Trend projections for social security expenditure

Abstract

Social security expenditure accounts for a large proportion of the Finnish economy. According to the latest statistical report (THL, 2016), Finland’s social security expenditure totalled 65.6 billion euros in 2014. The expenditure has grown substantially in recent years. Central and local government tax revenue covered nearly one half of all social security expenditure in 2014. The expenditure can be forecast with the help of spending estimates in which expenditure trends are modelled.

The report covered the long-term trend projections used as basis for social and health policy decisions. The focus was on the trend projections prepared in the Ministry of Social Affairs and Health and the social security expenditure analysis model (SOME model) on which the projections are based. The trend projections produced with the help of the SOME model are also regularly used by the Ministry of Finance in its estimates for the general government sustainability gap. For this reason, the report also discusses the preparation of the sustainability gap estimate insofar as this is necessary for examining the proper use of the SOME model. The long-term trend projections for social security expenditure produced by the Social Insurance Institution of Finland and the Finnish Centre for Pensions are the main sources used when comparisons with the SOME model are made in the report.

The aim of the report was to determine whether the knowledge base used in Finland for social and health policy decisions and sustainability gap estimates is transparent and described in an open manner. The aim was also to produce an overall picture of the long-term trend projections for social security expenditure and to highlight areas where improvements might be needed so that the knowledge base could be made more reliable and the information and resources available could be used more effectively.

There are differences in the content of the estimates concerning social security expenditure, depending on the perspective applied and the variables used in the modelling. The impacts of different variables on social security expenditure may vary, depending on whether they are examined on the long-term or short-term basis. The SOME model, maintained and used by the Ministry of Social Affairs and Health, is the most comprehensive of the models used in the production of long-term trend projections for social security expenditure. In addition to the benefits traditionally considered as part of social security, the accounting framework also covers health care and pension expenditure as well as unemployment security. The SOME model was jointly developed by Ministry of Social Affairs and Health experts and a Private consultant between 2007 and 2009. The accounting framework is clearly structured and provides a good basis for further development. The description of the model and the technical manual are comprehensive and detailed. However, the description has not been updated even though a number of changes have been incorporated in the model since its introduction.

There is demand for the analysis produced with the model and for more advanced versions of the model. For example, the social and health care reform (SOTE reform) will create a need for trend projections for social security expenditure in individual SOTE regions. The overall savings target set out for the SOTE reform has been calculated in relation to the basic trend produced with the SOME model. In this basic trend, it should be possible to subject the more detailed projections arising from the accumulation of documents or other reasons to regular analysis so that the cost savings that the SOTE reform is expected to bring can be registered and analysed in a transparent manner.

When the long-term sustainability of general government finances is measured and the policy decisions impacting the sustainability are justified, references are often made to the sustainability gap estimate prepared by the Ministry of Finance. The SOME model plays a central role in the Ministry of Finance’s sustainability gap estimate as it serves as a basis for the estimates for age-related expenditure. Trend projections for age-related expenditure are jointly prepared by the Ministry of Social Affairs and Health and the Ministry of Finance on an unofficial basis. The division of responsibilities in this cooperation process remains unclear even though the final responsibility for the sustainability gap estimate lies with the Ministry of Finance. The description of the methodology applied in the sustainability gap estimate for age-related expenditure is of general nature and characterised by lack of transparency.

Scenarios or sensitivity analyses produced with the SOME model have not been published on a regular basis. The analysis based on the model could also be used more extensively in short-term policy planning. Systematic publication of the findings would provide a basis for a dialogue between experts, make social and health policy decisionmaking and the sustainability gap estimates produced by the Ministry of Finance more open and transparent, and make it easier to develop the model.

In practice, only one official in the Ministry of Social Affairs and Health possesses the expertise required for using the model. The model is also used by two Ministry of Finance officials taking part in the preparation of the sustainability gap estimate. The Ministry of Finance has been the main partner in matters concerning the SOME model and there has been little cooperation with other parties since its introduction. Most of the SOME users outside ministries have been researchers occasionally using the model. In fact, the model could be used more extensively by experts.

The resources currently allocated to the SOME model are not necessarily adequate for developing it in accordance with the demand and in a manner that would allow systematic analysis of the findings.

Recommendations of the National Audit Office

1. The Ministry of Social Affairs and Health should ensure that the technical manual of the SOME model is updated. Reports on the scenario calculations produced with the SOME model and containing sensitivity analyses should also be published on a regular basis.

2. When developing the SOME model, the Ministry of Social Affairs and Health should take into account such issues as the new information needs arising from the SOTE reform. The Ministry of Social Affairs and Health should ensure that adequate resources are allocated to the development work and regular analysis and that there is enough expert-level cooperation with other organisations producing trend projections for social security expenditure and supplying information for them.

3. Cooperation between the Ministry of Social Affairs and Health and the Ministry of Finance in the preparation of the sustainability gap estimate aimed at producing age-related expenditure should be described in a transparent manner. The Ministry of Finance should prepare a thorough and transparent description of methodology on the sustainability gap estimate and use sensitivity analysis in the regular reporting on the sustainability gap estimate, for example in relation to trends in social security expenditure.