Increasingly countries around the world struggle to provide welfare and social security in a world where high unemployment, an aging population and increasing expectations erode public finances. Over the past decades some of the most accomplished economists in the world, such as Josef Stiglitz and Martin Feldstein have identified a method for combining a safety net with a much lower marginal tax wedge. The Finnish think tank Libera has packaged these ideas into a clear and feasible proposal.
Libera’s Life account is a concrete model for transforming the current welfare state to a new version, 2.0. The life account is a form of personal welfare account, which improves the incentives to work, employ and save. Compared with a conventional tax-transfer system, it reduces social insurance expenditure. The model allows combining work income and social benefits, leaving the initial need testing to the individual. It reduces the tax wedge and allows for more flexible employment by households and individuals. The life account also encourages individual saving, financial planning and the accumulation of private wealth.