Nordic model

1
Nordic model prospects and challenges

• Torben M. Andersen
• University of Aarhus
• CEPR, CESifo and IZA

2
Nordic model Achievements
Tax burden 25 vs 50
3
Nordic model main characteristics

• Universal individual rights, collective
  financing
• Social safety net decent standard of living
• Welfare services satisfy the needs of most - NOT
  a residual
• a large tax financed public sector

4
Average age dependent net-contributions The
social contract
1.000 euros
5
The social contract in Sweden
200000
100000
0
0--5
10--15
20--25
30--35
40--45
50--55
60--65
70--75
80--85
90--95
-100000
-200000
-300000
-400000
-500000
1930-1934
1950-1954
1970-1974
1990-1994
2010-2014
6
Employment focused model

• No self-support entitlement to some income
  transfer
• In work higher income and therefore higher tax
  payments
• The financial balance of the model requires a
  high labour force participation!

7
Labour force participation by ageFinland, OECD
max and min
8
An implicit insurance contract

• Welfare arrangements a large implicit insurance
  contract (collective risk sharing)
• Conditionalities (health, abilities, luck etc)
  determine both the use of and contributions to
  the welfare state
• Direct welfare effect conducive for
  flexibility/adjustment

9
Challenge I Ageing
Total and old age dependency ratios 1940-2040
80
70
60
50

40
30
20
10
0
1940
1946
1952
1958
1964
1970
1976
1982
1988
1994
2000
2006
2012
2018
2024
2030
2036
10
Primary balance projection 2010-2050
1
0
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
-1
For given arrangements not including any new
initiatives
-2
of GDP
-3
-4
-5
11
Non-Solutions

• More children too late. and they can expect a
  high longevity
• Immigration in need of some who are willing to
  pay some taxes!
• Growing the pie more wealth but who are not
  going to have their share ?
• The ageing problem is a distribution problem,
  not a problem of lack of resources!!!

12
Solutions ?

• Expenditure cuts a change of the welfare model
• Tax increases likely to be costly given the
  already high taxes globalization
• Increase employment more tax revenue, less
  expenditures on transfers

13
Challenges II Services

• How to maintain a satisfactory level and quality
  of welfare services?
• For some core activities it is very difficult to
  increase productivity human relations are
  involved

14
Higher living standard increased demand for
services

• Increased material well-being basic needs are
  satisfied
• Increased focus and demand for services, e.g.
  health
• New possibilities new demands

15
Public finances systematic deficitsprimary
balance in of GDP
1,0
0,0
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
-1,0
-2,0
A Higher productivity growth 0,5 pa
-3,0
Baseline Pure demographics
-4,0
-5,0
B A welfare service growth 0,25 pa
-6,0
16
Challenge III GlobalizationGlobalization
paradox?

• Support for globalization is very strong (or less
  strong lobbying for protectionism)
• Welfare model - most threatened by globalization?
• Nordic countries have always been open and the
  welfare state has been developed alongside
  openness

17
Globalization and taxation

• Tax base mobility difficult to tax highly
  mobile tax bases
• Most tax revenue accrue from direct and indirect
  taxation of labour income
• Need for tax reform, but not a major problem if
  employment rates can be kept high

18
Globalization - employment

• Globalization technology skill-bias
• Education becomes increasingly important
• Not only for the elite but for distributional
  reasons (to prevent a large supply of unskilled)

19
Migration and the welfare state

• Immigrants from low income countries low
  qualifications
• High unemployment risk qualification gap is
  large
• High risk of transfer-dependency

Qualifications
Wage
Social safety net
20
Employment gap for immigrants from low income
countries
21
Policy challenges

• How to ensure a high employment rate
• Ageing/Longevity
• Skill-bias/Qualifications
• Services satisfactory supply
• Migration how to square the model with open
  borders