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Convergence analysis of the structure of social protection financing.

Article Excerpt
Abstract

Expenditure on social protection in the European Union (EU) member states has been increasing rapidly over the last decade. To cover the increasing expenses, the countries need to find ways to increase revenues. Social protection financing systems and structure of financing vary across countries, but all of them use mainly two sources for financing: general government contributions and social tax revenue. The aim of this paper is to study the development of the structure of social protection financing at the main contributor level over the last decade, defining the trends that characterize the changes. We concentrate on convergence analysis of the structure of social protection financing, which is an important but, so far, insufficiently studied issue. (JEL H55, H53, P52)

Introduction

EU member states make constant efforts to increase revenues to finance social protection. Social protection expenditures are financed from various sources, the most important of which, in most of the countries, is social tax revenue. It is extremely important to prevent the rise of tax rates in all countries where the main source of financing is social tax revenue. To cover the growing social protection expenditure, the structure of financing has been changed in the last decade, in which processing the share of government contributions have increased. In 1993, on average, 63.0% of the social protection expenditures in EU were covered from social tax revenue (contributions paid by employers and insured persons) and 32.8% from government contributions (public financing). In 2001, this ratio was 60.5% and 36.0%. The tendencies have been in different directions across countries.

This paper seeks to study the development of the structure of social protection financing at the main contributor level over the last decade, defining the trends that characterize the changes. We concentrate on convergence analysis of the structure of social protection financing, which is the most important part of social protection systems but a relatively stable area of social policy in EU countries. We study whether convergence or divergence has occurred in social protection financing structures in EU countries in the period 1993-2001, while the social protection expenditures have converged [Puss et al., 2003]. We analyze the presence of [sigma]-convergence, on the basis of linear and non-linear regression, the presence of absolute [beta]-convergence, and the speed of convergence in the structure of social protection financing in the EU.

Background Information

In the EU member states, social protection has been an area of national competency. European Community legislation has therefore, purposefully avoided harmonization of national social security legislation of Member States. The Charter of Fundamental Social rights of 1989 made reference to the principle of subsidiarity and thereby, recognized the Community as an actor in social security. Subsidiaries conditionally give the Community the competency to act if objectives set out have not been fulfilled in a satisfactory manner at the national level [De la Porte, 2000].

The Social Charter also opened the debate on the setting of common objectives of social policies, where policies are understood as the manner in which the social protection systems develop. The Commission was the initiator of this process and believed that by setting common goals, a convergence...