Changes in European social protection budgets

What is a level (as percentage of GDP) and functional structure (see list below) of social protection expenditure (proportions of expenditure on different functions in total expenditure) in European or other countries with developed social protection systems and high coverage (if you wish, you can use example of a specific European country you analyzed as part of class assignment or the one you know the best)? Answer the question by providing answers to detailed questions (a), (b) and (c) below.

Reminder: social protection functions usually include old-age, health care, sickness and disability, employment injury, maternity, long-term care, disability, survivors’, family and children, and unemployment). 

  1. Provide overall current level of social protection expenditure as percentage of GDP in the selected European country, or average level in the European Union (3 points max)
  2. Name two or three social protection functions (see list above) on which expenditure has currently the greatest share in the total (3 points max)
  3. Name two or three functions on which share of expenditure in the total may increase and one on which it may decrease over the next 50 years considering expected demographic and labour market changes? Justify your answer very shortly. (4 points max)


  1. In European Union on average social protection expenditure is about 25% of GDP
  2. The greatest share have old-age pensions (old-age function) and health care
  3. Shares of health care and pensions may continue to increase due to ageing population structure. One can also expect significant increase in the share of expenditure on long-term care. With the expected changes in the labour market and emerging shortages of labour, unemployment rates will generally go down and this may be followed in smaller importance in the total expenditure of expenditure on all unemployment related social protection policies.

(Question 2 in A)( Question 4 in B) Changes in social protection budgets of developing country (Total: 10 points max)

Read the following:

A typical functional structure of the social protection expenditure prevailing in many lower-income developing countries at the beginning of the 21st century is usually dominated by health expenditure and old-age pensions (even though older persons still constitute a very small proportion of the total population, which is dominated by younger generations and pensions are paid only to a narrow group of those who were employed in the formal economy),

The overall social budget is small relative to total public spending and large portion of the population is not covered by any social protection programme except certain forms of access to public health care services. 

Children and working age population are the majority of the population in these countries. Also, many of those in working age are underemployed or unemployed and many families with children live in extreme poverty. At the same time, there is not much social protection accessible to families with children, to unemployed, to disable in the working age etc.

Select specific country (your own country or one of the countries discussed in class or in literature). You are in charge of planning social protection budget in this country and you can decide which programmes to expand and which to phase out or reform in order to meet the social protection needs of families with children and of those who are in working age but unable to work or unable to find a job.

  1. What new social protection programme (or programmes) would you add to social protection system and social protection budget of the country? Explain.
  2. Provide – as percentage of GDP – approximate level of total social protection expenditure currently prevailing in your selected country and indicate how – in your view – the ratio of social protection expenditure to GDP should change after new programmes are added?
  3. To finance new programmes and new expenditure would you rather increase taxes (what type of taxes), social security contributions or you would reallocate resources from other publicly funded programmes (which ones)? Justify very shortly your answers. (10 points max) 


  1. In Demoland there is no programme providing income support for families with children, and neither income support nor labour market policies for unemployed. Families with children and unemployed are over-represented among the poor and thus I would plan to implement family benefits, unemployment benefits and labour market policies increasing employability.
    1. Currently, Demoland spends, out of available public resource envelope, 3% of GDP on health care, and 1,5% of GDP on contributory pensions, mainly for civil servants. There is no non-contributory social assistance benefits – apart from small programmes funded by international NGOs. Planned costs of new cash benefits would be in range of about 1% GDP at the beginning and gradually growing over next 10 years. Policies for unemployed would cost at start another 1% of GDP
    1. New programmes will be funded from phased out-fuel subsidies, then from reformed personal income tax and finally from expanded coverage of social insurance.

