Europe must overhaul its tax and social security systems to safeguard welfare states against mounting pressure from globalisation, climate change, demographic shifts, and digitalisation, researchers from the EU-funded Project WeLaR warned.
In their latest policy brief, Taxes, social security, contributions and redistribution: Welfare state and public finances, the researchers argue that traditional models for financing the welfare state, especially those heavily reliant on labour-based contributions, are no longer adequate to sustain today’s systems.
“We’re seeing a clear mismatch between how Europe funds its welfare state and the economic realities it faces,” said Laurène Thil, one of the authors and a senior researcher at HIVA-KU Leuven. “Without major reforms, public finances will fall short of what’s needed to protect people and respond to long-term risks.”
One major threat to public revenue stems from harmful tax competition and corporate profit-shifting. As EU countries compete to lower corporate tax rates, governments lose the fiscal space needed to maintain essential public services. The brief calls for stronger EU-level coordination to harmonise tax policies, set minimum corporate tax rates, and enforce existing rules under frameworks like the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the EU’s Anti-Tax Avoidance Directive.
Climate change also presents both a fiscal burden and an opportunity. Despite the EU’s climate targets, fossil fuel subsidies remain widespread, slowing the green transition and straining public budgets. The authors argue that eliminating these subsidies and adjusting energy prices to reflect environmental costs could unlock $2.4 trillion in global revenues and cut carbon emissions by nearly a third. Reinvesting funds from carbon taxes in renewable energy, public transport, and targeted support for vulnerable households would ensure the green transition benefits all.
Europe’s ageing population and declining birth rates are placing unprecedented pressure on pension and healthcare systems. With fewer workers supporting more retirees, the sustainability of pay-as-you-go pension models is increasingly uncertain.
The brief urges policymakers to boost labour force participation through re-skilling, and support for working parents. In the longer term, to cope with the shrinking of its working population the EU will need to diversify how welfare is financed, introducing new sources of revenue such as property, wealth, and environmental taxes to complement labour-based contributions. The rapid rise of digital platforms and automation is transforming economies, while also exposing critical gaps in traditional tax systems and social protections, the researchers said.
The current frameworks often fail to capture the value created by digital business models, while automation is weakening the link between employment and tax revenue. To address these challenges and ensure fair contributions from tech-driven sectors, the researchers suggest taxing digital services, financial transactions, and automation technologies. Investments in AI and data analytics will be essential to improve compliance, reduce evasion, and expand the tax base.
The brief makes a clear case for reframing welfare as a long-term investment, not merely a short-term cost. It argues that timely reform of tax and social security systems is crucial to curb rising inequality and equip Europe to withstand future shocks.
“Tackling the fiscal sustainability of welfare systems is not just about balancing budgets – it’s about preparing for the future,” said Sebastian Rausch one of the authors and researcher at the ZEW Leibniz Centre for European Economic Research. “If we act now to modernise how we fund welfare, we can build a fairer, greener, and more resilient Europe.”
Laura Arnemann, Tim Kalmey, Ramón Peña-Casas, Sebastian Rausch, Holger Stichnoth, Laurène Thil (2025) Policy brief: taxes, social security, contributions and redistribution welfare state and public finances.
Read the full brief here.
