DIE Zeitschrift für Erwachsenenbildung

Sustainable Investment as Good Practice [1]

Gregory Wurzburg

1. Education systems in OECD Member countries expanded remarkably in the 1980s and 1990s. Today completion of upper secondary education is the norm, and a broader spectrum of the population than ever before participates in early childhood and tertiary education. These developments reflect the rise in social demand for learning that has been both a result of and a factor contributing to the emergence of the ‘knowledge society’. But are the forces made initial education such a sound investment likely to do the same for lifelong learning for adults?

Investment in initial education and training has been economically and financially sustainable

2. The expansion of initial education has been driven in large part by the economic and financial sustainability of investment in education and training. The vast human capital literature that has grown over the past few decades has demonstrated that there have been substantial returns, ranging from the individual earnings payoff of obtaining a university degree to the social gains from a child participating in a pre-primary programme. Analyses have expressed returns as earnings differential associated with different levels of qualifications as well as internal rates of return that also take into account direct costs (such as fees) and indirect costs (such as foregone earnings), and impacts on transfers and taxes. Recent estimates by the OECD suggest that 25-64 year olds with tertiary qualifications, on average, earn between 28 percent and 86 percent more than individuals with an upper secondary education, and between 36 percent and 133 percent more than those with less than an upper secondary education. When one takes into account the various costs of education, the internal rate of return to individuals for completion of upper secondary education is around 11 percent, as is the return for going on and completing tertiary education. Social rates of return range from 5- 13 percent for completion of upper secondary education, and from 4 to 15 percent for tertiary education (OECD 2003a, pp. 165.67). The substantial internal rates of return confirm the economic sustainability of formal education. Formal education also is financially sustainable inasmuch as there is strong political support for public financing (typically through secondary education and for at least some of the costs of tertiary education). Moreover, there exist well-established arrangements in, for example, private financial institutions, to help individuals cover the private share of financing.

What are the economic and financial challenges of adult learning?

3. The vitality of the “knowledge society” depends on investing in lifelong learning to upgrade and renew knowledge, skills, and competences of individuals. However, there has been only limited progress towards widening access to ongoing education and training for adults, particularly for those with low levels of initial qualifications and/or obsolete skills and competences. Many barriers have contributed to the limited degree to which adults in general and disadvantaged adults in particular participate in learning. Teaching methods are not always appropriate, and individuals may lack accessible and supportive services needed to balance work, family and learning (Colardyn 2002; OECD 2003d). Resource constraints – limits on time and money – have also been critical. Why?

4. The shift to a paradigm of lifelong learning poses a more complex resource challenge than those confronted during the gradual expansion towards near-universal secondary education. Lifelong learning simultaneously changes a number of different parameters that shape the economic and financial considerations associated with learning in the traditional formal sector: who the learners are; the scale, nature, timing, and duration of learning; what is learned; and where. The costs can vary enormously depending on how modest or ambitious a conception of lifelong learning one adopts. The OECD Secretariat and certain Member countries estimated the cost under different scenarios that varied the proportion of persons completing upper secondary education and the proportion of poorly qualified adults who participated in remedial training (see OECD 1999, “Chapter 1 – Resources for Lifelong Learning”; OECD 2000). These analyses suggested that lifelong learning could cost an amount equivalent to up to 4 percent of GDP in some countries. Is such an investment likely to be economically and financially sustainable?

5. The question is far more difficult to answer for lifelong learning than for initial education and training. Because ‘lifelong learning’ is a forward-looking remedy to a problem that has emerged relatively recently (large-scale skill obsolescence, increased reliance on older workers and would-be workers as a source of labour supply), there is comparatively little empirical evidence to be gleaned from actual practice. But insights can be had first by addressing a different question: under what conditions are investments in lifelong learning likely to be economically sustainable (understanding that economic sustainability is a pre-condition to financial sustainability)? The OECD tried doing this by decomposing estimates of internal rates of return to formal education into factors driving benefits (earnings, transfers) and costs (fees, foregone earnings, taxes), and re-estimating returns in several countries under scenarios that changed the level and allocation of costs for the stylised case of a 40 year old pursuing lifelong learning to acquire a higher qualification. In estimating returns, the analysis assumed that the average earnings of persons who acquired a higher qualification in their mid-40s would catch up in 10 years with the average earnings of those who had acquired the same qualification at an earlier age. The analysis (OECD 2003b,  pp. 79-101) was constrained by gaps in hard evidence on earnings by learners, and on the cost and feasibility of strategies (such as accreditation of prior learning) to reduce the duration of learning.

