ILO/95/23
GENEVA (ILO News) - Economic and political developments in Europe have increased the financial strain of paying for social programmes. But the need for them has grown rapidly in recent years. Resolving this tension will require significant, and possibly controversial, reforms in pensions, health care, unemployment and social assistance schemes warns the International Labour Office in a report prepared for the Organization's Fifth European Regional Conference in Warsaw (September 20-27).*
East Europeans are experiencing a serious deterioration in living conditions and stagnant or declining life expectancy as substantial numbers of the population slip below the poverty line. Pension funds have been eroded by inflation and social assistance is minimal. West Europeans are spending an increasing percentage of their Gross Domestic Product (GDP) on social assistance, a trend which is aggravated by structural unemployment and increasing social exclusion.
The report highlights both the wide gap between social protection in Eastern Europe and in Western Europe and also the pervasive tension between the cost and benefit of social protection throughout Europe. Mr. Colin Gillion, Director of ILO's Social Security Department, argues that while the contribution of welfare-state expenditure has been important for the maintenance of social cohesion in spite of growing unemployment: "The post-war consensus about the provision of social insurance has shifted, and there now exists a widespread perception of the need for change, particularly with respect to the role of the state and the extent to which individuals should be asked to rely on themselves."
The ILO's 5th European Regional Conference is the first to be held outside of ILO headquarters in Geneva and it is the first pan-European Conference since the collapse of communism in Europe.
Coverage and financing of social protection is one of the main agenda items at the Warsaw Conference which will bring together representatives of employers, workers and governments from 48 European countries. Other agenda items include a review of ILO activities in Europe, discussion of measures to reinforce dialogue between trade unions, employer organisations and Government for active labour-market policies, and the situation of international labour standards in the region.
During the 1960s and 70s social expenditure in Western Europe was generally matched by social security contributions and taxation. However, economic crises of the mid-1970s upset the balance by pushing up unemployment and social expenditures while reducing revenue from taxes, resulting in large fiscal deficits that continued into the 1980s. Since then, tax reforms and expenditure controls have stabilised the ratio of social expenditure to GDP, which has increased very little in the last decade.
In the centrally planned economies of Eastern Europe, social expenditure in the early 1980s was in the range of 20-30 percent of GDP. After 1989, the statistical picture is less clear with respect to explicit social expenditure. Though many forms of subsidies have been phased out, new benefits have had to be introduced to cope with unemployment and social assistance. As a proportion of GDP, social expenditures have actually increased in Eastern Europe, though much of the increase is explained by declines in GDP. In real terms, social expenditures have fallen steeply. According to Colin Gillion "the result is that the social-safety net has been eroded in transition economies at precisely the time when its benefits are most sorely needed."
The ILO notes that the economic transition in Eastern Europe points to the need for new systems of income support and social assistance and for a reorientation of pension, income-support and health-care programmes. Countries in the region face a hard choice between investment in the economy and social protection. "If expenditures swing too far in the direction of social support, investment and economic recovery will be jeopardized, but if insufficient social protection is afforded to those most in need, the political consensus for transition may not be sustained."
Though much of the decline in social spending is linked to the GDP decline in transition economies, the ILO report estimates that in many of these economies as much as 30 per cent of social security contributions are not collected due to administrative inefficiencies, tax evasion and delayed or non-payment of wages.
In Western Europe, there is little evidence that social expenditures are "out of control," however tensions are building due to concerns about the macroeconomic consequences of increasingly costly social protection systems. The continued growth and scale of expenditures in the wake of the early 1990s recession and persistently high levels of structural unemployment mean that in nearly all Western European economies, social charges represent between 25 and 30 percent of the total cost of employing labour. Contribution rates for pensions alone make up roughly 20 per cent of total labour costs, according to the report. The report notes that though West European Governments have generally managed to contain social expenditures, doing so "has left very little financial room to cope with new demands, particularly those associated with the new poor or with social and economic exclusion."
Pensions
Total pension outlays now amount to around 10.5 per cent of GDP in Western Europe and around 8 per cent in Central and Eastern Europe. As a proportion of total public spending, pensions today represent over 25 per cent in Western Europe and just under 20 per cent in Central and Eastern Europe (almost double what they were 25 years ago).
Public pension schemes in Western Europe have largely succeeded in providing increased income security in old age, but at an ever-higher price. The outlays have grown due to an increase in the number of elderly, the maturing of the schemes, which means that an increasing number of retirees are fully covered and the progressive enhancement of the schemes, both in terms of coverage and benefits. In Eastern Europe, pension and other benefits have been eroded by rapid inflation to the point where there is now widespread poverty among the elderly and among families with children.
