Introduction

1All European welfare states face a range of significant challenges, reflecting past economic and social trends as well as new developments. The post-war welfare states had many successes, with significant reductions in poverty in old age and the extension of health insurance coverage to the majority of the population being among the most notable. However, as government spending on social protection increased significantly in all European countries, there were renewed debates about the equity and effectiveness of this spending. Moreover, from the 1970s onwards new social challenges developed as a result of changing social and economic conditions. Employment rates increased for women, but fell for men, for youth and for those in the decade before official retirement. Virtually all countries have experienced substantial increases in unemployment and in the duration of unemployment, compared to the 1960s. The increase in unemployment was associated with severe recessions, but when economic growth resumed, it appeared in many cases that the level of unemployment had “ratcheted up”, and did not fall back to pre-recessionary levels. Unemployment also became more concentrated among households and regions, raising concerns about social exclusion. In addition, the incidence of divorce and lone parenthood has increased, leading to greater economic vulnerability for the women and children affected. In some countries earnings disparities have widened between low-paid and high-paid workers, although in the same period the gap between the earnings of men and women narrowed. In conjunction, these trends challenge aspects of existing social protection arrangements.

2More recently, economic growth was buoyant in many countries in the 1990s. Recovery after the downturn in the early 1990s was associated with falling unemployment in most European countries between 1995 and 2001. Unemployment fell particularly in Spain, and The Netherlands. Employment to population ratios for the population aged 15 to 64 years rose inmost countries. For the EU-15, the overall employment to population ratio increased by around 3 percentage points, better than the OECD average of around 1 percentage point. (The exception was Austria.) But since 2001, economic growth has been more muted, and in some countries unemployment started to rise, although not as rapidly as in the early 1990s.

3Looking forward, the challenges posed by demographic changes are now well-recognized. There have been remarkable gains in life expectancy in all EU countries, mirrored in declining mortality rates at all ages, a sharp reduction in infant mortality and higher survival rates at older ages. At the same time, fertility rates have fallen, and are below replacement in all European countries. Age dependency ratios are projected to increase significantly, from 24 per cent for the OECD as a whole in 2000 to nearly 50 per cent in 2050, and are projected to approach or exceed 60 per cent in Austria, Italy and Spain.

4Many European countries are already experiencing significant population ageing as a result of falling fertility rates and increased life expectancy. The effects of these trends will be sharpest over the next two to three decades as the baby-boom generation moves into the age group 65 and over, but will be preceded by an increase in the share of older persons in the population of workforce age, with significant implications for the size and composition of the workforce. Moreover, it seems likely that as a result of further gains in longevity, old-age dependency ratios will continue to increase even after all of the baby-boom generation have retired, unless fertility rates rise.

5These developments have major implications for systems of social protection (EU, 2001). OECD projections – which take account of the effects of announced reforms that are still being phased-in – suggest that old-age pension spending could rise on average by 3 to 4 percentage points of GDP in the period to 2050, with projected health care expenditure adding a further 3 to 3.5 percentage points of GDP, and spending on long-term care to add a further 1 percentage point of GDP. While expenditures on education and family benefits are projected to fall by around 1 per cent of GDP, these declines might not materialize if there are demands for longer periods of education, increased spending on training or more support for publicly-subsidized childcare (OECD, 2005a).

6Given this context, either the costs of programmes will increase, and with them the contributions and taxes required to finance benefits, or benefit levels will have to be reduced, or deficits will increase, or there will be some permutation of these and related alternatives. But as these new challenges have merged, not all old problems have been resolved. As a result of family and labour market changes, poverty among people of working age has increased. As a result, since the early 1990s many European welfare states have introduced reforms to their systems of social protection, in response to these significant demographic and labour market challenges.

7This paper provides an overview of some of these diverse policy challenges in a range of Continental countries (France, Germany, Belgium, Luxembourg, The Netherlands and Austria), as well as in a range of Southern European countries (Italy, Spain, Portugal and Greece). Part 2 of the paper surveys the social and economic environment for welfare state reform, including recent and prospective labour market and demographic developments. Part 3 reviews trends in the level and distribution of social expenditures, as well as developments in income inequality and poverty. Part 4 discusses reforms to pension systems, usually regarded as a key area for reform. The paper concludes with a summary of the similarities and differences across these countries in these challenges and responses.
It should be emphasized that the objective of this paper is to provide a broad panorama of some of the main features of the differing welfare states of these ten countries, looking first at the environment within which welfare arrangements operate, then turning to details of the social protection systems, and then to measures of outcomes of welfare state interventions. Thus, the intention of the paper is to provide the background data to set against the more detailed analyses following in other more specialized and more specific papers.
Much of the recent literature on European welfare states has been concerned with Esping-Andersen’s (1990) typology of three welfare state regimes, and with subsequent extensions to the typology – including by Ferrera (1996) and Moreno (1997) – that separates the Southern European countries from other Continental welfare states. This paper does not address these issues directly, although the comparisons that follow highlight the similarities and differences between the six continental countries and their four southern neighbours.

