1. International Labour Office 1 Financing Social Policies Hiroshi Yamabana Social Security Actuary ILO FACTS E-mail: yamabana@ilo.org

2. International Labour Office 2 Structure of the presentation 1.Social protection: Definition 2.OECD experiences 3.Basic social security in developing countries: Definition 4.Affordability of basic social security 5.How to find money? 6.Good governance in financing social policies 7.ILO Social Security Training Initiative

3. International Labour Office 3 1.Social protection: Definition All interventions from public or private bodies intended to relieve households and individuals of the burden of social risks or needs. Interventions to replace lost income but also to help where there is a lack of income. Interventions are mostly in the form of transfers with no reciprocity.

4. International Labour Office 4 2.Experiences of OECD countries OECD countries spend between 10 and 30% of GDP on social protection. Usually these countries spend between one third and half of total public expenditure on social protection. In countries younger demographically and less developed, it is basic education and health which dominates public social expenditure. In ageing OECD countries, pension expenditure dominates and health follows.

5. International Labour Office 5 2.Experiences of OECD countries (2) Political will counts: Countries at the same level of economic development differ significantly in how much they spend on social protection. There is no trade-off between productivity and the sixe of social expenditure. Size of social protection systems is shaped mainly by prevailing political attitudes towards redistribution. Affordability is a function of the societal willingness to finance social transfers through taxes and contributions.

6. International Labour Office 6 Social protection redistributes significant share of national income. (Social protection expenditure as percentage of GDP; Source: OECD)

7. International Labour Office 7 Social protection is effective in preventing and alleviating poverty. (Pre-transfer poverty risk reduced by social protection transfers; Source: OECD, EUROSTAT)

8. International Labour Office 8 Social protection requires large portion of available public resources (Social protection expenditure as percentage of general government expenditure; Source: EUROSTAT)

9. International Labour Office 9 Fiscal versus policy space: governments of the same size spend different portions of available public resources on social expenditure. (Source: IMF Government Finance Statistics Database)

10. International Labour Office 10 No trade-off between productivity and social expenditure.

11. International Labour Office 11 Ageing and other risks manageable: (old-age demographic dependency and projections of social protection expenditure in proportion to GDP; EU25, 2005=100, Source: European Commission 2006)

12. International Labour Office 12 Social protection is not a social cost but an investment in people and states for: prevention/reduction of poverty and vulnerability quality of work and life social cohesion and peace nation building global security

13. International Labour Office 13 3.Basic social security in developing countries: Definition Universal affordable access to basic health benefits: – provided through a public health service funded by taxes, social and private insurance and micro- insurance systems linked together into one system. Income security for all children: – provided through family/child benefits aimed to facilitate access to basic social services: education, health and housing. Income security for older persons and persons with disabilities. – provided through basic universal non-contributory pensions. Social security to working poor and unemployed in active age groups. – provided through social assistance and employment guarantees.

14. International Labour Office 14 4.Affordability of basic social security Assumptions for calculations Benefit package (1)Universal pension benefit 30 per cent of GDP per capita, capped at US$ 1 (PPP) a day, indexed with inflation For all the elderly 65 years of age and above and the disabled assumed as 1% of working age population. (2)Basic health care Cost measured based on ratio of 300 medical staff to 100,000 population Medical staff wages indexed in line with GDP per capita growth Health staff wages assumed at a minimum of three times GDP per capita Overhead costs of 67 per cent of staff costs. (3)Child benefit 15 per cent of GDP per capita, capped at US$ 0.50 (PPP) a day, indexed with inflation Provided to up to two children in the age bracket of 0 -14 per woman. (4)Income support to targeted poor and unemployed in active age group 30 per cent of GDP per capita, capped at US$ 1 (PPP) a day, indexed with inflation 10 per cent of the working age population for 100 days per year, only to those in households not benefiting from any other form of cash transfer (i.e. child benefit, pensions). Administration costs for delivering cash benefits 15 % of cash benefit expenditure

15. International Labour Office 15 4.Affordability of basic social security Assumptions for calculations (2) Real GDP growth Working age population growth plus 3% (India) Working age pop growth plus 2% (Ethiopia, Tanzania and Viet Nam) Working age pop growth plus 1% (Other countries). Total Government expenditure Increased by 50 per cent of their current level by the year 2034, with a maximum of 30 per cent of GDP. Total Government revenue (excluding grants) To reach the projected expenditure level by 2014 in order to reach a balanced budget. Government budget allocation Option 1 (Status quo) Governments will not increase the proportion of resources allocated to social protection as in 2003. Option 2 (Policy change) 20%of Government expenditure are allocated to the financing of basic social protection.

16. International Labour Office 16 Costs for components of a basic social protection package as a percentage of GDP for selected countries in Africa and Asia, 2010

17. International Labour Office 17 Costs for basic social protection package as a percentage of GDP for selected countries in Africa and Asia (selected years)

18. International Labour Office 18 Share of total costs possible to be covered by domestic financing (share of budgets allocated to basic social protection increases to 20%)

19. International Labour Office 19 5.How to find money? (1)Creating political will Affordability ultimately means willingness of the society to pay taxes and contributions to finance certain programmes. This willingness has to be translated into “political will” to reallocate available and create new domestic and donor funded resources to finance social expenditure programmes. Society willingness to finance specific programmes depends on how they are designed and how they deliver. – Universal programmes can sometimes attract more support than narrowly targeted ones. – If the existing public programmes are badly designed, badly managed and do not deliver according to expectations, there will be no support for the new similar programmes.

