What is the best way to fund social policy programmes? As it is, there are considerable variations both within and among states. The Scandinavian model is said to rest on general taxes (this is not true, but take this as a point of departure) while the Continental model is said to rest on earmarked contributions. The assumed advantage of the Continental/German model is that citizens are supposed to see a link between their contributions and the benefits they will eventually be able to claim. On the other hand, the Scandinavian model allows for greater flexibility in the financing of social transfers and services.
But there is a catch. Just because you have social contributions (in the form of social insurance fees or payroll taxes), doesn’t mean that there are any links between what you have paid and what you will be eligible to receive. The German old age pension is a case in point – all fees and payroll taxes collected during a fiscal year are used to finance benefits paid during the same fiscal year. There is no collection of funds in the programme. If you are lucky – like most of those who retired since 1957 – you will receive much, much more than you paid, if you are unlucky – like most of my generation will be – you have no legal claims against the system for a specific level of payments. The Germans use the term Umlageverfahren, everybody else talk about pay-as-you-go.
Denmark is in many ways an extreme outlier as welfare states go: To put it simply, benefits and services are either paid out of current taxes or out of funds. Denmark never introduced the kind of pay-as-you-go superannuation schemes that are known from Sweden or other countries. The exceptions are unemployment benefits and the early retirement benefit where insurance fees are part of the financing. Especially with regard to the ERB, this has led many to think that the contribution would guarantee access to the programme at a later stage.
It does not: Post-1998 there is an agreement that the fees paid will somehow be returned (and again: Remember that fees only financed a minor part of the ERB), pre-1998 members of unemployment funds simply helped finance the benefits for those currently receiving ERB.
Yes and no: Yes, because they will not receive the benefit they were led to believe they could receive. No, because there is not and never were any savings made in the system. When pay-as-you-go systems are expanded, those presently receiving benefits win. When pay-as-you-go systems are cut, those who have paid earlier lose.
Let me just note that this in itself is neither an argument for nor against cutting or abolishing the ERB but it points to some fundamental problems politicians and experts face in the design of social policy programmes. In this case, time does not really heal all wounds.