THE WELFARE STATE AND THE ELDERLY IN EUROPE

BY

Thomas Wilson

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I t is appropriate to begin with expenditure on social security and related schemes and to relate this expenditure to gross national product of each country. Th is is an appropriate f i r s t step but also a d i f f i c u l t one. For we have to decide what items of expenditur~ should be included and then try to find figures on a comparable basis. For the Six this has been done in Brussels and the s ta t is t ics are given in Comptes Sociaux. l Estimates for Br i ta in, Sweden and the USA have been added below on what is, I think, a reasonably comparable basis although this is not the kind of comparison which lends i t s e l f to precise s t a t i s t i c a l t reatment . Welfare expendi ture as a percentage of GNP at market pr ices in 1970 was roughly as fo l l ows : Germany, the Netherlands and Sweden 20 per cent , I t a l y 19 per .cent Bel~ium 17 per cent , B r i t a i n 15 I /2 per cent and the USA 14 per cent.

There i s , in f a c t , no standard pat tern of expendi ture between the d i f f e r e n t wel fare serv ices. I t is t r ue , however, t ha t heal th and old age are the most important i tems. Family allowances come next and are p a r t i c u l a r l y important in France and I ta ' i y . Our mair~ concern here is wi th old age and surv ivors and expenai ture on these items as percentages of t o ta l social expendi ture (exc luding a d m i n i s t r a t i v costs) was as fo l l ows : Germany 45; France 39; I t a l y 36; the Netherlands 41; Belgium 39; UK 45 I / 2 ; USA 35 I / 2 ; Sweden 29.

I t is scarcely su rp r i s i ng that the pat tern of expendi ture shou~ d i f f e r from country to country fo r there are bound to be d i f f e rences in age s t r u c t u r e , in the need fo r medical care, in urlemployment and so on. But the d i f fe rences in expendi ture can by no means be explained on these grounds alone. For there are also large d i f f e rences in the s t ruc tu re of the wel fare schemes, in t h e i r ob jec t i ves and in the methods adopted in order to achieve them. These d i f f e rences are r e f l ec ted not only in the varying degrees of emphasis placed on the d i f f e r e n t broad categor ies of the wel fare arrangements: hea l th , f a m i l y a l lowances, old age, etc. For i t is also the case tha t w i th in these categor ies there are some important d i f f e rences .

To attempt to review the f u l l range of wel fare po l i c i es would b~ far beyond the scope of th i s a r t i c l e and the knowledge of i t s e~t!icY'. A t ten t i on w i l l there fo re be concentrated on the e l d e r l y . ! t is~ p{~~aps, a l l the more appropr ia te to do so in view of cur ren t con t rovers ies r e l a t i n g to th is t op i c . I shal l begin wi th a summary of the arrange- ments in some of the other EEC countr ies and compare these arrange- ments wi th those in B r i t a i n , the USA and Sweden. The sketch must, of necess i ty , be made with a broad brush but w i t hou t , I hope, toc much d i s t o r t i o n of o u t l i n e . Much de ta i l must, however, be ignored nGt only because the main schemes are of ten complicated but also because there are a large number of special schemes. ~ This is genera l ly the case with regard to publ ic servants whose pension r i gh t s tend to be f a i r l y generous. I t is also the case tha t there are some other special schemes, notably in I t a l y , which are a l t e r n a t i v e s to the general scheme. In short we must record that there are not only d i f fe rences between members of the EEC but also so~e d i f fe rences w i th in some of the ind iv idua l coun t r ies .

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I t is not very satisfactory to compare the pensions provided in di f ferent countries by turning these pensions into a common currency such as Belgian francs. Th is is so because exchange-rate conversions provide an imperfect indication of relat ive purchasing power. Moreover, account should be taken of the relationship between pensions and previous incomes. A summary way of doing so is to indicate how much the average wage-earner might expect to receive in his f i r s t year of retirement as a fraction of average earnings in the previous year. I f the object is to see how the pensioner's re~l standard of l iv ing wi l l be affected by retirement, i t is necessary to adjust the previous year's earnings for changes in prices. In what follows, new pensions in 1971 wi l l be compared with earnings in 1970.

