How to bridge the social protection gap

A number of demographic, social and economic trends are pushing up the cost of social protections like public health services, pensions, out-of-work benefits and welfare programs at a time when the ability of governments to pay for such services is diminishing.

Public social expenditure among member-states of the Organisation for Economic Co-operation and Development, for example, has risen from 15.4 percent of GDP in 1980 to 21.6 percent at the end of 2014.¹

Population pressure

This trend reflects demographic developments such as population aging, rapid population growth and falling birth rates, which are driving demand for social protection even as the total number of people paying for it is in decline in almost every country in the world.

In the 2015 update of its report on World Population Prospects, the United Nations projects that the number of workers per retirees (the potential support ratio, or PSR), calculated by dividing the number of 20 to 64-year olds by the number of people over the age of 65, will fall dramatically. The report states that, “By 2050, seven Asian countries, 24 European countries, and four countries of Latin America and the Caribbean are expected to have PSRs below 2, underscoring the fiscal and political pressures that the health care systems as well as the old-age and social protection systems of many countries are likely to face in the not-too-distant future.”²

Squeezed income

At the same time, slower economic growth is making it harder for members of the public in many developed countries to protect themselves.

The International Labour Organization reports that real wages have been largely flat in developed economies over the past decade, and have fallen in some countries, notably the UK.³

As a result, private provisions against lost income and pensions are stagnant or falling in many countries at a time when governments are also cutting back on such protections, creating a widening gap.

In a recent report,⁴ the Geneva Association notes that despite a strong rise in global GDP, insurance penetration has fallen significantly over the past decade, with notable declines in the U.S. and UK, leading to widening underinsurance. In the U.S., for example, the number of households holding individual life insurance has fallen from 62 percent to 44 percent over the past decade, creating a notional life protection gap of USD 20 trillion, equivalent to 135 percent of the country’s GDP.

Vicious circle

The reduction in private provisions for personal protection needs is creating greater reliance on government social spending at a time when many developed states are trying to cut back on future welfare commitments. In Europe, for example, figures from Eurostat show that one-in-four people in the 28 EU member states are at risk of poverty or social exclusion.⁵ As a result, these systems are becoming increasingly unsustainable.

In the coming months, Zurich will be taking a closer look at some of the issues surrounding the protection gaps, starting with a multi-country survey of public attitudes towards income protection. Our aim is to identify potential solutions and begin a discussion around an issue which threatens the long-term sustainability of public social systems.