1. Nordic model – prospects and challenges Torben M. Andersen University of Aarhus CEPR, CESifo and IZA

2. Nordic model: Achievements Tax burden: 25 % vs 50 %

3. Nordic model – main characteristics Universal: individual rights, collective financing Social safety net: decent standard of living Welfare services: satisfy the needs of most - NOT a residual = a large tax financed public sector

4. -30 -25 -20 -15 -10 -5 5 10 15 00 2-6 12-1622-26 32-3642-4652-5662-6672-76 82-8692-96 1.000 euros Average age dependent net-contributions: The social contract

5. The social contract in Sweden -500000 -400000 -300000 -200000 -100000 0 100000 200000 0--5 10--1520--2530--3540--4550--5560--6570--7580--8590--95 1930-1934 1950-19541970-1974 1990-1994 2010-2014

6. Employment focused model No self-support: entitlement to some income transfer In work: higher income and therefore higher tax payments The financial balance of the model requires a high labour force participation!

7. Labour force participation by age: Finland, OECD max and min

8. An implicit insurance contract Welfare arrangements = a large implicit insurance contract (collective risk sharing) Conditionalities (health, abilities, luck etc) determine both the use of and contributions to the welfare state Direct welfare effect + conducive for flexibility/adjustment

9. Challenge I: Ageing Total and old age dependency ratios 1940-2040 0 10 20 30 40 50 60 70 80 194019461952195819641970197619821988199420002006 2012 2018202420302036 %

10. Primary balance projection 2010-2050 -5 -4 -3 -2 0 1 20102013 2016 20192022 2025 2028 2031 20342037 2040 2043 20462049 % of GDP For given arrangements – not including any new initiatives

11. Non-Solutions More children: too late…. and they can expect a high longevity Immigration: in need of some who are willing to pay some taxes! Growing the pie: more wealth – but who are not going to have their share ? The ageing problem is a distribution problem, not a problem of lack of resources!!!

12. Solutions ? Expenditure cuts: a change of the welfare model Tax increases: likely to be costly given the already high taxes + globalization Increase employment: more tax revenue, less expenditures on transfers

13. Challenges II: Services How to maintain a satisfactory level and quality of welfare services? For some core activities it is very difficult to increase productivity – human relations are involved

14. Higher living standard = increased demand for services Increased material well-being: basic needs are satisfied Increased focus and demand for services, e.g. health New possibilities = new demands

15. Public finances – systematic deficits primary balance in % of GDP -6,0 -5,0 -4,0 -3,0 -2,0 -1,0 0,0 1,0 20102012 2014 20162018 2020 20222024 2026 20282030 2032 2034 20362038 2040 20422044 2046 20482050 Baseline: Pure demographics A: Higher productivity growth: +0,5 pa B: A + welfare service growth: 0,25 % pa

16. Challenge III: Globalization Globalization paradox? Support for globalization is very strong (or less strong lobbying for protectionism) Welfare model - most threatened by globalization? Nordic countries have always been open and the welfare state has been developed alongside openness

17. Globalization and taxation Tax base mobility – difficult to tax highly mobile tax bases Most tax revenue accrue from direct and indirect taxation of labour income Need for tax reform, but not a major problem if employment rates can be kept high

18. Globalization - employment Globalization + technology = skill-bias Education becomes increasingly important Not only for the elite but for distributional reasons (to prevent a large supply of unskilled)

19. Migration and the welfare state Immigrants from low income countries = low qualifications High unemployment risk: qualification gap is large High risk of transfer-dependency Qualifications WageSocial safety net

20. Employment gap for immigrants from low income countries

21. Policy challenges How to ensure a high employment rate –Ageing/Longevity –Skill-bias/Qualifications Services: satisfactory supply Migration: how to square the model with open borders