The Economic, Demographic and Labour Market Context

Economic context

8The economic circumstances of European welfare states differ in important respects (Table 1). All continental welfare states have higher GDP per capita than the OECD average, with Luxembourg being by far the richest (although there is a wide gap between GNP and GDP per capita), while the southern countries have lower national incomes, particularly Greece and Portugal. Real GDP growth was strong between 1995 and 2000 in all countries apart from Germany and Italy, but since 2000 economic growth has fallen significantly, except in Greece and to a lesser extent Spain. The share of trade in GDP tends to be lower in the Southern European counties, and all of these countries have current account deficits, while all of the Continental countries apart from Austria have surpluses. Most of the continental welfare states had broadly similar rates of inflation over the 1995-2003 period, although The Netherlands was higher than average for this group; all of the Southern European countries have experienced higher inflation, with the increase in prices being highest in Greece. Most countries currently have government budget deficits, except Belgium, Luxembourg and Spain, with the 2003 deficit exceeding 4 per cent of GDP in France and Greece. In relation to Government debt, Luxembourg is an outlier with very low levels of debt, with other countries ranging between debts of around 60 per cent of GDP (Germany, The Netherlands, Spain) to over 100 per cent of GDP (Belgium, Greece, Italy).

Table 1

Selected Economic Statistics, Continental and Southern European Countries, 2003

GDP per capita Real GDP growth p.a. Real GDP growth p.a. Share of trade in GDP Current account balance CPI 2000=100 Government net borrowing Government debt USD in PPPs, 2002 1995-2000 2000-03 2003 % of GDP 1995 2003 % of GDP % of GDP Austria 28,872 2.9 0.9 51.0 -0.6 93.3 105.9 -1.25 69.7 Belgium 27,716 2.7 1.0 80.9 3.1 92.1 105.8 0.31 104.9 France 27,217 2.8 1.2 25.2 1.0 94.2 105.8 -4.14 71.2 Germany 25,917 1.8 0.3 34.0 2.2 93.9 104.5 -2.82 65.2 Luxembourg 49,150 7.1 2.3 131.4 9.9 90.9 106.9 0.78 5.3 Netherlands 29,009 3.7 0.4 60.1 1.5 89.9 109.9 -3.22 63.2 Greece 18,439 3.5 4.1 24.4 -6.5 79.0 110.9 -4.65 109.9 Italy 25,568 1.9 0.8 25.1 -1.5 88.7 108.1 -2.49 120.9 Portugal 18,434 3.9 0.3 33.4 -5.1 87.6 111.6 -2.81 70.3 Spain 22,406 3.9 2.5 28.8 -3.0 87.9 110.0 0.41 59.4 OECD 25,810 3.3 1.6 43.1 81.2 108.9 -3.68 EU-15 26,019 48.1 90.6 108.9 -2.75 Source: OECD Factbook (2005).

Selected Economic Statistics, Continental and Southern European Countries, 2003

9Total tax revenues range between 33 per cent and 46 per cent of GDP, with the southern countries apart from Italy tending to have lower levels of tax revenues (Table 2). Tax revenues have increased in all countries apart from The Netherlands, with the increase being particularly large in Greece. Social security contributions range between one-quarter and 40 per cent of tax revenues, and are well above the OECD average in most countries, but show no common trends since 1990. There are quite wide variations between countries in the extent to which the central government collects tax revenue (compared to local or provincial governments or social security organizations), with this ranging between 30 per cent in Germany and close to two-thirds in Luxembourg, Greece and Portugal, with the main factor associated with differences being whether the country is federal or not. Tax wedges (income taxes, plus employee and employer social security contributions as a percentage of total labour costs) are generally higher in continental Europe than in Southern Europe, apart from Italy, and have been more likely to increase in continental Europe.

Table 2

Taxation Systems, Continental and Southern European Countries

Total tax revenue % of GDP Social security contributions % of total taxation Tax wedge, single persons at APWW % of labour costs Central government revenue % of total 1990 2000 2003 1990 2000 2002 1991 2000 2004 2002 Austria 40.4 43.4 45.4 32.9 34.2 33.4 39.1 44.9 44.9 54.4 Belgium France 43.2 43.0 45.7 45.2 45.8 45.0 33.2 44.1 30.9 35.9 31.6 37.0 53.7 - 56.2 48.2 54.2 47.4 35.3 40.7 Germany Luxembourg Netherlands 35.7 40.8 42.9 37.8 40.2 41.2 36.8 40.7 39.5 37.5 27.0 37.4 39.0 24.7 38.9 40.3 26.9 35.5 46.4 33.9 46.5 51.8 35.5 45.1 50.7 31.9 43.6 30.0 66.3 59.9 Greece 29.3 38.2 36.9 30.2 30.8 32.8 33.0 36.0 34.9 65.3 Italy Portugal Spain OECD 38.9 29.2 33.2 34.8 43.2 36.4 35.2 37.2 42.0 33.5 35.2 36.9 32.9 27.2 35.4 22.4 28.6 29.8 35.0 24.6 29.4 27.1 35.3 25.4 48.8 33.2 36.5 - 46.7 33.5 37.6 - 45.7 32.6 38.0 - 53.9 64.8 37.6 57.8 EU-15 39.4 41.2 41.0 28.4 27.7 28.1 - - - 56.1 Source: OECD, Revenue Statistics, 1965-2003; Taxing Wages, 2003-2004.

