The Nordic Model - Embracing globalization and sharing risks

4.1 THE WELFARE STATE AS A SOCIAL
CONTRACT
It is a hallmark of the Nordic welfare model that it offers both an
elaborate social safety net as well as public services such as education
and care (child and old age care, health care). Although
there are various rules determining entitlements to these welfare
provisions, it is a defining characteristic that ability to pay is not
a criterion; the right to these provisions is universal in the sense
that they are available to all citizens without being preconditioned
on prior payments or contributions (see also chapter 2). These arrangements
are financed by various forms of taxation, and there is
no relation for the individual between tax payments and entitlements
to services. (The same is not the case for most pensions and
part of unemployment benefits.) However, at the aggregate level
the tax revenues obviously have to cover expenses generated by
the welfare arrangements.
This way of structuring the welfare society has the important
consequence that benefits received and payments made by the
average citizen differ strongly according to his/her age. The reason
is simply that many arrangements of the welfare state serve to
improve conditions for children (care and education) and the old
(health care and pensions), while the contributions in the form
of tax payments primarily accrue from income earned in the active
years. Figure 4.1 shows the age-dependent net contribution
of the average person to the public sector in Finland; that is, the
difference between tax payments (of various kinds) and the value
of transfers and individual services received.
The figure displays a clear pattern – the average person benefits
from the welfare state in young and old age, and contributes
in the years during which he or she is active in the labour market.
It should be stressed that the figure shows only the average position
for different age groups. Within age groups there are large variations:
some have high incomes and rarely use public provisions like
health care, while others have low income and poor health.
The relation depicted in the figure captures the “social contract”
between generations, which is one of the backbones of the
The social contract
between generations
and the change in
demographics imply a
serious challenge for
the sustainability of
public finances
64 · The Nordic Model