The Dutch scheme is the one which resembles most nearly the scheme introduced for Britain by the Social Security Act of 1973. That is to 6ay, f l a t ~ r a t ~ pensions are provided in re tu rn f o r graduated c o n t r i b u t i o n s . In the Dutch case, however, the c o n t r i b u t i o n s are lev ied only on the employee. In 1971 the pensions were s u b s t a n t i a l l y h igher in the Nether lands: about 48 per cent o f prev ious average earn ings in the case o f couple or 34 per cent and 20 per cent in B r i t a i n a f t e r the autumn rev iew. The Dutch r e l y upon p r i v a t e occupat iona l pensions fo r graduated supp lementa t ion but the s t a t i s t i c s are scanty . The equ i va len t o f about 10-15 per cent o f the s ta te pension f o r a couple may have been rece ived by those in the i n d u s t r y - wide schemes cover ing small f i r m s ; perhaps 40-50 per cent from the schemes run by large f i r m s . About t w o - f i f t h s of e x i s t i n g s ta te pensioners have also p r i v a t e pensions. Most of those s t i l l at work in Hol land are now earn ing occupat iona l pension r i g h t s as everyone w i l l do in B r i t a i n under the new l e g i s l a t i o n . There i s , however, noth ing cor responding to the B r i t i s h State Reserve Scheme.

In B r i t a i n about a t h i r d of those of pensionable age had occupat iona l pensions in 1971 but there was a wide s c a t t e r in the s ize of these pensions. The median was about t w o - f i f t h s the s ta te pension and t h i s would have l i f t e d the f r a c t i o n of average earn ings rep laced to about 45 per cent f o r a couple. I t is no t , o f course, to be inferred that those formerly earning average wages would normally have received this median occupational pension. Some reference should also be made to the old o f f i c ia l graduated scheme in Bri tain which is now being phased out. These pensions w i l l , of course, be paid but are not to be adjusted for in f la t ion.

The German scheme is quite di f ferent . Graduated contributions provide graduated pensions-with no minimum and no allowance for spouses. Thus the German arrangements seem to correspond a l i t t l e more closely to the principle of "social insurance". A safety net is provided not by a minimum pension but by means-tested assistance from the Lander, although only a small proportion of the elderly make use of i t . The Germans have placed much emphasis in principle on the preservation of status but i t is also true that, i~: the ph i losophy of t h e i r soc ia l market economy, emphasis is placed on the l i m i t a t i o n of the s t a t e ' s r e s p o n s i b i l i t y . Thus there is an upper l i m i t o f about 1 I / 2 t imes average earnings on which c o n t r i b u t i o n s are lev ied w i th a corresponding l i m i t a t i o n on pensions. Up to t h i s l i m i t , however, the pension replaced almost h a l f the prev ious y e a r ' s earnings as def ined above at a l l l e v e l s . There are also p r i v a t e occupat iona l pensions in Germany but these are much less importamt than in B r i t a i n , the Nether lands, Sweden or the USA. The Germans have, however, taken specia l f i s c a l measures to encourage savings by i n d i v i d u a l s .

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The Ital ians have also graduated pensions based on graduated contributions with no maximum but a means-tested minimum. In 1971 fu l l pension rights had not yet been earned and most pensioners in the main scheme were in fact receiving only this minimum which was very low: about a quarter of average earnings for a couple. A sub- stantial number were outside the contributory schemes altogether and had to fa l l back on a s t i l l lower "social pension".

The French have a more complex arrangement. The general scheme provides for graduated pensions based on graduated contributions with a means-tested minimum and a maximum. A married couple would have received something less than a half of previous average earnings in 1971. To this must be added, however, the complementary pensions received through the special pension federations which might have l i f ted the replacement factor to about three- f i f ths .

The Belgians have also graduated contributions for graduated pensions with a minimum but no maximum in the case of manual workers. In the case of white-collar workers there is, however, a maximum for incomes on which contributions may be levied corresponding to about 130 per cent of average earnings. For futher replacement, the la t ter must rely upon private schemes and i t has been proposed that a similar maximum shouted be imposed on manual workers. This is the subject of much controversy.

Sweden has a s t i l l more complex arrangement. There is a basic f la t - ra te citizens pension which receives a large contribution from general public revenue, and replaced under two-f i f ths of previous average earnings in 1971 for a couple. The means-tested housing allowance, received by about half the pensioners, replaced another tenth. On top there is a supplementary scheme for graduated pensions (with a ceil ing) which is s t i l l immature but added, in 1971, the equivalent of a further lO per cent of earnings so that, in the appropriate cases, the total percentage for replace- ment was something l ike 55 per cent. A third t ie r has been provided by private schemes for white-collar workers which have now been extended to cover the whole labour force, but no s ta t is t ics for actual payments in 1971 have been obtained, apart from total outlay.

The USA has also a graduated scheme with a maximum and a minimum. But the payments are so adjusted as to provide a higher replacement rate for the lower incomes - rather l ike the old Brit ish Crossman plan in this respect. An average wage-earner who retired in 1971 with a fu l l record of contributions would have received close to a half of his previous income i f married or about a third i f single. The average for pensions actually was lower: equivalent to about a third for a couple. Moreover, the minimum was low and the means- tested supplements varied according to the state: fa i r l y high in some states, very low in others. The Federal Government wi l l assume more direct responsibi l i ty from the beginning of 1974. In the USA about two-f i f ths of those ret i r ing in 1969 and 1970 had occupational pensions. A sample survey suggested that the median pension replaced about a quarter of previous earnings in the case of men. Unfortunately i t is impossible to present a satisfactory s ta t is t ica l frequency distr ibut ion for the USA or indeed for other countries which wi l l show the effect of adding private occupational pensions to o f f i c ia l pensions.

