Social policy: What OECD ministers are doing

OECD Observer

Does social policy help or hinder economic growth? Is it possible to reconcile work and family life, or must this be a tough choice that only parents should make? In this OECD Observer roundtable to mark the 2005 social affairs ministerial meeting under the theme, Extending opportunities: How active social policy can benefit us all, we have invited ministers from a cross-section of OECD countries to answer the following questions:

“What actions are you taking to improve social performance in your country? How do you reconcile these social objectives with economic goals?”

As their answers show, there is now a strong belief that good social policy is not only important in its own right, but that it promotes sustainable economic growth. There are new and innovative approaches, from the Dutch initiative to help parents deal with the stressful peak years of life to the renewed emphasis in the US on supporting strong families. There are new trends to study too, such as Sweden’s rise in fertility, despite its high rate of female employment. Pension reform is a key concern in Germany, while quality childcare and building stronger family-friendly partnerships are highlighted by Australia and Korea.

Aart Jan de Geus, minister for social affairs and employment and chair of the 2005 OECD social affairs meeting, leads the replies. He is followed by Australia’s minister for family and community services, Kay Patterson, Germany’s federal minister for health and social security, Ulla Schmidt, Korea’s Geun Tae Kim, minister for health and welfare and co-chair of the 2005 meeting, Sweden’s minister for social affairs, Berit Andnor, who is also co-chairing, and from the US, Wade F. Horn, who is assistant secretary for children and families at the DHHS.

Netherlands: Welfare to strengthen the economy

Aart Jan de Geus, Minister for Social Affairs and Employment and Chair of the 2005 OECD Social Affairs Ministerial Meeting
©ANP/Benelux Press

Like many OECD countries, the Netherlands is in the middle of a debate on how to amend the welfare state. Trends such as population ageing, globalisation, technological progress and individual freedoms make it necessary to consider changes to the social welfare system that go beyond adjusting benefit rates or sharpening financial incentives. A recent policy initiative by the Dutch government merits attention. We call it the individual life-cycle savings scheme (levensloopregeling).

When the current welfare state was built in the 1960s, the Dutch population was young, ethnically homogeneous and living in similar types of households. Today’s welfare arrangements were designed to accommodate the predominant life-cycle pattern of that time: education for the young, then working careers (for men) and running the home (for women), followed by retirement.

Dutch society has radically changed since then. The average skill level has greatly improved, women participate more fully in the labour market, and living arrangements have become more heterogeneous. As a result, individual life cycles are much more varied.

New pressures have emerged. Population ageing makes it imperative that people work later into their lives. The knowledge economy demands continuous investment in our human capital throughout our careers. Parents have to find ways to combine work with childcare. Many people are under pressure during this hectic “peak time” of life, when children, education and work lay competing claims on limited time. All too often, these tensions lead working people to withdraw from employment prematurely. This may jeopardise the sustainable financial basis for collective provision and social cohesion.

To address these tensions we introduced the individual life-cycle savings scheme. Under the scheme, workers can save out of their gross wage, and taxation is deferred until the time when the saving is drawn down. The money in the savings account can be used for various forms of unpaid leave, such as caring for children or ill parents, schooling, a sabbatical or, indeed, early retirement. The maximum amount that can be saved is 210% of the latest annual gross wage.

The new scheme allows workers to strike a better balance between their time and income needs during the different phases of their lives. This reduces the risk of unwanted withdrawals from the labour market, particularly by working mothers, and unnecessary absenteeism because of illness or disability. The upshot should be a more responsive welfare state that strengthens the economy, too.

This new life-cycle approach to social policymaking has great potential to create a welfare state that supports efficiency and equity, now and in the future. I look forward to ideas and suggestions from governments and stakeholders on how to develop this approach further.

Australia: Building a virtuous circle

Kay Patterson, Minister for Family and Community Services
©Australian Government

The Australian government is seeking to develop a social coalition of families, communities, non-government organisations, business and government to help build and support strong, resilient families. The government’s role is twofold–it pursues policies for a strong economy, and social policies to support individuals, families and communities to fulfil their aspirations and deal with difficulties.

