A welfare state has been defined as a "state which has a policy of collective responsibility for individual well-being" (Clegg 1980, p. 7). For some commentators the term refers to the services produced, provided, and delivered by public agencies; however, for others it also includes benefits and services that are purchased by public resources but may be provided by commercial or voluntary bodies. Others even include welfare services produced and provided by employers (occupational welfare) and the family.
Welfare is difficult to define in light of the fact that both its source and its delivery vary widely. Welfare can be derived from a range of activities, including paid work, private activity such as savings and insurance, and voluntary activity as well as through the state. Benefits can be in cash or in kind; benefits in kind include both free services such as public education and health care and subsidized services such as low-rent housing provided along with employment, community care services, and dental care. A service may be publicly funded, publicly produced, both, or neither.
The objectives of welfare also are varied, ranging from poverty relief or the reduction of inequality to strengthening social inclusion and increasing social cohesion (Barr 2001). Most welfare states act both as a lifetime "piggy bank"–using social insurance to redistribute funds from one point in an individual's life to another–and as a "Robin Hood"–redistributing income and wealth from the rich to the poor to alleviate poverty and reduce social exclusion. The balance between these two roles varies from country to country, depending on the priority assigned to different objectives.
Types of Welfare Regimes
Gøsta Esping-Andersen, in The Three Worlds of Welfare Capitalism (1990), constructed "decommodification" indexes to measure the coverage, accessibility, and performance of social security schemes in eighteen Organization for Economic Cooperation and Development (OECD) countries. Using these indexes, he distinguished three ideal-type welfare regimes:
- Liberal welfare regimes, in which the government provides only a minimum or "residual" level of welfare services and the family or religious and charitable institutions play the major role in providing health and social welfare services. Such regimes assign priority to promoting economic growth and aim to reduce poverty in a way that impinges minimally on that goal. Examples are southern European countries such as Greece, Portugal, and Spain, as well as the United States.
- Conservative/corporatist regimes, in which the government plays a leading role in both organizing and providing welfare services. Services are highly developed, are of good quality, and are funded by a mixture of private and social insurance schemes. In addition to the state, nongovernment institutions such as churches, employers, and trade unions are important. Corporatist welfare states assign priority to social stability and tend to be conservative in their approach to welfare issues such as the family and the role of women in the labor market. Examples are Germany, Austria, Belgium, and France.
- Social democratic regimes, in which the government emphasizes social equality as well as the alleviation of poverty. Services tend to be comprehensive and universal. Public spending is usually very high, and welfare benefits tend to be generous. However, there is also an emphasis on the work ethic and supporting people to remain in the labor force, for example, through extensive child-care services. The classic examples are the Scandinavian countries, especially Sweden.
Although they are theoretically useful, these classifications are highly stylized and have been subject to debate and criticism. In particular Robert Goodin and his associates (1999) claim that it is not sufficient to measure the performance of social security systems by using data from only one point in time. They argue that the assessment of welfare regimes needs to take account of their impact on people's lives over time. With the increasing availability of longitudinal panel data, this type of assessment is becoming possible.
Scale of Public Transfers
The scale of public transfers varies considerably among OECD countries, ranging in 1998 from around 5 percent of gross domestic product (GDP) in Korea to 31 percent in Sweden (Figure 1). It is notable that expenditures on public transfers increased considerably in most countries between 1980 and 1998, doubling from 11 percent in 1980 to 23 percent in 1998 in Greece and rising in that period from 15 percent to 28 percent in Switzerland.
Much of this rise in welfare spending is attributed to changes in the structure of the beneficiary population as a result of population aging. Public spending on old-age cash benefits (pensions and social assistance) has increased steeply, amounting to nearly 13 percent of GDP in Italy in 1998. Older people are also major consumers of health services, and public spending on health care, which by the late 1990s typically was over 5 percent of GDP, generally has risen over time (although some countries have experienced a fall, such as Denmark, Ireland, and Sweden).
Responding to an Aging Population
Recent growth in levels of public expenditure and changes in the relative size of different age groups have given rise to the notion of a "demographic time-bomb": It is argued that severe fiscal problems will arise as a result of the relative fall in the number of workers making pension contributions and the relative growth of those drawing pension benefits.
Demographers typically have examined the pressures of population aging by examining the size of the "dependent" population in relation to the size of the population of working age:
This is taken to be a rough index of the number of dependent people per nondependent person.
