The future of social protection in Europe: anatomy of a debate

In March 1997, the European Commission has recently issued a Communication on the modernisation and improvement of social protection in Europe. Here we outline the reasons for the current concern with the reform of social protection systems and highlight the development of Commission proposals, as well as the approaches taken by the social partners.

The recent Commission Communication on Modernising and improving social protection in the European Union (COM (97)102 of 12 March 1997- EU9703113N) is merely the latest step in a long process of debate revolving around the question of how systems of social protection can best be adapted to today's changing economic, social and demographic situation. It is a debate which has in the past clearly been influenced by the limited nature of Community legal competence in this area. This is restricted to the coordination of national social security schemes in cases where citizens exercise their rights to free movement within the Union. Member states have long resisted any attempts at a harmonisation of social protection systems, which have developed very differently as a result of every country's socio-economic, political and cultural heritage.

Changing requirements - common challenges

Over the last 10 years there has been a growing awareness that social protection systems face common challenges.

• The changing nature of work, with a shift from: manufacturing to service employment; low-skilled jobs to those demanding new, broader and higher skills; full-time, open-ended contracts to part-time and temporary employment. Income maintenance systems designed around the traditional model of employment no longer provide adequate security, and policy-makers see a need for the resources channelled through these systems to be made more employment-oriented. It is argued that this should be achieved by increasing incentives for unemployed people to look for jobs, by giving them opportunities to upgrade their skills. The employment programme decided at the December 1994 European Council meeting in Essen (EU9702101F) and the declaration on employment agreed at the December 1996 Dublin European Council have highlighted the importance of reforming the financing structures of social protection systems, to allow for efficient reductions in non-wage labour costs, especially in respect of low-wage employment. One of the main items of social protection expenditure in the member states is the public pension system. In light of demographic trends, there is seen to be a need to encourage a gradual and flexible transition to retirement to maintain opportunities for older workers to stay in the labour market.

• The ageing population, with the proportion of older people in the population set to rise from 21% to 30% between 1995 to 2025. This trend makes it necessary to rethink public pension systems and requires greater efficiency of healthcare systems, as well as an improved system for the care of dependent older people.

• A new gender balance, with women's employment in the Union having increased from 46 million to 61 million over the last 20 years, while men's employment has remained stable. There is therefore a need to achieve a new and better balance of family and working life and an individualisation of rights without penalising women who have not taken paid employment.

• Greater labour mobility requires greater coordination of social security schemes to ensure freedom of movement.

Expenditure remains high despite reform efforts

According to recent EUROSTAT figures, member states spend between 16% and 34.8% of GDP on social protection systems. Figures for 1980 and 1994 are given in the table below (no data are available for Sweden).

* The 1980 data do not include the new German Länder.

Source: EUROSTAT - ESSPROS.

Expenditure levels have remained high (with a slight reduction in some member states), despite recent attempts to curb support levels in a number of ways. These include restrictions in eligibility criteria, greater means-testing, abandonment of indexing of benefits with inflation, and the lowering of benefit levels.

Commission proposals for the improvement and modernisation of social protection in Europe

Since the formulation of the five Essen recommendations and the drawing up of the European Employment Strategy (which resulted from the process of consultation leading up to and following the publication of the White Papers on Growth, Competitiveness and Employment, and Social Policy), the role of social protection as a productive factor has been emphasised.

Making social protection more employment-friendly

One of the key elements of this strategy is the desire to make tax and social security systems more "employment-friendly", by preventing the or reducing the disincentive effects of the so-called unemployment and poverty traps. The Commission does not, however, merely advocate the institution of financial "incentives" for unemployed people to return to work, but stresses the key importance of turning unemployment insurance into "employability insurance" - ie the activation of passive labour market policy.

In its Communication, the Commission argues that more research is required to establish whether attempts at strengthening incentives for job seekers have indeed worked. It also commits itself to examining changes which would be required in the existing structure and organisation of unemployment compensation schemes to enable the switch from active to passive policies.

Rethinking funding arrangements for social protection

In its 1993 White Paper on Growth, Competitiveness and Employment, the Commission recommended a reduction in non-wage labour costs to boost employment opportunities, particularly for the low-skilled. The long-term trends in taxation have so far been unfavourable to labour. Between 1980 and 1994, the implicit tax rate on employed labour increased from 34.7% to 40.5% on average. At the same time, tax rates for other factors of production decreased.

