Download Total and old age dependency ratios 1940-2040

Nordic model – prospects and
challenges
Torben M. Andersen
University of Aarhus
CEPR, CESifo and IZA
Nordic model: Achievements
Tax burden:
25 % vs 50 %
40
IRE
GDP pr. capita
USA
NOR
35
30
AUS
UK
ITA
NZL
25
20
POR
CAN
DEN
AUT
NET
BEL
GER
JPN
FRA
FIN SWE
SPA
GRE
15
55
60
65
70
Equality
75
80
Nordic model – main
characteristics
• Universal: individual rights, collective financing
• Social safety net: decent standard of living
• Welfare services: satisfy the needs of most NOT a residual
= a large tax financed public sector
Average age dependent net-contributions:
The social contract
1.000 euros
15
10
5
0
2-6
-5
-10
-15
-20
-25
-30
12-16
22-26
32-36
42-46
52-56
62-66
72-76
82-86
92-96
The social contract in Sweden
200000
100000
0
-100000
-200000
-300000
-400000
-500000
1930-1934
1950-1954
1990-1994
2010-2014
1970-1974
Employment focused model
• No self-support: entitlement to some
income transfer
• In work: higher income and therefore
higher tax payments
• The financial balance of the model
requires a high labour force participation!
Labour force participation by age:
Finland, OECD max and min
100
90
80
70
60
50
40
30
20
10
0
1519
202
3
24 5-29 0-34
OECD Max
354
4
39 0-44 5-49
OECD Min
505
6
54 5-59 0-64
Finland
6569
An implicit insurance contract
• Welfare arrangements = a large implicit
insurance contract (collective risk sharing)
• Conditionalities (health, abilities, luck etc)
determine both the use of and
contributions to the welfare state
• Direct welfare effect + conducive for
flexibility/adjustment
Challenge I: Ageing
2036
2030
2024
2018
2012
2006
2000
1994
1988
1982
1976
1970
1964
1958
1952
1946
80
70
60
50
40
30
20
10
0
1940
%
Total and old age dependency ratios 1940-2040
Primary balance projection 2010-2050
1
% of GDP
0
-1
-2
-3
-4
-5
For given arrangements –
not including any new initiatives
Non-Solutions
• More children: too late…. and they can expect a
high longevity
• Immigration: in need of some who are willing to
pay some taxes!
• Growing the pie: more wealth – but who are not
going to have their share ?
The ageing problem is a distribution problem,
not a problem of lack of resources!!!
Solutions ?
• Expenditure cuts: a change of the welfare
model
• Tax increases: likely to be costly given the
already high taxes + globalization
• Increase employment: more tax revenue,
less expenditures on transfers
Challenges II: Services
• How to maintain a
satisfactory level and
quality of welfare
services?
• For some core
activities it is very
difficult to increase
productivity – human
relations are involved
Higher living standard = increased
demand for services
• Increased material
well-being: basic
needs are satisfied
• Increased focus and
demand for services,
e.g. health
• New possibilities =
new demands
Public finances – systematic
deficits
primary balance in % of GDP
1,0
0,0
-1,0
-2,0
-3,0
-4,0
A: Higher productivity growth: +0,5 pa
Baseline: Pure demographics
-5,0
B: A + welfare service growth: 0,25 % pa
-6,0
Challenge III: Globalization
Globalization paradox?
• Support for globalization is very strong (or
less strong lobbying for protectionism)
• Welfare model - most threatened by
globalization?
• Nordic countries have always been open
and the welfare state has been developed
alongside openness
Globalization and taxation
• Tax base mobility – difficult to tax highly
mobile tax bases
• Most tax revenue accrue from direct and
indirect taxation of labour income
• Need for tax reform, but not a major
problem if employment rates can be kept
high
Globalization - employment
• Globalization + technology = skill-bias
• Education becomes increasingly important
• Not only for the elite but for distributional
reasons (to prevent a large supply of
unskilled)
Migration and the welfare state
Qualifications
Wage
Social safety net
• Immigrants from low income countries = low
qualifications
• High unemployment risk: qualification gap is
large
• High risk of transfer-dependency
Employment gap for immigrants
from low income countries
Policy challenges
• How to ensure a high employment rate
– Ageing/Longevity
– Skill-bias/Qualifications
• Services: satisfactory supply
• Migration: how to square the model with
open borders