Past and future challenges in social security

1. The multidimensional concept of sustainability. 

 Sustainability is a multidimensional concept which requires to be analysed with an integrated approach by different disciplines. 

This interdisciplinary exercise is not usual in many field of studies and has a difficult testing ground in a highly complex and controversial area like social security. Even more so because this analysis have a merely intellectual objective, but must be finalized to promoting policy integration among the different areas of social security and among the various components: the sources of the financing the costs of organization and of delivery, the mechanism of adjustement between contributions and benefits etc. Moreover such an approach is necessary to understand the two major aspects of sustainably: financial and social. 

The very concept of adequacy is multidimensional, as indicated in the recent “Pension adequacy report” (2018) of the European Commission. The Report considers three aspects of adequancy related to pensions, but which can apply with variants to other institutions of social protection. One is measured by the ability of pensions and of welfare provisions to prevent and mitigate the risk of poverty. The second concerns their capacity to replace earned income while in work. The third is measured in relation to the duration of the period in which welfare benefits are provided or needed. 

Social adequacy refers not only to the amount and duration of income replacement but also to the conditions required for the effective exercise of the right to benefits: personal and family income requisites; age limits, organization and accessibility of services. 

2. Different reforms in pensions and unemployment benefits.

I will analyse some aspects of substainability as implemented in the major European countries. With specific reference to old age pensions. 

European countries have followed different reform itineraries depending on their history and on their political, social and economic context. Diversity is present in other areas of European labor law and industrial relations . A major institutional reason of this diversity is that according to the European treaties both fields fall within the prerogatives of the national States. The original separation between national and European prerogatives in these matters has remained unchallenged throughout our history and has greatly limited the construction of a social Europe, leaving it basically to the weak instruments of soft law. 

The old age pensions, both public and complementary, have been the area of social security most frequently regulated by national legislators. 

The pressures for reform stemmed from the economic and social transformations which have profoundly altered the basis on which pension systems were built in the last century: population aging; technological innovations and global competitiveness, accompanied with flexible and mobile patterns of work; lately weak economic growth culminated in the crisis of 2008.

Many comparative analysis confirm the existence of a variety of reform projects and outcomes. As in other fields of social policies the experiences of European countries presents more diversities than convergence. 

3. Adjustement of NDB schemes and systemic reforms (NDC).

Two major directions and methods of reform can be detected in our field. A group of countries has abandoned the approach of parametric (internal) adjustments of the traditional defined benefits (NDB) schemes, which had been often followed in the past and has approved a systemic reform that moved from defined benefits to defined contributions schemes while maintaining the unfunded character of the pension system; the so called non financial (or notional) defined contribution schemes (NDC). The early examples of Sveden and Italy have been fallowed by other European and non European countries: in Europe, Latvia, Poland, Norway, in part Greece. 

The experience of the countries which have adopted NDC systems has been judged positively by many commentators. Some have even claimed that these systems present the best characters for a universal public pension scheme.  In particular the one – to - one relation between individual contributions and pensions with annuities based on life expectancy at retirement is meant to provide a transparent, economically efficient and fair mechanism for insuring the population against the risk of outliving their resources, yielding financial stability over time. At the same time the tight relationship between contributions and benefits is expected to offer better incentives for labor supply decisions, including for labor market participation and for retirement age selection. 

Despite the potential advantages of NDC pensions, the diffusion of these schemes has been limited in recent years;  and since 2015 the pace of reforms has slowed down in OECD countries.

These two approaches have been applied differently in the various countries, but have pursued some convergent goals which reflect common economic and social constraints.

In order to respond to the need of financial stability some alternative measures have been adopted in a different combination: a) raising the retirement age, more or less rapidly, sometime (not often) combined with measures of active aging directed to favor the prolongment of work participation; b) reducing or containing pension costs in various directions: e.g. harmonizing downwards pension regimes, with the aim of reducing those granting benefits above the average via extra yields; restricting the conditions and controls of disability pensions; revising the criteria of pensions indexation; tightening the link between contributions and benefits either with the adoption of NDC systems; or with (equivalent) corrections of the functioning of DB systems, in particular shifting from a full salary to an average career salary formula for calculating the amount of pensions. 

