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Analysis

Benchmarking on Minimum Income Principle to Facilitate Upward Convergence

Text: Olivier Bontout, Katalin Szatmari Directorate-General for Employment, Social Affairs and Inclusion, European Commission1

While the social situation was improving in Europe when the Covid-19 crisis hit, remaining and emerging challenges call for continuing effort to ensure effective national social safety nets conducive of cohesive societies and just transitions. The EU-level benchmarking framework on minimum income supports mutual learning and the upward convergence of national systems.

BIO

Europe has some of the highest standards of living, best working conditions and among the most effective social protection systems in the world. While the 2008 financial crisis negatively impacted Europe’s social situation, this negative trend had been broadly reversed when the Covid-19 crisis hit: the number of people at risk of poverty or social exclusion steadily declined for a sixth consecutive year in 2018.2 Employment continued to increase, although at a slower pace, and unemployment reached a record low of 6.3 per cent in the third quarter of 2019. These trends however mask a lack of substantial improvement among lower income households. Income inequality remains at a high level compared to the pre-crisis period: on average, in the EU, the income of the richest 20 per cent of the population is about five times higher than that of the poorest 20 per cent. The poverty gap, which measures how poor the poor are,3 has also shown an overall deterioration in the last decade. In addition, the persistence of poverty4 – how likely a poor person is to stay poor – shows a similar trend over the past ten years.5

For those furthest away from the labour market, namely those living in households with very low work intensity, the at-risk-of-poverty rate remains persistently high and increased for a fifth consecutive year in 2018. This shows that the relative income situation of the most vulnerable was not improving, indicating possible gaps in the adequacy and coverage of social safety nets.

Large differences between Member States in all these indicators underscore the challenge of achieving upward convergence across the EU, which is exacerbated by the COVID-19 crisis. In this context, the role of social benefits to cushion the impact of the crisis will be key. Given the extent of the expected pressure on households’ income and poverty, it is essential that automatic stabilisers fully play their role to support households and that additional measures are taken to fill existing gaps in social protection systems.

Policy response – the Pillar and the active inclusion approach

A safety net that ensures a life in dignity is key to addressing risks of poverty and social exclusion. It also gains relevance when labour market transitions become more challenging to an increasing number of people, making the need to leave no one behind ever more pressing. To this end, Principle 14 of the European Pillar of Social Rights stipulates that ‘everyone lacking sufficient resources has the right to adequate minimum income benefits ensuring a life in dignity at all stages of life, and effective access to goods and services. For those who can work, minimum income benefits should be combined with incentives to (re)integrate into the labour market’.

The 1992 Council Recommendation on common criteria concerning sufficient resources and social assistance in social protection systems6 sets out a number of principles and guidelines such as fixing the amount of resources considered necessary to cover essential needs, taking into account living standards and price levels for different types and sizes of households; safeguarding the incentive to seek work; and regularly updating the amounts to ensure that needs continue to be covered.

Building on the 1992 recommendation, in 2008 the Commission adopted a Recommendation on active inclusion of people excluded from the labour market7. The Recommendation argues for a review of social protection systems as part of a comprehensive, consistent drive to combat social exclusion. In 2013, the European Commission’s Social Investment Package8 (SIP) reiterated this integrated approach, underlining the key importance of empowering and supporting people at all stages of their lives. This approach was confirmed by Council Conclusions in 2016.9 This policy guidance calls for a three-strand approach that, in turn, was fully endorsed in the Pillar Principle 14 on minimum income:

  • The first strand (adequate income support) recognises the basic right of an individual to resources and social assistance sufficient to lead a life that is compatible with human dignity.
  • The second strand covers labour market integration for people who are fit for work so that they receive effective help to enter or re-enter employment that corresponds to their work capacity. This is well reflected in the 2016 Council Recommendation on the integration of the long-term unemployed into the labour market,10 emphasising the need for an individual approach and coordinated service provision. Policies should ensure quality jobs and tackle labour market segmentation by helping people to stay in work, prevent in-work poverty and improve employment prospects.
  • The third strand calls for appropriate social support for those concerned through access to quality enabling services that support active inclusion policies. It also underlines various common principles, including coordinated and integrated delivery, which should be taken into account as much as possible.

