Human Capital Investment and the Sustainability of Public Transfer Systems Across Europe

An Evaluation based on National Transfer Accounts

Abstract

We evaluate the sustainability of the public transfer systems in 24 EU countries using a new cohort-specific indicator, the Human Capital Investment Gap (HKIG). The indicator measures for a certain cohort the difference between the public benefits in old age and the public contributions of the child generation. Calculating the HKIG for the cohort born in 1950, we show that in none of the analyzed countries the contributions of the child generation will be sufficient to finance the old age benefits of the 1950 cohort, given the age- and employment-specific transfer pattern observed in 2010. This result holds for most of the countries even when assuming very optimistic employment scenarios. The decomposition of the HKIG into its components indicates that the cross-country differences in the HKIG are mainly driven by the level of public contributions and benefits, while retirement age and employment rates play a comparably minor role.

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Notes

  1. 1.

    Age-specific data on income, transfers, consumption and saving for 2010 are provided on http://www.wittgensteincentre.org/ntadata.

  2. 2.

    A transfer is defined as a transaction in which one institutional unit provides a good, service or asset to another unit without receiving from the latter any good, service or asset in return as a direct counterpart (SNA 2009). Contracts, on the contrary, are agreements about mutual exchanges with well-described counterparts.

  3. 3.

    General information about NTA can be found on the webpage of the global NTA project at www.ntaccounts.org and in Lee and Mason (2011).

  4. 4.

    In NTA all flows are assigned to individuals dependent on their age. NTA distinguish only two sectors: the government and the private sector, which includes households, corporations and non-profit organizations serving households.

  5. 5.

    The contributions of children per member of the 1950 cohort are calculated by dividing the total contributions of the child generation by the number of the 1950 cohort members. Alternatively, it can be calculated by multiplying the net public contribution of a member of the child generation with the average number of children per member of the 1950 cohort.

  6. 6.

    In some countries child benefits are paid to compensate caregivers for the loss of labor income due to the absence from the job while they are taking care of their young children.

  7. 7.

    The number of children is calculated using data on completed cohort fertility. Source: Human Fertility Database. Max Planck Institute for Demographic Research (Germany) and Vienna Institute of Demography (Austria). Available at www.humanfertility.org (data downloaded 4 November 2016). For countries not included in the Human Fertility Database we use the total fertility rates in 1980 from EUROSTAT.

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Correspondence to Bernhard Hammer.

Additional information

This project has received funding from the European Unions Seventh Framework Program for research, technological development and demonstration under grant agreement no 613247.

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Hammer, B., Prskawetz, A., Gál, R.I. et al. Human Capital Investment and the Sustainability of Public Transfer Systems Across Europe. Population Ageing 12, 427–452 (2019). https://doi.org/10.1007/s12062-018-9224-8

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Keywords

  • Public transfers
  • Human capital
  • Sustainability
  • National transfer accounts
  • Generational contract