THE ROLE OF CONTRIBUTIONS IN SOCIAL SECURITY

COVERAGE AND FINANCING

Financing social security out of

contributions: About origins,
present discussions and
prospects of a success story
Wolfgang Scholz

Minister Counsellor, Germany

Abstract In writing the overture to an issue on contribution

financed social security one cannot but speak of Bismarck; it
must also address Beveridge who saw contributions, although
in their design and role clearly differently from Bismarck, as
one core revenue tool to finance his vision. Beveridge attributed
to the private financial sector a prominent role in securing 3
people against the negative effects on income of shocks and
crises, while Bismarck did not. Beveridge’s concept, when first
published, had, and still has today, the most attractive charm
of rigorously satisfying peoples’ striving for equitable and
inclusive societal solutions. Bismarck’s concept intrinsically
offers income security only to those who contribute, while the
level of protection depends on the level of contributions paid
(with the exception of health insurance). In reality, both
concepts, where implemented, had to face the realities of
socio-economic and political developments: Beveridge’s vision
was achieved in respect of access to health services where his
proposal, in its predominantly tax-financed version, has since
turned into a worldwide blueprint for health schemes; in its
other components, it was not resilient enough to achieve the
intended standards and now is replete with means-tested (poor
relief) elements. Bismarck’s scheme has proven its potential to
achieve “universality”, not necessarily by theoretical design
but as a matter of fact, i.e. covering people from cradle to grave

Address for correspondence: Wolfgang Scholz, Klosterstrasse 42, 53332 Bornheim, Germany; Email:
luzius.konfuzius@bluewin.ch.

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 Financing social security out of contributions

(like Beveridgean schemes). With globalization, schemes of

both origins have had to face massive neoliberal attacks over
the last three decades. Which of the approaches is best able to
survive must be left an open question: in the current worldwide
context of rapid change, both have weak and strong points, and
whether a symbiosis of the two offers the answer to future chal-
lenges remains to be seen.

Keywords contributions, social security financing, history,

international

Introduction: The roots of contribution financing of social

security – some lessons from unpredictable history

This article introduces a special issue of the International Social Security Review ded-
icated to addressing the question of the role of contributions in social security cov-
4 erage and financing. Much of the consulted literature with respect to the roots of
institutional social security sheds light of different colours on the subject, and
therefore offers reason, basis and a soundboard for better or worse and more or less
fruitful considerations and debates. Unsurprisingly, its topics follow irregular
cycles, fashions and preferences – triggered often by reasons outside the realm of
social security, sometimes within.
In trying to observe the historical roots of social security one finds, for example,
the following.
The implementation by the English Parliament of the (punitive) Old Poor Law
(1597/1601) is nowadays understood as the intertwined result of labour shortages,
stemming from the Black Death’s toll in the fourteenth century, and Calvinistic
thought echoing the sixteenth century Protestant revolution on the European
continent.1
Germany’s Bismarck’s relatively successful and France’s Napoleon III’s relatively
unsuccessful attempts to establish social security within the turmoil of the first in-
dustrial revolution were triggered by interests that clearly lay outside the narrower
sphere of social thought (at least as we understand it today).
We know that social security was at peril, but equally got boosts, through the
two Great Wars of the twentieth century.2 It progressed equally as a result of the

1. See Dixon (1999).

2. Governments introduced favourable labour legislation in order to support and maintain peoples’
(homelands’) readiness for war, or to fight the combat fatigue of their troops.

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post-First World War boom in Germany (which provided fiscal space to imple-
ment Bismarckian unemployment insurance in 1927) and by the Great
Depression of the late 1920s and 1930s,3 triggering “Social Security” in the United
States. The post-First World War revolutions in Russia and Germany, the dissolu-
tion of the Austro-Hungarian Dual Monarchy and other events gave reason to the
international coordination of national labour policies and, therefore, for the foun-
dation of the International Labour Organization – the effectiveness of the intended
co-operation of which was, regretfully, neutered as a result of the ineffable compe-
tition among its member states during the post-First World War period (Davies,
1996; Reidegeld, 1996).
The Declaration concerning the Aims and Purposes of the International Labour
Organisation (ILO), adopted at the 26th session of the International Labour
Conference in Philadelphia in 1944 (more commonly known as the Declaration
of Philadelphia) lifted social security finally and for several decades successfully
onto the international level, while Beveridge’s 1942 report, with clear separation
from, but by no means neglecting references to Bismarckian elements, evolved
during the Second World War as a liberal-democratic and emancipative alternative
to the German Reichskanzler’s conservative legacy. Only a few years later, the ILO’s
Convention concerning Minimum Standards of Social Security, No. 102 (1952), 5
codified legal and parametric norms that were considered applicable to social
security systems everywhere.
What followed was the post-Second World War antagonism between East and
West, which gave enormous momentum to the rise of social security on both
sides of the Iron Curtain, a dynamic that significantly contributed to the
emergence of the “welfare state” in the West (Judt, 2010), and to state-organized
full employment in the East. During this period, questions relating to how the
social should best be financed were, at least from distant retrospect, of a second-
ary nature. In a Keynesian full employment setting, the West managed to find the
necessary resources under all circumstances, including through governments’
deficit spending, while the Soviet East relatively quickly began consuming its
productive capital stocks, writing off more than re-investing, in order to finance
its social promises.
The neoliberal attack on the welfare state had been prepared as early as the
1970s; it fully unfolded with the “Washington Consensus” (Williamson, 1990) after
1990. Therefore, across a period of nearly four decades, issues of the cost of financ-
ing the social gained higher attention, with, until recently, a firm tendency among
discussants to claim that (“Bismarckian”) contributions work (“only” or “at best”)

3. In the United States, the Great Depression triggered the implementation of Social Security (pen-
sions); in Germany, the unemployment insurance (implemented in 1927) was turned into an autocratic
institution, organizing in the 1930s quasi-forceful participation in public employment programmes.

