  there  is  widespread  growth  in 
occupational and private pensions. 

Containing health-care costs: a common feature of recent 
policy  developments  in Member  States  has  been  to  im 
pose ceilings on expenditure of national health services or 
of  health  insurance  funds.  While  this, has  generally  suc 
ceeded  in holding down spending  relative to GDP, it has 
led to other concerns — about the way in which resources 
are  effectively  being  rationed  and  the  efficiency  with 
which  they  are  being  used.  In  many  countries,  direct 
charges  for  drugs  and  certain  services  have  been  intro 
duced or extended to make consumers aware of the costs 
involved in their supply and so encourage them to restrain 
their  demand.  In  a  number  of  Member  States,  govern 
ments  have  sought  to  exploit  the  potentially  beneficial 
effects  of market mechanisms on efficiency  by separating 
purchasers  and  providers  more  clearly,  by  encouraging 
both  to adopt more commercial  attitudes  and by  making 
room for managed competition in some areas. 

-3 

Modernising social protection and adapting systems to change 

Modernising social protection 
and adapting systems to change 

Systems  of  social  protection  and 

their reform have become a cen 
tral area of policy concern across the 
European Union. The Commission's 
Communication  Modernising  and 
Improving  Social  Protection in the 
European  Union  (COM(97)102) 
pointed  out  that  the  financial  and 
operational  structures  of  most  sys 
tems  were  established  decades  ago. 
Since then, the economic  and social 
conditions under which they operate 
have  changed,  and  will  continue  to 
do so. Demands on social protection 
systems have grown and constraints 
on their funding have tightened. This 
concern  has  been  reinforced  by  the 
ageing of the population and the im 
pending  growth  in  the  number  of 
people of pensionable age. In the  ef 
forts  to reform  social protection sys 
tems, the common aims are to assure 
their  continued  effectiveness,  to en 
sure  that  systems  strengthen  rather 
than  obstruct  economic  growth  and 
job  creation,  to  contain  the  costs of 
providing  social support to all those 
who  need  it  and  to  shift  towards  a 
more  active  policy  designed  to  get 
people  into employment  rather than 
merely  transferring  income  to  them 
when they are not working. 

This  new  emphasis  is  reflected  in 
recent  European  Council  declara 
tions.  At Dublin  at the end of  1996, 
the need  for taxation and social pro 

tection systems to become more em 
ployment-friendly  and more active in 
the fight  against unemployment  was 
stressed,  while,  at  the  Luxembourg 
Jobs Summit at the end of  1997, the 
Council called for  a more active ap 
proach to increase the employability 
of those out of work. The  framework 
for such an approach is set out in the 
Commission's  Communication 
mentioned  above  as  well  as  in  the 
1998  Employment  Guidelines 
agreed by the Council (OJ C 30 of 28 
January  1998). The main lines of ac 
tion identified in the latter—improv-
ing  employability,  developing 
entrepreneurship, encouraging adap 
tability  of  businesses  and  their  em 
the 
ployees  and  strengthening 
policies for equal opportunities — all 
have significance  for the orientation 
of systems of social protection. 

The present Report is very much fo 
cused on the themes which  were the 
subject  of  the  Communication  and 
the  Employment  Guidelines,  and 
which are a prominent feature  of the 
changes  being  made  to  systems  of 
social  protection  across  the  Union. 
Its specific aim is to contribute to the 
process  of  reform  by  reviewing  and 
analysing  these  changes  and  so 
broaden  understanding  of  the 
measures  concerned.  In  part,  it  up 
dates  the  analysis  contained  in  the 
two  previous  Social  Protection  in 

Europe Reports, for  1993 and  1995 
and  like  them  is  a  product  of  the 
European Council Recommendation 
of July  1992 (92/442/EEC) to moni 
tor the progress  achieved in relation 
to the convergence of  social protec 
tion  aims  and  policies  across  the 
Union.  (The full  report is  published 
in English, French and German; the 
present document which summarises 
the main  findings  is  available in  all 
11 Community languages.) 

It  is  based,  wherever  possible,  on 
quantitative  information,  drawn  in 
particular  from  two  new  sources  of 
comparable  data  — the revised ES-
SPROS (the European System of In 
tegrated Social Protection  Statistics) 
on  expenditure  on  the  various  ele 
ments of social welfare and their fin-
ancing  and  the  new  European 
Community  Household  Panel 
(ECHP). The latter provides, for  the 
first  time, a comparable  insight into 
income  and  living  conditions  in 
Member States, into the distribution 
of  benefits  between  households  and 
the level of income support they pro 
vide.  (Both  sources  of  data  are  de 
scribed  in  the  technical  annex  — 
Notes  and sources — at the back of 
the  full  report  and  these  should  be 
consulted before drawing policy con 
clusions from  the findings  presented 
here.) 

-4 

Modernising social protection and adapting systems to change 

Outline of the Report 
The Report begins by examining 

the  changing  context  in  which 
social  protection  systems  in  the 
Union are operating, focusing on the 
main demographic, social and econ 
omic  developments  affecting  the 
need  for  support.  Secondly,  it  ana 
lyses the scale of expenditure on so 
cial protection in Member States, its 
division between different  functions 
and  the  relative  importance  of 
various  sources  of finance.  Thirdly, 
it  considers  the  weight  of  social 
transfers  in  household  income  and 
their  contribution  to  reducing  dis 
parities  in  income  between  house 
holds. Fourthly, it reviews the major 
changes  which  have  been  made  to 
social  welfare  systems  across  the 
Union  in  recent  years,  focusing  on 
the period since 1995. 

Four aspects of particular policy con 
cern are analysed in some detail: 

• 

the  operation  of  unemployment 
compensation  systems  which  in 
a  number  of  Member  States  are 
being  modified  to  give  a greater 
to  fmd 
incentive  for  people 
work; 

•  policy towards retirement and, in 
particular,  towards  reversing  the 
trend  for  people  to  retire  before 
reaching  official 
pensionable 
age; 

•  action  to  contain  the  growing 
cost  of  health  care  while  safe 
guarding the quality of service; 

• 

long-term care for those who are 
infirm  or  too  frail  to  look  after 
themselves  and  who  are  impos 

ing  new  demands  on social wel 
fare systems. 

The changing 
context 
While European economies are 

wealthier  than  ever  before 
and real income, apart from brief in 
terruptions,  has  continued  to  grow, 
the  demands  on  systems  of  social 
protection  have  risen  even  more 
rapidly. In recent years, this has oc 
curred,  moreover,  in  a  macroecon-
omic context in which, in most parts 
of  the  Union,  Governments  have 
given priority to limiting expenditure 
growth and consolidating public fin 
ances.  (The  analysis  in Competitive 
Europe,  benchmarking 
the  EU 
against the experience of Ireland and 
New  Zealand  might  help  Member 
States decide how best to adapt their 
public finances and social protection 
systems to this new context.) Despite 
the  growth  in  wealth,  the  scale  of 
dependency  on  social  transfers  in 
most Union Member States is prob 
ably  greater  now  than  at  any  time 
during  the  post-war  years.  This 
seeming  paradox  is  explained  by  a 
combination  of demographic, social 
and  economic  developments  which 
have imposed pressure on social wel 
fare  systems they were not designed 
to deal with. 

In  the  first  place,  the  population 
above  the  official  age  of  retirement 
(65 in most countries) has increased 
in relation to the number of people of 
working-age  and  is  set  to  rise  even 
more  dramatically  in  the  years  to 
come. In  1986, for each person aged 
65 or over in the Union  (the present 
15 Member  States), there  were five 

people  aged  15  to  64.  By  1996, 
growth in the number of people of 65 
and  over  meant  that  for  every  one 
person in this age group, there were 
only just  over  4  people  of  working 
age.  By  2020,  on  the  latest  projec 
tions, there will be only just  over  3 
people of working  age in the Union 
for  every  one  person  aged  65  and 
over. 

At the same time, the number of men 
aged  between  55  and  64  no  longer 
economically  active  has  increased 
markedly, from  43% of those in this 
age group in  1986 to almost 50% in 
1996  (the  proportion  of  women  re 
mained  much the same), largely be 
cause  of  the  slow  rate  of  economic 
growth and the inadequate rate of net 
job creation. If this upward trend con 
tinues, it will add to the pressure on 
pensions  systems  in  future  years  as 
the growth in the relative number of 
people of 65 and over accelerates. 

Moreover,  the  average  age  of  the 
population of 65 and over is already 
increasing at the present time, inten 
sifying  the  pressure  on  health  care 
and social services (the average cost 
of  providing  health  care  alone  to 
someone aged 65-74 is estimated to 
be 2-2V2 times higher than for people 
under 65, for someone of 75 or over, 
4-5  times  higher). Whereas  around 
40%  of  those  of  65 and  over in  the 
Union  were  75  or over  in  1996, by 
2010, this is projected to rise to 47%, 
an increase of 3 3 % in numbers in just 
14 years (an average growth of 2% a 
year).  Although  total  population  in 
the Union is likely to increase by only 
3%  over  this  period,  therefore,  the 
'healthcare-adjusted'  rise  is  almost 
10%  (ie  in  terms  of  the  increase  in 
demand  for  health  services  implied 
by  the  prospective  demographic 

-5 

Modernising social protection and adapting systems to change 

change). Beyond  2010, though total 
population  is  unlikely  to  change 
much, the number aged 65 and over 
is  projected  to  continue  increasing, 
implying  a 
'healthcare-adjusted' 
growth in population of around V2% 
a year. 

