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ESPN Thematic Report on Financing social protection : Croatia

In Croatia the share of gross expenditure on social protection in GDP amounted to 21.3% in 2016 (compared with 18.8% in 2008). The highest share was in 2014 and 2015 – 21.8%. The growth in the share of gross expenditure on social protection in the 2008-2016 period can be attributed more to the drop in GDP than to the growth of real social protection expenditure, which rose on average by 0.5% annually. A major increase in the share of social protection expenditure in GDP was recorded in the 2008-2010 period, because of a huge drop of GDP and economic activity (GDP in 2010 was 9.8% lower than in 2008). On the other hand, declining economic activity resulted in a fall of the number of employed persons and a substantial reduction in social contributions (the employment rate fell from 60% in 2008 to 52.5% in 2013). The largest share of social protection expenditure in 2016 belonged to the old age function (34.2%) ; the share of the sickness/health function amounted to 33.4%, while the share of all other functions was 32.4%. The social protection system has been financed mostly through compulsory social contributions paid by employers or employees (58.7% of the overall social protection expenditure in 2016) and general government contributions (38.5% in 2016). However, in the 2008-2016 period a decreasing trend was observed in the share of social contributions and an increasing trend in the share of general government contributions − as a whole, and in the main functions of social protection (old age, sickness/healthcare, disability, survivors). There was a decline in the shares of all types of social contributions (paid by employers, employees and the self-employed) in total social protection receipts. The main source of financing for the old age function is social contributions, whose share fell from 66.8% in 2008 to 59.1% in 2015. The shares of social contributions in financing of the survivors and disability functions also fell in the 2008-2015 period. In order to ensure the financial sustainability and adequacy of the pension system, the government has implemented four categories of measures: 1) an increase in pensions for new beneficiaries in the two-pillar model ; 2) a reduction in pensions during the recession, and greater penalties for early retirement ; 3) changes in the classification of pensions (channelling savings from the fully funded to the pay-as-you-go [PAYG] pillar, or conversion of disability into old-age pensions) ; and 4) indexation of pensions (absence of indexation during the recession and change of the indexation formula). More than 80% of total financing for the sickness/healthcare function comes from social contributions. However, the trend for this function is very similar to the general trend for social protection: the share of social contributions is declining and the share of general government contributions and other receipts is increasing. Unemployment benefits prior to 2019 were financed through a mandatory unemployment insurance programme, but at the end of 2018 the unemployment insurance contribution (1.7%) and the contribution for accidents at work and occupational diseases (0.5%) were abolished, and instead the health insurance rate was increased from 15% to 16.5%. Negative demographic trends due to the emigration of the younger population, a low employment rate and weak economic growth make the pension system hardly financially sustainable. The government should make more effort to collect contributions and to control contribution evasion. In the healthcare system, we suggest that the government should increase supplementary health insurance paid premium to the Croatian Health Insurance Fund by 20%, with an improved means test ; and that it should improve the efficiency and effectiveness of this sector. In addition, it is important to increase government contributions towards means-tested benefits in the social exclusion and family/children functions, and to use EU funds to improve the availability and affordability of childcare services in underdeveloped regions.

Financing social protection ; social contributions ; social policy

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