Social spending is falling in some countries, but in many others it remains at historically high levels

OECD, November 2014

In 2014, OECD countries devote more than one-fifth of their economic resources to public social support.

Countries on average spent more on cash benefits (12.3% of GDP) than on social and health services (8.6% of GDP).

Cash income support to the working age population accounts for 4.4% GDP on average across the OECD, of which 1% GDP towards unemployment benefits, 1.8% on disability/sickness benefits, 1.3% on family cash benefits and another 0.4% on other social policy cash supports.

Public expenditure on health is another important social policy area. On average across the OECD, public expenditure on health has increased from 4% in 1980 to 6% of GDP.

In terms of spending, public pension payments constitute the largest social policy area with spending at just below 8% of GDP.

In the United States public social spending is relatively low, but total social spending is the second highest in the world

Thus far, the discussion focussed on public social spending on cash benefits and social and health services, and in the United States and other non-European OECD countries such spending is lower than in most European countries. However, a focus on public budgets misses two important features that affect social spending totals and international comparisons of social expenditure: 1) private social expenditure and 2) the impact of tax systems.

Private social expenditure

Private social expenditure concerns social benefits delivered through the private sector (not transfers between individuals) which involve an element of compulsion and/or inter-personal redistribution, for example through the pooling of contributions and risk sharing in terms of health and longevity. Pensions constitute an important part of both public and private social expenditure. Private pension payments can derive from mandatory and voluntary employer-based (sometimes occupational and industry wide) programmes (e.g. in the Netherlands or the United Kingdom), or tax-supported individual pension plans (e.g., individual retirement accounts in the United States).

Individual out-of-pocket spending on health services is not regarded as social spending, but many private health insurance plans across the OECD involve pooling of contributions and risk sharing across the insured population. On average across the OECD, such private social health expenditure amounted to 0.6% of GDP in 2012. It was 1.5% of GDP in France and 2.5% of GDP in Chile, but across OECD countries private health insurance is most important in the United States where it amounted to 5.7% of GDP. Taken together with public spending on health amounting to 8% of GDP in the same year, and the value of revenue foregone on tax breaks on health premiums (just over 0.5% of GDP), total social health spending in the United States amounted to over 14% of GDP – 4 percentage points higher than in France which is the second biggest “health spender” among OECD countries.

Private social spending plays the most important role in the United States where it amounted to almost 11% of GDP.

Cross-country rankings

The combination of small “net tax effects” and considerable private social spending ensures that Australia, Canada, Japan and in particular the United States move up the international social spending ladder. As private social spending (including health) is so much larger in the United States compared with other countries, its inclusion moves the United States from 23rd in the ranking of the gross public social spending to 2nd place when comparing net total social spending across countries.

http://www.oecd.org/els/soc/OECD2014-Social-Expenditure-Update-Nov2014-8pages.pdf

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Comment:

By Don McCanne, MD

The character of a nation is determined by support of its social programs. Medicare and Social Security are two social insurance programs that are revered by U.S. citizens. Yet those programs, combined with other public social programs, leave us ranked only 23rd amongst OCED nations. It is our unique private social spending programs that move us from 23rd to 2nd place.

At almost 11% of our GDP, private social spending was by far the highest in the United States, as compared to other nations. Contributing to this are our private pension plans (5% of GDP) and especially spending on private health insurance (5.7% of GDP). In fact, our total public and private social spending on health care (private insurance @ 5.7%, public spending @ 8%, and tax breaks on health premiums @ 0.5%) amount to 14% of GDP, making us by far the biggest health spender of all nations.

Is it wise for us to rely so heavily on private social spending? First of all, administration of private retirement accounts is much more expensive and complex than administration of our Social Security system, and administration of private health insurance plans is also much more expensive and complex than is administration of Medicare. We are wasting private social funds on these inefficient intermediaries.

But more than that, as a percentage of income, contributions to private retirement accounts and private health insurance are regressive. For comparable benefits, lower-income individuals pay a higher percentage of their incomes for private pensions and private health insurance than do higher-income individuals. The fact that we rely much more heavily on private social spending demonstrates how inegalitarian the United States has become, in contrast to other nations.

Imagine folding the benefits of individual retirement accounts into Social Security and folding the benefits of private health insurance plans into Medicare, and then fund both programs with equitable progressive taxes. We would have the finest retirement and health programs in the world.

Tomorrow – Thanksgiving – we can give thanks for having the wisdom to do that as a nation (or did I get something wrong here?).