Welfare state and social Europe

Jonathan Gruber, Ohto Kanninen, Terhi Ravaska, 22 November 2020

Fiscal sustainability challenges have prompted governments to restructure public pension systems, including the focal retirement ages. This column shows that relabelling ‘early’ and ‘normal’ retirement ages in a 2005 reform in Finland changed people’s retirement rate. Such relabelling allows policymakers to shape retirement behaviour with little fiscal cost. However, there is a marginal increase in regret among those who responded to the change in retirement ages, suggesting a potential source of welfare loss from inducing excess retirement.

Mariacristina De Nardi, Giulio Fella, Marike Knoef, Gonzalo Paz-Pardo, Raun van Ooijen, 06 November 2020

Understanding the source of fluctuations in earnings, and how workers insure themselves against those fluctuations, is key to evaluating labour laws. This column uses administrative data from the Netherlands to compare the role played by households to the tax and transfer system in mitigating shocks to individual earnings. It then compares those findings to data from the US – a country with a substantially smaller welfare state – and finds that hours, not wages, account for most of the variability in earnings for workers in the bottom two deciles of the earnings distribution.

Alex Rees-Jones, John D'Attoma, Amedeo Piolatto, Luca Salvadori, 04 November 2020

While few groups have weathered the Covid-19 crisis unscathed, recent evidence suggests that the damage has been especially extreme among the economically vulnerable. This column evaluates changing attitudes towards welfare spending as a result of the pandemic. The findings suggest that people living in areas most severely hit by the crisis are increasingly supportive of long-term reforms to the welfare system. Despite having access to relatively widespread welfare spending, European citizens are dissatisfied with the safety net systems currently in place. 

Mark Colas, Sebastian Findeisen, Dominik Sachs, 31 October 2020

Need-based financial aid helps underprivileged students in the US attend university. This column combines theoretical and empirical analyses to determine the optimal level of that aid and finds that current aid packages in the US are significantly less need-based than they should be. Not only does need-based financial aid help to reduce inequality, it is also an investment in future tax revenue, making it an optimal subsidy from an efficiency standpoint. In this case, equity and efficiency go hand in hand.

Johannes Fleck, Adrian Monninger, 02 October 2020

Household portfolios in the euro area differ systematically between countries. As a result, ECB policies have asymmetric effects and views on a potential EU financial transaction tax are divergent. This column argues that cross-country variation in portfolio structures is due to variation in country-specific beliefs on social and communal insurance. These beliefs lead to differences in subjective expectations regarding the availability of external support during financial distress. This means that they regulate the extent to which households use their portfolios for self-insurance, as well as their readiness to participate in debt markets.

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