In the Financing of Social Protection report published by the Organization for Economic Co-operation and Development (OECD) the other day, the financing of social protection expenditures, which has become a problem all over the world due to the aging of the population, was discussed and new taxes were suggested as a solution.
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According to the report, OECD and European Union countries face increases in retirement, health and long-term care expenses as their populations age. In most countries, labor income, the main source of financing for social protection, is under pressure due to the aging of the population as well as non-standard forms of work. For this reason, many countries are reviewing their financing sources for social protection and looking for broader financing methods.
According to the report, it is predicted that between 2023 and 2045, the ratio of old-age pension expenditures to gross domestic product (GDP) will increase from 8.8 percent to 9.9 percent, with an increase of 1.1 points across the OECD, and from 9.9 to 10.9 percent, with an increase of 1 point across the EU. In the same period, the ratio of health and long-term care expenditures to GDP is estimated to increase from 6.9 percent to 8.4 percent in the OECD with an increase of 1.5 points, and from 8.6 to 9.3 percent in the EU with an increase of 0.7 points.
THE EXPANSION OF FLEXIBLE WORK DECREASES LABOR INCOME
The report emphasized that labor income, the main source base of financing social protection expenditures, is under pressure due to the decline of the working-age population due to low birth rates and the trend towards non-standard forms of employment, including part-time work. It was stated that the decrease in total wages will negatively affect the financing of social protection systems such as retirement, health and long-term care.
According to the OECD report, total social protection expenditures were on average 23 percent of GDP in OECD and EU countries in 2024. Across the OECD, the ratio of pension payments to GDP increased from 5.6 percent in 1980 to 8.1 percent in 2021. The ratio of health expenditures to GDP increased from 4.0 percent to 6.6 percent in the same period.
HALF OF THE FINANCE IS FROM THE GENERAL BUDGET
While social security contributions financed 47 percent of social expenditures across the OECD in 1995, this rate dropped to 43 percent in 2023. In EU countries, employers finance 60 percent of social contributions. however, their share in total financing has decreased by 4 points in the last decade. Employee contributions increased by 2.7 points. Approximately half of social expenditures are financed from the general budget through collected taxes.
THE POPULATION IS AGING, WORKING HOURS ARE DECREASING
If working hours per worker do not increase, total working hours are expected to decrease by approximately 9 percent across the OECD and by 20 percent in the EU by 2060 compared to 2024 due to the aging of the population. This will directly affect total labor income, which is important in financing social protection expenditures.
It is considered that the decrease in total working hours, especially in EU countries, is due to the decrease in the number of full-time employees due to the widespread use of flexible working.
Social security taxes are applied to labor income. The share of labor income in GDP is key to social security financing. It is evaluated that technological development can reduce the labor share by increasing capital efficiency, even if there are no job losses.
INHERITANCE, REAL ESTATE, DIVIDEND, INTEREST AND CAPITAL GAIN TAXES SHOULD BE INCREASED
Without changes in labor supply, wages, or tax policy, total labor income is expected to decline due to a decline in the working-age population. This will lead to a decrease in tax revenues. Approximately half of tax revenues are obtained from labor income. In contrast, capital income may be more resilient because older people have more wealth.
In the OECD report, it was recommended to collect taxes from alternative sources in order to compensate for the deficit resulting from labor taxes to finance social protection expenditures.
The report noted that capital income, including dividends, capital gains and interest, is taxed lower than labor income in most OECD countries, and noted that countries may consider increasing capital income taxes.
Average inheritance amounts are expected to increase due to asset value increases and the decrease in the number of heirs per inheritance due to low fertility. Therefore, it was stated that inheritance taxes could play a greater role in the tax structure of countries.
The report noted that real estate taxes are underutilized in many countries and stated that higher property tax revenues could help local governments meet spending pressures. It was evaluated that this tax would also contribute to the financing of long-term care services, which are expected to increase with the aging of the population in some countries.
