Mutual Learning Programme

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1 Mutual Learning Programme DG Employment, Social Affairs and Inclusion Peer Country Comments Paper - Denmark One way ideal but not simple Peer Review on Universal Credit United Kingdom (London), 30 November 1 December 2015 Written by Bent Greve October 2015

2 EUROPEAN COMMISSION Directorate-General for Employment, Social Affairs and Inclusion Unit A1 Contact: Emilio Castrillejo Web site:

3 European Commission B-1049 Brussels

4 EUROPEAN COMMISSION Mutual Learning Programme DG Employment, Social Affairs and Inclusion Directorate-General for Employment, Social Affairs and Inclusion Peer Review on Universal Credit United Kingdom (London), 30 November 1 December 2015 October, 2015

5 Europe Direct is a service to help you find answers to your questions about the European Union. Freephone number (*): (*) The information given is free, as are most calls (though some operators, phone boxes or hotels may charge you). LEGAL NOTICE The information contained in this publication does not necessarily reflect the official position of the European Commission This document has received financial support from the European Union Programme for Employment and Social Innovation "EaSI" ( ). For further information please consult: European Union, 2015 Reproduction is authorised provided the source is acknowledged.

6 Table of Contents 1 Labour market situation in the peer country Assessment of the policy measure Assessment of the success factors and transferability Questions Annex 1: Summary table... 6

7 1 Labour market situation in the peer country This paper has been prepared for a Peer Review within the framework of the Mutual Learning Programme. It provides information on Denmark s comments on the policy example of the Host Country for the Peer Review. For information on the policy example, please refer to the Host Country Discussion Paper. Denmark s priority is to get unemployed people back on the labour market. Danish labour market is characterised by high levels of participation rates of both men and women, compared to many other European countries a low level of unemployment, and a high degree of labour mobility. Those in work have a substantial lower risk of poverty than unemployed and not employed. The number of people at risk of poverty in particular among not employed increased in recent years (Table 1). Table 1. People between 18 and 64 years of age at risk of poverty (60% of median income) All 10,1 9,4 10,8 10,6 10,7 11,0 11,9 12,7 12,8 13,6 13,4 13,4 Employed 4,4 4,7 4,8 4,5 4,2 5 5,9 6,3 6,3 5,7 4,3 4,8 Not employed 25,8 21,7 26,0 26,4 27,9 26,8 28,5 29,0 28,5 30,6 30,8 31,2 Unemployed 27,7 18,8 27,0 25,6 31,8 34,2 42,4 36,3 29,1 26,9 36,7 28,2 Source: Eurostat [ilc_li04], accessed on 27 September Denmark does not have a universal credit system like the one in the UK. There are three different administrative bodies (unemployment insurance funds, municipalities and Udbetaling Danmark 1 ) paying out the different types of social benefits. Albeit at the same time responsibilities at the central level for the cash benefits are placed at the Ministry of Employment and the Ministry of Social Affairs and the Interior oversees social services. The job-centres in each municipality support people in finding jobs. The absence of the universal credit is partly due to the eligibility criteria to receive the unemployment benefit. Only members of the unemployment insurance fund, voluntary paying contribution to be a member of the fund are entitled to receive the unemployment benefit. Additionally, there are rules specifying how long one can receive the unemployment benefit and how long one had to be employed in order to be entitled to get it. The other benefits in the Danish system are based upon the type of access to the universal welfare state people fulfilling the specific criteria for the individual benefit (e.g. high housing costs, sickness, maternity/paternity etc.) have the right to the benefits. The municipalities (98 of them) used to be responsible for paying all types of social security benefits except unemployment benefits and family allowances. Although, the local municipalities are still responsible for social assistance, since the decision of the parliament on 29 March several of the benefits were gradually taken over by Udbetaling Danmark 3, with the last benefits taken over from municipalities on 1 March Today, the Udbetaling Danmark pays the following benefits: state-funded oldage pension, disability pension, housing benefits, maternity/paternity benefits, family benefits and international pension and social security. 1 New administration responsible for paying out certain social benefits. 2 t.pdf 3 See which lists the benefits administered by this new organisation. October,