According to ILO, overall levels of pension funding are increasingly being called into question. Pension-fund expenditures put pressure on fiscal management, particularly in Central and Eastern Europe where deficits are large and resources urgently needed for reconstruction. High contribution rates increase the immediate cost of employing labour in Western Europe. Demographic trends, including longer life expectancy, lower retirement ages, decreased fertility rates and ageing population raise fundamental questions about how the older population will be supported if it does not work.
The report notes that for the transitional economies, the low retirement age (age 60 for men and 55 for women) is a particularly severe problem. Many countries find themselves with a large proportion of their populations receiving retirement pensions at an early age. In Bulgaria it is estimated that no fewer than one-third of pensioners are under 60 years of age.
Health Care
For Central and Eastern European countries, key indicators suggest a declining -- or at best stationary -- health status of the population during recent years. In Bulgaria, the Czech Republic, Hungary, Poland and Slovakia, life expectancy hovers around 1989 levels. In Ukraine life expectancy dropped dramatically, and in the Russian Federation male life expectancy dropped by 5 years for males and by 1.5 years for females between 1989 and 1993. Since 1990, infant mortality rates increased in Albania, Romania, the Russian Federation and Ukraine, after having declined for decades.
There is now a substantial health gap between East and West in Europe. East Europeans die between 3 and 5 years earlier than their western neighbours. The probability that an east European child will die in the first five years of life is between two and five times higher than for a West European child. The differential, according to ILO, "reflects a serious deterioration in living conditions in Eastern Europe and a crisis of the health care systems."
Public spending on health care in Eastern Europe is generally only of the order of 4 to 6 per cent of GDP versus 6.5 to 9.5 per cent in the West. Health care expenditures in Western Europe account for between 25 and 30 per cent of all social expenditures, much more than in the East. The differences between the quality and delivery of health care are equally dramatic, with the health care industry in most Eastern Countries still operating largely along the traditional lines of a socialist public service, in spite of reform efforts, while significant competition and productivity gains have improved health-care delivery in Western Europe.
Unemployment benefits and social assistance
Initially a relatively minor component of European social expenditure, unemployment compensation and social assistance have grown substantially over the last 15 years, particularly in Western Europe, where unemployment and the number of households living in poverty has increased dramatically. In Central and Eastern Europe general social assistance programmes were not unknown, but their scale and scope have had to be vastly expanded to cope with economic transition. Unemployment insurance programmes have had to be started, practically from scratch.
In the initial phases of market reforms, replacement rates of unemployment benefits tended to be generous and the duration of entitlement was two years or longer. Benefits today are of a shorter duration -- generally 12 months -- and the replacement rates are falling: for example, in Bulgaria from 54 per cent in 1990 to 39 per cent in 1992; in Poland from 79 per cent in 1991 to 48 per cent in 1993; and in Slovakia, which has a much shorter benefit duration, from 83 per cent in 1991 to 32 per cent in 1993.
"The risk," says Gillion, "is that unemployed people are falling through the social-safety net, either because they become ineligible or because they use up their benefits too quickly." Once benefits are exhausted, many people receive minimum subsistence benefits, which are subject to means testing.
The report notes that in spite of high levels of poverty in Central and Eastern Europe, "social assistance expenditure is estimated at about 1 per cent of GDP and there is evidence that the social assistance schemes often do not reach more than 50 per cent of the poor." The number of recipients, however, is increasing rapidly.
Social assistance expenditure is growing as a percentage of GDP in most of Western Europe: in Belgium, Finland, Norway, Portugal and Sweden it is about 0.5 per cent of GDP; in Germany and Netherlands 2.0 per cent; in Ireland and the UK about 5 per cent.
In Portugal and Luxembourg about 2 per cent of the population receives social assistance benefits, in Finland 10 per cent and as many as 15 per cent in Ireland and the UK.
The ILO argues that unemployment benefits and social assistance provide a strong buffer against poverty and play a major role in promoting efficient job search and reducing resistance to structural change in industry. "Unemployment benefits have shown themselves to be an effective way of preventing hardship, especially in the early days of unemployment." The emergence of long-term unemployment complicates the funding problems.
The persistence of unemployment suggests that "developments in social protection have reached a turning point; future directions cannot simply extrapolate past trends," says Gillion. He adds that "new and perhaps radically different strategies are needed to current economic constraints while anticipating future social needs." Given the vastly different levels of economic well-being across Europe, delegates to the ILO Regional Conference in Warsaw will have plenty to debate and resolving tensions will not be easy. ILO officials acknowledge that while the debate may be difficult and contentious, it is necessary to reinforcing the underlying values of different systems of social protection while laying the ground work for their improved functioning. While a modified role of the State may prove necessary, the ILO argues that Governments should build upon past commitments to maintaining social protection under ILO Standards, including guaranteeing people a reasonable standard of living, while maintaining social justice, social cohesion and social consensus.
*Conference Details
The Conference takes place in Warsaw at the invitation of the Government of Poland from
Victoria Hotel11,
Krolenska StreetWARSAW,
Poland