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in conditions of formal labour markets whereas (“Beveridgean”) tax financing of

social security is often considered the choice of the day (especially, but not only)
for informal economies.4
Much of the current development debate addresses social security implementa-
tion, and social spending levels, independently from the methods of collecting the
required revenue.5 This stands in surprising contrast to the fact that in political re-
ality, when and wherever governments aim at implementing social security, the
highest obstacle to overcome is usually how to source the required revenue.6 This
was Bismarck’s main problem in the 1880s, British Prime Minister Attlee’s after
1945, and, to mention a more recent social policy actor, Prime Minister Thaksin
Shinawatra’s in 2001/02 when he introduced costly universal health coverage in
Thailand.7
In other words, the issue of contribution financing (versus tax financing,
mainly) plays an important role in political reality but is commonly attributed less
prominence (at least) in those strands of literature that explicitly promote social
protection on the basis of its (undoubted) positive impacts on recipients of benefits
and services; instead, at best, it deals only in passing with solutions to the problem-
bound search process for financing the social through those who do not acknowledge,
6 or might be unable to understand, the positive implications of new contributions or
increased tax rates for their own situation or for society at large.8 This bias of the
pro-social-literature towards ignoring revenue issues is regrettable because it leaves
the respective discussion to authors of the (economic and financial) mainstream
literature who have often only limited understanding of the intrinsic financial
implications of social security. Their focus on “tax wedges” (see OECD, 2015), for
example, is ahistorical and suffers from a systematic micro-economistic aversion to
social security. It ignores the significance of differentiating income tax from

4. A modern detailed taxonomy of how socio-economic conditions and developments and the formal
and informal parts of societies relate to and interact with social security financing tools is still to be
written.
5. A good example is ILO Recommendation concerning National Floors of Social Protection, No. 202
(2012). A similar observation was already made in Cichon et al. (2004, p. 323).
6. A recent exception to this “emptiness” in the literature is Ortiz, Cummins and Karunanethy (2015).
The authors comprehensively elaborate on the multiple options that governments have to increase pub-
lic revenue. Still missing is sufficient discussion of the interdependencies of fiscal decisions and macro-
economic and labour market developments. Also, no space is given to evaluation of countries that may
have “failed” after tax increases.
7. See, for example, <en.wikipedia.org/wiki/Clement_Attlee> (accessed on 03.11.2015),
and <en.wikipedia.org/wiki/Thaksin_Shinawatra> (accessed on 03.11.2015); also see Sakunphanit and
Suwanrada (2011).
8. This observation relates to and is consistent with Cichon et al. (2004), who, in compliance with the
tradition of ILO technical co-operation practice, deal mainly with the technical problems and solutions
available to social security financing before or after the political-economic process of finding the proper
way of financing. The methods and issues discussed by Cichon et al. might nevertheless be instrumental
to that political process.

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wage-related social security contributions, and therefore is most often not overly
keen to support the cause of social security, but instead prefers to make it
politically residual. As a consequence, that literature favours minimalistic
financial regimes (“small fiscal space”) for social security; to the extent that it is ac-
cepted as an unavoidable ingredient for market economies, its financial design
should distort as little as possible the smooth functioning of market processes, es-
pecially of labour markets.9
Indeed, the neoliberal mainstream poses a fundamental threat to emancipative
social policy and its classical financing (see, for example, Judt, 2010), through pro-
posing “marketization” (Dixon, 1999) and targeting10 of social security. Social
security proponents have begun to counter-attack, often, and regrettably, by
accepting the use of economistic and neo-positivistic language and argument; for
example, by stating that social security is an “investment” in people and therefore
“good for the economy”, or a necessary “buy-out” of unproductive labour (see
Cichon et al., 2006 and Sala-i-Martin, 1995). Thus far, the two sides of the debate
have (luckily) been unable to agree upon theoretical ground from which to find a
common understanding.11
In nice contrast, the (older) historical literature focusing on Beveridge and
Bismarck and their social security legacies sometimes appears to indulge itself 7
in certain problems concerning social security financing, and how particular
solutions were found, or not (see Kaufmann, 2001, and the ample quoted litera-
ture). For Beveridge and Bismarck, the manner in which their respective pro-
posed social security objectives could and should be financed was core. It is
the wisdom of hindsight that allows us to see relatively clearly the prevailing
conditions that co-determined the financing solutions found, or the financing
proposals made, by the end of the nineteenth and the middle of the twentieth
centuries, respectively.
In addressing the debate about the adequacy of contribution financing versus
tax financing of social security, it is worthwhile going back to Bismarck and Beveridge.

9. The perception of such literature is mixed as realities are complex. For example, Beveridge is often
seen as a “leftist” reformer; but in his famous report he nevertheless argued very “neoliberal”: social
security regulations should be such that they do not hamper production (or only as little as possible).
For the feudal-conservative Bismarck, his proposed system’s interaction with the economy – positive
or negative – was never a category of prominent debate. After all, he wished to “solve” an overarching
“political” problem.
10. A significant recent example is IMF and OECD (2015).
11. Most probably, such common ground will never be found. The author holds that the productivity
impact of social security systems on market economies results (solely) from the fact that markets and
social security are intrinsically in a conflict that can only be overcome through efforts enhancing the pro-
ductivity of labour as well as of capital. Because of that unresolvable conflict between “the economy” and
“the social”, reconciling the two is not a realistic policy goal; instead, politics must aim at drawing eco-
nomic and societal productivity from the conflict as a prerequisite for cultural and socio-economic
advancement.