Taxation Systems, Continental and Southern European Countries

Demographic context

10Since the 1970s, fertility rates have fallen in all ten countries, but the ranking of countries has changed – in the 1970s, fertility tended to be highest in Southern Europe, but by 1990 continental Europe had higher fertility rates than Southern Europe. Moreover, between 1990 and 2000 fertility increased in Belgium, France, Luxembourg and The Netherlands, but continued to fall in the Mediterranean countries, as well as in Austria and Germany (Table 3). The mean age at first birth has increased in all countries, but there is no clear pattern of higher ages at birth associated with lower fertility; indeed, France, Luxembourg and The Netherlands have higher ages at first birth than all the Southern European welfare states apart from Spain. Moreover, teenage birth rates are highest in Portugal, Greece, Austria and Germany. However, births outside marriage are much more common in continental Europe than in Southern Europe (apart from Portugal), accounting for more than 40 per cent of all births in France, but only 4 per cent in Greece.

Table 3

Selected Family Statistics, Continental and Southern European Countries

Fertility rate Mean age at first birth Teenage birth rates Births outside Marriage (%) Divorces per 1000 population Lone parents as % of households/families with children Single people 16-29 living with parents Unmarried Women 65 and over living with adult children 1970 1990 2000 1970 2000 1998 1980 2001 1980 2001 1990 2000 1999 1999 Austria Belgium France 2.29 2.25 2.47 1.45 1.62 1.78 1.34 1.66 1.89 -24.3 24.4 26.3 26.4 28.7 14.0 9.9 9.3 17.8 4.1 11.4 33.1 27.5 42.6 1.8 1.5 1.5 2.5 2.6 1.9 15 20 12 16 -17 13.9 13.0 12.1 15.8 8.2 9.4 Germany Luxembourg Netherlands Greece 2.03 1.97 2.57 2.40 1.45 1.60 1.62 1.39 1.36 1.79 1.72 1.29 24.0 -24.8 - 28.0 28.4 28.6 27.3 13.1 9.7 6.2 11.8 11.9 6.0 4.1 1.5 23.4 22.3 27.2 3.9 1.8 1.6 1.8 0.7 2.4 2.3 2.3 0.9 15 5 13 3 21 4 16 3 10.1 12.9 8.5 16.9 7.4 17.0 1.4 19.0 Italy Portugal Spain OECD EU-15 2.43 3.01 2.88 2.70 2.40 1.33 1.57 1.36 1.90 1.60 1.23 1.52 1.24 1.60 1.60 25.0 --24.2 19.7 28.0 26.4 29.0 26.9 27.8 6.6 21.2 7.9 15.8 12.2 4.3 9.2 3.9 11.2 11.8 9.7 23.8 17.7 29.5 29.5 0.2 0.6 -1.8 1.6 0.7 1.8 1.0 2.0 2.0 2 10 2 12 - 3 -2 14 - 18.8 19.8 23.0 -14.1 19.6 22.1 26.8 -13.4 Source: OECD (2006, forthcoming).

Selected Family Statistics, Continental and Southern European Countries

11Divorce is much more common in continental Europe than in Southern Europe (except for Portugal), and not unexpectedly lone parenthood is also much more common in these countries, with the incidence of lone parenthood as a percentage of all households with children in 2002/2003 ranging between 3 and 4 per cent in Greece, Italy and Spain to 12-14 per cent in Belgium, The Netherlands and France. Household composition is also quite different across countries, with young single people being much more likely to be living with their parents in Southern Europe. Similarly, higher proportions of single (widowed or divorced) elderly women live with their children in Southern Europe, although Luxembourg and Austria differ in this dimension from other Continental countries.

Labour market Context

12How do labour market trends compare across countries? As with demographic and household trends, there are some similarities between countries in Southern Europe, and with a distinctive pattern compared to the countries of continental Europe (Table 4). Employment to population ratios tend to be higher in continental Europe than in the South, but Portugal has a higher employment rate than any other country apart from The Netherlands, where part-time employment is particularly high. In all countries employment was higher in 2000 than in 1990, but employment in continental Europe tends to have fallen between 2000 and 2004; in contrast, employment rates have continued to increase in all southern countries apart from Portugal, albeit from very low starting points. Over the whole period since 1990, total employment rates have increased most strongly in The Netherlands (12 percentage points) and in Spain (10 percentage points), followed by Belgium (6 percentage points), then Greece and Italy (around 5 percentage points).

Table 4

Selected Labour Market Trends, 1990 to 2004 – Men and women (%)

Employment/Population rates (%)* Unemployment rate Long-term unemployment Self-employment Temporary employment 1990 1995 2000 2004 1990 1995 2000 2004 1990 2004 % of civilian employment % of dependent employees Austria - 69.2 67.9 66.5 - 3.9 3.7 4.5 - 24.5 12.8 8 Belgium 54.4 56.6 60.9 60.5 6.6 9.7 6.9 7.8 68.5 49.6 17.8 9 France 60.8 59.4 61.7 62.8 8.5 11.1 9.1 9.7 38.1 41.6 8.8 15 Germany 64.1 64.9 65.6 65.5 4.8 8.0 7.2 9.5 46.8 51.8 11.4 13 Luxembourg 59.2 58.9 62.7 61.6 1.6 2.9 2.3 4.2 47.4 22.6 6.8 3 Netherlands 61.1 64.8 72.9 73.1 5.9 6.6 2.8 4.6 49.3 32.5 11.6 14 Greece 54.8 56.4 55.9 59.6 6.3 9.1 11.3 10.5 49.8 54.7 39.8 13 Italy 52.6 51.2 53.9 57.4 8.9 11.2 10.1 8.0 69.8 49.7 27.5 10 Portugal 67.4 66.3 68.3 67.8 4.8 7.3 4.1 6.7 44.9 43.2 26.8 21 Spain 51.8 47.2 57.4 62.0 13.1 18.8 11.3 10.8 54.0 37.7 18.6 33 OECD 64.9 66.2 65.7 65.3 6.1 7.3 6.2 6.9 31.1 32.0 17.2 11 EU-15 61.6 59.1 63.7 65.0 8.1 10.1 7.6 8.0 48.7 42.4 16.2 - Notes: * Long-term unemployment refers to the percentage of total unemployment 12 months or over. Source: OECD Employment Outlook, various years.