A dependency ratio defined only by age has, however, come under significant criticism for being simplistic. Economic dependency is complex and multifaceted, and many things in addition to age determine whether a person is dependent. A more sophisticated dependency ratio that is suited to an examination of pressures on public finances:
This ratio takes into account people of working age who are out of the labor market because they are studying, are unemployed (but not seeking work), or have caring responsibilities as well as people of postretirement age who are still working. However, this more refined ratio also can be criticized. Many social gerontologists argue that older people are contributors as well as recipients, particularly if unpaid work outside the formal labor market is taken into account. In the United Kingdom, for example, one-third of the people who provide unpaid care to frail older people are elderly themselves. Many older people are taxpayers as well as beneficiaries.
The key advantage of the refined dependency ratio is that it draws attention to the fact that the fiscal burden is determined by a range of factors beyond purely demographic ones. In particular, the effects of population aging in developed countries have been exacerbated by changes in the length of working life. Since the mid-1970s there has been a sharp fall in the number of years of life men spend in employment and a corresponding increase in the number of years spent in other activities or states, such as school, unemployment, and especially retirement. In a typical OECD country at the start of the twenty-first century a man might spend only half his life in employment (OECD 2000). Women, in contrast, are spending more of their lives in paid employment than was the case in earlier times.
It is increasingly recognized that "the burden of supporting an older population over the coming decades will depend crucially on the extent to which the population of working age in general, and older workers in particular, will participate in the labour market" (OECD 1996, p. 65). Many countries are adopting policies to slow and reverse trends toward early retirement. For example, work incentives in pension schemes are being strengthened. In addition, several countries are considering or implementing an increase in the retirement age (or, more accurately, the age at which state pensions are payable).
Moves toward later retirement may be politically unpopular. When pensions were first introduced, however, the period of expected life after the age of retirement was relatively short. For example, the first old-age pension, introduced in New Zealand in 1898, was payable at age 65; the pension introduced in the United Kingdom in 1908 was payable at age 70. In 1901 expectation of life at birth in the United Kingdom was 56 years for men and 63 years for women; in 2001 it was around 75 years for men and 80 years for women.
Because health-care costs are known to rise with age, it is feared that an aging population will lead to higher health-care expenditures. However, recent studies show that unlike the case with pensions, increased longevity in the population need not translate into increased health costs. Evidence suggests that the greatest proportion of health-care spending among older people is incurred in the final year of an individual's life regardless of the length of that life. In the United Kingdom it is estimated that people consume about a quarter their lifetime consumption of health care during the last year of life. If greater longevity means only that the cost of dying is postponed, the implications for future health spending are limited. If, however, there are additional costs to greater longevity, the implications will be very different. A critical factor will be whether the additional years of life are spent in good or poor health. So far the evidence regarding the compression of morbidity is mixed.
It is important to bear in mind that trends in health-care expenditures are largely determined by factors other than demographic change. For example, three-quarters of the rise in medical spending in the United States between 1960 and 1993 was attributable to technological change in contrast to only 3 percent that was due to demographic change. Thus, there are upward pressures on welfare spending for a whole range of reasons, including aging of the population. The future performance of the economy, and the levels of unemployment and early retirement in particular, will have as great an effect as will demographic change. The question of whether societies can continue to afford the welfare state will be answered as much by ideology as by fiscal concerns.
Clegg, Joan. 1980. Dictionary of Social Services: Policy and Practice, 3rd edition. London: Bedford Square Press.
Cutler, David, and Ellen Meara. 1999. "The Concentration of Medical Spending: An Update." Cambridge, MA: National Bureau of Economic Research, Working Paper 7279.
Esping-Andersen, Gøsta. 1990. The Three Worlds of Welfare Capitalism. Cambridge, Eng.: Polity Press.
Johnson, Paul, and Jane Falkingham. 1992. Ageing and Economic Welfare. London: Sage.
Organization for Economic Cooperation and Development. 1996. Aging in OECD Countries: A Critical Policy Challenge. Paris: Organization for Economic Cooperation and Development.
——. 2000. Reforms for an Ageing Society. Paris: Organization for Economic Cooperation Development.
Zweifel, Peter, Stefan Felder, and Markus Meier. 1999. "Ageing of the Population and Healthcare Expenditure: A Red Herring?" Health Economics 8: 485–496.