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Their respective policies and recommendations remain relevant; their considerations,

debates and solutions contain all the ingredients necessary for respective contempo-
rary discussions. As regards alleged contemporary innovations in social security
financing, there are no methods in collecting resources for social security that deserve
to be named novel; all has been previously said and debated and, indeed, all has been
tried (with varied success). Rather, what we might discover are some purposeful (old)
ideologies promoted through favouring one or other financing technique. For
example, the current use of the term “innovation” very much correlates with financ-
ing techniques that require flexibility of, and acceptance of individual risk by the
contributor and which are adapted to markets and market ideology; Bismarck and
Beveridge had different models of “societal order” in mind,12 and both expected that
their respective social security systems, and their proposed ways of financing these,
would contribute to shaping them.
In hindsight it can be said that the Bismarckian system was very attractive and
successful throughout the twentieth century, as a reference for many countries.
Yet, with fast growing populations and widening, instead of shrinking, informal
labour markets, governments see themselves increasingly unable to use the same
system to cover those deserving social security the most, and therefore seek solutions
8 that might be more easily handled.13
The Beveridge blueprint was globally successful in making socially acceptable
the idea of the state taking responsibility for its citizens, from the cradle to the
grave, as “people were more willing to accept government intervention, the rais-
ing of more state revenue, and … egalitarian and solidarity ideals. … Differing
from the individualistic pre-war and piecemeal approach … the newly formu-
lated national plans for social security … were designed to provide … adequate
protection against a whole range of risks”.14 In as far as Beveridge’s blueprint
had an impact on this development it also contributed to quasi-transforming
many labour and earnings-related Bismarckian social insurances – especially in

12. Bismarck wished to preserve the “old order” through consoling the working classes with the new
empire; Beveridge wanted the opposite: much influenced by socialist thought, he wanted to overcome
the old order. Both saw social security as instrumental to achieving their goals. In these respects, readers
might consult, for example, <en.wikipedia.org/wiki/Otto_von_Bismarck> (accessed on 07.09.2015)
and <en.wikipedia.org/wiki/William_Beveridge> (accessed on 02.09.2015).
13. See Dixon (1999). We agree with Dixon’s observation but at the same time do not share his slightly
“reproachful” undertone. One cannot, obviously, expect social insurance designed for formal employ-
ment to function under informal employment conditions. Without here going into details, we would
like to caution however that also unconditional cash transfer systems and, even more so, conditional
cash transfer systems, means-tested or not, need formality at least in the sense that those who pay and
those who receive are carefully registered, and their files carefully maintained. Otherwise, any transfer
system will sooner or later develop tendencies to collapse as a result of emerging corruption and induced
societal conflicts.
14. Ilcheong Yi, Research Coordinator, United Nations Research Institute for Social Development; ex-
cerpt of an email sent on 09.09.2015 to the author.

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Europe, but also beyond – through adequately completing them into universal
systems15 that left nobody behind.16
We conclude that comprehensive welfare states can be (and have been) success-
fully organized on the basis of, both, predominantly tax-financed or predominantly
contribution-financed arrangements. Both approaches depend more or less on
sufficient and fully-employed production capacities; it is contemporary worldwide
realities of high unemployment and underemployment which have intensified the
current discussion about the right method of designing (and financing) social
security. The remainder of this article extends on contemporary debates on social
protection and its financing, and on the roles that Beveridgean and Bismarckian
solutions may play in this regard.

Contemporary debates

Prepared by debates that were already underway in the West in the 1970s, and with
the ensuing fall of the Iron Curtain, the welfare state paradigm lost its attraction
among a majority of intellectual, political and economic elites and was replaced
with considerations on how to adapt social security systems best to “new circum-
stances” (Judt, 2010). The question of how best to finance social security gained 9
new prominence. In the following we deal with two disjunctive and opposite con-
cepts that, in our view, characterize the ongoing debate among those elites.

Averting the old-age crisis (1994)…

The first is the World Bank’s concept of the 1990s (World Bank, 1994), the orga-
nization that we take here as the most prominent international protagonist of an
economistic neo-classical and residual understanding of social security. At its very
core, the concept was triggered by standard economic growth theory (see for exam-
ple, Jones, 2002), which holds (inter alia) that more efficient tangible capital trig-
gers more income. In full congruency with, and carried by the spirit of the
Washington Consensus (Williamson, 2002 and 1990), this standard was turned
by a group of World Bank economists into a comprehensive vision: the world’s
economic growth and demographic ageing problems could simultaneously be

15. We take here the liberty to use the term “universal” in an unspecified ad hoc sense.
16. Universality of health coverage, for example, has been equally achieved in the United Kingdom and
in Germany (as in other European continental countries). It has been observed that the United
Kingdom’s tax-financed NHS is governed more by equity considerations, while the German contribu-
tion-financed system focuses more on efficiency and cost containment. More recently, governments in
both (and other) countries have intensified improving on crossing-over aspects, to keep health cost under
control as well as securing up to date health services for all residents. A thorough overview of the current
state of the health systems in both (and other) countries can be found in Mossialos et al. (2015).

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overcome by nationally-enforced personal savings strategies aiming at accumulating

the required monetary funds through the vehicle of private pension funds, which,
subsequently, are expected to operate on national financial markets (to be developed)
and thus provide the required financial means for investment into tangible capital
stocks (enterprises, infrastructure and the like), boosting economic growth.
While apparently ignorant of the many “ifs” in that finely chiselled arrangement
[and, especially, not aware of the inventiveness of greedy financial market actors in
circumventing rules], and with much trust placed in the stability of “well-
governed” financial markets combined with a disregard for longstanding interna-
tional minimum norms concerning the design of social benefits, the Bank hilari-
ously (and initially very successfully) offered “policies to protect the old and
promote growth” (World Bank, 1994) through recommending to governments
around the world fully funded, privately or quasi-privately managed and compet-
ing pension funds as a remedy to the emerging so-called old-age crisis. At the core
of this strategy were individual, mandated contributions to those funds, earnings
related (Bismarckian) or not (Beveridgean). Public (tax) financed pensions played
a role in that concept only as a minimum layer designed to avoid narrowly-defined
poverty. In short, the proposed system consisted of a public pillar – “to avoid pov-
10 erty”, and a mandated funded pillar – “for efficiency and growth” (World Bank,
1994). It was complemented by a third pillar, which consisted basically of voluntary
savings (incorporating provision for private property, life insurance and the like).
This pillar, however, did not gain much prominence in the social policy debate be-
cause it is in any case an intrinsic element for the better-off in market economies;
in other words, the World Bank in a way craftily adorned itself with borrowed
plumes by including in its pillars model an element that is a quasi-automatic result
of market economies.17,18,19

