Eger, Hungary

In 1942 William Beveridge, a British academic and civil servant, published his blueprint of a welfare state for Great Britain in his account of the “Five Giants”: disease, idleness, ignorance, squalor and want. He proposed new benefits for the retired, disabled and unemployed, a universal allowance for children and a nationwide health service. Polls found that majorities of all social classes backed these proposals. The blueprint was translated into 22 languages and the Royal Air Force dropped summaries on Allied troops and behind enemy lines. Such zeal for the welfare state is rare nowadays. Liberals such as Beveridge believed that people should take more responsibility for their own lives, but that government should support them. They did not see it as industrialised charity, but as a complement to free-market capitalism. In the second half of the 19th century the rise of unfettered markets brought demands for protection against its effects. Charity and churches were seen as failing to cope with poverty, as mass urbanisation weakened traditional bonds. Pressure came from socialists, but liberals responded, too. “New liberals” such as John Stuart Mill and Leonard Hobhouse argued that freedom meant ensuring that people had the health, education and security to lead the life they wanted. The development of welfare states was then hastened by the Great Depression and World War II. The war fostered a sense of unity and as middle classes shared the risks, their demands for support meant the welfare state became about more than just looking after the poor. The post-war government in Britain implemented most of Beveridge’s plan and similar reforms soon followed elsewhere in Europe. Welfare states have always differed from country to country, but from the 1970s on approaches diverged further. In the 1990s the Danish sociologist Esping-Anderson distinguished three varieties of “welfare capitalism”. First were the “social democratic” versions in Scandinavian countries with high public spending, strong trade unions, universal benefits and support for women to stay in the workplace. Second, “conservative” welfare states, such as Germany’s were built around the traditional family and had a strong contributory principle. Third, the “Anglo-American” welfare states, which put greater emphasis on guaranteed minimums than on universal benefits as in Britain.

Perhaps the most common charge against European mature welfare states is that they have created a culture of dependency. So policy makers have made programmes more “conditional”, forcing recipients to look for work, for example; and to help them, many countries expanded “active labour market policies”, such as retraining. The wide-spread notion that the welfare state is mainly about redistribution from rich to poor is a myth. Nowadays its role is more to allow people to smooth consumption over their lifetimes, in effect shifting money from their younger selves to their older selves. As countries become wealthier, public spending increases as a share of GDP. Spending on social protection, like pensions, health care and benefits, in OECD countries has increased from 5 per cent in 1960 to 15 per cent in 1980 to 21 per cent in 2016. Nevertheless, since 2000, some Scandinavian countries, for example, have combined high levels of public spending with high rates of economic growth. The effects of welfare depend not just on how much is spent, but how. Subsidised child care, which helps mostly women stay in the labour market, is more growth-friendly than pensions. The difficulties welfare states in rich European countries face are about more than just their size. The three main difficulties relate to demography, migration and changing labour markets. The fact of the ageing European population means that welfare spending is increasingly shifted towards the elderly. This threatens the implicit contract between generations. Meanwhile Denmark and Finland have linked state retirement ages to life expectancy, so will the Netherlands. In Germany, Portugal and Sweden pension levels are adjusted according to the ratios of workers to non-workers.

Immigration poses another challenge to the welfare state. In 1978 Milton Friedman argued that you could have open borders or generous welfare states open to all, but not both, without swamping the welfare system. Moreover, taxpayers are more tolerant of benefits that are seen to look after “people like them”. A study published in 2017 using survey data from 114 European regions found a correlation between areas with higher shares of migrants and a lack of support for a generous welfare state. Another survey of changing attitudes in European countries between 2002 and 2012 found both rising support for redistribution for “natives” and sharp opposition to migration and automatic access to benefits for new arrivals. Such popular views form a core part of the appeal of populists in Europe such as the Front National in France, the Sweden Democrats or the Danish People’s Party. The nature of the benefits influences attitudes as well. Immediate access to health care and public education for immigrants is widely supported by European populations, but benefits should not extend to unemployment or child benefit. Moreover, attitudes towards immigrants are volatile and swayed by the political climate. In 2011, for example, 40 per cent of Britons said immigrants “undermined” the country’s cultural life, and just 26 per cent believed they enriched it. By 2017, in the wake of the Brexit vote, only 23 per cent believed immigrants undermined British culture, compared to 44 per cent who believed they enriched British culture. Immigration might offer a partial solution to the first problem of ageing because since at least 2002 EU migrants have contributed much more in taxes than they have cost in public services, as economic research in Britain and Denmark has found out.