Secondly,  unemployment  has  in 
creased markedly from  the rates ex 
perienced  in  the  earlier  post-war 
years.  In  the  Union  as  a whole,  the 
average rate was consistently  below 
3 % of the labour force throughout the 
1950s,  1960s  and  early  1970s, 
whereas  it  has  been  persistently 
above  8%  since  1982 —  except  in 
1990,  when  it  was  only  slightly 
lower.  A  significant  proportion  of 
people  of  working  age  have, there 
fore,  been  unable  to  obtain  a job  to 
contribute  to  the  generation  of  in 
come  required  to  support  those  in 
retirement and have instead added to 
the need for social transfers. 

The  average  duration  of  unemploy 
ment has also increased considerably 
since  the  mid-1970s.  By  the  mid-
1980s, the number in the Union who 
had  been  out  of  work  for  a year  or 
more  had  risen  to  over  5%  of  the 
labour  force,  over  half  of  the  total 
unemployed. While it fell slightly be 
tween then and the early  1990s, as a 
result of the high rate of job growth, 
by  1996,  the  number  had  risen  to 
around  5% of the labour force  once 
more. Over 8V2 million people across 
the Union were, therefore, long-term 
unemployed  at the last count and of 
these over 60%, almost 572 million, 
had been out of work for two years or 
more. 

In consequence, whereas unemploy 
ment compensation systems were de 
signed to provide income support for 

temporary  spells  of  joblessness,  in 
practice,  for  the  last  10  years  and 
more,  at  least  half  of  those  unem 
ployed  at  any  time  were  in  need  of 
longer  term  and,  almost  certainly 
more  extensive,  assistance.  More 
over, the figures for long-term unem 
ployment do not reveal the full extent 
of  the  increase  in  dependency.  Up 
until recently, there was also a signi 
ficant  rise  in  a  number  of  Member 
States  (in  the  Netherlands  and  the 
UK,  in  particular)  in  men  over  50 
classified as disabled largely because 
of their inability to find a job. 

The other major feature of economic 
developments  which  is relevant  has 
been the substantial and ongoing in 
crease  in  the  proportion  of  women 
pursuing working careers. This trend 
spread first across much of Northern 
Europe  in the  1960s  and  1970s and 
then,  in  the  1980s,  to  the  Southern 
Member States. In 1970, only around 
40%  of women aged 25 to 54 in the 
Union were in work or actively look 
ing for work. By the mid-1980s, this 
figure  had  increased  to 60% and by 
1996,  had  reached  almost  70%.  In 
Spain and Ireland, the figure has  risen 
from  under  40% to  57% during  the 
last  decade  alone. The  effect  of  this 
has been to increase the demand not 
only  for  social  support  to  help  take 
care of children and elderly and  frail 
parents or grandparents, but also for 
the individualisation  of rights under 
the  social protection  system  and  for 
due account to be taken of interrup 
tions to paid employment in the cal 
culation of benefit  entitlement. 

This  increase  in  demand  has  been 
reinforced  by the changing  structure 
of households  and, in particular,  the 
growth of people living alone and of 
lone  parent  families,  coupled  with 

the  decline  in  the  extended  family. 
The average household size declined 
by  5%  over  the  10  years  1986  to 
1996. This  decline  was  common  to 
most parts  of  the Union, though the 
average household size remains sig 
nificantly  larger  in  the  Southern 
Member States  (2V2 people  aged  15 
and  over per household)  than in the 
Northern  ones  (under  2  per  house 
hold). It is attributable, in particular, 
to  the  substantial  increase  in  single 
adult  households  (ie  with  only  one 
person aged  15 or over), which rep 
resented  almost  a  quarter  of  all 
households in the North of the Union 
in  1996 as  opposed to under  20% a 
decade earlier. 

Some 8% of single adult households 
in  1996 had children, though in Bel 
gium, Austria and the UK, the figure 
was over 12%. The great majority of 
the  adults  concerned  were  women, 
many  of them in parts of the Union 
not in work and dependent on social 
transfers  —• in the UK, for example, 
some  two-thirds  of  lone-parent 
families  receive income support. 

Moreover,  in general, if  someone is 
unemployed  in the Union, there is a 
much  higher  probability  that  they 
live  either  alone  or  in  a  household 
where the  other members are out of 
work than in one where someone else 
is in paid employment and, therefore, 
bringing in income. In  1996, 15% of 
households in the Union with a work 
ing-age adult had nobody in work. In 
Belgium,  Finland  and  the  UK,  the 
figure  was  20%  or  more,  much 
higher than the average rate of unem 
ployment.  In  the  UK,  where  unem 
ployment  fell  significantly  over  the 
10 years 1986 to 1996, the proportion 
of households where nobody was in 
work  rose,  while  in  Ireland,  where 

Modernising social protection and adapting systems to change 

unemployment fell by even more, the 
proportion remained unchanged. 

The main 
quantitative findings 

The scale of 
social expenditure 

Any assessment of the scale of social 
protection  in  European  countries, 
and the associated cost in terms of the 
transfers involved, can only satisfac 
torily  be made  by  considering the 
revenue side of the public sector ac 
counts as well as expenditure. This is, 
first, because  social transfers  are in 
creasingly  subject  to tax or  social 
charges  in  a  number  of  Member 
States  and,  accordingly,  part  of the 
expenditure incurred by government 
returns as  tax or other receipts. Sec 
ondly, effective transfers can, in prin-
c i p l e,  be  made  t h r o u gh  tax 
concessions or allowances as well as 
through benefit payments and, in this 
case, will show up as lower receipts 
rather  than as expenditure.  Estimat 

ing  the scale  of  such  so-called tax 
expenditures  and the revenue gener 
ated by taxes on benefits is, however, 
fraught  with  difficulty. 

So far as expenditure  is concerned, 
social  protection  (as defined  under 
the new ESSPROS  to include social 
transfers, either in cash or in kind for 
welfare  purposes,  and health  care) 
amounted to 28'/2% of Union GDP in 
1995.  This  figure,  however,  varied 
markedly  between  Member  States, 
ranging from 20% of GDP in Ireland, 
21 % in Greece and Portugal and 22% 
in Spain, to 30% or more in France, 
the Netherlands and the three Nordic 
Member States, with Sweden  show 
ing  the highest  figure  at just  under 
36% of GDP (Graph  1). For the rest, 
in  Belgium,  Germany  and Austria, 
expenditure  was just  under  30% of 
GDP, while in the UK, it was around 
2772% and in Italy 24V2%. (Because 
of  the newness  of  the  system  of 
classification,  these  figures  are pro 
visional and liable to change as better 
information  becomes  available — 
see  Notes  and sources  in the main 
report.) 

The  variation  in  these  figures be 
tween Member States are broadly in 
line with relative levels of prosperity, 
as measured by GDP per head, and, 
therefore, reflect  the ability of coun 
tries to support the expenditure con 
cerned.  Nevertheless,  it  is  evident 
that  there  are differences  between 
countries with similar levels of pros 
perity  in the implicit  priority ac 
corded to social  protection.  This, in 
turn, partly reflects differences  in so 
cial  characteristics  (in the tendency 
for  women  to  pursue  working 
careers, for example, which is high in 
the  Nordic  countries  and low in 
Italy),  in  the age structure  of the 
population  and  in the degree  of re 
liance  on private  provision  (private 
pensions are included to varying ex 
tents in the ESSPROS  data  depend 
ing on the degree of social solidarity 
involved). 

In  a number  of the  countries,  how 
ever, especially in those where social 
spending is high in relation to GDP, 
benefits  are subject to tax and/or so 
cial charges, so that part of the money 
paid out by government comes back 
as receipts on the revenue side of the 

Total  expenditure  on social  protection  by  broad 
function  in Member  States,  1995 

2 

Growth  of social  expenditure  in real  terms in 
Member  States, 1990-93 and  1993-95 

%GDP 

Annual average % change 
(expenditure deflated by GDP deflator) 

B 1990-93 
•  1993-95 

• ( • • l i no 1111 

L  i al 

IRL  P  GR  E 

I 

L  UK  E14  D  A  B  F  NL  FIN  DK  S 

E  NL  S 

I  DK  FIN  E13  F  UK  P  D  GR  B  A  L 

IRL 

GR provisional data, nc breakdown available 

DK  1990-94 and  1994-95, GR & S no data Defore 1993 

Modernising social protection and adapting systems to change 

accounts.  This  part,  moreover,  has 
tended to increase in recent years as 
governments have sought both to tar 
get  protection  more  effectively  on 
those most in need of support and to 
distribute the costs more evenly. 

According  to  a  recent  study  ('Net 
public  social  expenditure',  OECD, 
Labour  Market  and  Social  Policy 
Occasional Papers,  No.  19),  direct 
taxes and social contributions levied 
on benefits  amounted  to  almost 6% 
of GDP in the Netherlands, over 5% 
in Sweden, 4% in Denmark and 272% 
in Germany, whereas in the UK, the 
figure was virtually zero. Taking ac 
count also of the revenue from  indi 
rect taxes as beneficiaries spend their 
transfers  —  which  is  more  similar 
between countries — reduces expen 
diture  on  social  protection  in  net 
terms  to  around  27%  of  GDP  in 
Sweden  and  to  between  23%  and 
2572% of GDP in the other four. This 
is  much  less  of  a  difference  than 
shown by the gross spending  figures 
noted above. Moreover, in net terms, 
the UK is estimated to have  slightly 
higher  expenditure  relative  to  GDP 
than Germany and the Netherlands. 

