The Nordic Model - Embracing globalization and sharing risks

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Many people want to retire early – but should be encouraged to prolong their working careers long-run perspective it is an anomaly that the statutory retirement ages (62, 63 and 68) are kept fixed while longevity increases. There are several reasons why retirement may take place too early as seen from the perspective of society. First, taxation (in combination with various forms of means testing and supplements) implies that the return for continued work and later retirement is smaller for the individual than for the society even if the benefits are actuarially fair. The reason is that the labour income earned by postponing retirement is taxed (while leisure is not). Second, even though indexation of benefits to longevity provides incentives for individuals to retire later when longevity increases, the system does not automatically ensure that this takes place. This is so since the statutory ages that apply to the various schemes are not indexed, and because individuals may underestimate longevity. Finally, with rising incomes there may be a preference shift with an increasing focus on leisure in the “third phase” of life. Ageing is often perceived as an issue of pensions and retirement only. While these issues are important, one should stress that there are other financing concerns related to ageing. These include welfare provisions such as health and old age care. Financing the latter is also strongly dependent on the age composition of the population. More people – both relatively and absolutely (and particularly the very old) – will be in need of old age care and health services in the future. While increasing longevity is associated with more healthy ageing, there will nevertheless be an increasing pressure on health and old-age care if the old are in the future to have the same access to welfare services as currently. This requires more resources and raises financing issues beyond that of pensions. 4.5 EASY FIXES? In the debate on the consequences of the ageing of society, it is often claimed that there are some easy solutions. Let us consider a few of these. Demographics: from tail-wind to head-wind · 75
More children. Since the problem is the increasing share of old people in society, it is intuitively plausible that more children would be a straightforward solution. However, there are two reasons why this will not solve the problem. First, to eliminate the baby-boom effect, fertility should have increased years back, cf. figure 4.5; it is too late to rectify this problem now. Second, the newborns will also benefit from increased longevity, and hence in a lifetime perspective they will not be net contributors if current retirement ages remain unchanged. If the current system is not robust with respect to increasing longevity, it does not help to increase the number of newborns who will also enjoy increasing longevity. This is not to deny that there are both economic and non-economic reasons why more children and higher population growth are important for the society. However, higher fertility is not a solution to the financial problems arising from ageing. Immigration. If it is too late to solve the problem by increasing fertility, could it not be rectified swiftly by immigration? It is correct that immigration of people in their 20s and 30s would contribute to flattening the rise in the dependency ratio. However, this will solve the economic problems only if the immigrants obtain a high labour-market attachment; to put it a bit bluntly, we are not looking for young people per se, but for workers who can contribute to financing our welfare system by paying taxes (rather than receiving benefits). It is not obvious that a country like Finland can induce immigration satisfying the latter condition on a very large scale. The potential for solving the problem via immigration may also been seen in light of the fact that in a medium-term perspective there is no “population surplus” in Eastern Europe; these countries are among the significantly ageing countries, and therefore large migration flows from these regions should arguably not be expected, cf. Carone (2005). The conclusion is again that more immigration may be desirable for various reasons but is not realistically to be perceived as a solution to the public finance problem at hand. The others have a bigger problem. It is often argued that our demographic problems are not that bad since other countries, like those in Southern Europe, are facing even larger demographic shifts. This is a strange argument: why would problems faced by other countries contribute to solving the problems faced by the More children are desirable – but will not solve the public finance problem More immigration may well be desirable – but will not solve the public finance problem 76 · The Nordic Model
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The Nordic Model Embracing globaliz
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ETLA B232 ISBN 978-951-628-468-5 IS
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THE AUTHORS Torben M. Andersen is P