8 2 Assessment of the policy measure Denmark does not have a unified system merging the different social security benefits. Instead several different systems exist, including unemployment insurance system 4, where membership is voluntary and only those who are members (and fulfil other conditions) can receive unemployment benefit. Additionally, there is a social assistance system to which there is universal access upon criteria such as means-test regarding income and wealth of a person and a spouse. The policy focus is not to the same extend, as described in the UK, to reduce spending per se but more to support pathways to employment. The following section focus on the benefits included in the UK s transformation towards a universal benefit system, e.g.: Jobseeker s Allowance, Housing Benefit, Working Tax Credit, Child Tax Credit, Employment and Support Allowance, Income Support. Denmark does not have a child tax-credit but family benefits are administered by the Udbetaling Danmark. There are user charges for day-care. The level of the charge depends on the household income and with a maximum of 25 percentage of the cost of providing daycare by the local municipalities. Like in the UK, the goal of the Danish welfare state is also reducing the benefit dependency, achieving a decent living standard and reducing poverty. Albeit the Danish government has decided to abolish a specific poverty line in Denmark. Denmark already has a digital service for most of the benefits. The citizens can on-line apply for and claim the benefits, they can also book meetings at the local job-centres. Additionally, people not able to use on-line system can apply for the benefits at local municipality. In general, the administration of the benefit system seems to run smoothly and without many problems. Personal identification number 5 makes the digitised system possible. It allows to identify the claimants and also control whether they have other income or wealth that needs to be included in the calculation of the benefit. The unemployment insurance fund administers the unemployment benefits. There are no specific problems with it, as the benefit only depends on the individual s possible wage income, e.g. wealth and capital income has no impact on the unemployment benefit. Furthermore, Danish welfare state policies for long time have an ambition that the access to benefit and welfare services should be based upon a one-stop approach. However, this has not always been effective or possible. The Danish welfare state has a twofold strategy to fight poverty. On one side the priority is given to the benefits at a decent level. On the other, the system tries to help people get back to the labour market. It has within the social assistance system, to a limited extend, been possible to support families with specific individual extra cost in order to cope with certain types of extraordinary expenditures for a family. There has been a constant focus on having incentives to take up jobs in the debate on welfare benefits in Denmark as in the UK. However, there has not been any specific agreement on the level of the economic incentive. The gain of a low income job is for nearly all at least DKK 1,000 (EUR 135) monthly after tax compared to the unemployment benefit, and for many substantially higher. The debate also concerns how to avoid in work poverty as increased income might have a relatively high combined tax and reduce the social security entitlement. The level of income influences other benefits and payments, in particular the housing benefit and the user charge for day-care. 4 Based on the Ghent-system. 5 CPR-nr is the unique number each individual has in the Centrale Person Register (The Central Registry of Person numbers). October,

9 There is a working tax-credit in the Danish system. This is however integrated into the tax-system. It thus reduces the income tax to be paid when people are having a wage income. This tax-credit is administered in the tax-system and would be difficult to transfer to the benefit system as the most of those who get the credit are in work the whole year, and, even those who are only having a job part of the year get part of the benefit. It is 8.05% of wage-income with a maximum of DKK 26,800 (EUR 247) in 2015 and with a 5.4% extra for a single earner of up to a maximum DKK 17,900 (EUR 165). Given that the credit also is available for persons having a job and not entitled to any other benefits this would, if it should be paid out directly, increase the complexity of the present system as more people then would have to be paid directly. Housing benefit depends in Denmark on several factors, including income of the household, the number of children, the size and the cost of rented accommodation, etc. Including all of them in the universal benefit system would be rather complicated. Alternative, could be ensuring that the combined marginal social- and tax-rate do not exceed e.g. 2/3 of increase in wage income. This way ensuring gain by an increase in the hours of work and attachment to the labour market. One might also foresee that some benefits are added together as a way of simplifying the system. The debate in Denmark concerns who is recipient of the benefits individuals or households. The unemployment benefit system is for individuals, whereas it is the household that is the unit for calculation of housing benefit, social assistance and payment for day care. In work-credit is also calculated for the individual. Furthermore, a problem being that married couples are obliged to support each other, whereas this is not the case for people co-habiting. There were for a short while rules regarding people who are cohabiting, but it was very difficult to define cohabiting. October,