Australia’s recent strong economic performance and budget surpluses mean we have the ability to give back to families a higher social dividend in the form of better funded and better quality healthcare, education and family assistance.

Australia is well placed to meet the challenges of its ageing society. Its retirement income system is built around compulsory savings through employer contributions to superannuation, voluntary superannuation contributions (supported by generous taxation concessions, and by government co-contributions for low earners) and other private savings. This is underpinned by a publicly funded, means-tested Age Pension for those in need.

We are committed to developing policies that help parents balance their work and family responsibilities. We have committed to introducing a Family Impact Statement, whereby ministers take account of the impacts of new proposals on families. We are responding to relationship breakdowns by supporting families with programmes that help couples learn a range of skills to assist them to work through difficult times.

Our National Agenda for Early Childhood provides a framework to improve the integration of support services in areas such as health, early learning and care, and creating child-friendly communities. We offer choice and opportunity to families who face different challenges at different times in their family life-cycle, for example, by providing family payments for both working and home-based parents, high quality and affordable childcare, and support to carers of the elderly and disabled.

We pursue a strong economy because of the benefits that flow to individuals, families, and communities. Appropriate social infrastructure in turn facilitates economic activity and prosperity. A virtuous circle is established.

Germany: Reliability and affordability

Ulla Schmidt, Federal Minister for Health and Social Security
©REUTERS/Fabrizio Bensch

No country can detach itself from globalisation and demographic trends, and Germany is no exception. On the contrary, Germany bears a special burden, owing to the impact of German reunification. With Agenda 2010, the government introduced a number of reforms to improve the economic framework and modernise our social systems. Since 2001, we have been implementing, with our pension reforms, a concept which combines reliability with affordability.

A sustainability factor was introduced to ensure that the demographic burden is borne equally by both those paying into the system and the pensioners themselves. Not only do these measures serve to protect the rights of pensioners, at the same time, the contributors–and companies–are protected from rising contribution rates. That is why the law is called the Pension Insurance Sustainability Act. This, too, is a question of social balance: if there is little left to share around, then for the gainfully employed, our children and grandchildren, pensions will not increase either, or will do so only negligibly.

The statutory pension insurance remains the centre piece of providing security in old age. However, it will not be enough on its own to guarantee the same standard of living in old age. The supplementary, capital-based funded provision will become increasingly important–alongside the statutory pension insurance–and has consequently been receiving state financing since 2001. It is predominantly families and low-income earners who are receiving assistance in creating funded supplementary old-age provision. Basic protection has served to spread a net against oldage poverty, and early retirement options are being phased out. If old-age protection is to remain stable in the future, it is imperative that older citizens continue to be given a chance on the labour market.

Signs of success are already evident. The contribution rates have been kept stable, despite the difficult economic situation in Germany in recent years. The average effective pension age has increased and oldage poverty has decreased. More and more of our citizens are supplementing their old-age provision. In short, old-age protection in Germany has a future.

Korea: Quality childcare

Geun Tae Kim, Minister for Health and Welfare
©Korean Government

One of the most serious challenges facing Korea today is the plummeting birth rate. The total fertility rate of our country reached its population replacement level of 2.1 in 1983 and then fell to 1.7, the OECD average, in the late 1990s. This downward trend became even more evident during the 1997-1998 financial crisis. In 2002, fertility in Korea hit a record low of 1.17.

This demographic challenge will be catastrophic for our country unless we take appropriate action in good time. If low fertility continues, it will seriously undermine our economic vitality and increase the burden of supporting the elderly population. In response, specific plans of action are carefully being devised.

In this respect, the proposed Fertility and Ageing Society Act signals a meaningful step forward in tackling this challenge. The new law will provide for a presidential committee where major population policies will be shaped and enforced. It will also cover a broad range of issues, from marriage, pregnancy, childbearing and childcare to education, housing and tax schemes.