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CONTENTS PREFACE THE AUTHORS 1 INTR
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8.5 The future of public services -
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Globalization is primarily an oppor
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ices financed by taxes, which are h
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14, respectively, out of a total of
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are the effects of technical change
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- and, particularly, their effect o
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not contesting economic growth as t
Page 25 and 26: 1.6 AN EFFECTIVE WAGE BARGAINING PR
Page 27 and 28: etter be tried in individual cases
Page 29 and 30: The scheme of the social contract c
Page 31 and 32: is worthy and realistic. But the de
Page 33 and 34: supportive interaction of openness
Page 35 and 36: The financial deregulations in the
Page 37 and 38: horizontal axis). These indices are
Page 39 and 40: does can nowadays be seen, in a bro
Page 41 and 42: employment increases in the public
Page 43 and 44: are not at the top of the league, t
Page 45 and 46: ENDNOTES 1 Wikipedia refers to popu
Page 47 and 48: consider employment and productivit
Page 49 and 50: from the mid-1980s. Finland has gra
Page 51 and 52: % 7 6 5 4 3 2 1 0 IT expenditure, %
Page 53 and 54: As technological change is to a sig
Page 55 and 56: 3.3 SOCIAL EQUALITY Economic effici
Page 57 and 58: 0.9 0.8 0.7 Net Fin Den 0.9 Composi
Page 59 and 60: ANNEX: GROWTH ACCOUNTING The Nordic
Page 61 and 62: sources of GDP growth in the EU15,
Page 63 and 64: 11 These decompositions have been c
Page 65 and 66: 4.1 THE WELFARE STATE AS A SOCIAL C
Page 67 and 68: The extent, coverage and quality of
Page 69 and 70: % % 80 80 60 60 40 20 0 OECD max Fi
Page 71 and 72: % 80 Total Old age % 80 60 60 40 40
Page 73 and 74: tem is seriously affected. Today, t
Page 75: Historically, however, the share of
Page 79 and 80: Actually higher growth may make the
Page 81 and 82: dependency ratio driven by the baby
Page 83 and 84: 82 · The Nordic Model
Page 85 and 86: to handle much bigger fields today,
Page 87 and 88: Table 5.1 Projections of public hea
Page 89 and 90: 5.4 AN EASY FIX - BRING SERVICES BA
Page 91 and 92: Box 5.1 Growth and the welfare stat
Page 93 and 94: it implies that the long-run defici
Page 95 and 96: The level of taxation is already hi
Page 97 and 98: One may ask why this problem arises
Page 99 and 100: globalization may contribute to bot
Page 101 and 102: able to pay to seek private solutio
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Page 105 and 106: ily policies that Nordic demographi
Page 107 and 108: absolute and relative terms than hi
Page 109 and 110: in the participation decision of th
Page 111 and 112: Table 6.2 The activity rate, aggreg
Page 113 and 114: Thus, responsible unions should res
Page 115 and 116: als take part in various unemployme
Page 117 and 118: Box 6.2 What is the Danish “flexi
Page 119 and 120: ENDNOTES 1 In his history of the ec
Page 121 and 122: particularly noteworthy in a euro a
Page 123 and 124: 7.2 COORDINATION AND DECENTRALIZATI
Page 125 and 126: also depends on the business cycle.
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ut not in any dramatic way (cf. fig
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displays higher nominal rigidity th
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model stem from an age in which the
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mostly in the years 1980-2000. For
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Table 8.1 Government expenditure by
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ure. This selection bias alone will
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that everyone gets their worth as m
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8.3 THE CASE FOR GOVERNMENT PROVIDE
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maximizing firms tend to focus exce
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than zero based budgeting) are impe
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sectors, place at or above the medi
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The demands for objectivity limit w
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assessed case by case. The importan
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c. Vouchers Vouchers are issued by
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mechanically in the political debat
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ENDNOTES 1 The private sector inclu
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The biggest hurdle to overcome for
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ment has a higher return when spent
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REFERENCES Adema, W. and Ladaique,
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Jonung, L. and Hagberg, T. (2005):
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Is there a Nordic model? What are t
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