Selected Labour Market Trends, 1990 to 2004 – Men and women (%)

13In general, unemployment rates increased in all ten countries between 1990 and 1995, significantly in most cases apart from The Netherlands; then unemployment fell in the second half of the decade (except in Greece, and the fall in Austria was not strong). Since 2000 unemployment has increased in all Continental countries and Portugal, but has fallen in Greece, Italy and Spain. The share of long-term unemployment (for 12 months or more) exceeds 40 per cent of total unemployment in France, Portugal, Belgium and Italy, and is over 50 per cent in Germany and Greece, and is between 30 and 40 per cent in Spain and The Netherlands, but is less than 25 per cent in Austria and Luxembourg.

14Self-employment is also much more significant in Southern Europe, although the level of self-employment in Belgium approaches that in Spain, which is the lowest of the southern countries. Temporary employment is particularly significant in Portugal and Spain, with France, Germany, The Netherlands, Greece and Italy having broadly comparable levels. It can be calculated from these figures that non-temporary employees account for between 75 per cent and 90 per cent of civilian employment in the countries of continental Europe, but between 50 and 60 per cent in Greece, Portugal and Spain, and 65 per cent in Italy.
A significant factor in the difference in employment rates across countries relates to the position of women (Table 5). In general, the employment rates of women are much lower in Southern Europe – but again with the exception of Portugal, where female employment is higher than in France or The Netherlands. In a number of countries, employment rates for mothers with one child are higher than for women without children (Austria, Belgium, France and Portugal), but in virtually all countries, employment rates are significantly lower where mothers have two or more children, or where the youngest child is under six years of age. With the exception of Italy, women are much less likely to work part-time in Southern Europe than in continental Europe, although part-time work is also relatively uncommon in France. If one calculates the “gender employment gap” and the “maternal employment gap” – the difference between the employment rates of men and of all women and of mothers, respectively – then the countries of the South (except Portugal) have much wider gender and maternal employment gaps than the countries of continental Europe, except Luxembourg. However, in Southern Europe the gender gap explains most of the maternal gap, that is, it is being female that is the main source of lower employment rather than being a mother.

Table 5

Selected Labour Market Statistics for Women, 2003-2004

Employment rates by group (%)* Share of part-time employment (%) All women No children One child Two or more children Youngest child under 6 Youngest child under 6 Youngest child over 6 All women Austria 75.8 79.5 79.9 67.6 70.6 39.9 38.7 29.6 Belgium 68.8 70.4 71.2 65.3 63.5 39.0 41.6 34.1 France 72.0 76.1 77.0 61.6 62.2 26.3 26.6 23.6 Germany 74.6 77.6 70.3 56.5 56.2 53.3 55.1 37.0 Luxembourg 64.6 71.2 67.6 51.2 57.7 43.6 47.9 33.3 Netherlands 74.5 76.8 73.8 68.6 69.2 80.6 75.6 60.2 Greece 57.8 56.1 54.4 47.4 50.2 11.5 8.9 10.9 Italy 57.8 57.2 54.5 45.7 51.1 30.2 30.8 28.8 Portugal 74.9 72.3 78.6 74.9 77.3 8.3 10.1 14.0 Spain 58.9 56.1 54.4 47.4 50.2 18.1 20.0 17.2 OECD 64.8 75.1 71.3 61.7 56.1 31.5 30.2 25.41 EU-15 69.2 73.1 70.1 60.2 56.5 29.1 28.5 31.2 Notes: * As a percentage of women aged 25 to 54. Figures for all women for France and Luxembourg refer to 2002, not 2003. Source: OECD, Employment Outlook (various years), and European Labour Force Surveys.

Selected Labour Market Statistics for Women, 2003-2004

15Patterns of employment also differ significantly by age group (Table 6). Employment among “older workers” – those aged between 55 and 64 – shows a very different pattern. Employment rate for men in this age group are highest in Greece, Portugal, The Netherlands and Spain, and lowest in Austria, Belgium and Luxembourg. However, in Southern Europe employment in this age group tends to have fallen over the 1990s, while trends in continental Europe are more mixed. Employment rates for youth (aged 15 to 24) are also diverse, ranging between 21 per cent in Luxembourg and 66 per cent in the neighbouring Netherlands. Youth employment to population ratios are also under 30 per cent in Belgium, France, Greece, and Italy, and are between 30 and 50 per cent in Portugal, Spain, Germany and Austria (in ascending order).

