Crisis and Austerity: A Painful Watershed for the Greek Welfare State?on 8 November 2013
By Maria Petmesidou
Since the eruption of the sovereign debt, Greece has been in a deep and prolonged economic crisis. GDP has shrunk by one fourth, and continues contracting for a sixth consecutive year. For the first time since the early 1960s, the labour force is less than the inactive population. Net closures of businesses hit record levels (about 150,000 since 2009), and unemployment soared (27.6% in mid 2013; youth unemployment 60%). Even the more optimistic forecasts for a positive growth next year (about 0.6%) continue to project a very anaemic trend over the longer term, fuelling scenarios about protracted austerity.
Has the welfare state contributed to the crisis?
An often expressed argument is that rising social spending contributed to the crisis, as though the Greek welfare state grew to a level that the country could not afford. Over the last three decades, spending rapidly increased, and surely profligate borrowing by successive governments (combined with EU funding flowing into the country) significantly boosted expenses.
However, Greece started from a very low social-spending level in the early 1980s (about 12% of GDP). Despite a remarkable rise in social expenditure over the 1990s and 2000s, per capita social spending remained below 80% of the EU-15 average, while GDP per capita almost converged to the corresponding EU-15 average before the eruption of the crisis. The country thus actually underspent in social protection in terms of its wealth. The welfare state remained weak and poorly funded. Comparatively low state revenues, regressive fiscal policies, and widespread tax fraud and avoidance, particularly among high income groups, contributed to this.
A hybrid social protection system, combining different organizing principles in major policy areas (social security, health and social care) persisted for a long time. On the eve of the crisis, social insurance was highly fragmented. A divide between social groups that could secure a continuous working career in the formal labour market and those precariously employed in the informal economy was prevalent. Deep inequalities in terms of funding, scope and level of provisions characterized also the about 130 social insurance funds covering those employed in the formal sector. The establishment of a national health system in 1981 marked a shift towards “universalist” principles. But the reform remained incomplete, as inequalities in coverage among social groups were sustained and private health spending remained high (about 40% of total health expenditure). As to social assistance and social care, these are chronically ailing policy areas. The family has traditionally been the main provider of care and support, though the crisis greatly squeezed resources. Overall, compared to northwest Europe, expansion of social rights has taken place in a much shorter time period, and consolidation of new institutions (e.g. the NHS) has been weaker.
Is austerity removing social protection in an irreversible way?
Rationalising a fragmented and polarized social protection system has long been overdue. The crisis brought reform to the top of the agenda of the “rescue deal” that Greece signed with its international lenders. The issue at stake is whether the prevailing fiscal consolidation will be balanced with reform measures redressing inequalities. Or, instead, austerity will dismantle social rights and drive welfare standards to the lowest common denominator.
In 2010, a ground breaking reform replaced the fragmented public social insurance with a unified, multi-tier system. This consists of a flat-rate, basic state pension (set at €360, but which can be further reduced depending on the state of public finances) and a second-tier benefit linked to contributions paid during a person’s working life (calculated on the basis of drastically reduced replacements rates), on top of which private savings need to be added. According to the Labour Institute of the General Confederation of Greek Trade Unions, when the new regulations will come into force (from 2015 onwards) public pension benefits will progressively be reduced by half. The state pension itself will no longer contribute to alleviating poverty among a significant number of pensioners, while unequal access to private insurance will deeply exacerbate income polarization among future retirees.
Over the last three years, successive rounds of drastic cuts (up to 40%-50% for certain categories of pensioners), compounded by a tax raid that disproportionally hit middle to lower pension incomes, severely affected current retirees too. Government rhetoric “frames” brutal cuts as system modernization for securing sustainability and distributional justice. Yet issues of fairness and benefit adequacy for maintaining living standards in old-age are completely missing from the reform agenda (as are also any projections of the effects of the ongoing reforms on poverty). Noticeably, the poverty reduction trend among the elderly during the previous decades has been reversed (30% of elderly women lived in poverty in 2011). Most importantly, pension sustainability is questioned too. The social funds’ revenues have been severely strained by steeply falling wages and salaries, galloping unemployment and inability of the self-employed and small businesses to continue paying contributions. But above all, a devastating blow to social insurance was dealt by the government’s decision to include the social insurance funds in the private sector “haircut” of bondholdings (of March 2012). A large part of the funds reserves are by law invested in government bonds, and their inclusion into the “haircut” led to over 50% losses. Needless to say, these conditions undermine actuarial valuations guiding current reforms. Benefits will thus be driven further downwards, throwing ever more pensioners into poverty.
Achieving fiscal balance at any cost has been the overriding aim in health care too. This is reflected in an impressive cost-containment. From 2009 to 2013 public health care spending was halved. Cost savings in hospital care, procurement and pharmaceutical policies are linked with higher fees and co-payments, and rapid rolling back of public provision. The effects on equity, quality and health outcome are rather grim. There are over 2 million uninsured, and unmet medical needs have sharply increased. Statistics show a rise in infant mortality, mental disorders, cardiovascular diseases, unhealthy practices (like alcohol and drugs addiction), HIV incidence, and the suicide rate. The human cost of austerity is still not fully visible but a perilous future of an eruption of expensive morbidity (and a humanitarian crisis) is highly likely. Strikingly this will cause a boomerang effect on system sustainability that is the flagship of the reform.
Is destructive austerity in the crisis-ridden countries testing the limits to social sustainability in Europe?
The verdict may still be out. Yet available data show that over a quarter of all EU population live in conditions of poverty and social exclusion (including close to one third of children); between 30% to 40% of EU citizens find it difficult to afford general health and long-term care as stressed in a report of the EU Social Protection Committee a year ago; and “de facto” privatization is expanding in Europe (through increasing fees for health and social care services, co-payments and private insurance). In a similar vein, a recent publication brings evidence from policy developments across Europe to bear upon the argument for a system of governance gaining acceptance and which, in the absence of political union in the EU, seeks crisis management and adjustment through the rolling back of social and labour rights. And, indeed, Greece is the “archetype” in this respect.
Maria Petmesidou is Professor of Social Policy at the Department of Social Administration and Political Science of Democritus University of Thrace, Greece. For more detailed data on the arguments presented here see her recent lecture at the Hellenic Observatory.
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