(Question 3 in A) (Question 6 in B)             Fiscal envelope, policy space and fiscal space (20 points max)

3a.      Developing country (you may use example of a specific country if you wish) needs to expand
 its available overall fiscal resources (resource envelope) in order to enhance creation of fiscal space for new social protection benefits. List at least four possible ways of expanding fiscal envelope, pointing shortly to advantages and disadvantages of each of these ways and possible obstacles in implementation of such policies. (6 points max)
3b. Discuss very shortly definitions and concepts of “resource envelope”, “policy space” and “fiscal space” and relationships between them. (8 points max)
3c.   Indicate what (or who) are domestic and external actors (agencies, institutions, organizations) who play important role in expanding or narrowing policy space and fiscal space for social protection in your selected country (6 points max)



  • Rationalizing existing public spending programmes, including phasing put those which are not effective in terms of policy priorities. Obvious advantage is that such re-allocation of resources allows financing of new programmes without the need to increase taxes or borrowing. It requires regular public spending reviews with its policy recommendations implemented. Implementation however, can be difficult as such re-allocation of resources involves opportunity costs and those profiting form the programmes which are scaleddown or phased-out will (sometimes even violently) oppose.
  • Increasing tax revenue not necessarily by increasing tax rates but by broadening tax base and improving tax collection and other elements of tax administration. While increasing taxes will everywhere meet with strong opposition of some domestic and external actors (as many believe that higher taxes have negative impact on economic activity and on competitiveness of the economy), reforms of tax administration can bring substantial amount of additional revenue but require both administrative capacity and political will.
  • Deficit funding (or – in other words – borrowing) has to be done in a responsible way but it is one of the normal instruments of fiscal policies. Increase in borrowing maybe limited by existing domestic and international rules (like EU Maastricht criteria) and in developing countries is often assessed negatively by external actors (like international financial institutions).
  • Foreign aid. Source of financing quite widely used in many low-income countries (for example to finance large portion of the country’s health care system).  It is not sustainable and reliable in the long run as decided by external actors and driven mainly by their interests.

3b. Fiscal envelope determines the overall resources available to fund all the public expenditure programmes. Fiscal space is a term to describe part of the overall fiscal envelope which is (or may be made) available for specific program or group of programmes with specific policy objectives (like social protection). Policy space (for example policy space for social protection) defines the scope and type of public interventions which are accepted by the participants in the decision-making process and is a result of explicit or implicit social contract, result national social dialogue and/or result of bargaining process between the government and different interest groups and other actors and. It usually will reflect attitudes prevailing in the society or at least prevailing in the ruling elites (depending on how much democratic is the policy dialogue process) but also often has to take into account positions of external actors.

3c. Domestic: Ministry of Finance, Ministry of Social Policy, Trade Unions, Other NGOs, Employers etc. Foreign: Donors, IMF, World Bank, rating agencies, global financial markets, business groups etc.

(Question 4 in A) (Question 5 in B): Demographic, labour force and employment projection (20 points max)

a) As you should know from the course change of the population between year t and t+1 for the population can be expressed by the following formula:

Pop (x+1,t+1)  


Pop (x,t) * [(1-MortR(x,t)) /(1-0.5*MortR(x,t))] * (1-0.5*MortR(x+1,t))  




Number of new-born girls will be equal to 

((Total number of births)/(1+sex ratio))*(1-0,5*Female mortality rate)  Number of new-born boys will be equal to:

((Total number of births)/(sex ratio/(1+sex ratio)))*(1-0,5*Male mortality rate)  In equation

MortR(x,t) describes mortality rate at age x in year t.

Pop (x,t) is population at age x in year t

NetMig (x,t) is a net migration of persons at age x in year t.

Complete the demographic projection (fill in the table below) given the following assumptions: (8 points max) i. No migration  

  1. Constant male mortality rate = 0.8% from age 0 to 3  
  2. Constant female mortality rate = 0.7% from age 0 to 3  
  3. Constant Sex ratio of new-born children = 1.05
  4. Expected total number of births (boys and girls together) in 2018 = 111,000
 Population projection by single-age and sex
054,993 54,733 
152,358 53,211 
249,877 50,455 
  • For each of the following three categories of assumptions, list major factors which may affect such assumptions (in general or in a country you wish to select) over next decades: (mention no more than two factors for each) (4 points max) 
    • Net migration 
    • Mortality rates 
    • Total fertility rate iv.    Participation rate
  • Complete the labour force and employed population below given the following assumptions: (8 points)
    • Constant single-age participation rate based on 2017 data
    • Constant single-age unemployment rate based on 2017 data
 Projection by single-age for female only
 PopulationLabour forceEmployed Population
3042,78943,56738,766 35,912 
3141,67942,34637,209 34,488 
3240,35441,56735,877 33,324 



