Are public and private social expenditures complementary?

Abstract

Most analyses of social protection are focussed on public arrangements. However, social effort is not restricted to the public domain; all kinds of private arrangements can be substitutes to public programs. OECD-data indicate that accounting for private social benefits and the impact of the tax system on social expenditure has an equalising effect on levels of social effort across a number of countries. This suggests complementarity between public and private social expenditures. Changes in the public/private mix in social protection will, however, have distributional effects. We expect that private schemes will generate less income redistribution than public programs. In this paper we will perform an empirical analysis. Using comparative international data we analyse whether there is a relationship between public and private social expenditures, and the distribution of income. We find a negative relationship between net public social expenditures and income inequality, but a positive relationship between net private social expenditures and income inequality across countries. In fact, when we incorporate private social security expenditures, the impact of total social expenditure on the income distribution becomes statistically trivial. We conclude that changes in the public/private mix in the provision of social protection may affect the redistributive impact of the welfare state