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individuals above retirement age, and the number of individuals living
on various benefit
systems (Lindbeck, 2006). Indeed, social insurance in some developed countries is today
heading in this direction. The basic idea is to relieve politicians from the necessity to take
unpopular policy measures from time to time for the purpose of guaranteeing the financial
sustainability of various social insurance systems.
Another lesson from developed countries is that the consequences of income-security
arrangements and redistribution policies for economic efficiency and economic growth
depend crucially on exactly how the arrangements are designed. Therefore, it does not
make sense to ask whether there is a trade-off between income
security and redistribution,
on one hand, and economic efficiency and growth, on the other hand,
without first
specifying how the arrangements of income security are actually designed
. For instance,
undesired disincentives effects of the taxes required to finance such systems may be
mitigated by establishing a rather tight “link” between contributions and benefits for the
individual – although this naturally reduces the redistributional effects across individuals.
Moral hazard in the connection with various benefit systems (such
as increased leisure
financed by the general tax payer) may also be mitigated by making benefits distinctly
lower than the after-tax wage. Otherwise, there is a risk that individuals develop a
gradually more “liberal” interpretation of their rights to live on various types of benefits,
such as unemployment benefits, sickness absence pay, and early retirement benefits. Such
a weakening of attitudes and social norms towards benefit dependency would accentuate
the problem of moral hazard. Indeed, I have hypothesized elsewhere that contemporary
welfare-state problems in several developed countries are partly due to such changes of
attitudes and social norms (Lindbeck, 1995; Lindbeck, Nyberg and Weibull, 1998).
These lessons from developed countries may seem self-evident at first, but experience
shows that they are not easily learned and adhered to. Contemporary experience in several
countries in Western Europe also expose the political difficulties in
cutting back the
generosity of welfare-state arrangements even after both experts and many politicians
have become convinced that existing arrangements are not sustainable. It is, therefore,
important that China watches out for problems of disincentives and moral hazard in the
future when expanding its social insurance system – preferably before the problems have
become severe.