EUROPEAN PAPERS ON THE NEW WELFARE

Ageing in Slovenia and Sustainability

3. Social Consequences of the Red to Gray Transition

In 2006 Slovenia spent 17.1% of GDP on social security, 6.4% on education, 6.2% on health care. While the expenditure for education has been more or less constant since 2000, expenditures for social security and health care have decreased respectively from 17.5% and 6.5% in 2000.
The pension and social security system represents the most important social challenge of the red to gray transition. The number of retired people doubled between 1985 and 20003, so that from 3 active persons per one retired the ratio fell to 1.5 and is expected to decrease further. Since the basic system is of the pay-as-you-go type, this represents a huge challenge. Therefore additional voluntary pension insurance became popular, however it is still not yet widely accepted by the population. Hence a significant reform of the pension system is needed.
The education system also requires a significant restructuring. Namely, while the number of children in primary and secondary schools is decreasing due to the decreasing number of births, the number of enrolled students at university is increasing. While this is a positive development, the distribution among the disciplines is not very favourable, as there is a small number of students in natural sciences and technology and a large number of students in social sciences. While this ratio has improved slightly in the last few years, it is still very low and represents a challenge to the employability of university graduates.

4. Environmental Consequences of the Red to Gray Transition

Ono and Maeda2 showed that ageing has both positive and negative consequences on the natural environment. While on one hand a negative aspect of ageing is captured by a decrease in unintentional bequests thus lowering the level of young people’s wealth, the positive effect of ageing is represented by more investment in the environment in preparation for longer lives. Ono and Maeda demonstrated that the effect of ageing on the environment depends on annuitisation. While perfect annuitisation is beneficial to the environment, imperfect annuitisation is harmful. They also find that for industrial countries such as Slovenia the degree of consumption externality should be lowered and annuitisation set to zero in order to achieve sustainability in the ageing economy2. While this might seem a mathematically possible solution, it is difficult to achieve in relation to reasonable economic growth, which is required if Slovenia is to reach its developmental targets. It is therefore important to seek alternative solutions, which might also be sustainable.
Such an alternative solution can only be found in the transition to a knowledge based society, where each person’s talents regardless of age are allowed to flourish. The most important preconditions for such a creative environment require as the first step a significant improvement in personal freedom, where the state’s role is to remove administrative and legislative barriers to knowledge, as well as to replace the current outdated tax system. The tax system is aimed at taxing most knowledge workers with incomes above average, who pay a nominal marginal income tax rate of 41%. When all other taxes are added the real marginal tax rate on additional income is about 60%. Without a significant decrease in the effective marginal tax rate on knowledge workers there is not much chance of significantly improving the role of knowledge in Slovenian society, and therefore not much chance of achieving the sustainable solution with a non zero annuitisation.

5. Conclusions

While population ageing in Slovenia is expected to bring many negative consequences, it is also linked with opportunities. On one hand the older population has more experience and this can be an asset in the knowledge based society as long as the pressures on social security and health costs are sustained with the healthy growth of the economy. The real challenge of the ageing transition in Slovenia is therefore in the application of knowledge and in the establishment of a creative environment, where each person’s talents regardless of age will flourish. Development since 2004 has been in the right direction, e.g. with a decrease in the top marginal income tax rate from 50% to 41% as well as a decrease in salary tax, however in view of the rapidly ageing population these changes should be significantly broader and faster in order that a sustainable knowledge based society might be achieved in Slovenia.

References

Chawla, M., Betcherman, G., Banerji, A., Bakilana, A.M., Feher, C., Mertaugh, M., Sanchez Puerta, M.L., Schwartz, A.M., Sondergaard, L. and Burns, A. (2007): From Red to Gray: Third Transition of Aging populations in Eastern Europe and the former Soviet Union, The World Bank.

T. Ono and Y. Maeda (2002): “Sustainable development in an Aging Economy”, Environment and Development Economics, 7, p. 9-22.

Statistical Office of the Republic of Slovenia, accessed on January 13, 2008. See also: www.stat.si/

Verbič, M., Majcen, B. and van Nieuwkoop, R. (2005): “Sustainability of the Slovenian Pension System”, Working Paper, No. 29, Institute of Economic Research, see also: www.ier.si/files/Working%20paper-29.pdf


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