Table 6

Employment among Men and Women aged 55 to 64 and Youth (15 to 24), 1990 to 2004

Older Women Older Men Youth 1990 1995 2000 2004 1990 1995 2000 2004 1990 1995 2000 2004 Austria - 18.7 16.7 18.5 - 42.9 40.2 36.8 - 58.1 52.5 49.9 Belgium 9.4 12.7 15.4 21.2 34.3 34.5 35.1 39.3 30.4 26.6 30.3 28.1 France 28.8 28.9 30.3 36.8 43.0 38.4 38.5 44.5 35.7 22.0 23.2 29.5 Germany 22.4 26.8 29.0 29.8 52.0 48.2 46.4 48.8 56.4 51.2 48.4 41.9 Luxembourg 13.7 13.2 16.8 22.9 42.9 35.1 37.9 38.5 43.3 38.2 31.8 21.4 Netherlands 15.9 17.9 25.8 32.5 44.2 41.1 50.0 56.4 53.0 54.5 68.4 66.2 Greece 24.0 23.8 24.4 24.0 58.4 58.9 55.3 56.3 30.3 26.5 26.9 27.4 Italy 15.2 13.5 15.3 19.6 51.9 44.7 40.9 42.2 29.8 26.1 27.8 27.2 Portugal 31.7 33.3 40.8 42.5 65.0 57.7 62.1 59.1 54.8 37.4 42.7 36.9 Spain 18.0 17.5 20.1 24.6 57.3 48.4 55.2 58.9 38.3 25.9 36.3 38.4 OECD 34.7 34.6 37.1 40.9 62.3 59.0 59.5 61.8 48.7 45.2 45.7 43.2 EU-15 24.9 25.7 28.4 33.2 53.2 47.7 48.5 52.2 46.3 38.8 38.7 40.7 Source: OECD, Statistical Annex, Employment Outlook, various years.

Employment among Men and Women aged 55 to 64 and Youth (15 to 24), 1990 to 2004

16An issue of particular policy concern in a number of OECD countries is the proportion of households with children where no adult is in paid employment. Broadly speaking, this problem is most significant in English-speaking countries, but there remain quite wide variations between the ten countries reviewed here. Non-employment among lone parents is much higher than among couples with children, although because lone parents are a minority among families with children, differences between employment rates among couple families can be important. Non-employment among lone parent households ranges between 17 per cent in Austria and Portugal to 40 per cent or more in Belgium and The Netherlands. In general, non-employment among lone parents has declined since the mid-1990s, except in France, and in Germany and Greece the fall in worklessness has not been large. Worklessness among couples with children is highest in Belgium at nearly 7 per cent; worklessness among couples has increased in Belgium and been broadly stable in Germany and Greece.

Social Spending – Trends and Patterns

17In 2001, gross social spending ranged between 19.6 per cent of GDP in Spain and 28.5 per cent in France, compared to an OECD average of 22.1 per cent and an EU-15 average of 24 per cent (Table 7). Over the longer run, social spending has increased most significantly in Greece, Portugal and France, with spending in Greece rising most strongly in the 1980s and in Portugal in the 1990s. All the continental European welfare states saw declines in social expenditure between 1995 and 2001 – significantly in The Netherlands, but only to a small extent in Germany; but all Southern European welfare states saw continuing increases in social spending after 1995.

Table 7

Trends in Spending On Social Welfare, Continental and Southern European Countries, 1980 to 2001 (% of GDP)

Trends in spending Components of spending, 2001 1980 1990 1995 2001 Change 1980 to 2001 Age Survivors Incapacity Health Family ALMP Unemployment Other* Austria 22.5 24.1 26.6 26.0 3.5 10.7 2.7 2.5 5.2 2.9 0.5 0.8 0.6 Belgium 24.1 26.9 28.1 27.2 3.1 8.7 2.6 3.3 6.4 2.3 1.3 2.2 0.4 France 21.1 26.6 29.2 28.5 7.3 10.6 1.5 2.1 7.2 2.8 1.3 1.6 1.3 Germany 23.0 22.8 27.5 27.4 4.4 11.7 0.4 2.3 8.0 1.9 1.1 1.2 0.7 Luxembourg 23.5 21.9 23.8 20.8 -2.7 7.5 0.6 3.6 4.8 3.4 0.1 0.5 0.3 Netherlands 26.9 27.6 25.6 21.8 -5.2 6.4 0.7 4.1 5.7 1.1 1.5 1.3 1.0 Greece 11.5 20.9 21.4 24.3 12.9 12.7 0.9 1.8 5.2 1.8 0.2 0.4 1.3 Italy 18.4 23.3 23.0 24.4 6.0 11.3 2.6 2.1 6.3 1.0 0.5 0.6 0.0 Portugal 10.9 13.9 18.0 21.1 10.2 7.9 1.5 2.5 6.3 1.2 0.6 0.9 0.3 Spain 15.9 19.5 21.4 19.6 3.7 8.3 0.6 2.4 5.4 0.5 0.8 1.3 0.3 OECD 17.9 20.9 22.9 22.1 4.2 7.6 0.9 2.6 5.9 1.8 0.6 0.9 1.4 EU-15 20.6 23.4 25.6 24.0 3.4 8.8 1.1 2.9 6.1 2.2 0.9 1.2 0.8 Notes: “ALMP”: Active Labour Market Programmes. “Other” includes housing. Averages exclude countries where data are not available for related time series. Source: OECD (2004), Social Expenditure Database (SOCX, www.oecd.org/els/social/expenditure).

