Photo: Steffen A. Frost

First, there was the initial impact with the subsequent contagion of the financial crisis spreading to the real economy, which resulted in reduced contributions and social security funds experiencing negative investment returns. Second, social security systems were compelled to respond by strengthening and extending programmes, in response to increased needs and also to soften the impact of the recession. This meant delving deeper into reserves fund or incurring more debt. And now we are beginning to see the emergence of a third phase, as countries attempt to address their budget deficits by cutting back on social security spending.

Many countries are now feeling the budgetary pressure caused by the crisis and recognize the need to scale down their interventions in order to rebalance budgets and stabilize public debt. The recent pronouncements of the Greek government are one example, as the country seeks to reduce its public deficit from the current 12 per cent to less than 3 per cent by 2013. To achieve this, the Greek prime minister announced in December 2009 that his government planned a 10 per cent cut in both social security spending and government operating expenditures. This is a response to mounting international pressure over its burden of national debt and its recently-reduced credit rating by key international credit rating agencies.

At the pan-European level there are also concerns that if Greece does not act appropriately, it could destabilize the wider Euro zone. Likewise, Spain has also announced austerity measures, which aim to cut its deficit by 50,000 million euros over the next three years. One aspect of this plan is to raise the retirement age from 65 to 67.

In fact, an earlier precursor to the Greek and Spanish examples can be seen in the Latvian government’s immediate crisis response package, which made cuts in some areas of social security (i.e. significant reductions in pension benefits) in order to prioritize spending and balance its budget. It seems that a trend is emerging and it may only be a matter of time before other countries are obligated to follow suit.

Clearly, governments are faced with a genuine dilemma: They need to keep their deficits as low as possible in order to remain fiscally responsible. However, the social and economic costs of reducing social spending are significant and need to be taken into consideration. Given the continued fall-out from the crisis, such actions could have a major economic and social impact and involve increased human suffering and hardship, spiralling unemployment, lower consumption, reduced social cohesion and even diminished social peace.

However, if governments continue high levels of expenditure they will incur greater interest on their debts and saddle generations to come with a significant debt burden. Furthermore, if social security institutions diminish their fund reserves this will render them less capable of responding to subsequent crises. Again, this scenario would also reduce the capacity of future generations to deal with major shocks/contingencies when and where they arise.

There is a compelling argument that taking preventative action now through continued social spending can be cost-effective in the long term. This argument is particularly pertinent to the labour market crisis. Trying to enable those who have exited the labour market to re-enter productive employment at a later stage can prove extraordinarily difficult and very costly for the public purse. This is a tough lesson gleaned from past crises.

The emergence of a possible fourth phase to the crisis with regard to the financial sustainability of social security systems cannot be excluded, and this centres on the structural challenge imposed by demographic ageing. This challenge might be accentuated if spending on pro-employment measures is reduced. If more people enter the ranks of the long-term dependents and unemployed it can be difficult and costly to re-activate these workers; this is particularly true of older workers.

It seems that governments are faced with a genuine “either-or” dilemma that will not disappear and will only intensify difficulties if left unaddressed. Weighing the exigencies of addressing budgetary concerns and contending with the current crisis, in particular the labour market crisis, is something governments need to consider very carefully.

Sources

The Economist . 21 Jan 2010. Pull the other one: A Greek deficit-reduction plan is greeted sceptically . www.economist.com/world/europe/displaystory.cfm?story_id=15331461

BBC. 8 Dec, 2009.     Greek stocks fall 6% on fears over the country's debt . http://news.bbc.co.uk/2/hi/business/8402406.stm

BBC. 14 Dec, 2009. Greece's government unveils major spending cuts . http://news.bbc.co.uk/2/hi/8411749.stm

BBC. 3 Feb, 2010. Greece unveils austerity programme to cut deficit . http://news.bbc.co.uk/2/hi/europe/8494849.stm

El País . 26 Jan, 2010. El plan de austeridad del Gobierno recortará 50.000 millones en tres años . www.elpais.com/articulo/economia/plan/austeridad/Gobierno/recortara/50000/millones/
anos/elpepueco/20100126elpepieco_7/Tes

El País . 2 Feb, 2010. La patronal europea respalda los planes de España de retrasar la edad de jubilación . www.elpais.com/articulo/economia/patronal/europea/respalda/planes/Espana/retrasar/edad/
jubilacion/elpepueco/20100202elpepueco_12/Tes

ILO’s International Institute for Labour Studies. 2009. World of Work Report 2009 . www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/publication/wcms_118384.pdf

ISSA. 2009. Latvia implements anti-crisis measures . www.issa.int/aiss/Observatory/In-Focus/In-Focus-Social-security-responding-to-the-financial-crisis/Snapshots/Latvia-implements-anti-crisis-measures

Back to snapshots overview >>