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Nordic Model Prospects: Achievements, Challenges, and Future Directions

This paper explores the Nordic model's achievements, notably its universal rights and comprehensive welfare services, contrasted with challenges such as aging populations, globalization impacts, and tax burdens. It highlights the need for high labor force participation and the implications of demographic shifts on welfare sustainability. Key challenges addressed include maintaining quality services amidst rising demand, managing immigration and employment, and responding to global economic pressures. Solutions such as tax reforms and productivity enhancements are discussed to secure the model's future viability.

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Nordic Model Prospects: Achievements, Challenges, and Future Directions

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  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. 15 10 5 0 0 32-36 42-46 52-56 62-66 72-76 82-86 92-96 12-16 22-26 2-6 -5 -10 -15 -20 -25 -30 Average age dependent net-contributions: The social contract 1.000 euros

  5. The social contract in Sweden 200000 100000 0 0--5 10--15 20--25 30--35 40--45 50--55 60--65 70--75 80--85 90--95 -100000 -200000 -300000 -400000 -500000 1930-1934 1950-1954 1970-1974 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 80 70 60 50 % 40 30 20 10 0 2018 2024 2030 2036 2012 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006

  10. Primary balance projection 2010-2050 1 0 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 2049 -1 For given arrangements – not including any new initiatives -2 % of GDP -3 -4 -5

  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. 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 Challenges II: Services

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

  15. Public finances – systematic deficitsprimary balance in % of GDP 1,0 0,0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 -1,0 -2,0 A: Higher productivity growth: +0,5 pa -3,0 Baseline: Pure demographics -4,0 -5,0 B: A + welfare service growth: 0,25 % pa -6,0

  16. Challenge III: GlobalizationGlobalization 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 Wage Social 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

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