6. However the analysis proved useful for demonstrating the extent to which lifelong learning for adults is sensitive to foregone earnings, the potential value of policies to reduce the duration of learning activity, and to shift (or facilitate sharing of) costs. In fact, subsequent analysis of actual earnings data in one country (Canada) suggests that the earnings of adult learners catch up far more quickly than had been assumed. Both the initial simulation of earnings and the subsequent analysis of actual earnings suggest that the incentives for poorly qualified adults to complete secondary education are far weaker than the incentives for those with upper secondary qualifications to acquire a tertiary qualification. (OECD 2003b, “Ch. 4 – Strategies for sustainable investment in adult lifelong learning”, pp. 79-101). Moreover, the results of the analysis were consistent with the consensus that began emerging in the late 1990s around the economics and finance of adult lifelong learning: i) public authorities alone could not provide the necessary financial resources for lifelong learning; ii) as the adult learning component generates considerable private return, employers and employees should finance at least some of it; iii) as the benefits of adult learning are shared by individuals, employers, and society, so the financing burden should be shared; and iv) the absence of institutional arrangements for such co-financing increases the risk of underinvestment in adult lifelong learning. There was also an increasingly widely held view that the low levels of participation among the least qualified were not explained simply by a lack of resources. Rather it reflected a lack of individuals’ “ownership” of, and hence responsibility for, their development. A related argument is that economic self-sufficiency depends on building up assets, including human capital (see e.g. Sherraden 2001; Boshara 2001).

How are countries enhancing economic and financial sustainability?

7. How are countries adapting to the challenges identified in this recent evolution in thinking? In the recent search for new models of financing adult learning has revolved around the issue of co-financing by individuals, governments, and employers. [2] Some have emerged as attempts to address problems that were not adequately addressed by earlier approaches to financing adult education and training [3] . More generally, they reflect a willingness of public authorities, social partners and non-governmental organisations to try new approaches that are consistent with the learner-centred and demand-driven orientation of lifelong learning. They aim to strengthen incentives and financial means for individuals to engage in learning – particularly those for whom costs have been a barrier to participation. The initiatives can be grouped according to three general objectives: reducing direct costs to individuals, replacing earnings, and sharing risk.

8. The objective of most co-financing schemes is to reduce costs to individuals by leveraging the resources that they put into learning (in cash or time) with a matching contribution and/or eligibility for reduced fees. Examples include the English Individual Learning Account Programme, launched in September 2000, two series of pilot projects established in 2001 and 2002 by the Ministry of Education in the Netherlands, There also have been initiatives in the Basque Region of Spain and the Flemish Community in Belgium. All have involved voucher-like subsidies, usually matching cash or in-kind contributions (e.g. leisure time) by individuals. All were established on a pilot basis to test the soundness and feasibility of different ideas. Results – where they are available – have been encouraging. The initiatives have managed to reach groups that have low levels of participation in more traditional programmes. Even the U.K. initiative that was shut down prematurely because of allegations of fraudulent use of individual learning accounts by some learning providers, proved very successful in attracting account holders, and did manage to reach poorly qualified learners, at least in proportions that were comparable to other measures. Another way of reducing direct costs is to reduce the cost of capital for investment in learning through interest rate subsidies (for adults in Korea to take out loans to cover the cost of long-term vocational training); and tax breaks (initiatives adopted in Austria in 2002 allow employers to deduct 120 percent of learning related expenditure from profits; loss-making companies can apply credits to future or past profits. In the Netherlands individuals can set aside before-tax earnings in savings accounts to be used subsequently for education).

9. A second, more far-reaching approach (with larger “up front” financial implications) is to co-finance income replacement for individuals who stop work to pursue full-time learning activities. One way of doing this is to set aside a share of working hours (e.g. overtime) in a “time account” that can be drawn on to continue earnings while an individual learns. “Time accounts” are seen frequently now in collective agreements in Germany. One of the earliest was established in 1988 in Deutsche Shell AG in the framework of an agreement under which the regular work week was reduced from 40 hours to 38 or 37.5 hours. Under that scheme individuals were entitled to apply the reduced hours to a time account that would continue to pay their wages while workers participated in training that was not necessarily linked to their present job. Since then the principle of co-financing has been incorporated into a number of schemes. It also is possible to set aside a share of earnings in a financial account, again to be used eventually to replace earnings during periods of education or training. Though they have been debated extensively, financial accounts to replace earnings during periods of learning are rare. Insofar as the total sums are necessarily larger (foregone earnings tend to be much greater than direct costs of education and training), such schemes need to take a long-term time horizon for savings. One case of actual experience is that of Skandia, a Sweden-based insurance multinational that in 1999 set up a scheme under which employees who set aside up to 20% of their annual salary in a competence assurance scheme, had their contributions matched by the company. The funds in the scheme were to be used to replace earnings when employees stopped work to participate in mutually-agreed learning activities. The scheme was modified over time (to facilitate inter-firm mobility), and was eventually adopted by other Swedish companies as part of Skandia’s line of financial products. The Swedish government also is considering a scheme to cover cost of living during training. However its development has been controversial it has yet to be finalised.