The figures above compare pensions with previous earnings before tax. When tax is taken into account, the percentages are naturally raised. Moreover, account shoudl be taken of the costs incurred in going to work. The average US wage-earner would require about three- quarters of his previous gross income to give him the same standard

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of l iv ing in retirement. Account should also be taken of the investment income received by some pensioners. (In Britain about half of investment income, as defined by the Inland Revenue, goes to retired people.) Moreover many pensioners supplement their pensions by earnings, I t is interesting to note that Britain and Belgium d i f fe r from the other European countries discussed in this ar t ic le by placing l imits on such earnings. Elsewhere the pensions are old-age pensions, not retirement pensions.

Pensions and wages have gone up in all countries since 1971. Moreover, some of the European schemes are s t i l l immature and the declared targets for the future are well above the current level- most notably in the case of I ta ly. The Brit ish pensioner should be helped i f the Tax Credit Scheme were in operation and wi l l also be helped as occupational pensions grow and extend their membership. I t cannot be doubted, however, that Britain wi l l continue to occupy a low position on the league table unless o f f i c ia l pensions rise a good deal faster than incomes from employment in the near future, instead of rising roughly in line as they have done in the past. The significance of this conclusion cannot be assessed without taking account of objectives and these necessarily involve some social value judgments.

I t is necessary to say a word about the effects of in f la t ion and growth. In all the countries with which we are concerned in th~s paper there are o f f i c ia l undertakings to adjust pensions with r ising prices, or, in some cases, with rising earnings. Generally speaking, pensions have kept pace with earnings in practice even when there was no o f f i c ia l commitment to this effect. There have also been some structural changes, notably in the Netherlands, which have raised pensions relat ively to earnings. Contrary to popular bel ief , pensioners have been protected over the trend against inflation, and have been given a share in real growth. In Britain real pensions have roughly doubled since 1948.

In the short run, the situation is far less satisfactory. Although Brit ish pensions are now adjusted every year, which means that they are adjusted roughly as often as earnings, those elderly people who depend mainly on pensions may have their standards of l iv ing pushed down to quite low levels between reviews. Naturally this is all the more l ike ly to happen when inf lat ion is high and accelerating. Thus pensions that are equivalent to about a third of average earnings just after an increase has been made wi l l drop to a much smaller fraction before the year is ou~ i f prices are rising at, say, 8 or 12 per cent. Naturally the pensioner wi l l also suffer in those other countries where adjustments are made only once a year; but the hardship wi l l be less i f on average over the year, pensions replace a higher proportion of earnings. Threshold arrangements would provide some answer but can be administratively cumbersome as Dutch experience shows. I f in f lat ion cannot be more successfully curbed, i t would be better to review pensions twice a year as the Dutch now do. When a change has been authorised by Parliament, i t should be implemented more quickly. The lags are unduly long in the Brit ish case.

Pension schemes and other forms of assistance for the elderly have two main objectives: f i r s t the prevention of poverty and, secondly, the replacement of previous income in order to prevent too sharp a fa l l in customary standards after retirement.

Poverty is a d i f f i c u l t concept. Even for one country at one point in time i t is impossible to determine a single objective minimum required to prevent poverty. Subjective elements are bound to creep in and there may thus be a number of bench-marks. I t is not

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to be inferred, of course, that these bench-marks are wholly arb i t ra ry . I t is i l luminat ing to take one of them, hold i t fixed over a l imi ted number of years and then measure the changes in the proportion of famil ies in poverty.

Operational poverty levels to be used in providing minimum benefits are a d i f fe ren t matter. In Br i ta in we have raised the o f f i c i a l poverty level on which supplementary benefit is based as real output has increased. Thus the poverty level is now about twice as high in real terms as i t was in 1948. A number of European countries have followed a broadly s imi lar course. I t may be regarded as ent i re ly proper to raise the poverty level with r is ing affluence. What is not proper is to ignore the fact that such increases have been made and then to claim that poverty has not been much affected by the rise in affluence.

The minimum incomes provided for the elder ly can be expressed as a percentage of previous average earnings as we have done in the case of pensions. This is a complicated exercise. In some cases there are means-tested minima iil the pension schemes themselves, but allowance must also be made for the fact that the respons ib i l i t y for dealing with poverty may be l e f t wholly or part ly to local or state governments. There may then be some dispersion and the figures are not always easy to obtain. A rough comparison can however be made and, for a married couple in 1971, the minima worked out roughly as follows: Br i ta in about 40 per cent; France about 46 per cent; Germany about 40 per cent; Belgium about 38 per cent; I ta l y about 21 per cent; the Netherlands about 56 per cent. I f I t a l y is l e f t out, a replacement rate of at least two- f i f ths of gross real average earnings in the previous year has been achieved.

