All Western countries suffer from run-away costs of health, unemployment and pension insurance. Controlling costs by regulation has failed utterly; government administration of social programs has proven wasteful; the age structure is out of balance. The welfare state cannot be sustained. But how to provide a social safety net? In this publication by the Centre for the New Europe, Wilfried Prewo shows that social security can be made more efficient and should be privatized - without slashing the social safety net.

Whether in the forms shaped by Bismarck in the 1880's, Roosevelt or Beveridge in the 1930's and 40's, the modern welfare state seemed to be the model for the maturing industrial society. It was even credited with initiating a virtuous cycle: Pension, unemployment and health insurance provided social stability. With improved and sustained health, the work force became more productive. Unemployment insurance allowed workers to overcome cyclical and structural slumps without falling through the social safety net. With guaranteed pensions, workers could look forward to retirement.

The success of this model - near-universal social protection - made us blind for its basic design flaws: The welfare state treats citizens as recipients of entitlements bestowed on them rather than as sovereign customers who otherwise can choose among an array of goods and services; with uniform entitlements, there are no incentives to economize. Second, social security is provided by government through monopoly schemes; their performance has been dismal when compared with other sectors of the economy that, under competition, have yielded continuous efficiency improvements. Third, the welfare state builds on the false assumption that the generational contract is adhered to and that society generates and raises its offspring to the necessary strength in order to preserve the demographic pyramid without which a pay-as-you-go pension scheme must collapse; instead, society is allowed to walk away from this commitment and shift an increasing burden onto a weakened future generation.

Increasing global competition has now exposed the Achilles heel of the welfare state. In world markets, we no longer can command prices that are generous enough to finance it. Jobs are lost. We are now caught in a vicious cycle: With higher unemployment and an increasing number of pensions financed in pay-as-you-go schemes, fewer workers have to pay for more beneficiaries. The welfare state sucks up the savings that we would urgently need as we leave the machine age and have to invest and grow into the information age. It is the albatross around our neck.

Applying the principles of the market economy to social security would unlock a vast potential of efficiency gains. The issue in such a reform is equity. Social security must be affordable for all.

Wilfried Prewo is Chief Executive of the Hannover Chamber of Industry and Commerce in Hannover, Germany.

The Hannover Chamber is one of the largest German chambers, with a membership of over 100,000 companies and a staff of 200. Apart from its strong focus on services for its members, the Hannover Chamber is an active pro-market voice in Germany. To this end, Wilfried Prewo writes and speaks frequently on economic and social policy. He has been promoting a privatization plan for the German pension and health insurance systems and, in the case of tax reform, has proposed a revenue neutral flat tax of 20 per cent for Germany.

Prewo was born in 1947. He holds a B. A. from Grinnell College and a M. A. and Ph. D. from Johns Hopkins University. Prior to assuming his current position, he had been working in the private sector as well as, earlier in his career, at the Kiel Institute of World Economics and at the University of Texas at Austin.

Prewo is a fellow and a board member of the Centre for the New Europe.

CNE Senior Fellow Stephen Pollard will serve as the moderator for this event.