Your Good Health! Competition and Contribution for better healthcare and pensions

Matthias Dauns

Friday 27th March 2015: Britain’s health service has become a central issue in the UK’s coming election. However, the UK is not alone in the priority it gives healthcare and pensions. Across western economies, as governments prepare the budget for the coming financial year, they have one question in common. How can the economic priorities of growth, and fiscal reform, be accommodated to the demands by ageing populations for more healthcare and pensions? Here, Matthias Dauns a senior economist from Germany’s Finance Ministry, explains some of the principles which guide successful systems.

As demand for healthcare and pensions rises with increasing life expectancy and higher proportion of retired to working age people, the design of social security systems will become ever more important. Not only must the constraints of the public finances be accommodated, but so too must countries’ wider economic aims, including economic growth. For all of these reasons, effective and efficient social security systems will be central as policy makers and societies tackle the challenge of paying for the future.

In our new Politeia study, Paying for the Future: Working Systems for Pensions and Healthcare, we consider the evidence for financing a variety of different health and pension schemes – exploring the principles and policies on which successful systems are built and why. We focus on the structures most commonly used, contributory, tax-based and mixed and the distinction between Bismarck (contributory) and Beveridge (tax-financed) types.

The aim is to establish which working systems are fiscally sustainable, cost-efficient and effective in meeting social goals while also supporting growth and employment. Because current demographic trends and their projected costs continue to be upward in industrialized countries, pensions and healthcare will account for a major, strongly growing proportion of public expenditure.

The evidence tells an interesting story. There are differences in the levels of expenditure which reflect the design of systems, their economic basis and how they are financed. In terms of overall GDP, tax based systems for both healthcare and pensions tend to be cheaper because governments can control expenditure better. Contributory and mixed systems are more expensive – often cross-financed with public subsidy, weakening cost containment. Other measures matter and should be taken into account. Tax based systems tend to be more compatible with high employment even during old age. Contributory and mixed systems, however, tend to perform better and more strongly: they provide more generous pensions and better health services with more successful outcomes.

What then are the principles to guide policy for a successful and affordable future?

The evidence shows that systems should be transparent; they should aim for purity; and they should be built on structures which help contain costs while improving performance. In particular, they should allow for competition amongst providers, contributions or top-up payments by users and have reasonable benefits packages. And, because in our societies it’s vital that productive employment continues for longer if systems are to be afforded and viable, then labour market reform is key, and especially linking employment to an incentivised social security systems that encourages longer working lives.

So what will be the key to success for the future?

Systems should reform how they are financed, how they are provided, and how the labour market operates. Contributory systems should be pure and tax financed systems should be limited to allow for private insurance top ups. There must be scope for competition too – for competing providers and competing insurers to bring efficiency. And there should also be scope for individual contributions for both healthcare and private pillar pensions.

*Matthias Dauns is Senior Economist at Germany’s Federal Ministry of Finance and co-author of Politeia’s publication Paying for the Future: Working Systems for Pensions and Healthcare.