Trends in Spending On Social Welfare, Continental and Southern European Countries, 1980 to 2001 (% of GDP)

18A higher share of spending in the Southern European welfare states is directed to pensions: age, survivors and incapacity pensions as a percentage of non-health spending ranged between 65 and 75 per cent in the continental welfare states in 2001, but were generally over 80 per cent of non-health spending in Southern Europe, and 88 per cent in Italy. In addition, health spending in virtually all OECD countries is strongly directed to older people – reflecting their greater needs for health care – with the ratio of health expenditure on those over 65 to spending on 25 to 29-year-olds generally being greater than 2.5 to 1. As a consequence of the high share of spending directed to pensions in Southern Europe, lower shares are directed to families and to the unemployed. Indeed, if one divides spending on the unemployed (benefits and active labour market programmes combined) by the unemployment rate, the resulting ratio is over 0.25 for all the continental welfare states and Portugal (although in Belgium the ratio reaches 0.51 and in The Netherlands it is 1.0), but in Greece it is only 0.05 and Italy 0.11, while in Spain it is 0.19.

19A number of recent OECD studies have fundamentally changed our understanding of the real size of social spending (Adema et al., 1996; Adema, 2001; Adema and Ladaique, 2005). The main implication of these studies is that accounting for private social benefits and the impact of the tax system on social expenditure has a significant equalizing effect on levels of social effort across OECD countries. Broadly speaking there are three instruments through which governments affect social expenditure through the tax system, the impact of which varies across countries and can be considerable:

201. Direct taxation (including social security contributions) paid on cash transfers are close to or exceed 2 percentage points of GDP in Austria, Belgium, and The Netherlands and slightly lower in France, Germany and Spain (Adema and Ladaique, 2005).

212. Indirect taxation levied on goods and services bought by benefit recipients is estimated to be over 2 per cent of GDP in Austria, Belgium, Germany, France, Italy, and The Netherlands, and close to this in Spain.

223. Tax breaks with a social purpose (either tax advantages similar to cash benefits or tax concessions aimed at stimulating the provision of private social benefits) are worth close to 1 per cent of GDP in Germany and France.
Taking account of the role of the tax system substantially reduces measured expenditure in many of the Nordic welfare states, so that on the basis of net social spending France and Germany are the highest spenders in the OECD.
What are the outcomes of social spending in relation to trends in inequality and poverty? Table 8 shows trends in market and disposable income inequality and in the differences between them. Market income inequality has increased in Belgium, Germany, Greece and Italy, most strongly in Germany and least in Italy; market income inequality fell in the remaining countries, although not significantly, except in The Netherlands and Spain. Disposable income inequality fell in most countries between the mid-1990s and 2000, but not to a significant degree, except in Spain. To the extent that the difference between market and disposable inequality is a measure of the effectiveness of the welfare state, then most countries saw either stability in effectiveness or slight increases, although in most cases (apart from Germany) the change was not large. However, in The Netherlands, there appears to have been a large drop in this measure of effectiveness, but because market income inequality also fell, overall inequality was lower in 2000 than in 1995.

Table 8

Income Inequality Trends, 1990s to 2000 and Progressivity of Transfers, 2000 (Gini coefficients)

1990s 2000 2000 Market in come Disposable in come Difference Market in come Disposable in come Difference Total transfers Pensioners Working Age Austria - 23.8 - - 25.2 - -6.0 17.3 -1.6 Belgium* 50.1 26.0 24.1 52.7 27.2 25.5 -7.4 22.2 -9.5 France 49.2 27.8 21.4 48.7 27.3 21.4 -3.0 23.9 -7.1 Germany 44.9 28.3 16.6 47.7 27.7 20.0 -1.3 18.0 -6.5 Luxembourg (42.7) 25.9 (16.8) (42.1) 26.1 (16.0) -8.2 12.5 -3.4 Netherlands 41.8 25.5 16.3 36.7 25.1 11.6 -22.1 -0.9 -26.3 Greece 44.6 33.6 11.0 46.6 34.5 12.1 17.2 23.6 21.8 Italy 51.3 34.8 16.5 51.8 34.7 17.1 14.8 20.7 19.6 Portugal 49.0 35.9 13.1 47.9 35.6 12.3 15.1 28.5 18.4 Spain (38.7) 32.8 (5.9) (35.4) 30.3 (5.1) 5.4 13.0 8.4 OECD 44.6 30.9 13.7 44.3 30.8 13.5 -6.5 12.0 -7.2 Notes: * Figures for Belgium refer to 1985 and 1995. Bracketed figures are incomes before transfers, but after taxes. Source: Calculated from various waves of OECD Income Distribution Study.

Income Inequality Trends, 1990s to 2000 and Progressivity of Transfers, 2000 (Gini coefficients)

23Countries also differ in the progressivity of their social transfer systems. Table 8 also shows the Gini coefficients for all transfers and transfers to people of pension age as well as people of working age. On this measure, all the continental welfare states have more progressive distributions of transfers than any of the Southern European welfare states, but with The Netherlands having the most egalitarian benefit system of any of these countries, by a wide margin; this is also the case both for transfers to persons of pension age and to persons of working age. The distribution of pension transfers is everywhere less egalitarian than for payments to people of working age; with the notable exception of The Netherlands, the remaining continental welfare states and Southern European countries are broadly similar in relation to the distribution of pensions. Using an alternative measure of transfer progressivity (the ratio of benefits received by the poorest decile to those received by the richest decile) suggests that between the 1980s and 2000, progressivity increased in The Netherlands (from an already high level) and in Greece (from a very low level), with significant declines in progressivity in Austria, Italy and Portugal, with the other countries being broadly stable, albeit with fluctuations. Overall, most of the continental welfare states redistribute about twice as much to the poor as do the Southern European welfare states.
Poverty is significantly higher in Southern Europe, ranging between 12 and 15 per cent of the population, compared to 5 to 10 per cent in continental Europe (Table 9). All of the Southern European countries have much higher poverty among people of pension age and also among children. Overall poverty increased in Austria and Germany between the mid-1990s and 2000, with the other countries showing stability or relatively small declines. Virtually all ten countries have seen declines in poverty among the aged, except Luxembourg, with a small increase, and Spain, where poverty among older people increased significantly. Child poverty was stable or declining inmost countries, apart from Germany where it increased slightly and Austria, where the increase was large. It is also worth noting that in most countries, poverty among households with a head over pension age remains higher than child poverty, with the exception of Austria, Italy, Luxembourg and The Netherlands.

