Sweden Finland Austria

1.2.
Benefit formula
There are three basic ’benefit formulas’ used in the social security systems studied. One
formula is the fixed amount, disregarding former income, it is the true ’flat rate’ benefit.
Another formula for the benefit is a certain percentage of the former income. This benefit
formula usually has a maximum which can be reached at a lower or higher income. If the

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maximum is reached at a relatively low income the benefit will have a ’flat rate’ character
for many recipients. Finally the benefit may follow several steps, where the percentage
may vary with the level of the former income, typically a decreasing percentage with an
increasing income. This ’step formula’ may have a maximum, but that is not always the
case, e.g. the Finnish system has several examples of benefits following the ’step formula’
without a maximum.
A few examples from the unemployment insurance schemes: Both the Danish and Swedish
unemployment benefits are a constant share of the gross wage, but the benefit reaches a
maximum rather early in the income interval in the Danish case (a little below 2/3 of the
APW income in 1997). In the Swedish case the maximum is reached below, but relatively
close to the income level of the APW in 1997, while in 1994 it was just above the APW
income level. In Germany, the maximum is reached at a much higher income level (1.7
APW income). Several of the schemes also have minimum benefits, e.g. in Denmark,
Sweden and Finland.
The APW income is used as a threshold for the characterization of the ’income related’
benefit formula. If the compensation has reached its maximum at the gross wage level of
the APW (or just above), it is characterized as ’income related, with a low cap’, the cap
being the income where the max. benefit is reached. If the cap is above (and more than just
above) the APW income or if there is no cap (no maximum benefit) the benefit formula is
characterized as ’income related’. Based upon this criterion, the compensation for
unemployment is classified as ’income related, low cap’ in Denmark and as ’income
related’ in Germany. For Sweden the cap related to unemployment benefits was below the
APW income in 1991, 1992 and the first half of 1993. In the second half of 1993 and in
1994 it was above the APW income and in 1995, 1996 and 1997 again below. In Finland
the benefits from the voluntary unemployment insurance scheme follow the ’step formula’
and there is no maximum. The scheme is characterized as ’income related’.
The elements of the social security systems are characterized according to this interpre-
tation of the terms ’flat rate’ and ’income related’ in table 1.2.

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Table 1.2.
Benefits: ’flat rate’ or ’income related’, 1997.
Elements
DK
S
FIN
A
D
NL
GB
CAN
Illness, benefits, insurance
w
2
2
2
2
2
*
2
Unemployment, insurance
w
w
2
2
2
2
*
2
1)
Injured from work, insurance
2
2
2
2
2
*
2
Disability pension
*
*
/
2
*
/
2
*
/
2
2
2
*
*
/
w
3)
2)
Retirement
*
*
/
2
*
/
2
*
/
2
2
*
*
/
2
*
/
w
3)
2)
Family allowance
*
*
*
*
*
*
*
*
Maternity leave, benefits
w
2
2
2
2
2
*
/
2
2
*
The benefit is ’flat rate’.
w
The benefit is ’income related, low cap’.
2
The benefit is ’income related’.
1)
From March 1995 the ’entrance’ conditions have been tightened considerably. Many newly unemployed
will therefore receive a ’flat rate’ benefit.
2)
The disability pension in Canada is from the supplementary pension scheme alone, it consists of a flat
rate component and a share of the earnings related retirement pension. The retirement pension consists
of flat rate basic pensions and an earnings related supplementary pension.
The max. retirement pension in the Canadian supplementary pension scheme is reached very close to
the APW income level.
3)
There is a minimum level in the Austrian pension schemes which are flat rate benefits.
For Denmark nearly all the elements are characterized as ’income related, low cap’ or as
’flat rate’. The additional pension scheme for employees, cf. section 1.1, is dependent on
former contributions. These contributions were basically related to the working period
(hours per week, and years of occupation) not to income, but from 1998 the contributions
also depend on income (1 per cent of the base for the general social contribution is also
paid as a supplementary pension contribution). The only Danish ’income related’ element
in 1997 is compensation for injuries from work, which in most of the countries has the
same character.
Sweden and Denmark are often believed to have the same welfare state type of social
security systems. According to the aspect in focus here, it is evident that the Swedish
system is considerably more income related than the Danish one. In the Swedish unem-
ployment insurance scheme the position of the cap in relation to APW income has, as
already mentioned, changed several times since the early 1990’s. This is a result of the
changes in the percentage of compensation (from 90 per cent to 80 per cent in mid 1993
and to 75 per cent from 1996 and back to 80 per cent from the last quarter of 1997) and the
max. benefits, which have been on the 1992 level since mid 1993. It was first increased in
1998. The Swedish unemployment benefit scheme together with the Canadian supplemen-

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tary pension scheme are the only ones in this study, where the cap is very close to the
APW income level.
In this broad classification the Finnish system has almost the same characteristics as the
Swedish one, but often uses a ’step formula’ without a maximum (e.g. illness, unemploy-
ment and maternity leave benefits).
The German system is, except for the family allowance (and social assistance, not covered
here), ’related to income’. Even the family allowance is in some cases ’related to income’,
because in Germany families with children either receive a refundable tax credit or a tax
reduction based upon allowances (one per child) deductible in taxable income, whatever
is most advantageous. The deduction in taxable income has the largest value for high
income families, because of the progression in the German taxation scheme, so child
benefits as allowances deductible in taxable income will typically be for high income
families.
Austria has the same type of 
income related' system as Germany. The Austrian family
allowance scheme has a cash benefit component and a refundable tax credit component. In
Austria there is no deduction in taxable income for children.
The British system is primarily ’flat rate’ in the true sense of the word, but also has a few
’income related’ components. 
The Dutch system is ’flat rate’ for the general part of the system, while it is basically
’income related’ for the part concerning employees.
The Canadians primarily apply ’income related’ schemes where the cap usually is some-
what (approx. 10 per cent) above the APW income level, except in the supplementary
pension scheme, where the cap, as mentioned, is very close to the APW income level, and
in the ’Workmen's Compensation’ (injuries from work) where the cap (in Ontario) is
approx. 60 per cent above the APW income level.
One consequence of a ’flat-rate’ or an ’income related, low cap’ scheme is that the effec-
tive compensation percentage will decrease very soon with increasing income, while in an
’income related’ scheme it will usually be almost constant over a much wider range of
income. The ’step formula’ will have a decreasing compensation profile but not as steeply
decreasing as the ’flat rate formula’.

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