Key questions

• Why do we have collective insurance solutions to personal risks, rather than leaving people to make their own arrangements?

• Should welfare be delivered by the state, or privately?

• How can we ensure that the welfare bill does not grow inexorably and undermine self-sufficiency?

• How do we ensure “generational equity” when the old vote in greater numbers than the young?

Summary

Life springs surprises, and sometimes these are not pleasant or welcome. Unemployment and sickness can come out of the blue to upset our carefully laid plans. But even life events that are more predictable, such as getting old, can be difficult to prepare for on our own. This is why collective social protection, or welfare states, can sometimes come to the rescue by allowing us to pool our risks and resources to deal with unexpected events. Modern welfare states are designed to take care of us “from the cradle to the grave”: from helping with childcare to maintaining an income for pensioners and the unemployed. One of the biggest drivers of increasing costs is medical progress in producing greater longevity. Having and raising children is a big expense for families, and a particular focus for policy-makers is how to help people deal with this in ways that will not disrupt their participation in the labour market, for example. The trouble is, if the state, or my private insurance scheme, will always take care of me, however I behave, why should I work hard, take care of my kids properly or look after my own health? Welfare states therefore face challenges in overcoming moral and other hazards to keep the lid on affordability. Although a well-designed and fully resourced welfare state, such as Denmark’s, helps the economy stay competitive, some others, such as Greece’s, are a huge drag on the economy. And, with so many vested interests bound up in welfare states, they can be very difficult to reform.

Key topics and theories covered

Social insurance and risk pooling; moral hazard and welfare state design; children and the welfare state; old age and pensions; poverty and inequality; welfare and the public finances; “worlds of welfare capitalism”.