OECD Warns: Social Protection Costs 23% of GDP and Rising

Social protection spending in OECD and EU nations has climbed to 23 percent of GDP, a level that the OECD characterises as structurally unsustainable unless substantial reforms are made to the financing of welfare systems.

The report from the Paris-based organisation, dated September 2026, anticipates that demographic pressures will contribute an additional 1.1 percentage points to GDP in pension expenditures across the OECD by 2045. Furthermore, health and long-term care costs are expected to increase by an additional 1.5 points.

Ageing Strains Financing Base, Says OECD

The challenge of financing extends beyond increased spending; it also involves a diminishing revenue base. Contributions to social security, which account for approximately 43 percent of social expenditures across the OECD, are primarily imposed on earnings from labour.

According to projections from the OECD, total hours worked are expected to decrease by approximately 9 percent among its member countries from 2024 to 2060 due to ageing populations.

The European Union is anticipated to experience an even more significant decline, nearing 20 percent.

A smaller working-age population supporting a larger retired population creates a mathematical squeeze that most member states have yet to address through legislation.

Self-Employed Contribute Far Below Share

The self-employed workforce in the EU highlights a similar structural disparity. The self-employed represent 14 percent of employment within the EU, yet they contribute a mere 4 percent to social contribution revenue. Coverage gaps are particularly pronounced in the unemployment benefits, whereas participation in pension plans is notably stronger.

The OECD highlights that voluntary programs aimed at bridging these gaps experience low participation rates and adverse selection, which ultimately weakens risk pooling.

EU Budget Reform Threatens Social Fund

There is increasing political pressure regarding spending decisions. The European Commission’s proposed Multiannual Financial Framework for 2028–2034 aims to consolidate the European Social Fund Plus, valued at around €96 billion, into a comprehensive “mega-fund” that encompasses cohesion, agriculture, and social objectives.

Under the proposal, member states would be mandated to designate a minimum of 14 percent of eligible expenditures toward social objectives, yet this would come without the safeguarded allocations that presently secure ESF+ resources.

Internal calculations from the European Parliament, as referenced by the European Social Network, indicate that overall social spending may decrease to a range of €63 billion to €87 billion under the new framework.

Italy could see a potential reduction in its allocation of nearly 80 percent.

The data from the OECD also highlight notable differences between countries.

France allocates about 31.9 percent of its GDP to social protection, the highest among the organization, with Finland and Belgium closely following at around 31 percent.

On the other hand, Colombia dedicates approximately 14 percent of its GDP to social expenditures, which is significantly lower than the OECD average.

Pension and Health Bills Set to Climb

These disparities illustrate varying degrees of economic advancement and the evolution of social welfare systems, while also indicating the areas where financial strain is likely to escalate significantly due to the growing demands of ageing demographics on pension and healthcare benefits.

The OECD highlights limited politically viable alternatives for significant cuts in spending.

Instead, the global organisation suggests expanding the financing base, which includes increased dependence on general revenues, capital income taxation, and property taxes.

The OECD also highlights that the share of labour income in GDP, which has remained stable since the 1990s following a prolonged decline, may face renewed pressure from technologies that replace labour.

This risk is characterised as uncertain in magnitude but significant in its potential impact.

For policymakers, the math is unforgiving.

A financing model reliant on a diminishing workforce cannot sustainably uphold expenditures associated with an expanding retired demographic.

The OECD’s report stops short of prescribing specific tax increases, but its analytical trajectory is clear: the 23 per cent figure is not a ceiling but a waypoint on an upward curve that current financing arrangements are ill-equipped to follow.