17. In market economies nobody can be hindered from making savings; also, the third pillar is intrin-
sically oriented towards the better off (who are the only ones with sufficient income to save), and –
especially when supported by favourable tax rules – prone to be inequitable. This statement simplifies;
for details see, for example, World Bank (1994, Chapter 7). Meanwhile, the World Bank has adjusted
its position; see below.
18. Hence, reasons for the World Bank’s aggressive policy advice during the 1990s and early 2000s hav-
ing been associated with the so-called Washington Consensus, but also the business interests of the fi-
nancial industries. For the latter, see for example, Scholz and Hagemejer (2004). Also: ILO (2014,
Chapter 4.6, pp. 94–97), where the ILO finds that “[l]obbying by the international financial services sec-
tor was successful in pushing for large-scale privatizations of social security pensions”.
19. To avoid misunderstandings: although much of the World Bank’s setting and language reminds of
Beveridge’s (after all, Beveridge was a classical economist, although much inspired by Keynes (who also
was a classical economist, but with an outstandingly good understanding of macro-economics and the
resulting conclusions for policy)), Beveridge clearly aimed at a system providing benefits well above pov-
erty levels. While he aimed at an equitable and inclusive system, the World Bank’s proponents came
from a background distinguishing deserving from non-deserving poor, where, deeply rooted in Poor
Law traditions, the deserving were to be looked after by charity and the non-deserving by tax. For en-
lightening reading see Dixon (1999).

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The public and academic hype around the World Bank’s proposal (which had
gradually been widened to a broad, deep and successful attack on the welfare state
in its own right) has since come to an end, mainly because the public is tired of the
impacts of reform debates which in many cases were at best disappointing (see, for
example, Scholz, 2005, pp. 44–49); meanwhile, there have been major financial cri-
ses, financial markets have been unmasked as anything but stable, and the world
economy appears to be in the midst of the Second Great Depression (see Bradford
DeLong, 2013). Civil societies, while deeply dependent on (dwindling) social secu-
rity, have lost confidence in the ability of financial institutions to assume their clas-
sical role of serving institutions; they are considered as part of the staggering
problems of the real economy, labour markets, primary income allocation and
re-distribution processes – rather than the solution to them. Investment returns
have reduced dramatically, and where high returns still occur they are often the
volatile result of casino-type gambling on markets that have lost contact with the
real economy and in which prudent pension fund management is for good reasons
forbidden to invest. In the interest of truth, but with some grain of irony, these ob-
servations have been shared by the World Bank in various publications and public
interventions (Rocha, Hinz and Gutierrez, 1999, may be taken as one example; also
see the article’s referenced literature). 11
With the benefit of hindsight, because the Bank’s proposal was clearly favouring
private, mandated and individual contributions, one might call its approach
“contributory overkill”, in some sense catapulting social security back to its
scattered status observed prior to Bismarck and between the two World Wars
on the European continent, and before Beveridge in the United Kingdom (and
the Commonwealth), and (before Roosevelt) in the United States.
There is reason to annotate, however, that a number of governments around the
world, including in Europe, have indeed reformed their social systems in the spirit
of the Bank’s proposals. Some are currently partially pulling back (re-reforming or
“re-nationalizing”),20 others, especially those promoting proactive adaptation to
neoliberal globalization, use their reformed systems most effectively as tools to sup-
port their respective economic strategies.21

… versus ILO Recommendation No. 202 (2012)

Not only, but also as a response to the marketization attack of the 1990s, the In-
ternational Labour Office developed the concept of Social Protection Floors,

20. Among these are (with varying significance of roll-back measures taken) Argentina, Chile, Hungary
and Poland. See also Kay (2014) and Fultz (2012).
21. Among these are, most prominently, Germany, the Benelux-states, the United Kingdom and Swit-
zerland. Also see: Cichon et al. (2004, pp. 106–107) where the authors state that “Governments can ac-
tually deliberately use … [the] social protection scheme to influence macroeconomic behaviour”.

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which was formally adopted by the International Labour Conference in 2012 as

the Recommendation concerning National Floors of Social Protection, No. 202
(2012). The Recommendation is actually a short “how to” document that guides
Members to:

(a) establish … social protection floors as a fundamental element of their .. social

security systems; and
(b) implement social protection floors within strategies for the extension of social
security that progressively ensure higher levels of social security …, guided by
ILO social security standards. (ILO, 2012, Paragraph 1).
Different from the World Bank’s bullish 1994 approach (and its aftermath), Recom-
mendation No. 202 covers the wide range of social cash benefits, social services and
health services, and comes as a document of compromise between governments’, trade
unions’ and employer organizations’ interests, puts emphasis on a comprehensive
social security system approach and implicitly accepts that establishing such systems
(including pensions as one of possibly many elements) is by principle a complex
undertaking, that excludes one-size-fits-all approaches. Also, in understanding that
establishing social security must not be left to the wisdom of “the markets” it is a
12 counterpoint to the Bank’s approach; therefore, the state, in collaboration with civil
society (including the social partners, and – obviously, where its competence is
needed – “business”), sets the pace and the rules of the game.
Recommendation No. 202 triggered also a new round in the international
debate about the most adequate approach to social protection (the discussion has
now evolved to use the concept of social protection) financing. It must be
understood that, despite its wide scope, the Recommendation does not bring back
to centre stage the (Beveridgean) welfare state. With respect to our topic of inves-
tigation, the following observations require mentioning:
First, Recommendation No. 202 is enormously flexible with respect to the modalities
under which social protection is to be financed. While elsewhere stipulating that revenue
should normally come from national sources it further specifies in Paragraph 11 that:

(1) Members should consider … different methods to mobilize the necessary re-
sources … Such methods may include … effective enforcement of tax and con-
tribution obligations … or a broader and sufficiently progressive revenue base.
(2) In applying such methods, Members should … prevent fraud, tax evasion and
non-payment of contributions.

