June 5, 2012
There were and still are fierce discussions about the financial crisis almost at all imaginable levels. Austerity, budget cuts and the need for ‘crucial reforms’ became key words of exchange of views. Let’s talk about these reforms which mean in most of the cases simply budget cuts which often touch upon (negatively) the amount of social security expenses. After participating in some of those debates, I decided to publish some basic remarks with regard to the – obvious – link between the financial crisis and the social security schemes.
Comment: In order to put my thoughts in a certain framework I understand under social security systems in the most wide sense the healthcare system, the pension system, the invalidity allowances and other special in kind and cash benefits such as unemployment benefit.
The social security systems and the European identity
From my point of you, social security systems are fundamental parts of the European identity. If we compared the European States (and mainly the EU Member States) to the rest of the world, we would see that the so called welfare state is one of the most important achievements of Europe in the XXth century. There are several antecedents of the today existing systems but the most important initiative among them issued from Bismarck who created the first modern insurance based system in Germany after the first reunification of the country and the Bismarck model was followed by several other European states after the end of the XIXth century.
The European social model is in crisis
That is another, undeniable fact. In other words it is widely recognized that social security systems spend more than the state can allow for that purpose. In other words, the welfare state became – in its current form – unsustainable. Since these systems concern a major part of budget spendings – in some cases around 1/3 of the budgetary expenditures – it is of utmost importance to examine the efficiency of these large public expenses.
The financial crisis and the social security systems
Some think that the social security systems are the main causes of the financial imbalances and therefore of the financial crisis. This is simply not true. In my opinion, the causes of the crisis are mainly of economic and financial nature so social security systems themselves aren’t responsible for the crisis.
On the contrary, these systems have a crucial role in fighting the crisis since only these financial and in kind benefits can protect people from the negative economic and health effects of the crisis. Without social security systems, the negative impacts of the crisis would have been more serious.
Social security schemes and austerity policy
I am aware that these schemes produce a major part of state deficits. That is true: there is a clear budgetary link between the two economic factors (social security costs are budgetary expenditures). On the other hand, social security schemes aren’t perfect, either. Sometimes they do not function properly since they can spend a large amount of state money inefficiently. Thus, I agree with those who are saying that there is an urgent need for a reform since social security systems have to be sustainable. But I do not agree that these systems would be only ‘public money expenditures’ and that the reforms would mean only cost cuts.
Conclusion – the added value of social security systems
I am deeply convinced that there is a strong need for social security systems. Without effective health, pension and unemployment systems there is no effective crisis management.
YES for the rationalisation of expenditures,
YES for putting these system to a sustainable way but
NO for just cutting the costs without a well-tailored plan and
NO for denying the merits of such systems.
Social security systems contributed to the financial crisis but in a positive way: without the safety net of these systems, the effects of the crisis would have been more grave.
I remain at your disposal.
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Related earlier updates:
(Photo © From “Why Social Security?” (1937) Social Security Administration pamphlet explaining need for the new system in terms of the transition from rural to urban-industrial society. Illustrations by Hendrik Willem Van Loon, author of widely read books of history.)Zoltán Massay-Kosubek