Traditional welfare states facing harsh fiscal reality

Traditional welfare states facing harsh fiscal reality. January. 25, 2011 09:56. viyonz@donga.com tesomiom@donga.com.

Traditional welfare states such as countries in Northern Europe and Japan are seeing a shift in their welfare paradigms, changing the focus of “cradle to grave” benefits of universalism and solidarity to one geared toward individual and market interests.

In other words, universal welfare is shifting to selective welfare in stark contrast to pledges of free medical services and childcare championed by Korea’s opposition political parties and progressive groups.

The harsh economic reality has prompted welfare states to shift their policy. With the global economy slowing and population rapidly aging, healthcare and pension systems that had been adopted in the age of high growth and birth rates pose a burden to national fiscal health.

Introducing social welfare is easy but taking it away is tough. French President Nicholas Sarkozy incited massive demonstrations when he raised the retirement age to 62 from 60 and the age when pension benefits begin to 67 from 65. France started implementing this system on Jan. 10 this year.

Greece, Spain and Italy suffered fiscal crises last year that threatened to spread to all of Europe. Their sovereign debt crises even gave rise to the term “PIIGS,” or Portugal, Italy, Ireland, Greece and Spain.

The direct cause of the debt crises was the global financial crisis, but experts say the more fundamental problem was a radical shift to universal welfare, a system which the economies could not bear.

The easygoing attitude of politicians and populism aggravated the situation. A welfare system that prompted a nation give more to its people than it received desperately needed drastic surgery, but for fear of or due to public resistance, politicians chose to retain the status quo.

Greece, where 23 percent of the population or 2.6 million people relies on pension, was doomed to face a fiscal crisis. It had to reduce pension payments an average of 7 percent despite strong public opposition.

Spain also abolished payments for births and raised its retirement age.

Countries that succeeded early on in welfare reform aggressively pushed forward change even if it meant sacrificing the government in power. The administration leading the reform was ultimately brought down and the results materialized under the following administration.

Longtime welfare state Sweden embarked on pension reform in 1985 and passed a new pension law in 1998. The basic pension amount for a senior citizen, which had been provided regardless of insurance payments, was reduced, while a new system determined pension amount according to income.

The Swedish administration that led this reform lost in the general elections in the early 1990s.

Welfare is one of the most sensitive matters in politics. The key to good welfare is to ensure a smooth and sound connection of the current generation to the next, and the biggest enemy of a good welfare system is politicians who seek immediate gains.