These  estimates  relate  to  only  five 
Member States for a single year (Eu-
rostat  plans  to  develop  special  mo 
dules on the effects  of taxes as part of 
ESSPROS) and are somewhat tenta 
tive. A further insight into the relative 
weight  of  social  transfers  can  be 
gained  from  the  ECHP  data  on  net 
benefits  received  by  households. 
Benefits  in this case are confined  to 
cash transfers and exclude benefits in 
kind, such as health care, though they 
include all private pensions. Accord 
ing  to  these  data,  social  transfers 
amounted,  on  average,  to just  over 
30% of net household income in the 

Union  in  1993  (the  Union  here  ex 
cludes Austria, Finland  and Sweden 
which  were not covered by the  first 
wave of the ECHP). 

The  pattern  of  variation  between 
Member  States  differs  from  that 
shown by the figures for gross expen 
diture relative to GDP. Social trans 
fers  were  highest  in  Belgium  and 
France, at over 36% of net household 
income (though the figure for France 
is  slightly  overstated  because  trans 
fers  are measured  gross  of  the  rela 
tively small amount of tax payable on 
them),  and  next  highest  in  Italy, 
which is well below the Union aver 
age  in  terms  of  the  expenditure 
figures, at just under 33 %. They were 
similar  to  the  average  in  Denmark 
and the Netherlands, as they were in 
Spain, where, like Italy, the ratio of 
expenditure to GDP is relatively low, 
below  average in Germany,  Ireland, 
Luxembourg  and the UK (at around 
27%  of  net  income)  and  lowest,  in 
Greece and Portugal (25% and 22%, 
respectively), in line with the expen 
diture figures. 

So far no reliable estimates are avail 
able for  the overall  value  of  tax-ex 
penditures  and  their  exclusion  is 
liable to distort the comparative pic 
ture  which  emerges  from  the  ES 
SPROS  and ECHP  data,  though  the 
amounts involved seem in most cases 
to  be  relatively  small  (though  there 
are exceptions, such as the UK where 
tax  relief  on  private  pension  con 
tributions is important). 

The pattern of 
social expenditure 

Old-age  pensions  are  by  some  way 
the  largest  item  of  social  protection 

expenditure in the Union, accounting 
for 4272% of the total in  1995, equi 
valent  to  12% of  GDP. The  figure, 
however,  varies  from  over  60%  in 
Italy  (1572%  of  GDP)  —  far  more 
than in any other Member State (but 
include  some  transfers  allocated  to 
other items in other countries) — to 
32% in Finland (1072% of GDP) and 
only 25% in Ireland (5% of GDP). In 
the latter, this partly reflects the small 
proportion  of  the  population  above 
retirement age, just as the high figure 
in Italy reflects  the opposite, though 
here the large numbers retiring early 
reinforces  the  unfavourable  age 
structure. 

While,  in  general,  high  unemploy 
ment  is often  regarded  as a primary 
cause of high levels of social spend 
ing, in reality, transfers  to the unem 
ployed accounted for only 8% of total 
expenditure  in  the  Union  in  1995 
(just  under  272%  of  GDP)  —  less 
than  spending  on disability  benefits 
and  only  a little  higher than that on 
family allowances. Only in Belgium, 
Denmark, Finland and Sweden, was 
expenditure  on  unemployment 
benefits  significantly  above  3%  of 
GDP (4-5% in each case). 

At the same time, such expenditure is 
only  a  very  partial  indicator  of  the 
costs  of  unemployment  for  systems 
of social protection. Not only does it 
reduce  the  finance  available  from 
taxes  and  contributions,  but  it  also 
adds to spending in other areas. Part 
of spending under disability benefits, 
housing allowances and social exclu 
sion  is  also,  in  practice,  related  to 
unemployment  —  or,  more  gener 
ally, to job shortages — as is a large 
part  of spending  on early  retirement 
pensions (which are included as part 
of old-age pensions in about half the 

-8 

Modernising social protection and adapting systems to change 

Member  States  rather  than  unem 
ployment compensation, as required 
under the ESSPROS  classification). 
In  the Netherlands  and  the UK,  ex 
penditure  on  disability  benefits  was 
much higher than on unemployment 
benefits  in  1995 (472%  of GDP and 
3%, respectively), while spending on 
housing  and  social  exclusion 
amounted  to  another  1%  of  GDP 
across the Union (over 2% of GDP in 
Denmark, Sweden and the UK). 

Health care is the second largest item 
of expenditure, amounting to around 
22% of the total in the Union, as well 
as  in  all Member  States, except  for 
Denmark  (only  14%),  and  to  some 
6%  of  GDP,  though  varying  from 
under  5%  in  Denmark  and  Italy  to 
772% in France, well above the figure 
in any other Member State. 

The growth of 
social expenditure 

Total  spending  on  social  protection 
increased  from  just  under  26%  of 
GDP  to  2872%  over  the  five  years 
1990 to 1995 as compared with a  rise 
of around  1 % of GDP over the 1980s 
(on  the  previous  ESSPROS  defini 
tion).  The  increase  was  common  to 
all Member  States  with  the sole ex 
ception  of  the  Netherlands,  where 
there  was  a  small  fall.  (Unfortu 
nately, no estimates are available for 
the  change  in  net  terms,  which  is 
likely to have been less.) 

The  rise,  however,  reflects  in  large 
measure  the  slowdown  in  GDP 
growth itself  during  the  1990s — to 
under  l72% a year as against almost 
272% in the 1980s. Moreover, the  rise 
was  confined  to  the  period  1990  to 
1993,  the  years  of  recession  when 

there was very little growth at all in 
GDP. In the two years  1993 to 1995, 
social spending in the Union declined 
on  average  relative  to  GDP, rising 
only in Belgium, Germany and Aus 
tria and falling elsewhere. While this 
was  partly  due  to  some  recovery  in 
GDP,  it  was  also  the  result  of  a 
marked  slowdown  after  1993 in the 
growth  of  social  protection itself, to 
some  extent  reflecting  the  stabilisa 
tion of unemployment after the large 
rise  which  occurred  during  the  re 
cession years. 

In  real  terms  (adjusting  for  general 
inflation),  social  spending  grew  by 
an average of around 472% a year in 
the Union in the three years  1990 to 
1993, when GDP hardly increased at 
all. In the two years, 1993 to 1995, it 
went  up by  l72%  a year  (Graph 2). 
Only  in  Belgium  and  in  Ireland 
(where GDP rose by over 9% a year) 
was there no reduction  in the rate of 
real  growth  over  the  latter  period. 
Even after excluding  unemployment 
benefits, which declined in real terms 
between  1993 and  1995, average ex 
penditure growth after  1993 was half 
the rate in the three years before. 

The largest rise in social expenditure 
over the five years  1990 to  1995 (6-
7%  of  GDP)  occurred  in  Portugal, 
where  efforts  were  being  made  to 
raise  protection  to  the  standards  in 
the North of the Union, and Finland, 
where  unemployment  rose  more 
steeply than anywhere else. By con 
trast, in the Netherlands, expenditure 
fell slightly relative to GDP, while in 
Ireland  and  Italy,  the  rise  was  well 
below  average  (under  1% of  GDP), 
in the former, GDP and social spend 
ing  growing  strongly,  in  the  latter, 
both growing slowly. 

Apart from  unemployment  benefits, 
old  age  pensions  and  health  care 
showed  the  largest  rise  over  the 
period (up by  1 % of Union GDP and 
72%  respectively),  in  part  reflecting 
the  ageing  of  the  population.  Be 
tween  1993  and  1995,  however, 
spending  on health care fell  relative 
to  GDP  in  a  number  of  countries, 
while  that  on  old-age  pensions  rose 
in line with, or less than, the growth 
in GDP in most Member States. 

Sources of finance 

The funding  of social protection con 
tinues to be the focus of much policy 
attention.  The  emphasis  throughout 
the  Union,  as  part  of  the  attempt  to 
increase  job  creation,  has  been  on 
reducing  non-wage  labour  costs. 
This  objective,  proposed  by  the 
Commission  in  its  White  Paper  on 
Growth,  Competitiveness  and  Em 
ployment in  1993, was confirmed by 
several  European  Councils,  espe 
cially in Dublin at the end of 1996, as 
well  as  in  the  Employment  Gui 
delines  adopted  at the  end  of  1997. 
However,  so  far  there  is  little  sign 
that  the  level  of  charges  levied  on 
labour (taxes and social contribution-
s) has decreased. In fact, the implicit 
tax rate is estimated to have increased 
from  35% in  1981 to  42%  in  1995. 
(Improvements in the coordination of 
taxation policies across the Union to 
address this issue are currently being 
discussed  by  the  Taxation  Policy 
Group set up be the European Coun 
cil in Dublin at the end of  1996.) 

The  funding  for  social  protection  in 
all Member States comes partly from 
social  contributions,  levied  mostly 
on  income  from  employment,  and 
partly  from  general taxation, though 

-9 

Modernising social protection and adapting systems to change 

in a few  countries (Belgium,  France 
and Luxembourg, in particular)  'ear 
marked'  taxes have been introduced 
in recent years. On the latest  figures 
(for  1995), around 65% of finance in 
the Union still comes from  contribu 
tions,  some  60%  of  these  paid  by 
employers,  including  voluntary  as 
well  as  statutory  contributions  (ie 
40% of total funding), and 30% from 
taxation,  virtually  all  of  this  from 
general taxes. 

