Many OECD and EU countries are facing fiscal strain, exacerbated by high levels of debt accumulated during COVID‑19 and the subsequent cost-of-living crisis, high interest rates and an uncertain macroeconomic and geopolitical outlook. Population ageing is expected to add pressure on spending: between 2023 and 2045, spending on pensions is projected to increase by 1.1 percentage points (p.p.) of GDP in the OECD, and by 1 p.p. in the EU. Similarly, spending on health- and long-term care is projected to rise by 1.5 p.p. of GDP in the OECD, and 0.7 p.p. in the EU over the same time period. The degree to which new social programmes will be needed to offset the effects of new technologies on jobs and wages is yet unknown. At the same time, labour income – currently the main resource base for social protection financing – is being squeezed by shrinking working-age populations unless labour supply and / or productivity increase sufficiently to offset this decline. Given the gap between growing demands and potentially declining resources, and without obvious sizable and politically feasible candidates for social spending cuts, many countries are taking stock of their current financing mixes and considering broadening the base of social protection financing.
This report – Financing of Social Protection – forms part of the OECD’s Future of Social Protection programme of work, overseen by the OECD Employment, Labour and Social Affairs Committee. It also builds on the Report of the High-Level Group on the Future of Social Protection and the Welfare State in the EU of February 2023, and its findings and recommendations on the current financing structure of welfare states in the EU, the major constraints they face, and possible further sources of revenue. The report takes stock of how OECD and EU countries are currently financing their social protection systems, notably the mix between social contributions and general revenue, including earmarked sources; considers challenges related to the social protection coverage of and contributions by self-employed and part-time workers; and looks at the development of the labour share, and how it may be impacted by population ageing and technological progress. It also examines current policy trends and debates across OECD and EU countries, as well as attitudes towards broadening the financing basis for social protection.
This report was prepared by a team in the Social Policy Division of the OECD’s Directorate for Employment, Labour and Social Affairs. Juan Siachoque (University of Nottingham) contributed to the drafting of Chapter 3.
The report benefitted from input of many national delegates to the EU’s Social Protection Committee and its Indicator Sub-Group, and from the OECD’s Working Party for Social Policy and Senior Budget Officials. We are grateful to European Commission officials, in particular Laurent Aujean and Fabiana Pierini (DG EMPL), as well as Terry Ward (Applica) for their guidance and comments. We also acknowledge useful comments from colleagues in the OECD’s Directorate for Employment, Labour and Social Affairs, as well as the OECD Centre for Tax Policy and Administration. The OECD gratefully acknowledges the financial support from the European Union, which co-financed this project with the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the OECD Member countries or the European Union.