Introduction to Public Finance Lecture 2: Functions and size of the welfare state. Retirement, unemployment protection, health care, etc. Welfare expenditures, aging problem. 1
Outline of the lecture Basic concepts of the welfare state, History of the involvement of the state in the provision of welfare services and benefits, Size of the welfare state and welfare expenditures, Aging problem. 2
Main arguments for and against + The welfare state is not only equitable, but also efficient, since the absence of this provision leads to externalities in the form of crime, poor public health, and failure to become employable. The welfare state has considerable costs, and there are adverse effects on incentives of both the taxes needed to pay for benefits and the means tests used to limit them. Oxford Dictionary of Economics, 1997 3
Goals of the welfare state 1. Reduction of poverty, 2. Reduction of economic uncertainty and insecurity, 3. Reduction of inequalities by race, gender, health status and income, 4. Reduction of differences in life chances. 4
Instruments of social protection Traditional: Social insurance: feasible to protect formal sector employees, Universal benefits: ideal to ensure minimum benefits to everybody in countries with large informal sector and/or large share of self-employed in labour force, Social assitance: complements two other forms whenever there are gaps in coverage. 5
Disability 6
Welfare state: measurement 1. Quantitative indicators: expenditure (% GDP), 2. Qualitative indicators: nature of entitlement (poverty, employment, citizenship), coverage (% population), generosity of benefits, number of programmes covered. 7
History of the welfare state 1. Family: - many children, few elderly, - family members help each other, 2. King and the church: - charity donations, hospitals for the poor and houses for elderly, - help for veteran soldiers, 3. Guilds: - guild members support each other, - help for those members, who are not able to work. 8
History of the welfare state 17 November 1881: Otto von Bismarck in the Imperial Message to the Reichstag said that those, who are not able to work because of age or disability have a right to support from the state. 1883 Health Insurance Law (Krankenversicherung der Arbeiter) 1884 Accident Insurance Law (Unfallversicherung) 1889 Old Age and Disability Insurance Law (Altersund Invaliditätsversicherung für Arbeiter or Rentenversicherung) 9
History of the welfare state Bismarck s reforms: Only people employed in industry, with incomes below some minimum level. Contributions paid either by employers and employees or by employers in case of accident insurance. Old age pension only for workers 70 or more years old. System was managed by the representatives of workers and employers according to the rules of selfgovernment within the limits set by the state. 10
History of the welfare state In 40 years since Bismarck s reforms national social insurance programs were introduced in 22 European countries, 6 South American countries, Canada, and South Africa. In USA Social Security was created in 1935. Conflict in retirement insurance: equity those who have paid contributions have right to benefits, even if they are able to work after reaching the retirement age, adequacy social insurance is an insurance, thus if you are still able to work, you should not receive benefits. 11
1942 Beveridge report: History of the welfare state Social Insurance and Allied Services Comprehensive policy of social progress: social insurance may only provide income security; thus, it has to be coordinated with other policies. social security must be achieved by co-operation between the State and the individual The state in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family 12
The Bismarckian and the Beveridgean model of welfare state Objective Benefits Eligibility Coverage Financing Bismarckian Model Income maintenance Earnings related Contributed record Employees Contributions Beveridgean Model Prevention of poverty Flat rate Residence or need Entire population Taxation 13