The relative weight of the two broad 
sources varies between countries, re 
flecting the historical development of 
the  system  itself. In Member  States 
where the system has its origins in the 
provision  of  social  insurance  for 
those  in  employment  (the  so-called 
Bismarkian  system) — the Benelux 
countries,  France,  Germany  and 
Austria  —  social  contributions  still 
account  for  two-thirds  or  more  of 
funding  (as much as 77% in France). 
In the Nordic countries, the UK and 
Ireland,  where  the  system  has  its 
origins in the provision of social wel 
fare  for  those in need (the  so-called 
Beveridge  system),  social  contribu 
tions  account  for  less  than  half  of 
total finance  (40% or less in the UK 
and Ireland and only 2372% in Den 
mark).  In  the  South  of  the  Union, 
two-thirds or more of revenue comes 
from  contributions  in Greece, Spain 
and Italy, but just under half in Por 
tugal. 

tributions  declined  from  43% of the 
total to 3972% in the five years 1990 
to 1995, while that raised from  those 
protected rose from 2272% to 2372%. 
This shift  was common to all Mem 
ber  States, except  for  Denmark  and 
the  Netherlands,  where  employers' 
contributions  are  relatively  small, 
and  Belgium.  It  was  especially 
marked  in  Portugal  and  Finland, 
where revenue from employers' con 
tributions was reduced by some 20% 
in relative terms. 

In relation to labour costs, however, 
the  evidence  suggests  that  em 
ployers'  contributions  increased 
slightly  between  1990  and  1995 
across  the  Union,  while  they  re 
mained  virtually unchanged  relative 
to  GDP,  despite  their  decline  as  a 
share of total funding  for  social pro 
tection.  Though  governments  have 
sought to relieve employers of some 
of  the costs  of financing social pro 
tection, therefore, this aim has gener 
ally been frustrated  by the growth of 
expenditure — and funding  require 
ments —  at a higher  rate than  GDP 
and,  accordingly,  than  the  tax  base 
from  which revenue has to be raised. 
The increase in employers' contribu 
tions  relative  to labour costs  (or the 
overall wage bill as measured by the 
compensation  of  employees)  was 
common  to  all  Member  States  for 
which  data  exist  (ie  excluding 
Greece,  Luxembourg  and  Sweden), 
except Portugal and Ireland. 

In all countries, except Denmark and 
the Netherlands, a much larger share 
of  contributions  comes  from  em 
ployers  than  from  those  being  pro 
tected.  In  line  with  stated  policy 
aims, however, there has been some 
shift  to  other  sources  during  the 
1990s. In the Union  as a whole, the 
revenue raised from employers' con 

The other main development  on the 
funding  side,  apart  from  the  emer 
gence  of  earmarked  taxes,  which  is 
limited  to  a  very  few  countries  (in 
France,  their  share  of  revenue  rose 
from 372% in 1990 to 8% in 1995), is 
the  increase  in  contributions  levied 
on  old-age  pensioners  and  other 

benefit  recipients. This reflects  both 
the  growing  real  income  of  pen 
sioners  and  the  desire  to  spread  the 
cost of financing  more evenly across 
the population. Nevertheless, only in 
the  Netherlands  (872%)  and  Ger 
many  (4%)  are  they  a  significant 
source of  funding. 

Levels of 
unemployment benefit 

Data from the ECHP for the first time 
enable the actual level of benefit  re 
ceived  by  those  out  of  work  to  be 
compared across the Union (whereas 
previously  it  has  been  necessary  to 
rely on the results of  models —  see 
Social Protection  in Europe,  1995, 
Chapter  4  —  which  however  well 
they  capture  the  features  of  the 
benefit  and tax systems in operation 
provide no indication  of  how  repre 
sentative the results for  hypothetical 
cases  are  in  reality).  They  indicate 
that,  in  practice,  the  disincentive  to 
look  for  work  associated  with  the 
benefit  system  seems  to  vary  mar 
kedly  across  the  Union.  In  the  first 
place, around a quarter of those aged 
25 to 64  in  the  Union  in  1993 who 
were  unemployed  for  at  least  three 
months  received  no  unemployment 
benefit  at all (though they may have 
received  other  means  of  support  to 
ensure that their income did not  fall 
below  a  minimum  level).  This  pro 
portion, however, varied from  5% or 
less in Belgium, Denmark, Germany 
and the UK and only slightly more in 
Ireland,  to  around  two-thirds  in 
Greece,  Italy  and  Portugal  (in  the 
ECHP  no comparable  data  exist  for 
the  Netherlands,  Austria,  Finland 
and Sweden and there are insufficient 
observations for Luxembourg). 

10 

Modernising social protection and adapting systems to change 

Secondly, for those receiving benefit, 
the  monthly  payment  averaged  just 
over  50%  of  net  earnings  for  the 
months  that  they  were  employed 
(which,  it  should  be  emphasised, 
could be in the jobs they moved into 
after  they  were unemployed  as well 
as in the jobs they had before becom 
ing unemployed), but was over 75% 
in Portugal (though only a third of the 
unemployed  received  anything)  and 
around 60-65% in Denmark, France 
and Ireland, but only 25% in Greece 
and the UK (Graph 3). Benefit levels 
in  Belgium  and  Germany  were 
around  the Union  average, in  Spain 
just above and Italy below. (It should 
be emphasised  that these figures  re 
late  only  to benefits  linked  with un-
e m p l o y m e nt  and  the  people 
concerned  may  also be  in receipt of 
other transfers which might affect the 
level  of  benefit  relative  to  earnings 
— see Chapter 4 of the full report.) 

Thirdly, the proportion of the unem 
ployed  receiving benefits  of 80% or 
more  of  their  net  earnings  when  in 
work  (assuming  that  their  average 
monthly earnings calculated from the 
ECHP  data  reflect  the  pay  they  re 

ceive in the jobs they move into after 
being  unemployed),  was  relatively 
small  in most  of  the Member  States 
covered (around 20% or less of men 
in  8 of  the  10 countries,  all  except 
Ireland and Portugal and under 6% in 
Greece, Italy, and around 20% or less 
of  women  in  7  of  the  countries, 
though  around  a  third  in  Germany 
and France and half in Denmark). 

These figures  need to be  interpreted 
with some caution, however, since in 
a number of countries where  benefit 
levels  are  low  (the  UK  especially), 
various benefits  in kind not included 
in  the  ECHP  data,  such  as  housing 
allowances, are also payable to those 
unemployed  to supplement  their  in 
come  (it  is  also  important  to  take 
account  of  the  nature  of  the  data, 
which is explained  in Chapter 4 and 
Notes and sources in the full report). 
Nevertheless,  though  significant, 
these  additional  payments  are  un 
likely  to  alter  the  picture  substan 
tially,  partly  because  in many  cases 
they are also payable to those in low-
paid jobs, which  most  of  the unem 
ployed  tend  to  go  into  when  they 
return  to  work  (the  ECHP  indicates 

that monthly earnings of those unem 
ployed for part of  1993 were in most 
cases substantially below average — 
see Chapter 4 of the full report). 

The relief of poverty 

As constraints on social expenditure 
tighten,  the  concern  in  all  Member 
States  is  increasingly  to  allocate 
revenue  in  the  most  effective  way. 
Data on household  income from  the 
ECHP provide an insight into the ex 
tent to which transfers are targeted on 
the poorest in society and, as a result, 
succeed in alleviating  relative depri 
vation  and  narrowing  disparities  in 
income distribution, though it should 
be stressed that this is only one of the 
aims of  systems of  social  protection 
in the Union. 

According to the ECHP, social trans 
fers  (including  private  pensions)  in 
the Union accounted for around 30% 
of net household  income in  1993, as 
noted above. For some 37% or so of 
households,  they  represented  the 
main  source  of  income.  In  their ab 
sence,  almost  40%  of  households 

Average  unemployment  compensation  relative  to 
earnings  for  men  and  women  aged  25-64  in 
Member  States,  1993 
Unemployment  benefit/earnings  (%) 

Scale  of social  transfers  and  effect  on  households 
with  net  income  below  50% of  average,  1993 

%  Households 

B Before  transfers 
•  After transfers 
•  Transfers as % net income 

%  net income 

GR 

UK 

I 

E10  D 

B 

DK  D 

GR  E 

F 

IRL 

I 

L 

NL 

P 

UK 

E12 

-  11 -

Modernising social protection and adapting systems to change 

would  have  had  an  income  level of 
under 50% of the national average (a 
measure  conventionally  used  as  an 
indicator  of  relative  poverty  and 
agreed as a working definition by the 
Council  of  Ministers  in  December 
1984), many none at all. This propor 
tion  varied  comparatively  little  be 
tween countries. In Belgium, Ireland 
and  the  UK,  it  was  around  42%, in 
Denmark,  Germany,  Greece,  Lux 
embourg  and  the  Netherlands,  36-
37% (Graph 4). 

After transfers, and after tax, an aver 
age of around  17% of households in 
the Union had an income level below 
half the national average. In the UK, 
Ireland  and  Greece,  the  proportion 
was over 20% and in Portugal, some 
29%,  in  Spain,  France  and  Italy,  it 
was around the Union average (15 to 
19%), in  the  Benelux  countries  and 
Germany,  13-14% and in Denmark, 
under  9%. The effect  of  transfers  in 
reducing  the  share  of  households 
with income below 50% was greatest 
in Belgium and Denmark, where the 
reduction  was around  29 percentage 
points,  though  Denmark  achieved 
this  with  proportionately  smaller 
transfers  (30%  of  net  household  in 
come)  than  Belgium  (37%). The  ef 
fect  was  also  relatively  large  in 
France  and  the  Netherlands  (24-25 
percentage points), though in France, 
the  scale  of  transfers  was  similar  to 
that  in  Belgium  (even  allowing  for 
the  overstatement  of  transfers  in 
France  noted  above)  and  in  the 
Netherlands,  similar  to that  in Den 
mark. 