 Population projection by single-age and sex
  Male Female
Age2017 201820172018
054,993 56,11654,73353,957
152,358 54,55353,21154,350
249,877 51,93950,45552,839


  1. Net migration 

Answer: (the list is not exhaustive) ü Economic opportunities ü Political stability

  • Law and regulation (restriction on migration) ü Education ü Religious beliefs 
    • Etc
  1. Mortality rates 

Answer: (The list is not exhaustive) ü Medical facilities ü Nutrition levels ü Living standard

  • Access to clean drinking water ü Hygiene levels ü Levels of infectious diseases
    • Human behavior 
    • Etc
  1. Total fertility rate

Answer:  (The list is not exhaustive) ü Economic prosperity ü Female labour force ü Poverty level ü Urbanization, 

  • Cost of raising and educating children,  ü Education and employment opportunities for women,  ü Availability of legal abortions,  ü Availability of reliable birth control methods,  ü Religious beliefs, traditions and cultural norms ü Etc
  1. Participation rate

Answer: (The list is not exhaustive) ü Economic prosperity ü Employment opportunities ü Education ü Level of wages

  • Retirement age of the pension system ü Fertility rates


 Projection by single-age for female only
 PopulationLabour forceEmployed Population
3042,78943,56738,7663947135,91236 565
3141,67942,34637,2093780434,48835 040
3240,35441,56735,8773695533,32434 326

(Question 5 in A) (Question 1 in B):           Contributory pension projection (20 points max.)

  1. Provide the definition and mathematic formula of the following variables: (4 points max)
    1. System demographic ratio
    1. System replacement rate
    1. PAYG rate
    1. General average premium
  • Complete the contributory pension projection (fill in the table below) given the following assumptions: (6 points max)
    • Projection based on “Coverage rate” methodology
    • Constant single-age coverage rate assumption based on 2017 data
    • Assume no mortality, no invalidity, no new entrants  iv.            Minimum age of retirement is 60 years old (but not mandatory)

                      v.      All insured persons becoming inactive receive a pension

 Employed PopulationInsured PopulationPensioners Population
5910701200876 0 
60680730450 300 
61400480200 480 
  • Complete the projection (fill in the table below) given the annual investment rate of return is 5% and contribution rate is 10 %: (6 points max)
Total Income  
Investment income  
Total Expenditure35,50837,307
Administration costs7,8558,543
Annual Surplus  
Reserve (beginning of the year)50,000 
PAYG rate  

Remember that: 

Reserve(t+1) =  Reserve(t) x (1+i) + (Income from contribution(t) – Total Expenditure(t)) x (1+i)^0.5

  • Analyze the financial sustainability of the contributory pension scheme based on the chart below: (4 points max)



a) System demographic ratio

Answer: Number of pensioners / Number of insured persons

  1. System replacement rate

Answer: Average pension / Average insurable earning

  1. PAYG rate

Answer: (Pension expenditure + Adm cost) / Total insurable earning

  1. General average premium

Answer: (Present value of future expenditures – Initial reserve) / (Present value of total insurable earning) 


 Employed PopulationInsured PopulationPensioners Population
5910701200876          982 0              –   
60680730450          483 300          393 
61400480200          240 480          510 


Total Income38,28439,562
Investment income2,5072,630
Total Expenditure35,50837,307
Administration costs7,8558,543
Annual Surplus2,7762,255
Reserve (beginning of the year)50,00052,776
PAYG Rate9.9%10.1%

Reserve(t+1) =  Reserve(t) x (1+i) + (Income from contribution(t) – Total Expenditure(t)) x (1+i)^0.5

           d) Answer:                  

  • Although the initial reserve is not known, it’s fair to assume that the pension scheme is not financially sustainable
  • GAP 36% and contribution rate only 21%
  • PAYG is increasing from 26% to 62%
  • Expenditure higher than income from contribution even in 2005
  • If the contribution rate is set at the GAP level (36%) then, the pension scheme will be sustainable over the projection period. (ignoring initial reserve)

(Question 6 in A) (Question 2 in B): Child benefit (12 points max)

The Minister of Social Protection has requested you to assess the possible cost of a universal child benefit to be introduced in 2020. Child benefit will be paid to parents or care-givers of all children at the age from 0 to 6. Benefit will be paid per every child in the amount equivalent to 20% of GDP per capita (that is every year amount is supposed be adjusted so that proportion between benefit amount paid annually for one child is equal to annual GDP per capita). 