The Commission had previously advocated offsetting any losses in revenue incurred by lowering non-wage labour costs through the introduction of taxes on natural resources (aiming, at the same time, therefore, to improve sustainable development). More recent assessments speak of broadening the tax base by reviewing the various existing exemptions, and reducing opportunities for tax evasion.

A number of member states have recently tried to reduce non-wage labour costs, mainly by introducing cuts in employers' social security contributions, usually for specific categories of employees (as in Belgium, France, Germany, Ireland, Italy and Spain). Some impact studies have been carried out, but findings have produced conflicting messages. While some have found positive employment effects resulting from a reduction of social security contributions for low-wage earners, others have highlighted the problem of substitution effects and "dead weight". More research is therefore required to established all parameters leading to the successful implementation of such schemes. The Joint Employment Report to be presented at the Amsterdam European Council in June 1997 will analyse the impact of such measures further.

Providing for more flexible retirement

In the light of increasing expenditure on public pension systems and the demographic trends which appear to indicate a future shortage of young workers, many member state governments and the Commission are increasingly advocating flexible retirement patterns.

In the late 1970s and 1980s early retirement was seen to be an acceptable (or even desirable) way of coping with high youth unemployment and the need for restructuring. A multitude of government and employer measures supported early exit through more or less generous early retirement packages. As a result, workers' expectations have changed, with many older workers now regarding early retirement as a perk (possibly in the absence of a viable alternative). Recent research ( "Employment policies and practices towards older workers: France, Germany, Spain and Sweden" T Weber, G Whitting, J Sidaway and J Moore, Labour Market Trends, April 1997) has shown that attempts to introduce part-retirement have largely been unsuccessful, for a number of reasons. Many such schemes were designed in disregard of the current age profile in industry, being targeted at workers around 62 or 63 who have frequently already left the labour market. A lack of coordination between retirement, social security and other policies has often meant that employers and older workers themselves have been able to use alternative forms of exit (via the unemployment insurance or sickness and occupational disability insurance systems). Employer policies and older workers' motivations have also militated against the take-up of such schemes, particularly in times of high unemployment. The Commission's assessment of the potential and problems for a gradual transition to retirement will be presented in it annual Employment in Europe report in September 1997.

Dealing with social exclusion

In its Communication, the Commission underlines the importance of the introduction of minimum income schemes in order to fight social exclusion. In the second half of 1997, it aims to present a report assessing the mechanisms of guaranteed income schemes in the social protection systems of the member states.

Other activities advised in the Communication

In additional to the activities outlined above, the Commission intends to

• present a Green Paper on supplementary pensions;
• carry out an analysis of most effective pattern of long-term care insurance schemes to meet the care needs of older people;
• assess healthcare reforms (ie introduction of market mechanisms, increasing preventative care etc) to draw out good practice; and
• outline, in the 1997 Report on Equal Opportunities, member state initiatives aimed at achieving an indivualisation of rights, and highlight good practice.

Commentary

The current concern with the future of social protection systems was highlighted in a conference on social protection in Europe in November 1996, organised by the European Trade Union Confederation (ETUC) in cooperation with the European Trade Union Institute. Speakers from trade unions, employers' organisations, governments and a variety of other organisations analysed social protection systems against the background of a drastically changing society and labour market - and particularly deregulation and discussions on the financing of social protection. For the ETUC, the conference highlighted that: "For the trade union movement, universal social protection and social security systems are fundamental elements of the European model. They represent a vision of society in which the social partners have a shared responsibility. But they are now beleaguered and under pressure throughout Europe, using competitiveness and the requirements for monetary convergence as an excuse."

There is a concern that recent changes, resulting from the concern over expenditure, will increase dependence on social assistance benefits and exacerbate social exclusion.

Although the social partners agreed to support the objectives of the Essen conclusions, in an October 1995 joint declaration, the trade unions stress that flexibility must not lead to greater insecurity. On the other hand, the Union of Industrial and Employers' Confederations of Europe (UNICE) argues that in order to modernise systems of social protection it is necessary: "to put in place systems combining individual responsibility and solidarity, and involving adjustments to benefit levels, introduction of the market mechanism into social security systems, enhanced control to prevent abuse and a targeting of resources on these who most need them".

Despite the fact that the Commission's strategy on social protection has - in the light of common fiscal, political, social and demographic pressures - become more comprehensive in recent years, the Communication shows that much work remains to be done to assess whether the measures it proposes can have a positive effect on employment, inclusion and social stability, as well as addressing the need to reduce public expenditure effectively. (Tina Weber, ECOTEC)