Social spending, % of GDP, OECD 35 30 25 20 Canada Denmark France Germany Greece Ireland Italy New Zealand Poland Spain Sweden United Kingdom United States 15 10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 14
Public social expenditure as % of GDP, 2001, OECD United States United Switzerland Sweden Spain Slovak Portugal Poland Norway New Zealand Netherlands Mexico Luxembourg Korea Japan Italy Ireland Iceland Hungary Greece Germany France Finland Denmark Czech Republic Canada Belgium Austria Australia 0 5 10 15 20 25 30 Old-age Survivors Incapacity Helath ALMP Unemployment Housing Family Other 15
20 4,7 8,2 5,1 3,3 6,5 6,5 3,0 4,2 4,8 Public social expenditure by broad social policy area, as a percent of GDP, in 2012 or latest year available 1 Cash benefits Services 7,9 3,8 4,9 6,2 8,3 3,3 Income support to the working age population Pensions (old age and survivors) 18 16 14 4,5 6,4 2,3 4,4 3,7 12 4,2 5,1 5,3 4,1 10 5,1 2,4 4,8 5,3 4,6 4,3 3,9 0,4 8 6 1,5 4 6,9 1,1 0,9 2 13,8 6,2 10,2 10,3 13,2 15,8 7,4 10,5 14,5 10,6 13,0 11,4 5,5 10,2 5,6 10,0 7,7 5,3 5,4 7,9 5,1 8,9 10,8 6,6 6,7 3,6 2,1 7,0 4,5 4,7 7,5 3,1 2,5 1,8 0 France (31) Denmark (30.1) Belgium (29.4) Finland (28.3) Austria (27.7) Italy (27.5) Sweden (27.2) Spain (26.8) Greece (25.7) Germany (25.5) Portugal (24.8) Slovenia (24) Netherlands (23.5) Japan (23.1) United Kingdom (22.7) Hungary (22.6) Luxembourg (22.5) Ireland (22.3) Norway (21.8) OECD (21.4) New Zealand (21) Czech Republic (20.1) Poland (20.1) Switzerland (19.3) United States (18.7) Australia (18.3) Iceland (18.1) Slovak Republic (18.1) Canada (17.4) Estonia (16.8) Israel (15.1) Turkey (12.2) Chile (10.2) Korea (9.6) Mexico (7.7) 8,6 6,7 8,0 5,7 6,7 7,0 6,7 6,8 6,6 8,0 6,3 6,4 7,9 7,7 7,7 4,9 5,8 5,8 5,6 6,2 8,4 6,2 4,5 6,5 8,0 6,1 5,6 5,6 7,2 4,5 3,9 4,2 3,4 4,1 2,8 1,0 0,9 2,3 0,1 1,9 1,7 2,2 1,9 1,0 2,1 4,8 3,0 2,2 1,3 2,4 0,6 1,1 2,6 2,7 3,9 2,4 2,2 2,1 4,9 2,4 2,1 1,1 1,6 1,4 3,5 5,0 1,0 0,9 0 2 4 6 8 10 12 14 16 18 20 7,0 7,5 Health All social services except health Data for Australia, Canada, Chile, Israel, Korea, New Zealand, the United States refer to 2012 otherwise they refer to 2011. Source : OECD (2014), Social Expenditure (SOCX) via www.oecd.org/social/expenditure.htm 16
Old-age and survivors pensions, % of GDP, OECD 16 14 12 10 8 6 Canada Denmark France Germany Greece Ireland Italy New Zealand Poland Spain Sweden United Kingdom United States 4 2 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 17
Aging problem Vaupel, 1998 18
Aging problem Longer lives Populations in many regions are aging rapidly. (ratio of people over 65 to those aged 20 65, in percent) 2005 2050 China 0.12 0.43 Italy 0.33 0.75 Japan 0.32 0.78 Korea 0.16 0.70 United Kingdom 0.27 0.47 United States 0.21 0.37 IMF, 2006 19
Aging problem Currently in Europe we have 4 working people for one retired person. In 2050 we will have 2 working people for one retired. In Japan this ratio will be reached in 2020. In 2050 for the first time on the planet there will be more people older than 60 than younger than 15. In 2000 average retirement expenditures in OECD were equal to 7,4% of GDP. In 2050 it will be 10,6%. More elderly, longer lives, less children. Who will work? 20
Macroeconomic effects of population aging Simulations for small, open economy, calibrated on data for Czech Republic Tamirisa and Faruqee, 2006 21
Macroeconomic effects of population aging Simulations for small, open economy, calibrated on data for Czech Republic Tamirisa and Faruqee, 2006 22
References Esping-Andersen G. (1990) The Three Worlds of Welfare Capitalism, Princeton University Press Stiglitz J. (2000), Economics of public sector, chapter 14 Blöndal S., Scarpetta S. (1999), The retirement decision in OECD countries, OECD Economic Department Working Papers No. 202. Tamirisa, N.T, H. Faruqee (2006), Macroeconomic Effects and Policy Challenges of Population Aging, IMF, WP/06/95 23