Second, the term “contributions” in Recommendation No. 202 takes no prominent

position: while it occurs around 40 times in the (much longer) Convention No. 102
of 1952 (and is on a few occasions explicitly specified as “insurance contributions”),
in the Recommendation contributions are only mentioned twice (without any further
specification).

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Third, the Recommendation remains mysteriously unspecific with respect to the

economic sources from which technically to gain the revenue for financing the
floors.22 While Convention No. 102 was still explicitly referring to workers’ gross
earnings as a financial source (which are, next to gross profits, one of the two pri-
mary income components of national income), Recommendation No. 202 avoids
touching upon the issue, including on the concern of worldwide falling labour in-
come shares in global production (see, for example, Onaran and Galanis (2012)).
The reasons for this reluctance to name the sources that should be properly tapped
for social protection financing might be manifold; here we imagine five out of
probably many23:
• Recommendation No. 202 was developed and adopted at a time of buoyant
neoliberal thought, when, given prevailing unemployment and underemployment,
labour around the world was (and still is) considered too expensive24; listing wages,
profits, private consumption, imports, private wealth, turn-over on financial markets
and other well-defined financial flows as major candidates for social protection
financing would have put too much strain on the well-institutionalized co-operation
among ILO’s tripartite constituents.
• In 2012, banks were awash with huge amounts of fresh central bank money or had
been bailed out by national tax payers in order to save them from bankruptcy in the 13
wake of the 2008 financial crisis; this rescue policy – for many observers, not easy to
understand – was difficult to convey to countries’ civil societies:
– which made many ILO constituents reluctant to adopt bold advice on social protec-
tion financing as any such step might putatively have contributed to turning a global
fragile economic situation into a depression; but
– the same rescue policy, ironically, triggered in some quarters of the international de-
velopment community the impression that “money is no problem”.25
• Many ILO constituents might have interpreted Recommendation No. 202 as
suggesting social assistance type benefits.26 Indeed, Paragraph 8 is quite suggestive
in saying that “Nationally defined minimum levels of income may correspond to
the monetary value of a set of necessary goods and services, national poverty lines,

22. It mentions only once that governments might seek “a broader and sufficiently progressive revenue
base” (ILO 2012, Paragraph 11 (1)), which could however be anything, including, e.g. a nation’s capital
stock, its GDP, its stock exchange indexes, machines (e.g. robots paying contributions) or the like.
23. One can understand the following bullets as intuitively plausible arguments that would require em-
pirical research for verification or rejection.
24. The author does not share this view, but only reports on the prevailing attitudes of ruling and busi-
ness elites; rather, the contrary appears to be true.
25. A reason might be that the United Kingdom, a country with much and internationally-influential
scholarly thought on social security, enjoys a tradition of discussing issues of proper fixing of social ben-
efit levels often without reference to available revenue. See Perry (2007); also Ortiz et al. (2015).
26. According to one of the prominent technical drafters of Recommendation No. 202, ILO’s Christina
Behrendt, this is a too narrow understanding. (Author’s interview with Ms Behrendt on 01.09.2015).

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income thresholds for social assistance or other comparable thresholds

established by national law or practice, and may take into account regional differ-
ences” (Paragraph 8 (b)) – which contains all ingredients to social assistance type
schemes.27 Not surprising, constituents might have straightforwardly and quite
naturally interpreted the “revenue side” of the Recommendation as tax financed.
Contribution financing and social assistance are traditionally considered alien to
each other.28
• ILO constituents with mature social security systems, including those with Bis-
marckian roots, had found themselves for a number of years under increasingly
unpleasant attacks in the context of academic and policy discussions in the after-
math of the Washington Consensus; in consequence, many were, in pursuing
neoliberal fiscal policies, considering extending (or had already extended) their
respective social assistance layers as a measure to fight persistently high unem-
ployment and, accordingly, saw their interests reflected in the “openness” of the
financial provisions of Recommendation No. 202, which would in a sense allow
them to expand options of tax-financed and means-tested benefits in exchange
for cuts in social security contribution rates; compatible with the Recommenda-
tion, the thus to be achieved reduction of labour costs could be complemented by
14 reducing or even abolishing contribution financed benefits, with social assistance
stepping in as and where needed; it is correct that the Recommendation does not
suggest such policy but neither does it exclude it; also, although, in Paragraph 17,
the Recommendation recommends to pursue policies that, after implementing a
floor, “should aim to achieve” more advanced standards it does not, formally, ex-
clude policies aiming to reduce already achieved higher standards back to floor
levels. Governments might indeed, and consistent with the Recommendation,
consider reductions in social benefit levels if, for example, this is considered a
necessary remedy for improving the overall socio-economic situation of their
country; the recent case of Greece, including the “Troika’s” impositions with respect
to social security system reforms, might be taken as an example. As long as those
measures do not violate individuals’ entitlement to live “in dignity”, which is, by
common sense, guaranteed through means-tested social assistance (the introduction

27. Indeed, the then pursuing text adds to this impression. Both, Paragraph 8 (c) “the levels of basic social
security guarantees should be regularly reviewed through a transparent procedure that is established by na-
tional laws, regulations or practice, as appropriate”; and Paragraph 8 (d) “in regard to the establishment
and review of the levels of these guarantees, tripartite participation with representative organizations of em-
ployers and workers, as well as consultation with other relevant and representative organizations of persons
concerned, should be ensured” very much remind of institutional regulations found, for example in the
United Kingdom and in Germany for the fixing of social assistance benefits or of minimum wages.
28. The roots for tax financing of social assistance (“poor relief”) lie in the early beginnings of the
English Poor Law, which distinguished between the deserving and the non-deserving poor. Also, see
Beveridge (1942), where the issue of tax versus contribution financing is elaborated on at some length.