The application of these measures has contributed to reduce in various degree the benefit generosity of the public system. 

With the declared aim of compensating for this benefit reduction many European countries have introduced in the same period supplementary pension pillars. A second pillar has been usually instituted and regulated by collective agreements, according to occupations or economic sectors and bilaterally administered. The diffusion of these supplementary pensions has been promoted by the legislators mainly through fiscal incentives. In some countries it has been made compulsory or semi automatic via contracting out mechanisms or the like . Consequently these pension schemes have acquired an hybrid nature: characterized by private origin but subject to public regulations.

4. Implementation and corrections of pensions schemes. 

An automatic adjustment mechanism implicit in the NDC scheme is the increase of retirement age in line with life expectancy, accompanied with a consequent reduction in the annual accrual rate of pension. But even so NDC schemes are challenged by heterogeneity in longevity among socio economic groups, an element which is widely documented among OECD countries.  

The financial sustainability of NDC is challenged by economic and demographic shocks which have intensified in recent years and which may influence in particular the indicators adopted by the various national schemes: the GDP growth rate (as in Italy) the per capita wage growth (as in Sweden), or the growth rate of the contributions wage sum (Norvegy, Poland). A balancing mechanism is necessary; either authomatic such as has been adopted in Sweden or decided through budgetary corrections, in order to remedy the imprecisions of the scheme‘s indexation. 

The national experiences confirm the importance of these elements. The Italian legislator has approved quite a few variations of the major reform of 1995 (Act 335). 

The long transition period aimed at correcting some shortcomings of the original design to the NDC scheme decided by the 1995 Act has greatly reduced the impact of the reform in containing the financial burden of pension on the Italian budget. 

Italy has still the third highest pension- related revenue as a percentage of GDP (15.7%) in the OECD, while the net replacement rates of current pensions are higher than the OECD average; 79,7% for a full career compared with 63% of OECD average. And the effective age of labor market exit remains the fourth lowest in OECD. The adjustement of benefits has been linked to period and not cohort life-expectancy. This choice has introduced a distortion in the calculation of pension benefits among generations the various cohorts. This distorsion has been aggravated by the fact that the Italian legislators has intervened repeatedly with the aim of guaranteeing the financial substanibility of the system. It has raised the minimum age for retirement, (in 2012) with an increase of five years. This decision is inconsistent with the logic of NDC schemes which implies not a fixed age of requirement but a range of possible retirement ages within which the individual may choose, with the consequent variations of the pension according to principles of actuarial equivalence. In order to reduce the period of transition fixed by Act. 335/1995 Italy has introduced in 2011 the application pro quota of the NDC scheme to workers extempted by the 1995 reform. 

The need of adjustements is even more evident in DC schemes which lack automatic systems of correction. In fact these schemes have adopted various corrections in order to prevent possible financial and social distorsions. One major correction has been to introduce the element of like expectancy in the functioning of the system. In some cases individualized life-expectancy either at the time of annuitization or during the accumulation phase. Gender inequalities in this respect can be redressed by applying gender specific life expectancies at retirement.   

5. Pensions adequacy: a necessary objective.

The two major lines of reforms implemented since the 90ies have pursued, with different methods and results, the primary objective of guaranteeing the financial sustainability of public pensions. Once sustainability gains were achieved, more or less completely, recognition grew in many countries that these reforms had to be accompanied with measures to safeguard pensions adequacy. In fact this dimension of public pensions has become increasingly critical because the reforms implemented has contributed to cause an already visible decline in the retirement income of future pensioners. In particular the stringent connection introduced between contributions and benefits has exposed the future pensions, specially for youngsters, to the negative effects of the increased labor markets flexibility and of the growth of intermittent and precarious careers. 

In fact since 2015 many national reformers have focused on the various aspects of pensions adequacy.  

Principle 15 of the European pillar of social rights stresses the right of workers and of self employed to a pension commensurate with contributions and to an adequate income during their old age. 

The pensions adequacy report analyses a wide range of measures and suggests best practices to members States, following the soft technique of the open method of coordination (OMC), with the purpose of promoting mutual learning and convergence of social policies. 

