January 1, 1995

Alternative funding of the social security system: the Van Elswijk proposal

Under the current system of social security contributions in The Netherlands a decrease in employment leads to higher social security contributions which raise labour costs and hence reduce employment even further.

To prevent this vicious circle Van Elswijk proposes to broaden the base for social security contributions from the wage bill to net value added. Furthermore he suggests to give a subsidy to the employers for every employee they engage. This working paper analyzes the effects of such a change in the funding of the social security system. It is found that introduction of a levy on net value added and decreasing the social security contributions accordingly, lowers real labour costs and increases employment: implementing the Van Elswijk proposal for ƒ 17 bln in social security contributions raises employment after 8 years with 30 000 labour years. However, introduction of the levy on net value added is hampered by the fact that net value added is not an accepted business concept and in practice has to fit in the existing fiscal regulations and concepts. A major source of uncertainty as to the effects on employment is the reaction of wages to the change in funding of social security. The more employees demand a share of the reduced labour costs, immediately or on longer term, the more modest the effects on employment will be and the larger the risks of lower profitability and lower investment.


Ruud Okker
A.W.H. Dortmans
Jan Donders
Ate Nieuwenhuis
M.O.F.M. van den Tillaart

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