Use of public services: does it change our idea of pensioners’ well-being?

The opportunity to use publicly provided services supports pensioners’ livelihood and well-being significantly. The Pension Adequacy Report 2018 of the European Commission highlights that an evaluation of an adequate pension depends on what the pension is supposed to cover, including consumption of goods and services. From this perspective, it is possible to draw a parallel between social transfers in cash and benefits received from the use of public services. On the other hand, out-of-pocket fees can be a substantial financial burden, in particular for low-income pensioners.

Public services are an important dimension of countries’ welfare package

Together with other Nordic countries, Finland has been a forerunner in developing comprehensive social care services. The State carries the biggest responsibility for care services in Finland, while the provision of care is the responsibility of families and markets in many other European countries. In cross-national comparisons of well-being and welfare, it would thus be important to broaden the scope of analysis to include benefits received from the use of public services.

Regarding pensioners, for example, welfare states plan a “welfare package” that may include higher pensions that can be used to purchase necessary services, or alternatively, a combination of pensions and services, in which case subsidized services complement cash benefits. This means that an in-depth analysis of the use of public services creates an important context for the evaluation of adequacy of pensions. Likewise, when we try to understand economic conditions of retired people in a more comprehensive way, studying the share of disposable income that goes into health services and social care is one important dimension.

Taking into account the value of services

Many studies have tried to take into account social transfers in-kind to look at their impact on poverty or income inequality. One may consider this to be analogous to adding apples to oranges and object to the idea of public services smoothing income gaps in the society. This opposition is not incomprehensible. Nonetheless, there is no doubt of the important role public services play in the welfare states’ redistributive mechanism even if redistribution is not their raison d’être. Hence, it is necessary to assess how the spending used in providing public services is distributed across society and how it may change our perception of well-being and income inequality.

Using Finnish register data, that was precisely what we analysed. Our main results can be summarised in the figure below.

Firstly, the amount of in-kind benefits is larger at the bottom of the income distribution both in absolute and relative terms. In other words, if in-kind benefits were to be taken into account in the concept of income – which is not straightforward methodologically or conceptually – the income gap between the poorest and the richest pensioners would narrow.

Average equivalised disposable income, in-kind benefits, and user fees by income quintiles (€/2015). Source: Vaalavuo (2018).

Secondly, we see that user fees paid are small in relation to the monetary value of the service received. On average, the annual value of in-kind benefits is more than 6,500 euros among pensioners, while user fees amount to around 830 euros.

Third, user fees equal to 3.5 per cent of pensioners’ disposable income. The difference between income groups is significant: 7.1 per cent for the poorest pensioners and 1.4 per cent for those in the top income quintile. This means that user fees are a regressive instrument to finance services.

There is, however, a lot of heterogeneity behind these averages. While almost 90 per cent of Finnish pensioners used some health care and social services, 10 per cent of the service-users caused 70 per cent of the total costs. In this group of users, the average annual costs exceeded 50,000 euros. At the other end of the distribution of costs, we find that every second pensioner generated costs below 1,000 euros.

New forms of spending and beneficiaries

Health and social policies can impact income distribution in several ways. In our study, we emphasised the importance of looking at the role of public spending as well as financing of services through user fees when analysing the mechanism of redistribution.

The increasing spending on care services can raise distributional concerns as the welfare state paradigm shifts to new forms of spending and new types of beneficiaries. The development can have a distributive impact among the retired as well as the total population and also between different age cohorts. From a policy perspective, it is fundamental that we know how public spending is distributed in society. Who benefits and who does not? What are the distributive consequences of, for example, the changes in the service provision or increased reliance on user fees?

Naturally, the use of services relates to certain needs, so adding the value of services to the disposable income is problematic. It would be necessary to account for the needs underlying the use of services. Nonetheless, we also see that, in the absence of public services, costs would grow out of proportion for many pensioners.

Read more

Vaalavuo, M. (2018) The Impact of Social and Health Care Services on Retirees’ Income.
English summary (pdf)