These measures have a different impact on the two aspects of pension adequacy mentioned above. Some are meant to maintain the amount of pension closely related to income earned during working life. Others are mainly directed to sustain low pensions in order to guarantee minimum income for the beneficiaries; sometime are directed to combine the two objectives.

A majority of European countries allow people to work while receiving an old age pension, within some maximum earning threshold. 

A general measure introduced by some countries to the same end, in addition to raising retirement age has been to facilitate longer work lives, sometime with monetary incentives (France) and often with policies of active aging. 

These policies have become a priority given the rapid aging of the population. The best practices have adopted a comprehensive approach to this issue, i.e. they touch on various aspects of working life, such as promoting learning opportunities during the entire life including the periods precedent to normal retirement age, and adapting the work place in order to favor the employment of elder people (flexible working times and part time, ergonomic improvements, career paths tailored to the abilities of the elders, promotion of heathy life styles).   

Some countries have used the leverage of indexation to improve the real value of pensions not only to protect pensions during economic downturns but also to take into account the increasing duration of retirement and to avoid pensions erosion. 

6. Specific measures to improve pensions adequacy.

Specific measures are suggested, and have been adopted in some countries, aimed at guaranteing pension schemes more favorable than the standard systems to hazardous and arduous jobs which are exposed to short and often precarious working careers. 

Similar critical conditions are common on a larger scale to migrant workers who are typically confined to short and discontinuous careers. But the conditions of the migrants have not been so far considered by specific social measures, indeed not only in the field of pensions. 

Another critical aspect which is affecting the adequacy of pensions systems is the gap between women and men treatments. 

Reducing gender related pension inequality requires new policies in two areas. One: promoting full application of the measures supporting equal opportunities for women and men which are often written in the books but weakly implemented (work life balance, equal distribution of caring responsibilities, equal employment and career opportunities). Two, fully recognizing care-related work breaks for pension credits.

Innovative measures are needed also to face the increased mobility of workers among different types of activities. In many pension systems organized along sectoral lines this mobility may expose pensioners to dispersions and losses of pensions credits and consequently of benefits. In order to counteract this negative impact some States – including Italy - have recognized the possibility for workers to cumulate periods of work performed in different economic sectors and in different types of contract, without additional or with reduced costs. 

A risk of loss of pension benefits is caused by the periods of interruption of work during working life. A traditional measure aimed at preventing or reducing this risk has been to provide pension credits paid out of taxes for career breaks due to socially relevant reasons, either personal, (such as illness, work accidents, maternity and childcare, care for dependent family members), or linked to economic conditions, such as unemployment and temporary inactivity due to business slowdowns.

But in many cases the limits posed to these credits make them insufficient to restore adequate levels of pensions.  Indeed this approach has become inadequate to cope with the intermittent work patterns which have altered for an increasing number of people the continuity of employment well beyond the cases considered by the traditional measures. 

In particular these measures are insufficient to protect part timers which often are not adequately covered by pension schemes, because they are considered a marginal group of workers mainly of women. This gap of protection has become quite serious since part-timers are becoming a growing component of the workforce.

In fact the new structure of work patterns has posed a wider threat to the traditional pension schemes. People in non standard works and in self employment, even in the countries which have included them in the general pension system, face conditions for accessing and accruing pension rights less favorable than those employed in standard open- ended full time jobs.

7. Support to low income pensioners. Minimum pensions.

The insufficiency of the provisions so far adopted to support pension rights of future pensioners has given more prominence to measures targeted at low income pensions and aimed at preventing the risk of poverty. 

A measure approved by quite a few countries to this end has been to grant to low earners a replacement rate of pensions higher than that provided to average and high earners.  But even the greatest “advantage” provided in this respect (e.g. in the UK 50% point) does not compensate fully for the difference in work earning. Moreover the difference in net replacement rate is lower than in gross rate due to the impact of pension taxation.  

More specific measures in this respect are those which introduce some kind of minimum pension. 

A few legislations have introduced universal flat rate benefits, usually based on residence and on age. Consequently all elders, including those with incomplete or atypical earning careers and those who have never worked in paid employment, qualify for this minimum income guarantees. The Netherlands is an exemplar case. This flat rate pension, rather generous in international comparison, has been important in preventing poverty in the old age. In this country the basic pension is supplemented by a general system of occupational pensions extended also to non standard workers. 