By contrast, the reduction in the share 
in  Greece  was  only  14  percentage 
points and in Portugal, only just over 
10 percentage points. In terms of the 
scale of  social  transfers  (25% of net 

household  income  in  the  former, 
22% in the latter), the effect in reliev 
ing poverty in the two was very simi 
lar and in both transfers  appear to be 
less  targeted  on  the  poorest  than  in 
other Member States (around 70% of 
transfers  going  to  households  with 
under  half  average  income  before 
transfers as against 77% in the Union 
as a whole). 

Over the rest of the Union, the reduc 
tion  in  share  was  20-23  percentage 
points,  though  again  the  level  of 
transfers  involved  in  achieving  this 
differs  between  countries,  being 
higher  in Italy, for  example,  than in 
Germany  (23  percentage  points  as 
against 20). 

The comparatively small effect of so 
cial transfers  on income  distribution 
in Greece  and Portugal  also  reflects 
their  uneven  allocation  between 
households,  with  some  receiving  a 
substantial amount,  others compara 
tively little. This was particularly  so 
in the case of old-age pensions which 
are  the  major  element  in  transfers, 
though  it also applied to other trans 
fers  (unemployment benefits,  family 
allowances  and  so  on),  as  it  did  in 
Italy. In the case of these other trans 
fers, over the Union as a whole, 19% 
went to the  17% of households  with 
income  below  50% of  average  after 
transfers  and  37%  to  the  30%  with 
income below 65% of average. 

In  the  case  of  old-age  pensions,  on 
the other hand, 19% of transfers went 
to  the  15%  of  households  in  the 
Union with income of over  l72 times 
the  average  after  transfers  (28%  in 
Greece and  Portugal  to the  16-17% 
of  the  households  in  this  category, 
25% in France to the  13% of house 
holds and 29% in the Netherlands to 

the  15%  of  households).  In  four 
countries,  however,  Belgium,  Ire 
land,  Luxembourg  and,  most  espe 
cially,  Denmark,  pensions  went 
disproportionately  to  lower-income 
households. 

Recent changes 
in policy 
The common response of govern 

ments  across  Europe  to  the ex 
penditure  trends  noted  above,  has 
been to seek ways, on the one hand, 
of containing the growth of spending 
and, on the other, of activating policy 
to  reduce  the  number  of  people  de 
pendent on social transfers. The acti 
vation  of  policy  has  been  a  central 
theme  underlying  many  recent  re 
forms,  the aim being  to shift  from  a 
passive  stance  of  income  support to 
an  active  one  of  encouraging  those 
out of work to take up paid employ 
ment,  by  increasing  incentives  to 
work  and  helping  people  to  partici 
pate  in  society  and  working  life. 
Measures  have,  therefore,  been  im 
plemented  to  improve  the  em-
ployability  of  those  out  of  work,  to 
provide access to training and career 
guidance and to assist them in finding 
ajob. 

This approach has not been  confined 
to  those  registered  as  unemployed 
but has been extended to other groups 
dependent  on  long-term  state  sup 
port,  especially  to  people  with  dis 
abilities  but  potentially  able  and 
wanting  to  work,  lone  parents  and 
those  retiring  from  work  early. The 
aim  has  been  not just  to  reduce de 
pendency  and  expenditure,  but  to 
combat  social  exclusion  by  helping 
the  people  concerned  find  a  more 

12-

meaningful  place  in  society  and  a 
chance  to  contribute  to  its  well-
being. 

The  ageing  of  the  population  has 
added further impetus to these effort-
s. It has also served to focus increased 
attention  on  the  growing  costs  of 
health  care,  which  goes  dispropor 
tionately  to  the  elderly,  and  on  the 
need  for  new  ways  of  catering  for 
those requiring long-term care. 

The concern to address this new need 
exemplifies  the  prevailing  attitude 
towards  social  protection  across  the 
Union. Although  the emphasis is on 
cost  containment  and  reducing  ex 
penditure  wherever  possible,  the 
principle  of  maintaining  a universal 
system which provides protection to 
all  those  in  need  remains  unques 
tioned. Nevertheless, there is increas 
ing  debate  on  how  widely  social 
welfare  systems should extend, what 
risks  they  should  cover  and,  most 
pertinently,  where  state  responsi 
bility  should  end  and  individual  re 
sponsibility  take  over.  At  the  same 
time, there is a growing emphasis on 
the pursuit of active measures and the 

Expenditure  on  active  and  passive  labour  market 
policies  in  the  Union,  1990-96 

Modernising social protection and adapting systems to change 

need to support  policies  for increas 
ing employment, the main guidelines 
of  which  were  agreed  by  Member 
States at the Luxembourg Jobs Sum 
mit. 

Tightening eligibility 
for benefit 

In  several  Member  States  (the 
Netherlands and Sweden, in particu 
lar),  the  qualifying  conditions  for 
benefit  have  been  tightened  since 
1993 (the year to which the analysis 
above  relates),  while  in  others 
(Spain,  Austria  and  Finland),  the 
contributions  record  required  to  be 
eligible  for  benefit  has  been  leng 
thened.  Rates  of  benefit  have  also 
been  reduced,  as  in  Germany  and 
Finland — in the latter by their non-
indexation in  1995 and  1996. On the 
other hand, in Sweden,  although the 
rate of benefit was reduced from 80% 
to 75% in  1996, after  being lowered 
from  90% before  that,  the  rate  was 
restored to 80% in 1997. 

The  period  of  entitlement  to  insur 
ance benefit  has also been shortened 
in  some  Mem 
ber  States — in 
the  UK,  from 
one year to only 
6 months on the 
introduction  of 
the Job Seeker's 
Allowance  in 
1996  (payment 
being  means-
t e s t ed 
after 
that);  in  Den 
mark,  from  9 
years  to 7 years 
in  1995 and to 5 
years  in  1996, 
though  it  re 

mains  among  the  longest  in  the 
Union (but for the last 3 years, inten 
sified  efforts  are made to get the un 
employed  into  active  programmes). 
In Belgium, from  1996, benefits can 
be withdrawn if the person concerned 
has been unemployed  for more than 
l72  times  the  regional  average  (in 
stead of twice as long as before). 

Strengthening 
incentives to work 

Cuts  in  benefit  and  a  tightening  of 
eligibility  criteria  provide  in  them 
selves  an  increased  incentive  to 
work. Other measures have also been 
introduced  in a number  of countries 
to  make  it  more  attractive,  and  in 
some cases more feasible, for people 
to  work  rather  than  remain  unem 
ployed. In-work benefits, designed to 
increase  the  take-home  pay  from 
working,  even  in  low-paid  jobs, 
exist,  at present,  in only the UK (eg 
Family  Credit)  and  Ireland  (Family 
Income Supplement). Whereas so far 
they  have  been  paid  only  to  people 
with  children,  in  the  UK,  a  pilot 
scheme  was  introduced  in  1996  for 
low-paid  workers  without  children. 
In  both  countries,  the  number  of 
people  covered  by  in-work  benefits 
has  increased  in  the  recent  past  as 
qualifying  income  levels  have  been 
raised.  Lone  parents  have  been 
targeted  specifically,  with  a  new 
benefit  for these being introduced in 
Ireland in 1997. Help with child care 
for  low  income  families,  including 
lone parents, was also introduced re 
cently  in  the  UK.  In  the  latter  and 
elsewhere, attempts have been made 
to encourage the unemployed to take 
part-time jobs, partly to prepare them 
better  for  full-time  employment  — 
through  giving  them  entitiement  to 

13 

Modernising social protection and adapting systems to change 

unemployment benefits (in Belgium, 
or  enabling  them  to  keep  some  of 
their benefit  in the UK). 

Effects  similar  to those  of  in  work-
benefits  can  be  also  obtained  by 
granting  specific  tax advantages  for 
low-wage  earners  (eg  in  Finland, 
measures have been introduced to re 
duce the income tax paid by those on 
low pay, a concession which is with 
drawn as earnings increase). 

Shifting towards 
more active policies 

Changes in unemployment  compen 
sation  systems  have  generally  been 
accompanied  by  measures  aimed  at 
increasing  the  employability  of  the 
unemployed and helping them find a 
job, including, for example, training 
to  improve  skill  levels  in  line  with 
labour  market  requirements  and ad 
vice  on  job  search  and  interview 
techniques.  Shifting  policy  from 
passive measures of income support 
to active measures, however, is not so 
easy,  especially  during  periods  of 
high  unemployment.  Given  budget 
constraints, it requires a restructuring 
of  expenditure  and  a  reform  of 
benefit  and tax systems to maximise 
the  return  on  existing  outlays.  Al 
though the need to shift  expenditure 
from  passive to active labour market 
measures  was  highlighted  by Mem 
ber States at the Essen Summit at the 
end  of  1994  and  reiterated  at  suc 
cessive  Council  meetings  since, the 
policy  intention  has  been  slow  to 
show up in the figures on labour mar 
ket  expenditure.  Between  1990  and 
1996, there was  only  a small rise in 
the Union as a whole in spending on 
active  in  relation  to  passive 
measures, all of  which  has occurred 

since  unemployment  stabilised  in 
1994  (Graph  5).  Member  States 
have,  therefore,  reaffirmed  their 
commitment  to  bring  about  such  a 
transition  in  the  Employment  Gui 
delines  agreed  at  the  Luxembourg 
Jobs Summit. 