The third issue is adapting to changing labour markets. The welfare state developed at a time of powerful government, powerful companies and powerful trade unions. The economic aim after World War II was full male employment. Recent research by the OECD in seven of its member countries estimated that 60 per cent of the working-age population had stable full-time work. Of the other 40 per cent, no more than a quarter met the typical definition of unemployed, namely out of a job, but looking for one. Most had dropped out of the labour market completely or worked volatile hours. The causes are complex and overlapping, but hey include the incentives and disincentives to work that complex benefits systems produce. Universal basic income (UBI) may be one way to avoid such problems. It may take many different forms, but basically replaces a wide range of means-tested benefits with a single unconditional one, paid to everyone. Scotland and the Netherlands are running experiments involving UBI, but in no country is it yet the foundation of the benefits system of working-age adults. The OECD recently modelled two forms of basic income. Under the first one, a country’s spending in benefits is divided equally among everyone – a revenue-neutral form. Under the second one, everyone would receive benefits equal to the current minimum-income guarantee, and taxes would rise to pay for it, if necessary.

The results of this project have to be viewed under three aspects, namely the overall costs, how much it really alleviates poverty and its effects on work incentives. Furthermore the effects of introducing basic income vary hugely based on what welfare system it would partly replace. Countries such as Italy, Greece, Spain, Austria and Poland all spend more on welfare for the richest 20 per cent than for the poorest. For them spreading benefits more evenly would benefit the poor, even under a revenue-neutral model. But in countries that target welfare spending on the poor such as Britain, UBI would either lead to large tax rises, to maintain a minimum income for everyone, or see benefits cut for the worst-off.

A more realistic alternative for many countries may be a negative income tax (NIT), championed by Milton Friedman. NIT means that below a certain income level the tax authorities pay the person. As the person earns more, they start to pay tax. The effect is similar to a basic income, especially as UBI models assume that rich people would have to pay more tax to afford them. A NIT, however, is more efficient in that it does not give the rich a stipend only to take most of it back in tax. So reform has to take into account new social risks and that’s why the welfare state has to be adapted.

What should not be forgotten when talking about the European welfare state is that there is an endogenous element in Europe’s social change today; globalisation is not necessarily the only cause of these changes. The great social challenges that have to be tackled and the reasons why the European welfare model need to be reformed are the following four: first, the demographic aging of the society mentioned before, second, the change of women’s roles in European society, third, a radical evolution of the concept of family and fourth, the demands of the knowledge economy.

At the moment approximately 10 per cent of Europe’s GDP on average is spent on pension payments. It is predicted that the rapid increase of the aging population in Europe will cause an extra 50 per cent spending on the elderly by the year 2040, which would mean that the young cohorts are very small and a huge demographic imbalance is about to occur. The 80+ group is forecast to double every 20 years and they do not just cause pension payments to rise, but they are the ones most in need of care. So in effect, life expectancy in Europe is improving dramatically and the working age population is shrinking. Due to the change of women’s roles, few women will take care of the elderly at home by 2040. Extended residential care facilities and home help services will devour an extra 5-6 per cent of Europe’s GDP on average already within the next few years. Privatising the social services will not solve the problem because the total social costs will not be any smaller if you put them on the market. The savings on schools and kindergartens will be insignificant and we would probably need four times the immigration levels of the 1990s in Europe to replace the workforce that is retiring. The method to share these huge costs might be a renewal of the Musgrave Principle, the generational contract in financing public pensions. The intergenerational solidarity principle results in the simple fact that one year more of work means one year less of pension payments. Early retirement in the past was due to bad health conditions, but nowadays health conditions are much better and still improving. The big gap in skills between older and younger workers is also narrowing, so the seniority principle might have to be questioned, which makes older workers too expensive and raises pension payments if only the last working years are calculated for pensions. The problem is not one of intergenerational solidarity, but it is one of intra-generational inequity because there is no equality in death. European workers have a five year shorter life expectancy than professionals, which results in the fact that professionals receive the higher pension payments and live longer and this gap is widening continuously. Consequently, one proposed solution would be that pensions have to be based on life-time earnings and financing has to be more progressive because the pensions of the well-to-do are the most expensive. A further suggestion for a reform of the European model would be to extend the working life of high life-time earners, so that they would retire later than low life-time earners. Another model proposes a basic flat-rate pension for basic coverage for those most at risk, but a highly tax-subsidised private pensions system further increases inequalities in Europe, as these schemes traditionally cater for the wealthy part of the population.