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 Financing social security out of contributions

of which is one of the Troika’s conditions under the rescue package), all imposed
measures can be seen as sanctioned by Recommendation No. 202.29
• In combination, and in a sense contrasting the above points, the relative vagueness
of the stipulations of Recommendation No. 202 concerning revenue and benefits
also permits seeing in them tax-financed non-social assistance arrangements; in
other words, arrangements, internationally promoted by lobby groups and activists,
that are known as Basic Citizens Income or demogrants,30 can, if so wished, also be
seen covered by the Recommendation. This possibility of interpretation gives the
Recommendation a “progressive”’ edge, making it interesting for institutions acting
outside the standard tripartite ILO repertoire.
On the basis of the above considerations it is not surprising that many contempo-
rary experts, including those in the neo-Beveridgean tradition,31 think in terms of
tax financing rather than of contribution financing when it comes to the imple-
mentation of Recommendation No. 202 “style” national “floors”.
Furthermore, in important institutions of the Anglophone world, especially in
the United States, the United Kingdom and in the International Financial Institu-
tions, but also within the European Union Commission and probably in European
core national finance ministries, the differentiation between “social security contri-
butions” and “labour tax” is not, or no longer, of high prominence as, from a 15
macro-fiscal point of view, social insurance institutions are systemically nested into
government finance. Internationally-binding accounting methodologies, like the
UN System of National Accounts (2008) (UN et al., 2009) or the International
Monetary Fund (IMF) Government Finance Statistics Manual (IMF, 2014), con-
tribute to shaping this indifferent “view on reality” (Bonß, 198232). Indeed, from
the perspective of macroeconomic process policies, it is of minor importance
whether private households are burdened with, or relieved from, levy through
changing income tax rates or earnings-based social contribution rates. The signifi-
cance of the difference between the two is only understood by social security system
specialists, lawyers and tax specialists that are, by profession, dealing with the
specific constitutional role, legal status and tax as well as income implications over
individuals’ life cycles, of social security contributions versus income tax.

29. For example, the European Commission estimates that implementing a General Minimum Income
Scheme (GMIS) in Greece would pay benefits at an aggregate amount of EUR 1 billion to 1.2 million
persons, which boils down to EUR 70 per person per month. See EC (2015a). The calculations are based
on the World Bank (2015), which assumes an individual GMI level of EUR 200 per month.
30. See <www.citizensincome.org>.
31. We use here the term “neo-Beveridgean” because Beveridge’s 1942 propositions had a strong
contribution-financed component (at flat contribution and flat benefit levels), which, in itself however,
did not achieve the goal of freedom from want; it is probably the proposal’s inability to mature in British
society, that the option of flat contribution financing is currently not debated.
32. Bonß discusses in his seminal book the role of statistics in shaping “our views”.

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 Financing social security out of contributions

Beveridge and Bismarck: The Cain and the Abel

of financing the social? Future outlook

In terms of mere techniques, one might be tempted to boil down Bismarck’s as well
as Beveridge’s financing schemes to simple, otherwise irrelevant, mechanisms that
can be used interchangeably to collect contributions and tax from individuals and
institutions.33 But the debate about how to do it best is not meaningless, as the var-
ious ways in which the revenue collection process can be organized very much in-
teract with, or correspond to, societal habits, perceptions and traditions as well as
with individuals’ and institutions’ reactions to incentives whether provided or
not, which, in turn, might have implications for economic performance.
It has been argued at length that the global success of complex-to-manage con-
tribution financed social security’s peaked in the late twentieth century and since
then has been on the decline, mainly for the reason that it was not able to achieve
sufficient population coverage (Dixon, 1999).
In important contrast to this, it was during the financial crisis of 2008/09 and
after when “Bismarckian Germany” most impressively demonstrated how a tripar-
tite social insurance system can be effectively used to stabilize private households’
16 incomes and (simultaneously) provide substantial support to fast economic recov-
ery. This was achieved not only through macroeconomic income stabilization but
also through the types of benefits, including their organizational conditionalities,
which kept the labour force of many German enterprises temporarily in “alert status”
until the moment when production would again expand (ILO, 2014). Bismarck
would probably have liked to see his legacy in action.
Even before the 2008/09 financial crisis, but more so after, a number of scholars
claimed to have found evidence of the inadequacy of earnings-related social pen-
sion systems as a means to support formal employment (Holzmann, 2012). In
using the old Beveridgean, and modern neoliberal argument, that contributions
are nothing but a tax on labour, and therefore an obstacle to more formal employ-
ment, they conclude (differently from Beveridge) that levying contributions on
earnings triggers movement into informality if there is also a basic tax-financed tier
available. As Holzmann (2012) summarizes:

many low and middle income countries introduced basic provisions in the form
of [tax-financed] social pensions, assuming that over time, workers would move
towards formal sector employment and participation in a mandated and earnings-
related (funded or unfunded) scheme. Yet in fact, these very provisions … risk
becoming a tax on formal work and providing individuals with incentives to take