In  a number of Member  States, con 
scious efforts  have been made to im 
prove  the  articulation  between  the 
provision of income support and get 
ting  the  unemployed  into  work.  In 
Denmark,  as  noted  above,  measures 
were introduced in 1995 to ensure that 
anyone  unemployed  for  two  years 
either receives a job offer or goes on a 
training course, which  seems to have 
been  a key  factor  in reducing  unem 
ployment to under 6% at the last count 
as  against  over  8%  in  1994.  At  the 
same time, those under 25 with insuf 
ficient  education  or  training  have  a 
right  to education or training for at least 
18 months  if  they  have  been  unem 
ployed  for  six  months but  forfeit  the 
right  to  receive  unemployment 
benefits if they do not take up the offer. 
In  Sweden,  a  new  programme  was 
launched in 1996 to draw up individual 
action plans  for job-seekers, who are 
able to take a year off  to study while 
effectively  receiving  unemployment 
benefit. In the UK, a key element of the 
Jobseeker's Allowance, introduced in 
1996, is a requirement  for  the unem 
ployed to enter into an agreement spec 
ifying  the steps they intend to take to 
find work and the services available to 
help them. 

These programmes exemplify  the in 
creasing importance attached to pro 
viding  job-search  assistance  to  the 
unemployed  as  well  as  access  to 
training  or  re-training  courses. This 
importance  was  emphasised  at  the 
Luxembourg  Jobs  Summit  and  is a 

-  14-

prominent  feature  of  the  Employ 
ment Guidelines  agreed by Member 
States, which specified  that: 

•  every unemployed young person 
should be offered  a new  start be 
fore  reaching  six  months  of  un 
employment, 
the  form  of 
in 
training,  retraining,  work  prac 
tice, a job or other employability 
measure; 

twelve 

•  unemployed  adults should be  of 
fered  a  fresh  start  before  reach 
ing 
of 
unemployment  through  one  of 
the  above  measures  or,  more 
generally, through individual vo 
cational guidance. 

months 

Despite  the  acknowledged  import 
ance  of  training,  however,  only  a 
small minority of the unemployed at 
present receive training in the Union, 
a situation which Member States also 
committed  themselves  to improving 
in the Employment  Guidelines  (set 
ting a specific target of increasing the 
proportion to 20%). 

Extending job 
creation schemes 

In  several  Member  States, job  cre 
ation schemes  are under  discussion. 
Any  assessment  of  the  cost-effec 
tiveness of these schemes, however, 
has  to  take  account  not  only  of  the 
direct effect  on jobs of the measures 
introduced but also their substitution 
effects  (employers  dismissing 
workers  and  taking  on  subsidised 
ones  in their  place)  and  deadweight 
costs  (employers  recruiting  subsi 
dised workers they would have taken 
on anyway). 

Modernising social protection and adapting systems to change 

In  a number  of  Member  States, job 
creation  has  been  encouraged 
through  selective  reductions  in  the 
social  contributions  levied  on  em 
ployers as well as by direct subsidy. 
In Belgium, employers creating jobs 
for  young people and long-term  un 
employed  in  socially-useful  acti 
vities  ('Smets jobs')  receive  both  a 
large subsidy for three years and  full 
relief  from  social  contributions.  In 
the UK, employers taking on people 
unemployed  for  two  years  or  more 
are exempt from social contributions 
for  a year,  while  in  France,  recruit 
ment of the long-term unemployed is 
subsidised both directly and through 
reductions in contributions. The new 
French Government, moreover, is di 
verting the resources at present going 
to a range of job subsidies into plans 
for  creating  700  thousand  jobs  for 
young people at the minimum wage. 

More generally, Member States rec 
ognised  at  the  Luxembourg  Jobs 
Summit  the potential importance  of 
job  creation  at the local level in the 
social economy and in new activities 
where  needs  are  not being  satisfied 
by the market (eg in the environmen 
tal  sector). They  agreed  in  the  Em 
ployment  Guidelines  to  investigate 
measures  to  exploit  these  possi 
bilities  and  to  identify  and,  where 
possible,  remove  obstacles  to  their 
development. 

been  universally  available.  In  Italy, 
there is a political discussion whether 
to establish  a national  (in place of a 
regional) means-tested minimum in 
come scheme, with payments related 
to  family  size,  as  recommended  by 
the  Onofri  Report.  In  Portugal,  a 
rmnimum-income guarantee scheme 
was  introduced  in  1997,  involving 
not just the provision of income sup 
port but measures  to help  recipients 
integrate  into  society.  This  is  a  re 
sponse  to  the  experience  under 
longer-standing  schemes  elsewhere, 
where social transfers by themselves 
have  not  proved  sufficient  to  over 
come the problem of deprivation and 
social exclusion. 

Indeed,  a  general  tendency  throug 
hout  the  Union  is  to  address  the 
underlying causes of poverty and so 
cial  exclusion  and  to  avoid  systems 
of  income  support  becoming  the 
means  for  entrenching  a  permanent 
division  in  society  between  those 
who contribute to its well-being and 
those  who  do  not.  The  aim,  in  par 
ticular, is to help those dependent on 
benefits to become more self-suppor 
ting by giving them an opportunity to 
find a job, which means not just pro 
viding  access  to  training  and  job 
counselling  but  to  accommodation 
and  adequate  levels  of  health  care 
and social services, such as child care 
facilities. 

Reducing dependency 
and social exclusion 

In  all  Member  States,  social  assist 
ance  is  available  to  those unable  to 
work  for  one  reason  or  another, 
though  in  some  countries,  in  the 
South  of  the  Union,  in  particular,  a 
minimum  level  of  income  has  not 

In Denmark, from  1998 on, everyone 
receiving  social  assistance  will  be 
given the chance to return to educa 
tion or go on to a training scheme. In 
Germany,  increased  efforts  have 
been made to get those on social as 
sistance  into  active  labour  market 
programmes,  while  in  the  UK,  the 
new  Government  has  announced  a 
'welfare  to work'  programme aimed 

at reducing the number of people re 
liant on benefits. The latter is particu 
larly  focused  on  the  young,  the 
long-term  unemployed,  people  with 
disabilities  and  lone  parents.  From 
October  1998,  all  lone  parent  who 
wish to work will have access to per 
sonal  advice  from  the  employment 
services  as well  as receiving  assist 
ance  with  child  care.  At  the  same 
time,  however,  additional  benefits 
available to lone parents will be with 
drawn  for  new  claimants  and  the 
same level of benefifwill  be payable 
to  all  those  with  children.  In  the 
Netherlands,  in  similar  vein,  more 
stringent procedures for claiming so 
cial assistance have been introduced, 
requiring  recipients  to  be  actively 
seeking work and to accept any suit 
able job offer  they receive, except if 
they  are  lone  parents  with  a  child 
under  5. In  Luxembourg,  recipients 
of  support  are  required  to  have  ex 
hausted all other means of improving 
their  situation  and be actively  seek 
ing  employment,  unless  they  are 50 
or over or disabled. 

Helping people 
with disabilities 

Attempts have been made across the 
Union to reduce the number receiv 
ing disability benefits by introducing 
more stringent tests for assessing in 
capacity  for  work.  In  the  UK,  a 
tougher medical test, which  after  28 
weeks  on  benefit  is  designed  to 
assess  a  person's  fitness  to  do  any 
kind  of  work  rather  than  their  pre 
vious job, has been introduced, much 
the  same  as  in  Germany,  where 
benefit  entitlement  depends  on 
people being incapable of working at 
all. In the Netherlands, the  financial 
responsibility  for  disability  benefits 

15 

Modernising social protection and adapting systems to change 

has been shifted to employers whose 
contribution rates are now — partly 
—  differentiated  according  to  the 
number of their employees claiming 
disability benefits,  a measure which 
gives  an  incentive  both  to  improve 
health and safety at work and to con 
tinue  employing  those  with  disabil 
ities.  This  has  been  coupled  with 
greater stress on helping people with 
disabilities, but able and wanting  to 
work, to find jobs through active em 
ployment  programmes.  In  Austria 
and Finland too, the emphasis of pol 
icy has shifted  from  income support 
to rehabilitation,  with entitiement to 
benefit  needing  to be  re-established 
periodically. 

Incentives  for  people  with  disabil 
ities  to  look  for  work  and  help  for 
them  to  do  so  have  generally  been 
accompanied  by  legislation  to  pre 
vent  discrimination  against  them  in 
employment  and  in  their  access  to 
goods,  services  and  facilities  of 
various kinds as well as by enabling 
measures,  especially  in  the  work 
place,  to  remove  obstacles  to  them 
working  —  in  1993,  all  Member 
States  adopted  the  UN  Standard 

Member States, 1986 and  1996 

%  population in the age group 

S 

IRL  UK  P  DK  GR  E  D  E15 

16 

Rules of Equality of Opportunity for 
Disabled  People.  Such  measures, 
however,  while  increasing  equality 
of opportunity, will only result in ad 
ditional competition on the job mar 
ket, where those with disabilities will 
always  be  disadvantaged,  unless 
there is, at the same time,  sufficient 
growth of employment. 