So much for a rough estimate. We must now consider the ways in which the poor may be assisted. In both Br i ta in and the Netherlands, the level of basic benefits is set del iberately below thepoverty level , including in the la t te r the assistance needed with housing. This is also true of the basic pension in Sweden to which a means- tested housing allowance is added in the case of about half the pensioners. I f , then, poverty is measured by the proportion of famil ies with incomes below the o f f i c i a l means-tested level at which assistance is received and i f , furthermore, the periodic increases in the poverty levels are ignored, one may reach the conclusion that neither the welfare state nor the general rise in affluence has done much to reduce poverty. Such statements are, of course, misleading. To recognise that this is so is not to imply that o f f i c i a l poverty levels are too high or even high enough. Moreover, means-tested benefits are not always claimed by those ent i t led to them. Inadequate take-up has been s t a r t l i n g l y high in Br i ta in in the past and i t was the discovery of this fact which, very r i gh t l y in my view, led to so much concern some years ago about the assistance received by the poor. The position is now believed to have improved a good deal but hard s ta t i s t i cs are lacking. Here we are about to become involved in the debate about the merits and weaknesses of " se lec t i v i t y " .

Let us turn to the replacement of income. We must note at the outset that f l a t - r a te benefits financed by graduated contributions - as in Br i ta in and Holland - provide more scope for vert ical re- d is t r ibu t ion than do graduated pensions. Thus the wage-earner with less than average earnings w i l l have a higher proportion of his income replaced than w i l l those with more than average earnings.

I t is true, of course, that those with higher earnings w i l l want to have a higher income in retirement as well. The basic question is whether i t is the respons ib i l i ty of the state to ensure,

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by compulsory schemes, that this objective wi l l be achieved. For this could be l e f t to private arrangements. In some European countries, notably in France and I t a l y , o f f i c i a l compulsion is used in a way which wi l l replace a substantial proportion of incomes far above the poverty level. I t may be held that this i~ an over-paternal is t ic approach. I f these arrangements are nevertheless acceptable - as they c lear ly seem to be in the countries concerned - the explanation is to be found part ly in the f iscal bias there, as elsewhere, against private saving by individuals, part ly in the inadequacy of the instruments for private savings in some countries and l as t l y , but by no means least important, in the misunderstanding created by the employers' payroll tax. For~future pensioners may be misled into supposing that i t is the employer who pays and may thus be encouraged to press for higher and higher benefits. Although the precise incidence of the tax is uncertain, there can be no doubt that a substantial part is passed on in the form of higher prices. I t a l y is the outstanding example with i ts replacement target of about three-quarters of income received towards the end of working l i f e - with no upper l im i t . Other forms of social expenditure may suffer as a resul t , for example expenditure on the environment.

In Br i ta in the Government has now accepted respons ib i l i ty for ensuring that private occupational pension rights are preserved on a change of job. This is clearly desirable. I t has, however, gone beyond this and made occupational pensions compulsory. Admittedly the scale on which income replacement wi l l be provided is s t i l l quite modest and the charge of excessive paternalism should not be pressed too strongly. The fact remains that the state is now accepting some respons ib i l i ty , i f mainly ind i rect , for graduated pensions. We must, therefore, expect comparisons to be made with graduated schemes in Europe and the comparisons are l i ke l y to be so unfavourable as to give rise to po l i t i ca l pressure in Br i ta in for further change.*

*The Three Bank Review. Number lOl, National and Commercial Banking Group

Ipublished by the Sta t is t ica l Office, EEC, 1972.

2These estimates include expenditure by central , state and local governments on sickness, old age, death and survivors, d i s a b i l i t y , industr ia l accidents, unemployment, family expenditure and some miscellaneous items. They also include private occupational pensions. Private occupational health schemes are also included in the case of the USA where they are important. The Br i t ish estimates include assistance with housing costs through supplementary benefit but not other forms of assistance with housing. Costs of administration are included throughout.

3A more detailed account and comparative analysis is g~ven in Pensions, In f la t ion and Growth, edited by Thomas Wilson, Heinemann, 1974.

4This,in e f fec t , has been the arrangement in Br i ta in for some time. I t is true that the basic f l a t - ra te pension is financed from f l a t - r a te contr ibut ions, but graduated contributions have been collected over a band of income for graduated pensions since 1961. The proceeds of these graduated contributions have largely been used to help meet the cost of the basic scheme. The new arrangements which w i l l come into force in 1975 can be regarded as being to this extent a regularising of an existing practice.