10 3 Assessment of the success factors and transferability Having on-line claim and administration of a universal benefit would be possible within the Danish administration given that already several benefits are administered by the state and by state rules. Thus ensuring that administration for most is done on-line should also be possible in the Danish context. It is more difficult per se to see that all the mentioned credits could be done as a universal benefit in the Danish system. This due to that some benefits are based on the individuals circumstance (unemployment benefit, in-work-tax-credit), whereas others are based upon household (housing benefit, user charges day-care and social assistance). A change to a universal credit would thus require substantial changes in the Danish system and will also imply a need for a stronger and clearer perspective on what is individual and what are household based benefits. It would require, for the inwork tax-credit and family allowances, where the automatic system functioning right now, would need to be changed. Perhaps also the condition for getting the benefits will then need to be changed. In order to cope with possible risk of disincentives to work one could instead ensure that the combined marginal social- and tax rate would not exceed 2/3. Thus also having those already at work in the system instead of today within the tax-system seems a possible hindrance for transferring universal credit to the Danish welfare state system. Danish benefits are in general also more generous than the one in UK. The Danish system furthermore builds upon that all benefits are taxable and thus calculation within the tax-system integrates in-work-benefits and other benefits in a consistent way. This in principle, but not fully, also reduces the possible negative interaction between tax and benefit system towards high combined marginal tax and reduction in social benefits rate. The question posed on how to understand and look into underemployment is less clear from the description of the host paper. Underemployment for part-time workers was in Denmark 2.1% in 2014 compared to EU-average of 4.2% 6. In Denmark it is possible to acquire complimentary unemployment benefit when working. However, there are restrictions that historically have been argued to be necessary to avoid people continuously to combine working part-time and at the same time get unemployment benefit. Therefore, there is a balance that needs to be ensured, including how and when people by working at least partly can regain access to unemployment benefits. It is further an on-going discussion on what makes people having sufficiently incentive to work. Discussion involves not only economic aspect, but also the possible impact on self-esteem by having a job, and thus whether economic incentive is the only element. This also combined with whether the demand for labour can have an impact on the ability to enter or re-enter the labour market. Given the negative impact on quality of life and well-being which cannot be compensated even by a high unemployment benefit it is an open question whether the benefit system or in overall economic policy should be solution to get people a job. Thus the universal benefit system alone can presumably not make it possible to help people back to the labour market. Focus on training and education also seems to be an important issue. Ensuring that people who are not able to use IT-system have also the same social rights as others, can also be a challenge within the system. A further success factor will be making sure that the legal system is as simple as possible and transparent for citizens. This includes the relation between the benefit and taxsystem and how these will interact in a possible new system. 6 Eurostat, Statistics Explained: Underemployment and potential additional labour force statistics, October, October,

11 4 Questions How does the peer country cope with difference in housing costs and the size of family in the integrated universal benefit system? Is there any documented evidence for that the system is more efficient and reaching the goals compared to the system before? What are the success factors to reach the goals? Can it be documented that the universal credit has reduced the number of people living in poverty? How is a household defined and when are people seen as living together? Are there any regional differences in implementation? For whom which groups of the society the new approach has been more difficult than for others? October,

12 5 Annex 1: Summary table Labour market situation in the Peer Country Denmark is in the literature described as a universalistic welfare state with access to benefits for all citizens. In contrast hereto, the unemployment benefit system is an insurance based system. There is a focus on incentives in order to take up jobs. Focus is on how to reduce the risk of poverty by getting people back on the labour market. IT is already used as a central instrument in the administration of most benefits. Assessment of the policy measure In principle a combined system has advantages. Distinguishing between different types of benefits can cause problems. The use of IT is important in making and developing an effective administration. Not clear how the proposed system increase incentives to take up a jobs. Assessment of success factors and transferability The use of IT as a coherent instrument can be transferred. A need for clear and strong focus on how to distinguish between individual and household level, and presumably also to keep those on the labour market outside the system. Using a one system approach is simple and fair for users. How to combine work and benefits also for those working part-time and do so over a long-time span remains a challenge. To ensure simple and understandable rules, Questions How does the peer country cope with difference in housing costs and the size of family in the integrated universal benefit system? Is there any documented evidence for that the system is more efficient and reaching the goals compared to the system before? What are the success factors to reach the goals? Can it be documented that the universal credit has reduced the number of people living in poverty? How is a household defined and when are people seen as living together? Are there any regional differences in implementation? For whom which groups of the society the new approach has been more difficult than for others? October,

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