33. The term institution is here used in the meaning of the System of National Accounts. See UN et al.
(2009).

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informal jobs or move into self-employment while they build up their own retire-
ment provisions (e.g. businesses, houses, financial assets, etc.), knowing that the
safety net will be there for them if everything else fails. … If confirmed, this
may risk sounding the death-knell of Bismarckian systems in many low and
middle income countries.
Indeed, Beveridge was obviously aware of this potential problem and thus appears
to be providing the appropriate blueprint for solutions in middle-income and low-
income countries. In suggesting a small flat contribution to be paid by all employed,
he explicitly left provision of higher benefits to individuals’ voluntarily contracting with
the private insurance market. He could reasonably expect that non-employees (i.e. self-
employed workers among others) would not only pay because they were legally obliged
to do so but would have a self interest in paying the (small) flat contribution. This
would be so even for those with sufficient personal savings for old age: the flat-rate
weekly contribution would serve as an acceptable regular (imposed) “donation” into
a system providing last-resort security in the event that they outlived their savings or
the savings were lost.
Unsurprisingly, Beveridge’s proposal required setting the mandated flat-rate
contribution at a low level, as it had to be socially and economically acceptable
and adequate to the worker with the lowest contributable earnings. This, in turn, 17
implied a significant tax-financed subsidy into the system. Nevertheless, as he
aimed at a system providing state benefits to all in need at substantially above-
poverty levels, Beveridge needed the social contribution as one distinguished reve-
nue element, in order to avoid unacceptable increases in income tax for the middle
classes and others. The contribution represented a meaningful quid pro quo ele-
ment, and at the same time the implicit replacement rate of the flat-rate pension
benefits would be quite high for low-wage workers – a good result.
The above considerations were fundamentally alien to Bismarck. In more of a
sink or swim approach, he offered to the German skilled workers, not to Germany’s
Lumpenproletariat (Marx) (Ritter, 2014, p. 4), a system that, if all went right, would
offer a decent pension at old age. Workers not joining the system would have to
labour until death or would have to rely at old age on the family or charity.
To do justice to Bismarck, it must be added that, even with hindsight, his 1889
pension legislation can only but be classified as “modern”: it covered all blue and
white collar workers of the time (up to an income threshold), including those
working in inland waterways transport, the cottage industry, in small businesses,
in agriculture, as well as domestic workers.34 Excluded were civil servants and em-
ployees in pharmacies (Rückert, 1990).

34. It might be recalled that the ILO adopted a Convention and a Recommendation on domestic
workers in 2011: Convention No. 189 and Recommendation No. 201.

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While both expositions depend on more or less full employment, Beveridge’s

proposal needs full employment “only” in order to get the required monies into
the public coffers; revenue and benefit are systemically independent from each
other; in Bismarck’s system, the situation is different: earned wages play a signifi-
cant role not only as a source of revenue but also in determining the levels of ben-
efits. The intrinsic functioning of Beveridge’s system can be understood without
knowledge of labour (law) rules and without the rules governing employer-
employee relations; Bismarck’s system cannot (Kaufmann, 2001). In that respect,
indeed, contemporary Bismarckian systems are more complex to administer than
systems with a Beveridgean tradition. In reality, however, one might find easily
managed Bismarckian systems while Beveridgean systems might fail to provide
the intended protection because of cumbersome administration, and vice versa.
More than 125 years after Bismarck, many contemporary systems in his tradi-
tion have also proven able to provide cradle to grave protection under the welfare
state perspective. It must not be forgotten that Bismarckian systems are not only
“pensions”, but equally offer work accident insurance, health insurance and, in
some cases, unemployment insurance (and others). Although not by legal tradi-
tion, but in legislative and administrative practice, these schemes can all take “uni-
18 versalistic” shape. For example, Bismarckian social pension insurance can provide
accrual of benefit entitlements for spells of unemployment, maternity or other pe-
riods without pay; and social health insurance can cover the whole population
through co-insuring non-contributors or through co-operation with private health
insurance on the basis of clearly drawn borderlines between the two. Means-tested
social assistance, which, in Bismarckian systems can only but play the role of last
resort at “just-above-poverty” level, can, in practice, after means testing has specified
the relevant individual parameters, turn into a scheme offering regular and indexed
minimum income-type benefits that cover all usual expenses in the initial (1942)
Beveridgean sense. Germany’s recent adaptation of the workfare concept provides
an insight to the principle flexibility of Bismarckian systems.
While the beauty of Beveridge’s scheme, at its 1942 onset, was its simplicity and
transparency, it – or rather the contemporary schemes rooted in Beveridgean tradi-
tions that have been shaped by reality – has meanwhile evolved. What we now see are
complicated systems of rules and administrative practices, very similar to the com-
plexities of most fully-fledged social security systems found anywhere in the world.
Reflecting on the above it is not easy to determine who among Bismarck and
Beveridge will be Cain and who Abel. It might turn out that Bismarck and Bever-
idge are not at enmity at all. It could very well be that, after years of intellectual de-
bate, it turns out they actually are Jacob and Esau, who finally, after years of
struggle and separation, will come to reconciliation. Given the world’s demo-
graphic, environmental, distributional and multiple other problems it is time to
take action beyond academic debate.

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Conclusions

Beveridge and Bismarck stand for representing two ideal blueprints of possible
welfare-state designs as follows:
• In Beveridgean systems all citizens are protected by sufficiently high, flat, equal and
non-means-tested benefits,35 they have equal access to health services and protection,
which by design stretches from the cradle to the grave; they are generically financed out
of low, flat contributions to be paid by “all” and out of general taxation. Bismarckian
systems generically depend on the existence of formal labour contracts, which provide
the main entry to social security entitlements; benefits as well as their financing are
earnings-related, while equitable access to health services is guaranteed for holders of
such contracts.
• Spending and revenue are independent from each other in Beveridgean systems.
In Bismarckian systems they are intrinsically interwoven; a full understanding of
Bismarckian systems is not possible without understanding labour law. It is especially
this differentiation between the two that nurtured the perception of Beveridgean sys-
tems being more easily to administer than Bismarckian ones.
• Beveridgean systems, in order not to undermine market economies’ core func-
tional conditionalities (and, therefore, not to put at risk their own financial basis) 19
must find the optimal benefit level(s) which, on the one hand, guarantee life free
from want, but, on the other, leave sufficient incentives to individuals’ taking up
labour. Bismarckian systems do not have this problem or, rather, they delegate
the political problem of defining that optimal benefit level(s) to the labour markets:
earnings levels and their distribution over employed labour determine benefit levels
and their distribution (except for access to health services).
• Beveridgean systems do not require a layer of last resort; they are last resort by
definition. Bismarckian systems need a layer of last resort, usually in the form of un-
attractive social assistance.
In reality, social security or social protection systems, whether inspired by
Bismarckian or Beveridgean traditions, have proven to be closely correlated with
(and easy victims to) political meta-trends – for the period after the Second World
War this has been impressively described for example by Tony Judt (Judt, 2010).
Neither of the two was resilient against over-proportional expansion during the
strong economic growth period ending in around the mid-1970s (although one
of the standard narratives is that social protection declines during economic growth
periods); and both were unable to stand against the neoliberal attacks since the
1980s or to counterbalance the income implications for many of austerity policies
since the mid-2000s (although the opposite theoretical narrative holds).

