Sizing up Welfare States: How do OECD countries compare? (2024)

5 minute read

By Willem Adema (Willem.ADEMA@oecd.org), Pauline Fron (Pauline.FRON@oecd.org) and Maxime Ladaique (Maxime.LADAIQUE@oecd.org), Directorate for Employment, Labour and Social Affairs (OECD)

In many OECD countries, Welfare States have expanded from a rudimentary base 60 years ago to the more comprehensive systems we see today. Public social expenditure amounted to less than 10% of GDP in 1960 but has more than doubled to just over 20% on average across the OECD since, and two/thirds of public social spending goes towards pensions and health services.

At over 30% of GDP in 2022, France and Italy have the highest level of public social expenditure, while it is less than 15% of GDP in Costa Rica, Ireland, Korea, Mexico and Türkiye. At 3.1% of GDP on average across the OECD, private social spending is much smaller than public spending, but is above 10% of GDP in the Netherlands, Switzerland and the United States.

The rise and fall of social spending during COVID-19

The latest update of the OECD Social Expenditure Database (SOCX), released 26 January 2023, illustrates the rise and fall of gross public social spending with the COVID-19 pandemic. With the outbreak of COVID-19, the average public social spending-to-GDP ratio in the OECD increased by almost 3 percentage points (ppt) from about 20% in 2019 to 23% in 2020 (over 80% of the increase was driven by a rise in spending, the remainder was due to a decline in GDP). In stark contrast to previous crises, spending-to-GDP ratios declined in the aftermath almost as rapidly as they increased at the onset of the pandemic: public social spending fell from the aforementioned 23% in 2020 to an estimated 21% in 2022, on average across the OECD (OECD, 2023_[1]).

Figure1 shows that trends differ markedly across countries. Between 2019 and 2020, Canada (6.9 ppts), Spain (6.5 ppts) and the United States (6 ppts) recorded the largest increases in the public social spending-to-GDP ratio. On average across the OECD, the increase in public social spending in 2020 was largely related to higher public spending on health (+0.9% ppt), unemployment (+0.8% ppt), active labour market programmes (+0.4% ppt) and income-related cash payments in response to the outbreak of the COVID-19 pandemic. In most countries, social spending declined in 2021, and by 2022, spending-to-GDP ratios had fallen compared to the peak of 2020 in all countries except Korea and Latvia. In fact, in Estonia, Denmark, Finland, Greece, Hungary, Norway and Sweden, the 2022 estimated public spending-to-GDP ratio was below the 2019 ratio.

Pensions and Health are the main areas of public social spending

Across the OECD, old-age and survivor pension payments (7.7% of GDP) and health (5.8% of GDP) are the largest areas of public social spending. At over 15% of GDP, public pension spending is highest in Greece and Italy while Chile, Iceland, Korea and Mexico spent around 3% of GDP on pensions in 2019. In France, Germany, Japan, and the United States, public expenditure on health is over 8% of GDP, while it is less than 3% of GDP in Mexico, the Netherlands and Switzerland (Figure2). These public spending differences relate to a number of factors including the age structure of populations. For example the Mexican population is on average much younger than the Italian one. The amount of public spending is also determined by the nature of health and pension systems – i.e., the generosity of systems and the extent to which countries make use of private health – and pension insurance plans (e.g. in many OECD countries, like Netherlands and Switzerland, health insurance is compulsory but operated by private agencies).

“Other social spending” (6.5% of GDP) is a mixture of income support to the working-age population and social services other than health. Income support includes public spending worth 1.6% of GDP on sickness and disability cash payments, 1.1% on family cash benefits and 0.6% on unemployment benefits. Spending on social services other than health accounted for around 2.3% of GDP, of which almost 1% was family services – mostly Early Childhood Education and Care services for children aged 0-5 inclusive. Public spending on services for the elderly and disabled was just below 1% of GDP, with this spending being typically highest in Nordic Countries.

Private social expenditure and the influence of the tax system

To present a more complete picture of social spending, it is important to account for private social arrangements and the influence of tax systems. Private social expenditure concerns social benefits delivered through the private sector (not including transfers between individuals) which involve an element of compulsion and/or inter-personal redistribution, for example, through pooling contributions and risk sharing to cover health and longevity risks, or fiscal support for taking out social protection coverage, e.g. a pension plan. Private social expenditure plays an important role in many economies, making up 3.1% of GDP in 2019 on average across the OECD. In the Netherlands, Switzerland and the United States where private health insurance and pension plans are prevalent, private social expenditure accounts for around 11-13% of GDP.

Tax systems influence public and private social spending in different ways (for more detail see (OECD, 2023_[3])). Governments often levy direct income tax and social security contributions on cash transfers to beneficiaries, and also levy indirect taxation on consumption out of benefit income. In this way, governments recoup part of social spending. This effect is largest in Denmark at 7.2% of GDP, and smallest in non-European OECD countries.

At the same time, countries can use the tax systems to provide Tax Breaks with a Social Purpose (TBSPs) to deliver social support either in the form of tax credits, e.g. tax credits for dependent children, or to encourage employers and/or individuals to organise private insurance for their employees or themselves. The value of such TBSPs is largest in the United States at just under 2% of GDP, of which over half is towards employer contributions to medical insurance.

Taking public and private social expenditure together and accounting for the effect of tax systems allows a comparison of gross (before tax) public social spending and net (after tax) total social expenditure (Figure3). France is the biggest social spender according to both gross public and net total social expenditure indicators. The most notable divergence in ranking is in the United States, where private social spending and the value of TBSPs are higher than elsewhere, moving the United States from 23rd place in the international comparison of gross public social spending to 2nd place in net total social spending.

However, a higher ranking in total net social spending does not necessary contribute to more equal outcomes. Tax advantages often benefit high-income workers more than those on low incomes (certainly when tax breaks are not paid in cash to those with limited or no tax liabilities), and low-income workers often do not have access to private social benefits.

References

• Adema,W. and P.Fron (2019), The OECD SOCX Manual 2019 Edition A guide to the OECD Social Expenditure Database, OECD, Paris, https://www.oecd.org/social/soc/SOCX_Manuel_2019.pdf (accessed on 16December2022). [2]
• OECD (2023), Social Expenditure (SOCX) Update 2023: Private social expenditure and the influence of tax systems, http://www.oecd.org/social/expenditure.htm. [3]
• OECD (2023), Social Expenditure (SOCX) Update 2023: The rise and fall of public social spending with the outbreak of the COVID-19 pandemic, http://www.oecd.org/social/expenditure.htm. [1]
• OECD (2017), A Decade of Social Protection Development in Selected Asian Countries, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264272262-en. [4]

Related