The integrated guidelines for the employment policies11 set out policies for fighting poverty and social exclusion in line with the active inclusion approach and integrated the elements of the European Pillar of Social Rights. These guidelines form the legal basis for the European Semester process,12 providing a framework for the monitoring and coordination of economic and social policies across the European Union.

Benchmarking framework on minimum incomes

In accordance with the principle of subsidiarity, Member States set income support and the related policy mix. All Member States have some minimum income schemes in place but the designs vary greatly, and challenges remain at national or local level. The shortcomings can relate to limited coverage, gaps in the adequacy of benefits, financial incentives to take up work and limited availability of social or activation services.13 Improving the effectiveness of such schemes can make a substantial difference, contributing to upward convergence and better protecting the most vulnerable, including from the labour market and societal transitions to come.

In order to strengthen the analytical work of the European Semester, the Social Protection Committee14 agreed to develop a benchmarking framework on minimum income that was finalised in 2019 and has supported the analysis in the Joint Employment Report, the Country Reports and Country-Specific Recommendations (CSR). In 2019, 14 CSRs were adopted in the area of social inclusion and social benefits; of those, four are directly related to Principle 14 of the European Pillar of Social Rights and focus on minimum income support.

Through this benchmarking exercise, relevant high-level outcome and performance indicators were identified. Indicators and/or quality principles were also agreed for the policy levers, which affect performance (see box). A key emphasis was given to the active inclusion approach: the need for strong links between adequate minimum income support, the delivery of inclusive labour market policies and access to high quality enabling services so that they are mutually reinforcing. Three policy levers have been identified in line the active inclusion approach,15 and in par­ticular, a twofold indicator has been developed to assess the adequacy of minimum income schemes.

Adequacy of benefits

The level of financial support provided under a minimum income scheme has a direct impact on the ability of the scheme to alleviate poverty. However, the impact on poverty cannot be considered separately from other features of the tax-benefit systems. Benefit levels need to be analysed based on the net disposable incomes received by the minimum income recipients and their household members.

Indicators of the benchmarking framework

Outcome indicators

Relative at-risk-of-poverty gap of the working age population (18–64)

Material and social deprivation rate of the working age population (18–64)

At-risk-of-poverty rate of the population living in (quasi-)jobless households (18–59)

Performance indicators

Impact of social transfers (excluding pensions) on the poverty of the working age population (18–64)

Persistent at-risk-of-poverty rate of the working age population (18–64)

The benefit recipient rate for people at risk of poverty in (quasi-) jobless households (18–59)

Gap in self-reported unmet needs for medical examination (18–59)

Gap in housing cost overburden rate (18–59)

Gap in non-participation in training related to professional activity

Policy levers

Income of a minimum income beneficiary as a share of the at risk of poverty threshold

Income of a minimum income beneficiary as a share of the income of a low wage earner

In particular, minimum income benefits interact with other benefits (notably unemployment, family or housing benefits), but also with the design of tax systems (as regards work incentives). This is why it is important to have a twofold indicator that captures the income of a beneficiary household and compares it to the national poverty threshold (60 per cent of the median income) or to the income of a low wage earner household.16

Access to benefits: eligibility rules

A second policy lever relates to access: the capacity of minimum income schemes to reach those in need. The coverage of minimum income schemes can be defined on the basis of eligibility criteria, showing the potential number of beneficiaries. The take-up of benefits refers to the share of those actually receiving the benefits among those entitled to the benefits. Coverage and take-up rates do not necessarily match, and the available evidence shows that the gap between the two can be large. Complex or restrictive eligibility rules can also lead to exclusion errors or non-take-up, or the inability of the system to reach the most vulnerable groups (such as the homeless or migrants). For this policy lever, no specific indicator was identified but some quality context information was collected on means testing and residence requirements.

