Future generations will pay a high price if countries fail to reform pension, health care and unemployment schemes, according to a new OECD report.
Vulnerability of Social Institutions warns that population ageing and slower growth will threaten the sustainability and the adequacy of benefits in the coming years while undermining the risk sharing across society that social institutions have long provided.
The ratio of workers to retirees will on average shrink from 4.2 to 2.1 across the OECD area by 2050, triggering a high pension burden for future workers if nothing is done. Health care spending could rise considerably in the future, due to both price and technology developments. After a period of relative stability in the 2000s, structural unemployment has been drifting up since the recent crisis, putting upward pressure on unemployment spending.
In the face of these challenges, governments must reform social institutions, while being prepared to make regular adjustments to adapt to trend changes and to shocks with long-lasting effects.
Among the key OECD recommendations:
The retirement age of pension schemes should be linked automatically to life expectancy gains in the countries where this is not yet the case.
In the health sector, regulated competition among health care service providers, well-designed budgetary caps, hospital payments based on diagnostic related groups and health technology assessments can improve sustainability without damaging the adequacy of services.
The settings of unemployment insurance systems – notably the coverage, amount and duration of benefits – should balance different objectives. In the short run, generous benefits and long duration generate large spending spikes during severe downturns and can create disincentives to work. But too stringent eligibility criteria and short benefit duration can jeopardise the core functions of unemployment insurance as a tool for risk sharing and efficient reallocation of labour.
The legacy of high government debt and weak growth prospects stemming from the global economic crisis strengthen the call for adapting social institutions. Projections of future public health care and pension spending indicate that policies must be developed today to address spending pressures so that countries can avoid a considerable tax hike or benefit cuts in the future. The crisis has also revealed the weaknesses of social institutions in some countries. On average, youth poverty has soared during the crisis, and in hard hit countries, unmet medical needs have increased.
OECD analysis shows that some reforms are better than others at limiting the trade-off between sustainability and adequacy of benefits and services. Increasing the statutory retirement age is more efficient for balancing Pay-As-You-Go pension schemes, including defined-contribution point schemes, than increasing the contribution rate or decreasing the pension rate. However, raising the retirement age is not sufficient if options for early retirement exist; the employment of older workers needs to be facilitated.
Similarly, reforms aimed at enhancing the efficiency of the health care sector could generate large savings and partly offset future spending pressures, thus easing the sustainability-adequacy trade-off.
Effective labour activation policies can reduce spending on unemployment benefits, and by getting people back to work, will also buttress government revenues. Contingency plans should be in place to cope with a surge in unemployment, and activation policies should be scaled up during crises. Temporary extensions of unemployment benefit duration and temporary loosening of eligibility criteria may play a useful role in countries where duration is low and access to social assistance is limited.