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Economic Issues 2019: Dealing with labour shortages and financing social protection systems

The Institute of Macroeconomic Analysis and Development has published its annual publication Economic Issues. This year we have focused on two challenges that already have a significant impact on our society today. In the future, they will affect it even more and therefore require concerted action across a range of different policy areas. These challenges are (I) tackling labour shortages, the issue that we have also addressed in a debate, and (ii) financing social protection systems. We also give an overview of developments in the area of public finances. In the following paragraphs we summarise the main findings of the analysis on the financing of social protection systems.

Projections of age-related expenditure indicate that we can expect an increase in expenditure on social protection (pensions, health and long-term care) in the coming decades, under a non-policy change scenario, and a gap with sources of finance. This is particularly true for systems financed from contributions of the employed population, which is shrinking as a result of demographic change, as is also the case in Slovenia. To ensure the functioning and sustainability of social protection systems, they will have to be reformed as soon as possible, which will require adjustments and response of several public policies on both the revenue and expenditure side. 

Social contributions of the working population, the main source of funding for social protection expenditure in Slovenia, are already insufficient to cover all expenditure. Owing to demographic and technological changes (robotisation, automation), which are affecting the labour market, the problem of financing social protection expenditure is expected to deepen in the future. Additional pressure on social protection systems will be exerted by non-standard forms of employment, which are associated with lower payments into social insurance systems. To be able to meet the rising demand, measures for reducing the gap will therefore be required – both measures that will slow social protection expenditure growth and measures that will offset the loss of revenue from social contributions.

In the area of the pension system, longer life expectancy and smaller generations entering the labour market undermine the fiscal sustainability of pay-as-you-go systems with defined benefits, as in Slovenia. The main measure in this area is postponing retirement and introducing automatic mechanisms to adjust key pension parameters (the retirement age, pension level, sources of funding) to demographic change and increase the sustainability of the system. Reforms to improve financial sustainability are, however, also associated with a risk of deteriorating the material situation of pensioners. To alleviate the pressure on public finances and maintain the adequacy of pensions, countries are therefore introducing supplementary pension insurance systems. For Slovenia it will also be essential to encourage supplementary insurance in the future, as it has the lowest participation of the population in individual supplementary pension insurance schemes.

In the health area, countries have taken more varied approaches to bridging the gap between sources of finance and expenditure than in adapting the pension system. Measures do not belong strictly in the area of health and therefore require formulation of inter-sectoral policies. The revenue-expenditure gap could be reduced by measures towards improving the health of the population and promoting active and healthy ageing, increasing the efficiency of the systems on both the supply and demand side, and changing the sources of health system financing. A common feature of changes in health care financing arrangements across countries is broadening the revenue base by extending contributions to non-wage income and to revenues that are less dependent on business cycle fluctuations. 

Slovenia has adopted several permanent measures to increase public sources of health financing in the recent period. The additional public funds have mitigated primarily the cyclical shortfall in social contributions during the crisis, so that public expenditure on health as a share of GDP has remained at the level recorded a decade ago. However, it will be necessary to think about sources of funding that will offset the decline in social contributions related to demographic change. An overview of experiences of other countries and analyses from this area point to the need for greater inclusion of tax sources.

In some advanced countries, long-term care has already been recognised as a new branch of social protection for a long time. In international comparisons Slovenia lags behind not only in public expenditure on long-term care, but also in the share of long-term care services at home, the dominant type of care in the most developed countries. EU countries have undertaken systemic regulation in this area in different ways, depending on the level of development of their long-term care systems, economic development and the traditional role of the family. Some of them thus have universal LTC coverage and budgetary financing (most Nordic countries), while others have compulsory social insurance for long-term care (for example Germany, Belgium and Luxembourg). However, given the decline in the working-age population, these countries will also have to consider financing long-term care by general taxes.  
According to the latest draft act on long-term care from 2017, the aim of establishing a single long-term care system in Slovenia is pooling the existing public sources into a new social insurance system for long-term care and securing additional public funds. Although the draft act represents a step towards establishing a single long-term care system, some analyses point to some of its key parts where further reflection will be needed from the aspect of financing, particularly regarding the actual scope of additional sources, the consideration of demographic changes and the ratio of public to private sources for financing long-term care.