Table 9

Poverty, 1990s and around 2000 (Poverty rates – Percentages)

Total Older people Children Single parent Two parents Not working Working No worker One worker Two workers Austria, 1993 7.4 14.2 7.3 20.8 8.9 15.7 10.7 0.7 Austria, 1999 9.3 8.6 13.3 67.6 23.3 35.6 12.7 8.6 Belgium, 1985 10.5 - - - - - - - Belgium, 1995 7.8 13.5 4.1 22.8 11.4 16.1 2.8 0.6 France, 1994 7.5 10.3 7.1 45.1 13.3 37.5 7.3 2.1 France, 2000 7.0 10.1 7.3 61.7 9.6 37.9 6.3 1.6 Germany, 1994 8.3 10.0 10.6 61.8 32.5 44.8 5.6 1.3 Germany, 2001 8.9 10.0 12.8 55.6 18.0 51.5 6.4 1.9 Luxembourg, 1996 5.5 4.7 7.9 51.0 20.7 20.4 8.1 2.3 Luxembourg, 2000 5.5 6.0 7.8 66.3 31.4 20.8 8.5 2.9 Netherlands, 1995 6.3 1.8 9.1 41.3 17.0 51.4 4.7 1.2 Netherlands, 2000 6.0 1.6 9.0 42.8 17.7 50.7 7.8 1.7 Greece, 1994 13.9 27.5 12.3 36.8 16.3 22.0 15.1 5.0 Greece, 1999 13.5 24.4 12.5 18.8 20.0 13.4 16.8 4.8 Italy, 1993 14.2 16.4 18.8 78.7 24.9 69.8 21.2 6.1 Italy, 2000 12.9 15.3 15.7 76.8 13.4 61.1 23.9 1.6 Portugal, 1995 14.6 27.6 15.6 87.3 21.2 70.6 24.5 4.7 Portugal, 2000 13.7 25.4 15.6 84.8 20.3 50.6 32.4 4.8 Spain, 1995 12.6 10.3 17.4 81.6 25.7 56.7 16.6 7.2 Spain, 2000 12.1 19.0 15.6 68.2 32.8 64.7 18.1 4.7 OECD Average, 1995 10.4 14.1 11.4 45.8 17.6 37.3 12.2 4.4 OECD Average, 2000 9.9 14.2 12.3 55.8 16.6 40.8 12.6 3.4 Source: Förster M. and Mira D’Ercole, M. (2005), “Income distribution and poverty in OECD countries in the second half of the 1990s”, OECD, Paris.

Poverty, 1990s and around 2000 (Poverty rates – Percentages)

Pension Systems – Characteristics and Reforms

24In a paper of this size it is impossible to do justice to the full details of the social protection systems of 10 countries. It is also difficult to summarise meaningfully the full range of reforms to social protection that have been introduced in the last decade. An OECD study (Kalisch, Aman and Buchele, 1998) contains over 200 pages of illustrative tables and charts. Recent OECD studies of responses to population ageing are even more voluminous. The reports compiled as part of the Bertelsmann Foundation’s International Reform Monitor come to more than 60 pages per edition twice a year. Given the volume of reforms and studies of reform, the discussion that follows can only give a flavour of the approaches adopted.

25Tables 10 and 11 provide details of the main parameters of retirement pension systems, taking account of all reforms that have been introduced or announced. With the exception of The Netherlands, both the continental and Southern countries have rather similar “Bismarckian” pension systems, characterised by a close link between benefits and contributions. Standard retirement ages at 65 are similar across countries, except in France with a standard retirement age of 60 and in Austria, which has a lower age for women; the early retirement age ranges between 55 and 63 years. Most countries have or are moving towards systems that take account of lifetime average earnings, although Greece and Spain retain final earnings. There are quite wide variations in the level of benefits provided by first-tier pension arrangements (table 11), with Luxembourg, Portugal and Greece providing the highest level of benefits, in relative terms. The accrual rates in the second tier of pensions are uniformly higher in the Southern countries, and the ceilings on second pillar pensions are also higher in Greece and Italy than in Austria, Belgium, France or Germany.

