Central and East European countries in transition are an interesting observatory for social welfare reform, because of the vast political, economic and institutional changes that these countries experienced in the early 1990s. The wider question is how their social protection systems managed to cope with these changes and how these systems performed their basic functions, i.e. ensuring replacement incomes to the elderly, unemployed and other vulnerable groups and providing health care for the whole population.

In the early years of transition (early 1990s), almost all countries in the region experienced large drops in output, large increase in unemployment and large decrease in employment, particularly in employment in the formal sector. These developments caused an increase in social protection needs. Unfortunately, with a rise in needs came a decline in ability to meet those needs, as the contribution base eroded. This was due to the decreasing number of contributors and increase in contribution evasion.

In the more developed countries of the region the financial crisis of social protection systems did not result in a substantial decrease in the social protection rights of the population, whereas in the less developed countries of the region the financial deterioration of the social protection systems resulted in increased poverty and reduction in the standard-of-living of vulnerable population groups. In other words, the real value of pensions, unemployment benefits and other social benefits decreased considerably.

Social protection systems, which are based on the social insurance principle, depend to a large degree on the “core” group of contributors: these are full-time, permanent, wage or salary earners. In normal circumstances their compliance (and compliance of the employers) is assured. However, in some Central and East European countries in transition even this “core” group was (and still is) problematic. In these countries large contribution arrears were caused by state enterprises, such as railways, steelworks and mines. In our view, non-compliance by the state sector is unacceptable. An important goal is to achieve high compliance in the formal sector, which is possible through strict adherence to rules and procedures, as well as through an efficient (centralised) contribution collection and control mechanism.

Transition caused an increase in the number of self-employed in all countries of the region. This group of contributors typically pays low contributions. In Poland, Hungary and Slovenia most self-employed are included in the social protection system, but pay small contributions: between 80% and 100% of the self-employed pay contributions from the minimum contribution base. In Romania, despite the very low minimum contribution base, only a small number of self-employed are registered in the social protection system.

Farmers are the most important group of self-employed in Poland and Hungary, and somewhat less important in Slovenia and even less in Hungary. Poland and Slovenia have separate social protection schemes for farmers; in Slovenia these schemes are formally integrated in the general social protection scheme. In both countries these schemes are very heavily subsidized by the government.

The unemployed have satisfactory social protection coverage only while they are entitled to unemployment insurance benefits. Persons receiving the means-tested unemployment assistance are typically not covered for pension insurance. In Poland, Hungary and Slovenia the unemployed who are sufficiently close to retirement age are granted a somewhat more favorable treatment, i.e. their insurance benefits are extended till pensioning.

In conclusion, it must be stated that the increasing number of the active population which is not employed in the formal sector poses problems in all social protection systems. It reduces the level of social security contribution revenues and also causes problems on the benefit side, as a large part of the active population does not accumulate sufficient social protection entitlements (particularly for old-age pensions). There are no magic solutions to this problem, and it is difficult to expect that persons with a weak attachment to the formal sector will have high contribution compliance. Increasing compliance is though possible by linking contribution payments for high priority social protection risks - such as health care, insurance for injury at work - with other risks (insurance for old-age, etc). In the long run, the best course for expanding coverage is satisfactory economic growth, which also increases the size of the formal sector and provides the means for a financially sustainable system of social protection.

However, it must be stressed that not all hinges on economic growth and that experience in Central and Eastern European countries has clearly shown that improvements in the administrative capacity are also very important for the satisfactory functioning of social protection systems.