Reversing the 
trend towards 
early retirement 

The  tougher  stance  on  disability 
benefits,  which  in many  cases  have 
been  paid  to  those  over  50  losing 
their job, is part of a reversal of policy 
towards  older  workers,  towards  en 
couraging  them  to  stay  in  employ 
ment rather than retire early  (except 
in agriculture where early retirement 
continues  to  be  promoted  under 
Regulation 2079/92) and represents a 
reaction  to  the  fact  that  in  1996 al 
most half of men aged 55 to 64 in the 
Union were no longer  economically 
active  (Graph  6).  Because  of  job 
shortages, however, there remains an 
awkward  con 
flict between in-
c r e a s i ng 
the 
number of older 
people  in  work 
and  reducing 
unemployment 
( t h o u gh 
this 
conflict  disap 
pears  once  the 
focus  of  policy 
is,  more  satis 
factorily,  on the 
e m p l o y m e nt 
rather  than  on 
the  unemploy 
ment  rate,  as  in 
the  Employ 

ment Guidelines). 

In  addition  to  the  examples  noted 
above,  those  claiming  early  retire 
ment pensions  in Sweden now need 
to  demonstrate  that  they  are  inca 
pable of working, in effect,  transfor 
ming the payment into an invalidity 
benefit,  while, at the same time, the 
basic  rate  has  been  reduced.  Eligi 
bility  criteria  have  also  been  tight 
ened  and  the  pension  effectively 
reduced  in  Germany  and  Austria, 
coupled in the latter with an increase 
in  the  required  period  of  contribu 
tions from  35 years to 3772. In Bel 
gium,  the  number  of  years  of 
contributions necessary to qualify for 
a  pension  is  being  raised  gradually 
from  20  to  35  beginning  in  1997, 
while  social  contributions  on  early 
retirement  pensions  have  been  in 
creased.  In  Spain,  voluntary  retire 
ment  before  the  age  of  65  is  now 
penalised, while in Greece, pensions 
payable  to  those  retiring  early  have 
also been reduced. 

Moreover, in Austria, further encour 
agement  to  employment  of  older 
workers has been  given by  a bonus-
malus scheme, reducing  social  con 
tributions for employers taking them 
on and imposing  a penalty  on those 
dismissing them. 

Encouraging 
partial retirement 

One  means  of  diminishing  the  con 
flict between providing jobs for older 
workers  and  reducing  unemploy 
ment is to encourage people to move 
from  full-time  to  part-time  employ 
ment  as  they  approach  retirement 
age.  This,  moreover,  can  ease  the 
transition  process  for  those  con-

6  Men aged 55-64 no longer in the labour force  in 

Modernising sacrai protection and adapting systems to change 

cerned  while  taking  extended  ad 
vantage  of  their  experience  and 
know-how.  Partial  pensions  to  this 
effect have been introduced in a num 
ber of Member States in recent years. 
Elsewhere, however, obstacles exist 
for  older  workers  wishing  to  work 
part-time  (in  the  UK,  for  example, 
they cannot continue to work for the 
same employer if they draw an occu 
pational pension). 

In  Austria,  a  partial  retirement 
scheme has existed since 1993, enab 
ling people to reduce hours of work 
and receive a proportion of the pen 
sion  normally  payable,  though  few 
people  have  opted  for  it,  seemingly 
because  early  retirement  per  se  is 
more attractive. In Finland, a similar 
scheme has existed  since the end of 
the  1980s, but again the number in 
volved has been small. In Germany, 
partial  retirement  has  been  intro 
duced more recentiy for those of 55 
and  over,  at  the  same  time  as  their 
eligibility  for  early  retirement  was 
restricted. The possibility of combin 
ing  a  partial  pension  with  a  partial 
salary  also  exists  in  Luxembourg, 
though  relatively  few  fewer  people 
have so far taken up the option. More 
success has been achieved in France, 
where partial retirement has been re 
garded  since  1993  as  a  solution  to 
(full)  early retirement and where the 
number opting for the latter has fallen 
while those continuing to work part-
time have risen (to 27,000 in 1995). 

Adapting to 
population ageing 
The  reform  of  pension  systems, 

aimed at managing the cost of the 
impending  growth  in  population  of 

pensionable  age  —  or,  more  accur 
ately,  the  income  redistribution  en 
tailed — has become a central policy 
aim in all countries. (The pension re 
forms in Italy, Sweden and France in 
particular were described  in detail in 
Social  Protection  in  Europe,  1995, 
Chapter 2, while a general economic 
analysis of pension reform and the fu 
ture of the welfare  state was recently 
published in European Economy,  Re 
ports and Studies, 4/1997.) A common 
response has been to raise the  official 
retirement  age of women to  conform 
with  that  of  men,  for  both  cost  and 
equity  reasons  —  as  in  Germany, 
Greece, Portugal, the UK,  and, more 
recently, in Belgium and Austria. In all 
these countries, as in most other parts 
of  the  Union,  the  official  retirement 
age is being standardised at 65. This, 
however,  is  being  coupled  with  in 
creased emphasis on the contributions 
record of those retiring, so linking the 
pension received more closely with the 
payments made over a person's work 
ing  career  and  reinforcing  the  insur 
ance aspect of the system. 

In  addition,  the  effective  pension 
payable relative to past earnings has 
been  reduced  in  a number  of  coun 
tries  by  altering  the  calculation  for 
mula.  In  France,  Portugal,  Austria 
and Finland,  the number of years of 
earnings  on  which  the  pension  is 
based  has  been  increased,  while the 
method of revaluing pensions for in 
flation  has  been  made  less  favour 
able,  as  has  also  occurred  in  Spain, 
Germany (through a shift in the basis 
from  gross  to  net  earnings)  and 
Sweden  (where  pensions  are  not 
being  fully  indexed  so  long  as  the 
budget deficit  remains excessive). 

In other countries, the value of pen 
sion has been reduced more direcdy. 

In Greece, the rate of supplementary 
pension relative to earnings has been 
reduced  and  limits  set on the maxi 
mum  payable,  resulting  in  a  rise in 
pensioners  receiving  very  low  in 
comes  and  prompting  the  introduc 
tion  in  1996  of  a  means-tested 
allowance. A  similar  allowance  has 
also  been  recently  introduced  in 
Spain,  where  the  number  of  years 
needed  to  qualify  for  a full  pension 
has  been  raised  and  the  coefficient 
applied to earnings reduced. In Ger 
many, the new pension reform to take 
effect from  1999 introduces a 'demo 
graphic factor'  into the pension  for-
mula  to  take  account  of  the 
increasing  life  expectancy  of  pen 
sioners and accordingly to reduce the 
standard  pension  (Eckrente)  from 
70% of previous net earnings to 64% 
by  2030,  in  addition  to  raising  the 
pensionable age. 

So  far,  however,  there  has  been  no 
general  tendency  to  shift  away  from 
pay-as-you-go to funded  schemes (ie 
from  contributions  covering  present 
pension  liabilities  to  covering  future 
ones),  though  there  is  a  widespread 
growth  in the importance  of occupa 
tional and private schemes to supple 
ment  basic  pensions  and  relieve  the 
State of part of the future funding  lia 
bility.  As  emphasised  in  the  recent 
Commission  Green  Paper  on  Sup 
plementary pensions in the single mar 
ket,  (COM(97)  283),  the  growth  of 
such supplementary schemes requires 
an  appropriate  Community-wide 
framework.  The  Green  Paper  also 
notes that the sustainability of pay-as-
you-go  schemes  necessitates  further 
reform  of pension systems. Although 
reversing  the  trend towards  early re 
tirement  can  alleviate  funding  prob 
lems,  it  is  unlikely  to  solve  them 
completely. In this regard, it is relevant 

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Modernising social protection and adapting systems to change 

to  note  that  there  is  a  shift  towards 
defined  contribution  systems,  where 
contributions  paid  over  a  person's 
working career determine the amount 
received in pension, so reducing some 
of the difference between pay-as-you-
go and funded systems. 

The only two countries in the Union 
where funded pension systems play a 
major  role  are  the  Netherlands  and 
the  UK.  In  the  latter,  in  particular, 
where the basic state benefit is lower 
than  in  most  other  Member  States, 
two-thirds of pensioners have an oc 
cupational  or  private  pension.  The 
State concentrates  on taking  care of 
the less well-off, leaving the manage 
ment of pension funds largely to pri 
vate insurance companies. The main 
recent  focus  of  policy  has  been  on 
strengthening  the  regulations  gov 
erning  these  funds,  to  prevent  their 
fraudulent  use  and  the  misleading 
selling of private schemes. 

Whether a funded  approach is better 
designed  to  overcome  the  transfer 
problem  inherent  in  demographic 
trends  remains  unclear.  Ultimately, 
the  ease  of  securing  the  transfer  of 
income from  those in work to those 
in retirement, irrespective of how it is 
achieved, depends largely on the in 
come available to be distributed and, 
therefore,  on  the  economic  growth 
sustained in the intervening period. 

Containing 
health-care costs 

The  ageing  of  the  population, 
together  with  constraints  on  public 
expenditure, has also focused  policy 
attention on health care, the demand 
for  which in any  event  tends to rise 
rapidly as real income increases and 

medical  know-how  expands.  The 
widespread  response  in  Member 
States has been either to limit expen 
diture  directly  where  services  are 
managed  by  the  state  or  to  impose 
ceilings  on  spending  growth  where 
this  is  determined  by  health  insur 
ance funds. While this has generally 
succeeded in holding down spending 
relative to GDP in recent years, it has 
given rise to other policy concerns — 
.  in  particular,  how  best  to  allocate 
expenditure to serve the needs of so 
ciety  as a whole  and  how  to  ensure 
that available resources are used effi 
ciently. 

