This chapter summarises the key contributions and findings of the research presented in this report that studies how different welfare state regimes address the challenges of population ageing. We performed projection analyses applying the dynamic microsimulation model microWELT. microWELT is designed to investigate both sustainability issues and income redistribution at intra and intergenerational levels along the lifecycle.

The simulation analysis covers four countries (Austria, Finland, the United Kingdom and Spain), representing the four different welfare state models in Europe. Represented regimes are the conservative (Continental); the social democratic or universal (Nordic); the liberal (Anglo-Saxon); and, the Mediterranean welfare state regime having a more extended role of the family. Given its relevance to economic redistribution, the socioeconomic analysis emphasises education, which affects young adults’ economic emancipation, fertility, partnership formation, and mortality patterns of individuals.

microWELT, (fully documented in Chapter 1) incorporates the National Transfer Accounts (NTA) project’s accounting logic, which extends the National Accounts to incorporate the inter-age resource reallocations, also adding an estimation of private transfers. As a result, the model accounts for all the resource reallocations occurring along the lifecycle, through the welfare state (taxes paid and transfers received), the private sphere (intra and interfamily transfers) or the market (mainly capital markets).

microWELT also produces sustainability indicators, derived using NTA and intergenerational redistribution measures in the Generational Accounting tradition. Aggregate NTA data, usually detailed by age (and sometimes gender) has been previously used to derive sustainability indicators (see section 2 in Chapter 7). This literature is extended, incorporating newly built disaggregated NTA data (see Chapter 3), differentiating age profiles by the level of education and family status. The corresponding socioeconomic modules are derived after a careful analysis of the currently observed interactions between demographic and economic variables and the welfare state types (see Chapter 2). Specifically, the following potential links between socioeconomic status and the different welfare state regimes are identified: (1) the intergenerational transmission of education; (2) childlessness and fertility by education levels; (3) partnership behaviours and single parenthood; (4) age at leaving home; and (5) the mortality differentials by sex and education. microWELT projections incorporate these processes’ impacts on the future population composition by age, sex, education, and family characteristics of the studied countries.

Significant differences arise among the countries analysed. Regarding the intergenerational transmission of education, Finland stands out as the country where young people have the most universal education opportunities, one of the main characteristics of the Nordic welfare state regime. However, the educational expansion is almost completed in this country, allowing few additional benefits in our projection. The opposite occurs in Austria, with a lower share of the population with high (tertiary) education; and especially Spain, which still shows a high level of low educated people and a smaller share with medium education. Concerning fertility, the UK has the highest fertility rate and the lowest level of childless women. This was also the case in Finland, though fertility has fallen sharply in recent years. Finland has also experienced a reversal in the education gradient of childless women.

In contrast, Austria and especially Spain, show low fertility rates. As a result, the ageing prospects shown in the data are the strongest in Spain and milder in the UK. Spain also stands out because of its late economic emancipation of young people, who are more dependent on the family, data being coherent with the Mediterranean welfare regime. Finally, Finland has the benefit and the burden of having the largest sized welfare state transfers and taxes, the opposite being the UK case, where transfer and taxes are the lowest among the countries studied.

Sustainability Indicators

A variety of indicators based on aggregated NTA data combined with population projections was developed in the literature. Two were selected for this analysis: the Support Ratio (SR) and the Impact Index (IMP). The economic Support Ratio was introduced to overcome the shortcomings of a pure demographic measure of economic dependency, based entirely on age. It was claimed that applying age profiles with economic content (labour income and consumption) as observed today can give a more realistic outlook of the economic burden of ageing. For European countries, the economic Support Ratio shows more severe effects of ageing than the pure demographic indicators.

However, SRs obtained from disaggregated NTA data give a distinct - and more optimistic - picture of the economic effects of population ageing. In the four countries analysed, the Support Ratio accounting for composition effects (mainly due to education) stays above the purely demographic measure. The difference is particularly high in Spain, which has the strongest demographic ageing process, but also considerable educational improvements. At the other extreme is the UK, with its demography less affected by the ageing process. In the UK it is less the expected size of education improvements, but the higher labour income differentials by education – together with the liberal regime’s focus on poverty prevention – which alleviate the economic effects of ageing.

The Impact Index complements the analysis based on the Support Ratio, by measuring the gap between income available for consumption – assuming a constant age-specific saving rate – and initial consumption standards. It also adds a simple economic model to the calculation of the burden of ageing. It introduces wage and interest rate reactions. Again, when basing the Impact Index on disaggregated NTA, results change considerably.

Welfare state regimes and intra and intergenerational income redistribution along the lifecycle

microWELT is also capable of analysing the impact of the welfare state regimes on the intra and intergenerational income redistribution, by computing the net present value of public and private lifetime transfers (net of taxes) by education and parenthood status. Based on the analysis, public transfers are shown to be highly redistributive among different educational groups – low and medium educated being net receivers of public transfers, whereas high educated are net payers. The differences between low and high-educated individuals are more pronounced in Austria and the UK. In the UK, net public transfers for low educated are substantially higher, especially for parents, which follows the literature explaining that in liberal countries, the state mainly takes care of low-income individuals. Private transfers are highest in Spain, which results from the extended role of the family emphasised in the Mediterranean welfare regime. Higher educated childless individuals in the UK receive the highest private transfers, which is explained by the lower coverage of public higher education and the higher private cost of education.

Presenting results by parenthood status and education, but not distinguishing by gender, individuals of all groups are net receivers of private transfers over their whole life cycle. This holds for all the countries, whatever the level of education and parenthood status. This result is partly attributable to the discount effect in computing the present value: individuals are net receivers of private transfers in young ages and net givers during older ages, later transfers being discounted at a greater extent. On the other hand, net private transfers are higher for non-parents in all the countries, independently of their education level. This is mainly explained by the higher amount of private transfers that parents give when raising their kids.

The question arises as to whether, as a result of the welfare state policies, lower net private transfers for parents are at least partially compensated by higher public transfers received by parents. The difference between parents and non-parents could result from family tax deductions, higher family transfers, lower labour market participation rates, among other factors. However, this only holds for low and medium educated. In Spain, Finland and the UK, highly educated parents are net payers of public transfers at a greater extent than non-parents. The difference between high-educated parents and non-parents is particularly high in Spain, emphasising the lack of redistributive family policies for the higher educated. In most cases, parents’ higher public net transfers are not enough to compensate for the lower net private transfers. The exceptions are the low-educated in the UK (they receive much higher total transfers) and the low and medium-educated in Austria (where parents and non-parents receive practically the same, public policy compensating fully for differences in private transfers.

This report identifies several features of the welfare state that foster sustainability, such as education improvements. The redistribution analysis reveals the importance of the interplay between family and public transfers to reduce inequality, although further research is needed in this direction. The introduction of additional countries in the projection will bolster the data collection and analysis for drawing more conclusive results regarding the welfare state regimes and drive more clear-cut lessons for national and EU-wide policy reforms.