China Versus the West by Ivan Tselichtchev

Author:Ivan Tselichtchev
Language: eng
Format: epub
Publisher: Wiley
Published: 2011-12-19T00:00:00+00:00

The Welfare State Has to Be Trimmed More and Faster

Since the 1990s, as life expectancy was rising and birth rates and the share of the population in its working age falling, most Western, especially European countries started to overhaul their social security systems in order to contain the increase of taxes, social contributions, and social spending. As a result social security benefits, especially pensions and health insurance payments, have been gradually reduced in scale. A number of countries elevated the retirement age. To provide for the means of support in the postretirement years, in the case of disability and so on, people have to save more and more by themselves, entrusting the management of the money they have accumulated to pension funds and other financial institutions.

Still, in the 2000s, the ratio of public social expenditure to the GDP continued to rise in most Western countries—though with some notable exceptions like Germany and Sweden, which managed to bring it down (Table 11.2). Today’s critical status of public finance makes it necessary to do everything possible to reverse or at least stop the trend.

Table 11.2 Gross Public Social Expenditure as Percent of GDP (%)

Source: OECD. Social Expenditure Database.

2001 2007

France 32.0 32.8

Sweden 33.6 32.1

Italy 27.1 28.8

Germany 29.8 28.4

Finland 27.4 28.2

Spain 22.3 24.1

UK 22.1 23.3

Japan 18.9 20.3

US 16.3 17.4

OECD total* 22.3 28.0

*OECD-23 for 2001 and OECD-27 for 2007.

The West has to return to the roots of the social security concept. Basically, public social security payments are supposed to provide a minimal basic living standard, and not a cozy free lunch. For instance, high replacement rates (the ratio of public pension payments to the income from work the beneficiary received before retirement) in a number of countries, especially those facing grave public finance problems (for instance, in Greece it has reached around 90 percent), can hardly be sustained.

A big welfare state may badly undermine work motivation—an old problem coming to the forefront again in the wake of the growing global competition, especially from China.

While people out of work count on high social security benefits comparable to their earnings in times when they had a job, those who have a job are not motivated to work harder, as a substantial part of the increase of their earnings will be eaten out by high taxes and public social security contributions. On their part, employers restrain new hiring because they have to share the heavy social security burden. It pushes up unemployment rates.

Overall, too big a welfare state reduces the efficiency of the use of human resources—the fundamental issue of primary importance the West has to address in a really serious way, not least in the wake of the Chinese challenge.

Besides, one more somewhat tricky welfare state–related problem exists, deserving close attention. It is still largely unspoken because of its sensitivity. The creation and expansion of public social security systems were driven by the quest for social justice. However, today those systems have turned out to be very unfair toward working families, especially those in their 30s and 40s—the age when, logically, consumption activities should reach their peak.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.