Title page 1

Contents 5

Foreword 4

Executive summary 7

1. A stocktaking of current financing mixes in social protection systems 10

1.1. Introduction 11

1.2. What are the most sizable areas of social spending? 11

1.3. Social spending trends 15

1.3.1. Social spending contracted quickly after the strong increase during COVID-19 pandemic, but has lately somewhat rebounded 15

1.3.2. Private social expenditure is a small share of overall expenditure in most EU countries 16

1.4. Social protection financing mixes 18

1.4.1. Funding mixes vary widely across countries 19

1.4.2. The share of SSCs in social spending has only declined slightly 20

1.4.3. Earmarking 22

1.5. Social contributions by source 23

1.6. Financing mixes by function 24

Annex 1.A. Additional Statistics 29

References 31

Notes 34

2. Social protection financing and non-standard forms of work 36

2.1. Introduction 37

2.2. Social protection financing and self-employment 37

2.2.1. The self-employed are less likely to be statutorily covered by social protection 37

2.2.2. Participation in voluntary schemes tends to be low 40

2.2.3. The self-employed are overrepresented at the bottom earnings distribution, which partly explains low contributions 42

2.2.4. Recent and planned policy reforms to expand coverage for the self-employed 44

2.2.5. Platform work is a small share of total employment 45

2.3. Social protection financing and part-time work 46

2.3.1. One in seven workers works part-time in the EU 47

2.3.2. Part-time workers sometimes do not fully contribute to social protection 48

2.4. Non-standard workers are at higher risk of poverty 49

References 50

Annex 2.A. Additional Statistics 54

Notes 60

3. Securing the Revenue Base for Social Protection 62

3.1. Maximising the labour potential 63

3.1.1. Population ageing will result in fewer hours worked, with a direct effect on total labour income 63

3.1.2. This decline could in principle be compensated by maximising the labour force potential 65

3.1.3. But keeping hours worked constant is unrealistic even with decisive government action 66

3.1.4. The effect of ageing on labour productivity is ambiguous 66

3.2. Trends in the labour income share 66

3.2.1. The labour share has declined from the 1970s to the 1990s, but has been largely stable since then 67

3.2.2. There is no consensus in the literature on the causes of the labour share decline 69

3.2.3. Technological progress could drive down the labour share even if it does not lead to aggregate job losses 70

3.2.4. Policy insights 71

3.3. Diversifying funding sources 71

3.3.1. Ageing will put downward pressure on labour income 71

3.3.2. While capital income may be more stable 72

3.3.3. Tax revenue is set to decline because of population ageing 72

3.3.4. Broadening the taxation of capital income 73

3.3.5. Inheritances are set to increase 75

3.3.6. Inheritance taxes are unpopular 75

3.3.7. Taxes on immovable property are underutilised in many countries 77

3.3.8. Taxes on wealth can play a role in countries where the taxation of capital income and inheritances is low 78

3.4. Strengthening the entitlement - contribution link 78

3.4.1. The link between benefits and contributions can be incomplete even for insurance benefits 78

3.4.2. For some benefits, the rationale for contribution-financing is weaker 79

3.4.3. But financing is often tied to governance 79

3.4.4. Policy insights 80

3.5. Closing contribution gaps in undeclared work 82

3.5.1. Undeclared work remains widespread 82

3.5.2. Undeclared work narrows the financing base of social protection, weakens risk pooling and leaves workers without social protection coverage 83

3.5.3. Overall, the incidence of undeclared work is higher among men, younger workers, the financially constrained and manual workers 83

3.5.4. Undeclared work is more prevalent in small firms 83

3.5.5. Undeclared work may lead to lower wage growth over the life cycle 84

3.5.6. High non-wage labour cost can incentivise undeclared work, but is not the main driver 84

3.5.7. Policy insights 85

3.6. Looking ahead: what are countries doing to rebalance the mix of social protection financing? 86

3.6.1. Several countries are adjusting the financing of their pension systems 86

3.6.2. Several countries are boosting occupational and private pension schemes 86

3.6.3. Another focus area is the financing of in-kind benefits and services 87

References 87

Annex 3.A. Additional Statistics 94

Notes 95

Table 3.1. Government revenue in the EU and the OECD as percentage of total government revenue, 2024 74

Figure 1.1. Old-age, health and disability benefits are the biggest spending items 12

Figure 1.2. Social spending contracted quickly after the strong increase during COVID-19 pandemic, but has lately somewhat rebounded 16

Figure 1.3. Private social expenditure is a small share of overall expenditure in most EU countries 17

Figure 1.4. Funding mixes vary widely across countries 19

Figure 1.5. Social security contributions as a share of GDP have remained stable 21

Figure 1.6. Earmarking of general revenue is relatively rare 22

Figure 1.7. Employer contributions account for over half of all social contributions across the EU 24

Figure 1.8. Old-age and unemployment benefits have a larger share of social contribution financing than family benefits 26

Figure 2.1. Access to unemployment benefits for the self-employed is incomplete in many countries 39

Figure 2.2. Willingness to pay more for social protection is low among the self-employed 42

Figure 2.3. The self-employed are overrepresented at the bottom and top of the earnings distribution 43

Figure 2.4. One in seven workers is part-time in the EU 48

Figure 2.5. Non-standard workers are at higher risk of poverty 50

Figure 3.1. Without significant increases in employment, total hours worked will fall in most countries 64

Figure 3.2. The labour share of income has been relatively stable in recent years 68

Figure 3.3. Tax bases are age dependent 72

Figure 3.4. Inheritance taxes are unpopular, but earmarking may help 76

Figure 3.5. A large share of cash unemployment- and family benefit receipt is non-contributory 81

Boxes 13

Box 1.1. Key Data sources and statistical concepts 13

Box 1.2. The role of collective bargaining in social protection 18

Box 1.3. Estimation of the financing mix of social protection revenue for selected functions 27

Box 2.1. Adverse selection in voluntary social insurance schemes 41

Box 3.1. Accounting changes can influence the labour share 69

Annex Figure 1.A.1. Share of private expenditure as percentage of total social protection expenditure 29

Annex Figure 1.A.2. Share of mandatory and voluntary private spending in overall old age spending in 2021 or latest available year compared to... 29

Annex Figure 1.A.3. Public social spending by social security contributions and general revenue funding in the EU22 30

Annex Figure 1.A.4. The share of SSCs in public social expenditure in selected countries 30

Annex Figure 2.A.1. Self-employment as a share of total employment, 1996 and 2024 or nearest available year 54

Annex Figure 2.A.2. Willingness to pay more for social protection among dependent employees 55

Annex Figure 2.A.3. Self-employed women account for 16% of the bottom decile of the earnings distribution 56

Annex Figure 2.A.4. The self-employed as a share of all workers, by wage / earnings quintile and country, in per cent, 2024 57

Annex Figure 2.A.5. Average annual hours worked per worker by country compared between change over the last three decades and... 60

Annex Figure 3.A.1. Inheritance, estate, and gift tax revenues as percentage of total tax government revenues in per cent 2024 94