Please see below the main selected parameters, assumptions and projections: 

  1. Entitlement condition: having or caring for children in the age between 0 and 6 – so benefit will be paid to all resident children in this age bracket
  2. Amount of benefit = 40% of GDP per capita annually
  3. Projected total population in 2020 = 1,000,000 iv.         Projected total population in 2040 = 1,500,000

v.     Projected child 0-6 population in 2020 = 250,000 vi.       Projected child 0-6 population in 2040 = 400,000

  1. What will be the child benefit expenditure as percentage of GDP (excluding administration cost) in 2020? Indicate formula used for calculations. (4 points max)
  2. What will be the child benefit expenditure as percentage of GDP (excluding administration cost) in 2040? Indicate formula used for calculations. (4 points max)
  3. When performing calculations for 2020 and 2040, you had to make certain assumptions: (1) that population projections will adequately describe demographic situation of the country in near and distant future, and (2) that declared government policy will continue (that is, that benefit will be regularly adjusted to keep their proportion to GDP and that promised entitlement conditions will be preserved – universality and age range).  What are the possible changes in demographic trends and possible policy changes which – if happen – may results in departure from assumed parameters and will either increase or lower future costs of such child benefit in the future? List them and very shortly explain. (4 points max)


Number of children 0-6250000400000
Share of beneficiaries in population (coverage ratio)0,2500,267
Benefit amount as  percentage of GDP per capita (benefit ratio)0,40,4
Cost as % of GDP (coverage ratio times benefit ratio)10%10,67%
  1. 10%
  2. 10,67%
  3. Demographic factors: fertility, mortality and migration; Economic factors economic growth, income and consumption growth, inflation; Policy parameters: retirement age, benefit amount (through indexation mechanism)

Question 7           Health care financing (8 points)

A country changed its system of financing health care. In the past, it had a universal public health care system financed directly by the state budget from its general revenue. After reform, extrabudgetary autonomous health insurance fund pays for all the costs of health care. It is financed partly by contributions paid by employed persons and pensioners (there is no contribution paid by employer). However, personal income tax of all employed persons and all pensioners, was reduced exactly by the amount of their new health insurance contribution. For other persons (children and some other groups not covered by personal income tax) health insurance contributions are paid to health insurance fund by the state budget. Assume that utilization of health services and total public expenditure on health remained unchanged as a result of the reform and thus unchanged is the total size of its financing from any sources. As a result of such reform what happened to:

  • Labour costs to employers: (1 point)

                                  ☐ decreased?                    ☐ increased?                     ☐ no change?

  • Share of social insurance contributions in the total revenue of the country’s national health account: (1 point)
                 ☐ decreased?                   ☐ increased? ☐ no change?
Expenditure of the state budget: (1 point)  
                 ☐ decreased?                   ☐ increased? ☐ no change?
Revenue of the state budget: (1 point)  
                 ☐ decreased?                   ☐ increased? ☐ no change?
Deficit/surplus of the state budget: (1 point)  
                 ☐ decreased?                   ☐ increased? ☐ no change?
  • Expenditure of the consolidated general government budget: (1 point)

                                  ☐ decreased?                    ☐ increased?                     ☐ no change?

  • Revenue of the consolidated budget: (1 point)

                                  ☐ decreased?                    ☐ increased?                     ☐ no change?

  • Deficit/surplus of the consolidated budget: (1 point)

                                  ☐ decreased?                    ☐ increased?                     ☐ no change?

Reminder: Consolidated general government budget includes state budget and extra-budgetary funds (like social security funds). Social budget includes all revenues and all expenditure of all the social protection schemes.


  • Labour costs to employers: no change
  • Share of contributions in the total revenue of the country’s national health account: increased
  • Expenditure of the state budget: decreased
  • Revenue of the state budget: decreased (by the same amount as above)
  • Deficit/surplus of the state budget: no change
  • Expenditure of the consolidated general government budget: no change
  • Revenue of the consolidated budget: no change
  • Deficit/surplus of the consolidated budget: no change
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