It  has,  in  addition,  raised  more  fun 
damental questions about the relation 
ship between public and private health 
sectors,  about  whether  the  former 
should be limited to basic care — and, 
if so, how this should be defined—and 
about the implications  of  this for  the 
overall  pattern  of  care  in  relation  to 
need (and the possibility of a shift from 
essential to more cosmetic treatment). 
It has also given rise to questions about 
the justifiability of limiting the growth 
of services (andjobs) to below the level 
people seem willing to pay for and, in 
turn, about how far consumers can be 
relied on to make rational choices on 
an  issue  which  is  so  important  but 
about which there is a serious lack of 
information. 

The tendency in most Member States 
has  been  to  seek  to  exploit  the  ad 
vantages  of the market while retain 
ing control over supply. In particular, 
people have been encouraged to con 
sume less and choose more rationally 
by  making  them  aware  of  the costs 
involved, through the imposition and 
extension  of  charges  —  or  co-pay 
ments — for drugs and certain kinds 
of  treatment.  In  Germany,  for 

example,  charges  have  been  raised 
significantly  in  order  to  avoid  in 
creases  in  social  contributions  and 
have been explicitly linked to the lat 
ter in an attempt  to persuade the in 
surance  funds  to keep  contributions 
down, increase efficiency  and nego 
tiate  more  effectively  with  service 
providers  (GPs  and  hospitals)  over 
terms. 

The  success  of  such  a policy, as in 
deed of the introduction of market, or 
pseudo-market,  mechanisms  in 
countries, depends, in part, on there 
being effective  competition  between 
insurance funds, in the German case, 
or doctors in countries with national 
health systems, and consumers being 
able to choose between them, other 
wise  prices  cannot  serve  their  in 
tended  purpose.  It  is  also  desirable 
for  there to be competition  between 
service providers to increase the bar 
gaining  power  of  purchasers  and  to 
stimulate  increases  in efficiency.  In 
practice,  there  tend  to  be  natural 
limits  on  competition  in both  areas, 
because  of  the  localised  nature  of 
supply  and  economies  of  scale, 
which  are  often  reinforced  by  gov 
ernment  to  avoid,  for  example,  the 
closure of local treatment centres. 

Accordingly,  attempts  to  introduce 
market  mechanisms  have  not,  in 
general,  led  to the  increases  in  effi 
ciency  expected,  and  governments 
throughout  the Union  have been re 
luctant  to relinquish  controls  on ex 
penditure  and  leave  this  to  market 
forces.  Nevertheless,  in  countries 
where  an  attempt  has  been  made, 
there  appear  to  have  been  some 
gains,  without  any  noticeable  dete 
rioration  in  service.  These  have 
arisen  from  the clearer  division  be 
tween purchasers  and providers, the 

•18-

Modernising social protection and adapting systems to change 

greater weight given to costs in deci 
sion-making, the collection and pro 
vision  of more information  on costs 
and the drawing up of more detailed 
contracts on service supply. 

In  the  UK,  for  example,  indicators 
show a small rise in productivity since 
reforms  were  introduced  in  1991. In 
Italy and Spain, the separation of pur 
chasers from providers and, in the for 
mer, the devolution of financial as well 
as organisational responsibility  to the 
regions, seems to have led to improve 
ments in management and clearer con 
tractual arrangements between the two 
sides.  In  the  Netherlands,  the  recent 
introduction of a system of per capita 
payments to insurance funds based on 
a prior assessment of the costs implied 
by their membership structure, in place 
of  one  where  effectively  costs  were 
covered ex post, has led to competition 
over fees and pressure to contain costs 
and might, in turn, with partial removal 
of controls, lead to increased competi 
tion between providers and  efficiency 
improvements in this area. 

At the same time, the innovatory step 
has  been  taken  in the Netherlands  to 
confine the public health service to the 
provision  of  'curative  basic  health 
care' (as well as of long-term care), and 
to  leave  other  treatment  ('amenity 
care'j to the private sector and individ 
ual arrangements. The criteria used to 
defme the latter—that it should not be 
medically necessary and be affordable 
—  has, however,  led  to  problems  in 
practical application (not least because 
of  the  inevitably  subjective  nature of 
the concepts used) and so far very few 
services are excluded from  the public 
sector. 

Providing 
long-term care 

An estimated 10% of people aged 75 
and over in the Union are in need of 
full-time  care while another 25% re 
quire  part-time  care.  The  present 
high growth of population in this age 
group  is  focusing  increasing  atten 
tion  in  Member  States  on  how  this 
expanding  need  should  be  met  — 
whether through the social protection 
system,  and  if  so,  whether  through 
transfers  or  the  direct  provision  of 
services,  either  way  implying  in 
creased  taxes  and/or  social charges, 
or through private arrangements, im 
plying  the acceptance  of an unequal 
burden  falling  on  different  individ 
uals,  whether  they  take  out  private 
insurance cover or not. 

Debate has  been  partly prompted by 
the introduction in Germany in 1995 of 
a  new  social  insurance  scheme  for 
long-term  care  (Pflegeversicherung), 
funded  by social contributions  (com 
pensated by the loss of a day's holiday) 
and payable to both those being cared 
for  at  home  and  those  receiving 
residential care. Allowances for carers 
are of longer-standing in the UK and 
Ireland, though in the former, they are 
payable at a relatively low flat-rate and 
apply only to those providing care vir 
tually full-time,  and in the latter, they 
are  means-tested.  In  Austria,  attend 
ance  allowances  (Bundespflegegeld), 
administered by the regions but funded 
from  general  taxation,  have  been 
payable since 1993 to people needing 
care for at least 50 hours a month, at 
rates varying according to the amount 
of  care  medically  assessed  to  be re 
quired. 

Those  receiving  allowances  in Aus 
tria  are free  to decide  how to spend 

them  (most  going  to  informal  care 
within the family). Rising unemploy 
ment,  however,  has  led  to  calls  for 
payments to be linked with employ 
ment objectives  and used directly to 
create demand for formal  social ser 
vices. This is, in essence, the option 
chosen  in  the  Nordic  countries, 
where  there  is  little  distinction  be 
tween healthcare and social services, 
both being freely available to all, and 
where,  in  relation  to  working-age 
population,  these  account  for  sub 
stantially more jobs than in the rest of 
Europe (over twice as many in Den 
mark  and  Sweden).  Nevertheless, 
budget  constraints  have  led  to  cut 
backs  in  expenditure  and  growing 
concern about the costs of maintain 
ing extensive social services. 

Elsewhere, a draft bill was published 
in Luxembourg in 1996 for the intro 
duction  of  a  compulsory  'depend 
ence  insurance'  scheme  to  cover 
assistance  required  by  those  unable 
to take care of themselves, the  fund 
ing  divided  evenly  between  social 
contributions and general taxation. 

Targeting expenditure 

The  twin  concern  of  present  policy 
on  social  protection  across  the 
Union,  to  contain  costs  and  reduce 
dependency, is being achieved in part 
by increasing the effectiveness  of ex 
penditure  through  the  adoption  of  a 
more  active  approach  and  targeting 
resources  on those  most  in need. In 
Southern Member States, this is com 
bined  with  efforts  to rectify  gaps in 
the  protection  provided  and  to  bal 
ance  the  provision  of  support  more 
equitably.  In  Northern  Member 
States, debate is centred on the scope 
of  social  protection.  While  the con-

-19-

Modernising social  protection  and adapting  systems 

to  change 

sensus  on maintaining  the universal 
nature of social protection accessible 
to all holds firm, this does not rule out 
some shift in responsibility from  the 
state to the individual or the private 
sector in certain areas. 

Privatisation, however, in the sense of 
the private, profit-making, sector being 
involved in providing social protection 
has  not  developed  very  far  in  most 
countries and there is little sign, outside 
of the provision of supplementary pen 
sions, of any significant growth in the 
foreseeable future. Nevertheless, there 
is evidence of increased concentration 
of expenditure on those in need, both 
through  reducing  benefits  going  to 
those  on  relatively  high incomes, by 
setting a ceiling on the amount payable 
or  imposing  taxes  and/or  social 
charges  on  benefits,  and  through 
greater recourse to means-testing. The 
former  serves not only to redistribute 
the  net  gain  from  transfers  from  the 
more wealthy to those further down the 
income scale but also to spread the cost 

of financing more widely, an increas 
ingly justifiable aim given the growth 
in wealth of many pensioners. 

Although  spending  on benefits  sub 
ject  to  means-testing  has  generally 
increased in the Union (apart from in 
the  Netherlands),  it  still  accounted 
for only  11% of the total in  1995 as 
against  10%  in  1990,  and  only  in 
Ireland  (where  it  was  34%  of  the 
total),  the  UK  (23%)  and  Spain 
(1372%)  was  it  more  than  10%. 
Moreover, much of the rise was due 
to  changes  in  underlying  circum 
stances — in the growth of long-term 
unemployment, for  example, and in 
the number of people not eligible for 
social  insurance  benefits  —  rather 
than a change in policy as such. In the 
case  of  unemployment  compensa 
tion, almost 75%  of transfers  in Ire 
land  were  means-tested  in  1995 
(reflecting  high  levels  of  youth  and 
long-term  unemployment),  50%  in 
the UK, 40% in the Netherlands and 
around 25% in Spain and Portugal. 

20-

ISSN 0254-1475 

COM(98) 243 final 

DOCUMENTS 

EN 

05  06  17 

Catalogue  number  :  CB-CO-98-264-EN-C 

ISBN  92-78-35264-0 

Office  for  Official  Publications  of the European  Communities 

L-2985  Luxembourg 

9  A-