A different solution adopted by some member States has been to include a guaranteed minimum amount of pension in the earnings -related pension system, usually at the condition to reach the pensionable age and to complete a certain number of years of contributions or of residence. This solution amounts to introducing a redistributive element in the commutative logic of NDC systems. The amount and the coverage of this minimum pension are variable among the States. 

In addition to minimum pensions most States provide a ultimate safety net for those elders unable to meet even the minimum contributory or residential requirements. 

The social benefits mentioned here are usually means -tested, according to conditions which are common to other benefits provided by social assistance schemes. 

These redistributive mechanisms inserted in the pension systems have acquired growing importance in the last years, particularly after the crisis of 2008. But this trend is all but uniform. In contrast to it some countries have cut benefits across the board including those for low earners. Others like Italy, Poland, Hungary, have tightened the link between contributions and benefits up to the point of eliminating all or most elements of redistribution in their pension system.  

In these countries pensioners who do not reach the minimum requirements for pension rights under the NDC system are entitled only to a social allowance, which is means- tested and rather low, (in Italy it amounts to 5825 euro yearly). 

8. Supplementary pensions.

As indicated above a major strategy followed by many European countries in order to maintain an adequate income for pensioners has been to complement statutory pensions with supplementary retirement savings. The forms of these supplementary pensions are quite different across Europe. In quite a few member States (UK, Netherlands, Switzerland, Denmark) the adoption of a second pillar of pension has become mandatory or quasi mandatory in such a way to extend their coverage to the entire workforce.  In other countries, including Italy, supplementary pensions have been promoted by collective bargaining and supported by fiscal and other incentives, including cost effective access for different income groups. 

In the order to improve the safety of private pensions the EU has put in place specific directives finalized to strengthen the regulatory framework and scheme designs.  These provisions have been specified and reinforced by national legislations in many respects. 

The diffusion of the supplementary schemes, both in the form of defined contribution and of defined benefits, has contributed with their positive financial performance to improve the level of benefits for the pensioners involved in these schemes. 

However the benefits are not equally distributed across the different groups and generations of workers. The groups usually underrepresented in the funds (in those countries where participation has remained voluntary) are those mostly in need of increasing the amount of their public pension, i.e. young employees, low wage earners and non standard workers, including part timers. The reasons which reduce the impact of private pensions schemes for these workers are similar to those which prevent public statutory schemes to guarantee adequate pensions to the same categories, namely intermittent and late work careers and scarce income capacity. 

The search of new formulas aimed at improving the functioning of these schemes has been stimulated, here as in other fields, by the economic crisis of 2008, in particular with the view of finding a better combination between public and private forms of social security. An often quoted example of virtuous combination of the two pillars is that of Sweden, where the first pillar of public pensions is supplemented by a public capitalized system of mandatory individual accounts which cooperates under a regulatory framework with the private sector, acting as investment manager. This solution utilizes private sector advantages without-depriving the system of its social character.  

9. Difficult choises for combining financial and social sustainability. 

The reforms approved by most member States particularly in the two last decades, have tried to adapt the systems received from their traditions in order to ensure that these systems could continue to be even in a long term perspective an important part of social protection of their citizens. This intense reform activity shows that welfare systems, contrary to common opinions, are not a static segment of the State apparatus, but are capable of reacting positively to the social and economic transformations.

Recently the economic crisis and the persistent high level of unemployment have called for a more direct initiative of the Europe Union in this policy area, including the adoption of a common unemployment insurance financed with European funds. But the Emu has not contributed to support common social policies; it has stressed the prior target of financial sustainability of social security, even though it has been claimed that this influence has not produced the much feared race to bottom.  

The pressures exerted on social budgets by the economic crisis and by the cost cutting strategies adopted by many countries and promoted by the European institutions have reduced the resources available for many areas of social at the same time when the needs and the expectations of social protection were increasing. A further factor has augmented the difficulty of balancing financial and social sustainability of pensions, namely the increase in the life expectancy which has prolonged the time spent in retirement in a measure which has not been matched by raising the retirement age.

