What future for welfare?

(This policy bulletin is an extract from an Occasional Paper first published in May 2002 by The Free Market Foundation)

Has the era of the welfare state now passed?

Many commentators today suggest that the various European welfare systems which Marshall saw as the pinnacle of social development were in reality the products of a specific era of industrial mass production and Keynesian economic management which is now passing.

The Swedish case

In the archetypal welfare state, Sweden, government absorbs 65% of GDP, and 60% of the income of low-paid workers is taken by the State in direct or indirect taxation (Sandberg 1997). Most households survive only because both adults work full-time, and the welfare state itself employs 15% of the working age population (many of them women) as compared with just 5% to 6% in the rest of western Europe. Reflecting on this bloated system, Mauricio Rojas argues that its high cost, its centralised bureaucracy and its rigidity is making it increasingly non-viable: “What we are witnessing is fundamentally a conflict between, on the one hand, collectivist, standardised and nation-centred social forms and ideas, and on the other, increasingly individualised, diversified and transnational ways of living and thinking” (2001, p.108).

While Sweden shows little sign of actually abandoning its cherished welfare system (indeed, the Swedish Prime Minister promised in his 1999 budget speech that “Sweden will consolidate its position as a leading welfare nation” – New York Times 10 October), it has had to make some significant concessions. Through the 1990s, as high unemployment eroded government revenues and pushed up welfare costs, the Swedish government cut certain services, introduced waiting periods for new claimants, put more emphasis on seeking work and retraining, imposed tighter qualifying conditions on benefits, linked a portion of the age pension to individual contributions and, most importantly, reduced the generous ‘replacement rates’ which had hitherto enabled unemployed, sick and retired workers to maintain an income very close to the full-time working wage. Reviewing these changes, John Stephens denies that they represent any “fundamental” step back from the distinctive “decommodifying” character of the Scandinavian social-democratic welfare regime (i.e. its refusal to link material well-being to economic activity), but he does recognise that this principle has come “under assault” (1996, p.55). In Norway, too, there are signs that the old statist model is coming under increasing critical scrutiny (Bawer 2001).

Continental Europe

It is a similar story in what Esping-Andersen (1990) refers to as the ‘conservative-corporatist’ insurance-based welfare regimes of continental Europe. As in Scandinavia, strong unions and conservative public opinion have made it difficult for governments in countries like Germany, France and Italy to cut back substantially on welfare entitlements or to encourage greater flexibility in labour markets. The price of this reluctance has been high unemployment and a growing division between those in core jobs, who still enjoy protection and income security, and an increasing number of marginalised people who do not. These trends are reinforced as the continental EU countries find it increasingly difficult to block competition from North America, East Asia and the developing world, since their comparatively high direct and indirect labour costs threaten to undermine their global market share. Meanwhile, demographic projections indicate that their ageing populations will generate increasingly unsustainable demands on their pay-as-you-go old-age pension systems over the next twenty to thirty years. The unfunded liabilities of these pension systems already exceed 200% of GNP and are as high as 350% in Italy – World Bank 1994. Like rabbits transfixed in a car’s headlights, none of these governments seems to know what to do about any of this, and private pensions remain remarkably under-developed in these countries.

Source: This policy bulletin may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.