10. A third grouping of co-financing strategies includes those that aim to reduce the risk to individuals of investing in learning, by sharing it with others. Such approaches are meant to address the fact that though investment in learning may be sound, on average, some individuals will earn more than the average and others less – perhaps so much less as to generate a net loss of earnings. In order to reduce the likelihood of individuals not participating in tertiary education because of fears that they would not earn enough to pay off their loans for fees, the Australian government introduced in 1989 loans for higher education fees for which repayment is income-contingent. In 2002 the government extended the principle of income-contingent loans to a wider group of learners by establishing the Postgraduate Education Loans Scheme (PELS).

Conclusions: Do the remedies fit?

11. The recent surge of co-financing initiatives has been prompted by general worries about the adequacy of overall levels of investment in adult lifelong learning, and more targeted concerns over the low levels of participation by poorly qualified individuals. Although there still is a dearth of definitive information on the impact of these initiatives, there is room for informed speculation about what might be expected, and where further policy attention is needed.

12. It is striking that so many initiatives aim at the lesser problem of direct costs. Surveys that have attempted to capture information on reasons for non-participation consistently underline the importance of resource constraints – the lack of time in particular swamps other reasons (see for example OECD 2003d). Even where providers can offer flexible scheduling and on-line access to learning, competing demands for time on the job as well as at home (so called leisure time is not a costless alternative to work time, particularly for individuals with family responsibilities). Yet the majority of initiatives presently being tested aim to ease the direct costs of learning activity. There are reasons for that. Such initiatives have lower unit costs (it typically is less costly to pay the fees of a training course, than to pay the salary of an individual during the time they are in such a course); they are easier to manage as provisional pilots because they do not envision long periods of time over which savings accrue. They also have value insofar as they are able to reach the non-working poor (for whom the direct costs of training may be an insuperable obstacle). However, it would be unfortunate if they serve as substitutes for approaches that squarely address the issue of how to ease the trade-off between work-time and learning time. The issue of risk is not being addressed widely. Although the notion of income-contingent repayment loans is being more widely adopted in connection with tertiary education, it is not permeating the debate about co-financing strategies for adults. This is partly because of the lack of evidence on average returns to learning by adults and the proportion of adult learners who have excessively low returns. It is an issue that needs to be addressed most urgently at an analytical level. Finally, there appears to be a need for “institution building” in the form of instruments and arrangements that allow long-term co-financing of the direct and indirect costs of learning, by individuals, employers, and the state. Even if such co-financing might be arranged in co-operation with private financial institutions, public policy has a role to play in creating the framework conditions to foster such arrangements and ensure equitable access.

REFERENCES

BOSHARA, R. (ed.) (2001), Building Assets: A Report on the Asset-Development and IDA Field, Corporation for Enterprise Development, Washington, D.C.

CHEESMAN, K. (2002), European Learning Account Project: A Report on the Activities of the ELAP Project, European Learning Account Partners Network, London, (mimeo).

COLARDYN, D. (ed.) (2002), Lifelong Learning: Which Ways Forward, Kenniscentrum EVC and Lemma Publishers, Utrecht.

OECD (1999), Education Policy Analysis, Paris

OECD (2000), Where are the resources for lifelong learning?, Paris.

OECD (2003a), Education at a Glance, Paris

OECD (2003b) Education Policy Analysis, Paris

OECD (2003c), Taking Stock of Co-finance Mechanisms (updated), www.oecd.org

OECD (2003d), Beyond Rhetoric: Adult Learning Policies and Practices, Paris.

SHERRADEN, M. (2001), “Asset-building policy and programs for the poor”, in T. Shapiro and E. Wolff (eds.), Assets for the Poor: The Benefits of Spreading Asset Ownership, Russell Sage Foundation, New York.