The increased flexibility and volatility of the labor markets have supplanted the historic pattern of open- ended contracts and stable life- long employment on which most institutions of social security where based. Consequently they have challenged the insurance- based social security schemes adopted by many European countries.

10. Strategies for promoting social adequacy.

A prior commitment of national economic policies is to develop robust employment strategies capable of better sustaining social security schemes. In turn the design of these schemes must be adapted to more flexible labor markets, in particular with a view of supporting intermittent work careers and the frequent transitions that future workers will have to face. 

We have enough evidence that the reconciliation between financial sustainability and social adequacy is not possible unless we change the insurance- based structure of both pensions and unemployment benefits.

11. Guiding and solidarity.

Our previous analysis supported by comparative research, indicates some positive results of recent reforms, but also the limits of a piecemeal approach . A more systematic set of strategies are needed in order to promote a better balance between financial sustainability and social adequacy of social security schemes.

 A first guideline which can be drawn from the experience is to modify the architecture of social security organized on the basis of different economic sectors and of social groups which is still present in many countries, including Italy, towards a more universal coverage and harmonized treatments. 

Secondly a new balance has to be found between the commutative- individualistic principle which inspires the insurance- based schemes and the principle of solidarity, which is typical of most programs of social assistance and of the universal guarantees of social security. 

This balance requires a new combination of two functions of social security: that of providing total or partial replacement of personal income earned with work, and that of guaranteeing to all persons regardless of their work career, income and services adequate to their basic needs during the lifetime and in the old age: the needs and risks may be different in the various life cycles. 

12. Extending the coverage of social security and the credits for career breaks.

The first guideline mentioned above requires extending the coverage of the various areas of social security to all types of work which have emerged in the new economy, according to the principle of universality, with the view of correcting the limitations and the inequalities of the sectorial insurance systems.

The second guideline implies that the two principles mentioned above, commutative and solidaristic, should be combined in the design of pensions and of unemployment benefits. While keeping a link with the years of work, both schemes could guarantee a flat rate of benefits, possibly joined with an amount of benefits proportional to past earnings.

Moreover the number of qualifying years for the benefits might be increased by including not only periods of actual work but the all the periods during which work is suspended for socially relevant reasons: in addition to those already considered in many social systems, (illness, maternity, work accidents, involuntary unemployment), all periods spent in performing care activities.  

This new design of social insurance has the positive effect of extending the benefits to groups of workers mostly in need to be supported by public solidarity. At the same time it can contribute to redress the balance between social insurance and social assistance, against the trend promoted by mainly conservative governments to reduce the share of insurance - based systems and to shift the emphasis on social assistance. The coverage and the adequacy of many programs of social assistance have been limited not only for the reasons just mentioned, but by the use of various types of means and income tests. The actual implementation of means testing, combined with high marginal taxes, has caused a increasing number of unclaimed benefits and of incomplete take up, which raises serious doubts on the functioning of many schemes of social assistance. 

The inadequacy of existing social security schemes to meet the expectations of workers and of citizens has stimulated the search and practice of alternative ways to design these schemes. Indeed the growth of inequalities and of poverty among various sectors of the population, including workers, has posed a major challenge to the entire welfare system, even in the rich countries.

13. Minimum income provisions: common objectives, different conditions. 

In response to this challenge most European countries have introduced or reinforced various forms of minimum income directed to provide monetary support to poor workers and families, usually accompanied with personal assistance services to the beneficiaries, with a special emphasis on child care. 

Usually the national systems of minimum income have maintained the approach common to most welfare measures, whereby (for people able to work) they are combined with labor and training policies aimed at activating the beneficiaries.   

The possibility to introduce measures of basic income unconditional, i.e. granted regardless whether the beneficiaries work or are willing to work has been widely discussed in Europe but has been tested in practice with some limited experiments (Finland, Austria). It has been deemed unfeasible not only for its costs but for objections of principle. One: because disconnecting completely social security from the participation to the labor market would obscure or minimize the value of work and contradict the concept of social security as contributing to the activation of people; two: because it might reduce the (prior) commitment of public economic policy to the promotion of employment opportunities.