Moving now to the changed role of women and the evolution of the family, it can be observed in Scandinavian countries that the disappearance of the family home care unit and the general and widespread public care for the elderly does not reduce intergenerational solidarity, on the contrary, contact to the elderly tends to be more frequent, intense and of a higher quality than when the elderly are cared for at home because it takes away the huge strain from the caring family member. Yet the best way to think about the elderly is to think about children because when you start out poor in life the chances are high that you will end up poor. Unfortunately young adults fare poorly on the labour market in many European countries today if they have children. European society is not more hedonistic today, young people still desire 2-3 children on average, but if child care and work is incompatible, the young family loses one income. There is a welfare gap in Europe and citizens do have difficulties to form families. That’s why we have 1.4 children per woman in Austria and only 1.2 in Italy and Spain for instance. Spain and Greece were lagging far behind in Europe concerning female employment, but they are fast catching up and there is evidence of the enormous amount of wealth that is being created in GDP if women enter the labour market in growing numbers. What we need in Europe is a basic package of maternal and paternal leave, full-time child care for everyone at an affordable price from an early age on. At the moment child care costs swallow a large amount of a woman’s wages in many European countries and this hits poorer women more if the costs are the same for everyone. Statistics have shown that the probability of having a child doubles when the woman has a permanent employment contract as compared to insecure employment conditions or unemployment. Another interesting trend is visible in Europe, namely that educated women make sure that the men they live with contribute more to home production before they have children. This helps men to change their life styles and sociologists speak of a “feminisation” of male life styles, while the radical change in the role of women leads to a “masculinisation” of female life styles. These are most dynamic elements of change in European society. Generally women are selecting their partners in different ways today from the past, when they used marriage as an upward mobility tool. Nowadays we can find much more marriage homogeneity and by that more social polarisation, e.g. two highly-skilled parents versus two unskilled parents. This enforces inequalities in the life chances of children.

The final reason for a need for reform is the fast spreading knowledge economy. Which children will lose out in tomorrow’s knowledge economy is not due to genetic inferiority, but to institutional deficiencies in some European countries. The interesting aspect for analysis is how many children end up far below average at school because that shows an institutional deficiency. Here Britain is doing very badly and Finland and Sweden are rating on top. The rising income inequality in Europe prevents poor parents from investing in their children’s education and that is a very alarming trend. A similar development can be identified in the relative performance of immigrant children, who usually do less well at school due to the economic situation of their parents and their lack of education. These gaps are unusually large in Germanic-speaking countries, such as Germany, Austria, the Netherlands and Belgium, whereas Britain is doing much better. European society has a stake that the life chances of all tomorrow’s children are excellent because they will provide the pensions. As they are a small cohort Europe cannot afford to waste any chances. A child gets most stimuli at pre-school age and these are determined by money and cultural environment. The more money a family has, the more they can invest in the child. It reduces the child’s future chances radically if the family is poor. US data show that child poverty results in two years less schooling. Poor parents take few risks and have the child quit school rather than help him /her to continue. So, one way to fight child poverty in Europe would be to make sure that all mothers have the chance to earn a proper salary. The second decisive stimulus at pre-school age is the learning culture in the family. This is not clearly visible to the policy maker, but has a tremendous effect on the performance of children at school later on. This learning culture includes indices such as books in the household or parents who read to their children. This is the reason why early childhood intervention programmes, such as the Children’s Centres in the United Kingdom for disadvantaged children from age 0 on, are so successful and extraordinarily effective. That is the time when the foundation for learning in a knowledge economy is laid. If the first five years are wasted, this gap cannot be made up. The more you stimulate learning early on, the easier it is to learn later on.

The solution is universal affordable childcare in Europe with invariably high standards and an excellent preparation before the children start school. As both parents in full employment might have an adverse effect on the development of a very young child, there should be parental leave and part-time work opportunities provided for parents with children below the age of one, but after the age of one child care facilities can provide an adequate learning surrounding for all children, independent of their parents’ income. Scandinavian countries introduced universal early childcare some time ago and that is one reason why they are doing much better at Pisa studies. There are very few children lost, few drop-outs, fewer dysfunctional children and the society is much more homogenous and can respond better to the knowledge economy challenge. Consequently, basic European standards along the lines mentioned above which are then implemented independently in the different regions according to the principle of subsidiarity might be a new social model for Europe.


Welfare states. Repairing the safety net, The Economist, July 14th 2018

Esping-Anderson, Gosta, Why We Need a New Welfare State, Oxford University Press 2002