Greater financial resources will be invested to provide quality childcare. It is expected to raise the share of the public sector in national childcare spending to 60% and to provide more services to fully satisfy the needs of parents. Employees benefit from a 90-day maternity leave, with a guarantee of full wages, along with parental leave of up to twelve months. During parental leave, workers can receive fixed allowances from the employment insurance fund, so that they can take care of their children without worrying about a loss of income. The Korean Labour Standards Act specifies measures to develop a family-friendly work environment. These measures, however, are not mandatory, so we largely rely upon the voluntary participation of employers. The government takes the lead by introducing a flexible working-time system and by allowing part-time work for those who take parental leave. Moreover, the recently introduced five-day working week is expected to create a more family-friendly work environment and promote female employment.

Mothers who go out to work can reduce child poverty. The prospect of a labour shortage makes raising female participation all the more important for sustainable growth.

Sweden: Mutually Dependent

Berit Andnor, Minister for Social Affairs
©Pressens Bild Sweden

In Sweden the basic principle is that the social security systems must cover all members of society. Everyone pays towards our common welfare with taxes and contributions, and everyone, irrespective of income, is also covered by the system. This gives our welfare system legitimacy and creates security.

It is important to continuously review, evaluate and improve the security systems. It is important that these are funded and sustainable, not least for the sake of future generations. The recently implemented pension reform is an example of how we are meeting these criteria.

Our choice of welfare system also supports the requirements for economic growth, as welfare and growth are mutually dependent. Extensive welfare provision requires high employment and growth. And given the right design, welfare in turn generates growth. It is important that the systems are designed so as to encourage work and that they are individual-based. In recent years we have also worked on reducing marginal effects, for example, by adjusting the design of the tax system and by introducing a ceiling for childcare charges.

Real security promotes initiative and creativity. One basic requirement for coping with major changes in society is that people know there is a safety net, for example, in the form of unemployment insurance, training or collective agreements.

Two encouraging indicators show we are moving in the right direction. For several years in succession, the total fertility rate in Sweden has risen and now stands at 1.8 children per woman. Generous and flexible parental insurance, combined with high-quality childcare for all children, have enabled Swedish parents to reconcile work and children. As a result, while a high proportion of Swedish women are gainfully employed and earn their own living, their fertility rate is also high.

Raising fertility rates is not enough, however. Working lives must be prolonged. During the last five years, the employment rate among people aged 60-64 has risen from 48 to 58%.

These achievements give cause for optimism regarding our future ability to provide good welfare for all our people.

United States: A healthy marriage

Wade F. Horn, Assistant Secretary for Children and Families, Department of Health and Human Services
©US Government

Perhaps the most remarkable development in US social policy under President Bush has been a renewed commitment to support marriage. Spurred by the president's announcement in 2002 to provide financial support for innovative programmes aimed at reducing child poverty and increasing child well-being, the Healthy Marriage Initiative seeks to help couples who have chosen marriage for themselves, gain voluntary access to marriageeducation services, where they can acquire the skills and knowledge necessary to form and sustain a healthy marriage.

This is a significant shift in US social policy, given that since the 1960s, the government has largely ignored marriage, and perhaps even unintentionally undermined it. A large body of social science research over the past 20 years that documents the benefits of healthy marriage to children, adults and society supports that shift.

While the emotional and psychological benefits of healthy marriage are well known, research consistently finds that marriage and the family are foundational institutions that profoundly affect the economy. Our language even affirms this connection, as economy and household originate from the same Greek word, oikos.

How do healthy marriages boost the economy? Every marriage creates a new household, an economic unit that generates income, spends, saves and invests. The household typically includes children, which contribute human capital to the economy. Marriage influences economic behavior as well. This is especially true for men, who in many cases become more economically responsible when they have a family to support.

No wonder that Gary Becker, the 1992 Nobel laureate in economics, has argued that the married-couple household represents the most economically efficient of all living arrangements. Men and women who are happily married can expect higher average incomes and relatively lower living expenses than other households. Sociologist Linda Waite documents that marriage is a wealth generator, as married couples usually reach retirement with substantially greater assets than their single peers.

Given the clear economic benefits of marriage, the new move to support the formation and stability of healthy marriages goes a long way in helping American social policy reinforce sound economic policy.

©OECD Observer No 248, March 2005

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