35. Income tests might be applicable.

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As is the case, systems of both types have meanwhile undergone numerous ex-
ternal interventions – improvements and dis-improvements alike – turning them
into complex systems to administer. Systems that might have begun as Beveridgean
meanwhile test means; systems of Bismarckian nature have turned universal.
Contribution-financed (Bismarckian) social insurance schemes in the develop-
ing countries36 need to foster their position through improving their governance
but also through decisive steps aiming at wider coverage. While this is paramount,
they also need the complement of social assistance. Their completion can only be
achieved through social assistance because, as Holzmann (2012) quite rightly
argues, the alternative of attractively high universal (Beveridgean) flat benefits
might pose a systemic threat to social insurance (a different view is offered by Kidd
(2015)). It has been observed that social assistance (means testing) is difficult to
administer, might deter eligible persons from applying for benefits and that,
instead, (universal) cash benefits are the simpler and socially more appropriate
solution (not only) for developing countries (see, for example, Kidd, 2015). This
observation might be correct when “poor relief” is provided in the strict tradition
of Protestant ethics but here we hold that it is possible to develop and apply
“lighter forms” of social assistance administration, which, on the one hand, make
20 such transfers acceptable to societies’ tax payers at large and, on the other, maintain
general openness to release beneficiaries into the labour markets when and where
appropriate (see, for example, Cambodia37).
Among a long list of other challenges facing social security systems
– Beveridgean or Bismarckian – which await solutions, we consider the following
as most prominent and urgent:
Youth unemployment: Educating, training and providing productive occupations to
the young generation is one of the most urgent problems to be solved from the per-
spective of both Beveridgean and Bismarckian social security systems. Beveridgean
systems need the earnings of employed youth for taxation, while Bismarckian sys-
tems need youth as contributors in order to be able to pay at a later date their ben-
efits. Beveridgean universal benefits will remain fragmented and inadequate as long
as the young labour force is excluded from providing its tax share; Bismarckian

36. This equally applies to a number of European countries. It is one of the major failures of austerity-
prone European policy that no measures were taken in due time to improve Southern Europe’s resilience
against economic shocks. It can only be hoped, as was often the case in history, that the current Euro-
pean crisis contains the seed for the right future solutions.
37. Over a process of a few years, the Government of the Kingdom of Cambodia developed, together
with GIZ (Germany’s leading provider of international cooperation services), a tool that allows for the
identification of poor households at community level. Since 2015 the government runs the programme
in its own capacity. A general discussion of the pros and cons of conditional versus unconditional cash
transfer programmes is offered by ILO (2011, pp. 118–120). See <www.mop.gov.kh/Projects/IDPoor/
tabid/154/Default.aspx>.

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pensions risk being inadequate in the event that contribution payment periods are
too short.38
Protection of workers’ rights: Bismarckian systems depend on the prevalence of for-
mal, contractual worker-employer relationships; labour contracts and their embed-
ment into national law widely determine persons’ rights in their roles as
counterparts to employers in the production process; to the extent that social secu-
rity legislation is intertwined with labour law Bismarckian systems can intrinsically
help to protect those rights; the better the template of labour law the better social
security will be, and vice versa; Beveridgean systems lack this mutual complemen-
tarity of social and labour laws and therefore both legal codes must seek anchoring
in case law that might, or might not, be related to human rights (Kaufmann, 2001).
Social dialogue: Employers play a pivotal role in the administering of Bismarckian
systems as enterprises are instrumental to collecting contribution revenue and
transferring it to the social security institution(s); workers have a fundamental in-
terest in those monies being transferred as they are the potential beneficiaries of the
system; joint (bipartite or tripartite39) administration of social security is therefore
obvious; by way of the respective organizational measures taken, self-governing
structures of social security can be made an inherent part of social dialogue thus 21
allowing for discussing (and ideally finding solutions to) conflicts between capital
and labour on a revolving basis and outside the standard conflict lines between la-
bour and capital. Again, Beveridgean systems do not trigger such practical ap-
proaches; instead, employers rather are to seek communication with the tax
offices while the solution of workers’ benefit issues must be found directly with
the government or, indirectly, through subjecting governments to general elections.
Meanwhile, it is 70 years since the Beveridge approach was first put into practice,
and, for that of Bismarck, nearly twice that length of time. For historians and social
security analysts with a long-term perspective, such horizons are (in a sense) quite
short – one or two human life spans, three or four individual working-lifetimes or
contribution histories. For politicians, in contrast, whose time horizons are gener-
ally measured in terms of electoral cycles, such periods are effectively an eternity.
Both the Bismarck and Beveridge models, each built on the basis of combining
technical excellence in design with steadfast political commitment, may therefore
be seen to have stood, and stood well, the test of time. While the patterns of future

38. For example, the foreseeable developments in European pension levels are alarming (EC, 2015b).
These results will become worse where long youth unemployment spells stretch into long-term unem-
ployment. The same problems routed in (prolonged) youth unemployment will emerge, mutatis
mutandis, for social security systems – whether Bismarckian or Beveridgean – in many other regions
of the world.
39. Bipartite: workers and employers; tripartite: workers, employers and government(s).

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development for social protection cannot always be seen clearly in advance, the
contributory approaches represented in each case certainly have a vital, continuing
role. Nevertheless, there remains much to learn from past experience, and deep
challenges to be met in their future application. It is these issues to which this set
of papers is devoted.

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