Labour market activation and access to services

As a third policy lever, the benchmarking framework focuses on inclusive labour market policies and access to affordable and quality services. The design of minimum income schemes should prevent inactivity traps,17 lowering disincentives to take up work for those who are able to do so. The entitlement to minimum income benefits is also generally coupled with activation requirements.18 To support labour market transitions, beneficiaries need to have access to adequate activation and enabling services. Access to services such as healthcare, housing and training is not only an essential precondition for successful labour market integration, but also guarantees an adequate standard of living and social participation for those who cannot work. For this third policy lever, specific indicators were not identified. It was agreed to rely on three performance indicators in the areas of access to healthcare, housing, and education (see box).

In the Joint Employment Report, this benchmarking framework is reflected in the analytical part of Guideline 8 on promoting equal opportunities for all, fostering social inclusion and combatting poverty. There is a mutual understanding that it should not be applied mechanically in assessing country policy responses and should be followed by country-specific analysis.

Conclusion

Social safety nets are critical for ensuring cohesive societies and just transitions. While the financial crisis negatively impacted Europe’s social situation, this negative trend had been broadly reversed when the Covid-19 crisis hit. There are, however, some remaining challenges which call for concerted action to ensure an effective minimum level of social protection in all EU Member States to further upward social convergence.

In this context, the joint exercise with Member States’ representatives of the Social Protection Committee to develop a benchmarking framework on minimum income has been highly relevant. By establishing a basis for cross-country comparisons, the framework supports various mutual learning and monitoring processes such as the European Semester and peer and thematic review activities. Building on this framework, mutual understanding and upward convergence in the design of national systems can be facilitated along the related Pillar principle.

Footnotes

1.
The views expressed in this article are those of the authors and may not be interpreted as stating an official position of the European Commission.
2.
Proposal for a Joint Employment Report from the Commission and the Council accompanying the Annual Sustainable Growth Strategy 2020 COM(2019) 653.
3.
Indicator of relative median at-risk-of-poverty gap, calculated as the difference between the median equivalised disposable income of people below the at-risk-of-poverty threshold and the at-risk-of-poverty threshold, expressed as a percentage of the at-risk-of-poverty threshold.
4.
The indicator measures the share of people who are poor and were also poor in two out of the three previous years.
5.
See further details in the 2019 Annual Report of the Social Protection Committee.
6.
OJ L 245 of 26.8.1992, p. 46.
7.
OJ L 307, 18.11.2008, p. 11.
8.
Communication from the Commission on Towards Social Investment for Growth and Cohesion.
9.
A Commission Staff Working Document was published in 2017 together with the Pillar package taking stock of the implementation of the 2008 Active Inclusion Recommendation and concluded that the Recommendation has acted as a driver for structural reforms in many Member States, still with overall uneven impact.
10.
OJ C 67, 20.2.2016, p. 1–5.
11.
OJ L 224, 5.9.2018, p. 4–9
13.
See further details in the Commission Staff Working Document on the implementation of the 2008 Commission Recommendation on the active inclusion of people excluded from the labour market 2017.
14.
The Social Protection Committee (SPC) is an advisory policy committee to the Ministers on the Employment and Social Affairs Council (EPSCO). The SPC was established by Council decision under Article 160 of the Treaty on the Functioning of the EU.
15.
Namely concerning adequate income support, accessibility of benefits and access to social services and the labour market.
16.
The calculations are based on the OECD tax and benefit model that is validated by Member States.
17.
Inactivity trap refers to the monetary disincentive to return to employment after inactivity. It is often referred to as the participation tax rate and refers to the part of the additional gross wage that is taxed away in the form of increased taxes (personal income taxes, employee social insurance contributions) and withdrawn benefits (unemployment, social assistance and housing benefits) in the event of an inactive person taking up a job.
18.
Such as registration with public employment services, active job seeking, contracts for individual integration/activation plan, acceptance of offered job and participation in active labour market policy measures, including training schemes and community work.
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