Table 10

Parameters of Pension Systems, OECD Countries, 2005

Normal retirement age Early retirement age Qualifying conditions Measure of individual earnings Men Women Men and women Austria 65 60 180 months coverage in last 30 years, or 300 months in lifetime, or 180 months actually paid Best 15 moving to 40 years Belgium 65 60 30 years contributions rising to 32 in 2004 and 35 in 2005 Lifetime average France 60 37.5 years contributions rising to 40 Best 20 moving to 25 years (public) Lifetime average (ARRCO points) Germany 65 63 Payable from 63 with 35 years contributions or from 65 with 5 years. Lifetime average (points) Greece 65 57 Minimum pension with 15 years contributions from 65; 37 years contributions allow retirement at any age; concessions for workers in arduous or hazardous occupations and women with dependent/disabled children. Final 5 years Italy 65 60 Minimum 5 years contributions, but pension must be at least 1.2 times social assistance pension. Lifetime average (notional accounts) Luxembourg 65 57 Early pension with 40 years contributions and from 65 with 10 years. Lifetime average Netherlands 65 60 40 years residence, reduced pro-rata. Lifetime average for around two-thirds, final for others (occupational) Portugal 65 55 15 years contributions for normal pension, and 30 years for early pension, with pension accruing for maximum of 40 years. Best 10 out of final 15 moving to lifetime average Spain 65 60 Minimum 15 years, with maximum accrual after 35 years. Final 15 years Source: OECD, Pensions at a Glance, 2005.

Parameters of Pension Systems, OECD Countries, 2005

Table 11

Summary of Pension System Parameters

Austria Belgium France Germany Luxembourg Netherlands Greece Italy Portugal Spain First tier (% average earnings) Social assistance - 23 - 24 36 - - 22 - - Targeted Basic 37 - -- 31 - -- -12 34 34 12 - -- 20 - -- Minimum Overall entitlement (full-career worker) -37 *31/38 38 29 31 -24 46 46 -34 40 40 -22 44 44 33 33 Second tier Earnings-related Type Accrual rate (% individual earnings) DB 1.78 DB 1.50 DB/points 1.25+ 0.5-1.4 [w] Points 1.00 DB 1.85-2.05 [y] DB *1.75/2.25 DB 2.57 N. acs 1.96 DB 2.0-2.3 [w] DB 2.0-3.33 [y] Ceilings (% average earnings) Public 164 129 128 164 240* - 325 357 none 189 Private/occupational - - 385 - - none - - - - Notes: – = not relevant. *: Belgium: values for minimum pension/minimum credits. Luxembourg: effective ceiling based on maximum pension. Netherlands: accrual rates for private final salary/average earnings schemes. NB: Parameters are based on 2002 values, but take account of all legislated changes even when these take place in the future. Source: OECD, Pensions at a Glance, 2005.

Summary of Pension System Parameters

26All 10 countries have actively reformed their pension systems (see annexe). There have been reductions in the value of final pension benefits. This has been accompanied by increases in the contributory or employment period required to generate the same level of benefits and increased number of years of earnings used in calculating final benefits. In other instances, the value of final benefits has been better linked to individual’s previous employment experience. By contrast, public pensions have increased in other countries concerned about the adequacy of basic benefits for older people. The retirement age is being increased for both men and women in most instances. More commonly, the retirement age for women has been increased to the same as men or closer to the male age. This has been accompanied by restrictions on access to early retirement pensions and incentives to longer workforce activity.
There do not appear to be significant differences between the types of reforms favoured in continental or Southern European countries, per se, perhaps reflecting the broad similarities between their systems. Greece appears to have done least to promote reforms, simply increasing pension eligibility ages, but with a very long phase in period. Italy’s reforms in contrast are more significant, but again with a very long period of transition before the new system is in operation. In contrast, the timing of reforms in Belgium, France, Germany and Portugal appears to be more rapid, but Austrian reforms are also to be phased-in over the longer run.

Conclusions

27This paper has highlighted a number of similarities and differences between continental and Southern European welfare states. A first point to note is that not all of the indicators examined here support the idea that these two groups of countries form homogeneous regimes. For example, on many indicators such as fertility rates and female employment, Portugal is clearly different from other Southern countries, while in some dimensions Austria and Belgium share common characteristics with the Southern welfare states. The Netherlands also has unique features that set it apart from other continental welfare states.

28Having said this, there are clearly broad similarities within the two welfare state groupings. Some of the main similarities within the Southern European welfare states include:

29• While labour market performance has improved in recent years, Southern Europe has much lower employment levels than continental Europe mainly associated with lower female employment. In addition, the gap between the employment of mothers and fathers is wider in Southern Europe, but is mainly the consequence of lower female employment generally.

30• Moreover, much higher shares of employment in Southern Europe are in self-employment, and temporary employment also tends to be significantly higher, with the result that the share of the population employed on a non-temporary basis is significantly higher in continental Europe.

31• Southern Europe tends, however, to have higher employment rates among older male workers (over 50).

32• In broad terms, the pace of fertility decline has been sharper in Southern Europe, so that population ageing is more advanced in the South and will increase more rapidly in the next 10 to 20 years.

33• In Southern Europe, multi-generation households are more common and lone parent households less common.

34• Government debt is higher in some of the Southern European countries, and these countries also tend to have lower levels of tax revenues.

35• Levels of social expenditure are lower in Southern Europe, but they continue to have grown in recent years, while they have declined in continental Europe.

36• Spending in Southern Europe is strongly oriented to pensions, and support for the unemployed and for families with children is less extensive, and social assistance is more meagre.

37• Southern European welfare states have less progressive benefit structures, but the differences between pension systems across these countries are less marked than the differences in support for people of working age.

38• Both income inequality and poverty are higher in Southern Europe, but in general terms there have been no strong trends in either dimension since the mid-1990s.
• Across both continental and Southern European welfare states there are similarities in the design features of pension systems, with all (except The Netherlands) being “Bismarckian” in design. There are differences in reforms, but these relate to the timing of reforms rather than the type of reform put into place.