The actual costs of basic income depend not only on its coverage and level but also on its relations with other social security benefits. The present measures of minimum income have been often introduced in addition to the existing measures of social assistance, with some specific targeting (which however has not been always sufficient to avoid overlapping of benefits). 

Any how the introduction of a general form of unconditional basic income would dramatize the issue of coordination among social security measures and the need of financial sustainability. According to some estimates referred to the Austrian case, a non conditional basic income of 800 euro granted in addition to other social security benefits would result in raising the state social expenditures to 70%. An increase of such a magnitude of social security costs, which in many of our countries are already high, would hardly meet the capacity and the willingness of the active population to share the burden of this welfare measure.  

On the other hand granting basic income in substitution to all other welfare benefits, following a neoliberal approach to social security, would not contribute to promote equality among the beneficiaries and the citizens. On the contrary it might increase the gap between the poor and the rich because the former profit more relatively to the latter from the existing social security benefits (which perform redistributive functions).

The discussions and the controversies over this perspective are due to continue.  They might be influenced by the impact of the digital revolution on the future of work. Whatever the dimension of the impact, certainly these technologies will represent a major challenge for the existing measures both of labor law and of social security. 

Policy makers and the social parties will be faced more drastically than in the past with two general alternatives: find economic and labor strategies capable of promoting employment opportunities for people displaced by the new technologies, or pursue some redistribution of employment opportunities by reducing working time - as the German metal workers have begun to do -, and/or by generalizing part-time work even more than in the Dutch system. 

The impact of the digital revolution on the quantity of work might increase the pressure to experiment forms of basic income, on the assumption that no viable economic policies can be implemented to fight an irreversible decline of work. But this assumption cannot be taken for granted. 

14. Social security and labor policies: common challenges and need of coordination. 

The evolution of social security systems analyzed here confirms the need of further reforms directed to reconcile financial sustainability and social adequacy of the various kinds of benefits. This reconciliation is proving particularly difficult for the future generations in the area of pensions, which appear to be most exposed to the negative impact of restrictive social and economic policies and of demographic trends.

The pressure of new technologies and of the increased global competition are threatening the adequacy not only of social security, but also of traditional employment policies.

 A significant evolution worth mentioning, because it is somehow parallel to the changes of social security analyzed here, is the diffusion of minimum legal wages in many countries, lately Germany. 

This diffusion  is a significant indicator of the need to coordinate labor market policies with social security measures. 

Moreover the fragmentation of work patterns requires new instruments and policies capable of guaranteeing employment continuity in the (recurrent) variation of job positions. Welfare measures will be challenged to sustain employment transitions with new more focused measures: in particular services and income support directed to promote the reemployment of unemployed workers and the employment of inactive persons; paid leaves for periods of inactivity due to personal reasons (not only parenthood, illness, work accidents, but also professional upgrading); personal services aimed at facilitating work life balance, professional and territorial mobility.

 In this perspective welfare measures need to be better integrated with labor policies with the aim of helping them in the difficult task of fighting precariousness and of promoting quality employment. Indeed the institutions of social security are called to perform a major role for the future of labor relations, because they will be decisive in correcting the deficiencies and failures of transitional labor markets. 

In performing these new functions the institutions of social security will still (or even more) be required in order to maintain a balance between the two guiding principles of sustainability and adequacy. 

The meaning of adequacy has to be examined in relation to the various areas so as to reflect the different functions of the benefits, in particular to determine the level of income to be guaranteed to the beneficiaries.

The various forms of social assistance, in so far as they are finalized to satisfy fundamental needs of workers (or possibly of citizens) with resources coming from the solidarity of the national community and defined in the public budgets, should be designed in such a way to provide a similar level of benefits, even though with variable forms of income guarantee and of services.

Some national experiences show convergent trends in this direction. In particular the common objective should be to provide similar basic treatments in the case of minimum income, in favor of workers who are unemployed beyond the maximum terms provided for insurance-based benefits, and in case of (minimum) social pensions. These income guarantees may be accompanied by special allowances and by personal care and health services according to the specific conditions and needs of the beneficiaries.

Minimum wages are usually fixed at a level higher than minimum income, a level which is justified by their multiple function. Even though they perform not a purely commutative but a social function, they correspond to a work activity which deserves to be specifically rewarded.