The European Welfare System: What are the Reasons for its Decline?

By Denard Veshi

Published on May 14, 2012

Albert Einstein once said that “Old age has its good moments”. Consequently, the pension system introduced for the first time with the social insurance policies of German Chancellor Otto von Bismarck (1815 – 1898), in 1883, were considered as one of the major social achievements in Europe at that time.

From the Second World War to the 1970s, there has been a considerable expansion of the welfare state. As a result, the welfare system began to experience problems.

This is the result of several factors but, the most important factor is the aging of the European population. Based on the last report of the European Commission for demography in 2009, in the 27 countries of the EU, around 5.4 million children were born. This number is much smaller than the 7.7 million live births in 1964 which was the highest number of births ever registered.

It is from 2003 that the total fertility rate (the number of children that would be born alive per woman) is below the replacement level which is considered to be 2.1 children per woman. Furthermore, the timing of births has also changed significantly: The age of women at childbirth has been postponed from around 26 years old in 1980 to 29.7 in 2009. In addition, in Europe, during the last 50 years, life expectancy at birth has increased by about 10 years for both men and women.

Consequently, the EU population is becoming older and older because there is a decrease in the number of people younger than 64 years old and an increase in the number of people older than 65. For this reason, the old-age dependency (population aged 65 and over in relation to that aged 20-64, in 2010 is 28.4%, where 4.7% of them are people who are over 80 years of age. In the future, it is projected that the old-age dependency ratio will more than double from 28.4% in 2010 to 58.5 % in 2060. Therefore, if this trend continues, the EU will be one labor for one non-labor.

Obviously the change of demography will have an important effect on the GDP. Based on the EUROSTAT 17/2011 “Population and Social Condition” in 2008 the social protection in the 27 countries of the EU, representing 25,3% of the GDP where old age and survivor benefits predominated with about 11.5%. Because of the increase of the old-age dependency, in less than 30 years the old age and survivor benefits will increase to more than 50%.

Europe is experiencing a crisis in its welfare system because the state has assumed all the pension’s obligations without help from the private sector. If the state covered all the pension expenditure, it would be forced to increase the social security contributions of workers. But, this would cause an increase in the laborer’s cost with a nega

tive impact on the international economic competitiveness of the EU, especially in comparison with the BRIC countries or Turkey.

In addition, the Maastricht Treaty provides a stock of public debt up to 60% of the GDP. Based on EUROSTAT 153/2011 fourteen member states had government debt ratios higher than 60% of the GDP in 2010.

In my opinion, the state must reduce pensions’ expenditures by providing a higher personal pension responsibility. The state must stimulate the construction and the enrollment in pension funds by prefiguring tax incentives for both employers and employees.

A pensioner should no longer rely exclusively on compulsory public insurance. The compulsory public pension is characterized by the obligatory social security contributions and the repartition system which is the system that uses social security contributions to pay the pensions of retirees in the same year. All EU countries have this form of guarantee. In addition, they have other forms of supplementary basic pension.

Fourteen of the twenty-seven states have compulsory insurance based on capitalization. In contrast with the repartition system, the system of capitalization provides a funded position for each worker that will be distributed to the same worker in retirement age. In addition, all the states provide a supplementary pension scheme, which is divided into supplementary pensions for collective membership and supplementary pensions for individual membership which is predicted in all member states.

In conclusion, the rapid aging of the population is mainly caused by the decrease in fertility rates, and the increase of life expectancy at birth. These two main factors entail an increase of the elderly dependency ratio that comports the increasing of the pension system’s expenditure with more than 50% within 30 years. The increasing of the pension system’s expenditure will have like consequences: An increasing stock of public debt and a negative impact on the international economic competitiveness of the EU. The only way that the EU has to come out of that is to stress in supplementary insurance.

The Author

Denard Veshi is an Albanian student who graduated with honors from the law faculty of the University of Bologna. During his studies in Bologna, Denard Veshi was ranked as the fourth-best student of the law faculty during the academic year 2009/2010 and was ranked as one of the best non-EU Students of the law faculty in the academic year 2010/2011.

Article picture: Pixabay