20. International Labour Office 20 5.How to find money? (2)Creating fiscal space within existing resource envelope Revising current programmes to release fiscal space or use it in accordance with social security policy objectives – Review (Re-assessment) Reviewing current programmes in the light of policy objectives (like: is there sufficient economic justification to existing fuel (or similar) subsidies – “cash” transfers to the richer part of the society? – Rationalization Making expenditure more effective (e.g. decreasing administration costs in existing programmes) – Integration, coordination and redesign Integration or coordination of plenty of small, underfunded and uncoordinated poverty alleviation programmes Redesign of existing social insurance programmes to make them meeting priorities

21. International Labour Office 21 5.How to find money? (2)Creating fiscal space within existing resource envelope The review has to be done as a first step as: – There will be no political support for new spending programmes if the existing ones are not meeting expectations; and -Mobilizing new domestic or foreign resources will be difficult without making current spending programmes right. Such a review should be done along a similar social impact analysis of taxation.

22. International Labour Office 22 5.How to find money? (3)Creating new fiscal space – extending fiscal envelope (1)Mobilizing domestic revenue. Improving effectiveness in tax collection Broadening tax base Increased or new taxation (2)Securing increased grants from donors. (3)Borrowing from domestic and foreign sources (concessional versus non-concessional).

23. International Labour Office 23 5.How to find money? (4)Creating new fiscal space – global sources Basic Social Security package for everybody would cost about 2% of global GDP Mechanisms: – Increased Official Development Aid Multilateral and bilateral ODA to governments More budget support? A Global Welfare Fund? Global taxes? – Collecting a minimum tax on corporate profits and strengthening tax cooperation – An International Tax Agency? Global voluntary donations: Global Trust Fund pilot (ILO)

24. International Labour Office 24 Remarks for affordability Basic social security not only desirable, effective mechanism of poverty reduction but also an affordable one. Eventually however, affordability depends on political will to reallocate and seek available and new domestic and donor resources. Coordinated forward-looking national social protection policy strategies should sequence implementation of various social programmes and policy instruments. Capacity should be build in coordinating government agencies, line ministries and then at the local level in the areas such as – Social protection development, analysis and design, – Administration of social protection programmes.

25. International Labour Office 25 6.Good governance in financing social policies Basic principles of financing social policies Governance instruments (1)Monitoring performance Statistical report Annual report Performance indicators (2)Planning Actuarial studies Social budget

26. International Labour Office 26 Basic principles of financing social policies (1)Long-term financial equilibrium / sustainability -Balancing income and expenditure, taking in to account accumulated reserves (2)Collective financing and adequate redistribution within the group Firstly, social equity -Contributions / taxation in line with individual ability to pay -Benefits in line with agreed-upon individual basic needs rather than individual contributions to the scheme Then, individual / actuarial equity -Balancing social and individual / actuarial equity

27. International Labour Office 27 IMPLEMENTATION MONITORING PERFORMANCE ANALYSIS PROJECTIONS MANAGEMENT AND POLICY DECISIONS DATA, INDICATORS MODELS

28. International Labour Office 28 Records and data for daily administration – Who are the beneficiaries (potential, claimants, actual – age, sex, family status, income status etc.)? – How much they should be/were paid and when? – How much was spent on delivery of benefits and other administration?

29. International Labour Office 29 Actuarial studies / Social budget Where money goes now and where do resources come from? Expenditure / revenue accounts for all existing social protection schemes What resources are needed in the future to finance existing schemes? How much it will cost in short, medium, longer term to finance new planned or reformed schemes?

30. International Labour Office 30 Social budget Compilation of the revenues and expenditures of a country's social protection system Projection of income and social expenditure for a medium- to long-term period under several demographic and economic assumptions for status-quo and reform scenarios

31. International Labour Office 31 Components of social budget Demographic module Population projections Labour supply module Labour supply projections Economic module Consistent assumptions on GDP, prices, wages, labour productivity, employment and unemployment Government budget module Projecting revenues and expenditure of the different administrative levels of government Social protection module (see next slide)

32. International Labour Office 32 Components of social budget (2) Social protection model – Pensions submodel Projection of the different types of pension cases, average pensions by category, and revenues and expenditure of the pension system – Health submodel Projections of health-specific types of physical entities (hospitals, doctors, patients, etc.) and revenues and expenditure of the health system – Other submodels Projections of financial developments of other social protection subsystems (e.g. unemployment benefits or social assistance) – Social budget submodel Aggregating the fiscal results of all social protection sub-models

33. International Labour Office 33 Back-of-the-envelope estimates of benefit expenditure Benefit level ----------------------- GDP per capita Covered population -------------------------- total population x Benefit expenditure -------------------------- GDP = Benefit: Universal old age pension Benefit level:30% of GDP per capita Coverage:5% of population Benefit expenditure:30% * 5% = 1.5% of GDP

34. International Labour Office 34 Performance measurement Indicators -Coverage -Benefit adequacy (e.g. level, target beneficiaries) -Equity and redistribution -Social impacts (e.g. poverty alleviation) -Financial sustainability -Administrative efficiency (e.g. coat, timely delivery, correctness, satisfactions) Benchmarking against: -Policy targets -International standards -International comparison

35. International Labour Office 35 7.ILO Social Security Training Initiative (1)A one-year master degree course in Social Policy Financing in Maastricht University (2)Two-years master degree actuarial studies in Lausanne (3)A series of textbooks in Quantitative Methods in Social Protection -Modelling in health care finance -Actuarial mathematics of social security pensions -Social Budgeting -Actuarial practice in social security -Social Protection Financing (4)Training within the framework of technical co-operation projects (5)Courses in collaboration with ILO Turin Centre and the International Social Security Association (ISSA)