Poverty and Social Assistance System in Ukraine: Analysis and Policy Recommendations Liudmila Cherenko, Head, Department for Living Standards Assessment, Institute for Demography and Social Studies, National Academy of Science of Ukraine

Current Social and Economic Trends Slowdown of economic growth over the past few years (after the dropdown in 2005) and the first signs of a crisis in The beginning of 2009 marks the development of recession Significant decrease in industrial output – in January-February % compared to the same period in The biggest decrease in automotive industry, metallurgy, chemical industry, and light industry (automotive industry experienced twofold decrease in production) Most hardly hit by the crisis are the cities where the main industry was among those affected the most The labour market is shaky, but still relatively stable The recession happens at the time of a difficult demographic situation – decrease in population and worsening of its age composition

GDP and real incomes (% to previous year),

Number of Unemployed by ILO methodology and Registered Unemployed, , thousand Data for 2009 are based on the forecast of the Cabinet of Ministers of Ukraine

Impact of the Crisis on the Standards of Living of the Population Reduction in real (and in some industries also nominal) wage. In 2008 an average wage increased by 18.6%; taking into account inflation of 22.3% the real wage decreased by 3% over the year, which did not happen since (In November 2008 nominal wage fell below the wage level of June, and in December was hardly above the level of October. Meanwhile consumer prices were constantly going up.) In January-February 2009 the real wage was 87% compared to the same period in In some regions wage reduction was even more significant – in Donetsk, Dnipropetrovsk, Zaporizhya oblasts the real wage in January-February 2009 was 82-83% compared to the same period in Western oblasts - Chenivtsi, Ternopil, Ivano-Frankivsk, Zakarpattya – were less affected (the indicator was above 90%). Increase in wage arrears – in the beginning of 2009 the indicator was 168% compared to the same period in Reduction in the purchasing power of the population (retail trade volume in January-February 2009 was 89.3% of that in the same period in 2008).

Impact of the Crisis on the Living Standards of the Population (sociological data) 90 % of Ukrainians have already felt the impact of the financial crisis, only 7% of respondents did not experience its influence. 80% referred to prices and house bills increase as the major consequence, 44% indicated the decrease in their income, 14% experienced delays with salaries and pensions payments, 11% lost their jobs The majority of those who lost jobs are people of (20%) and (16%). The most vulnerable to loss of a job are people with secondary education (15%). (Sociological survey conducted on February 2009)

Forecast of the Impact of the Crisis on Social Situation Ukrainians will feel the impact of the crisis to its full extent in the fall of 2009 The deficit of resources to meet growing social commitments. For 2009 the size of minimal wage, pensions and social assistance benefits are fixed at their current level. This means that the incidence of absolute poverty will not decrease in 2009 – every fifth person will have an income less than the subsistence minimum (626 UAH / 75 USD). Social insurance funds experience deficits. The most difficult situation is in the Pension Fund (according to some estimates its deficit amounts to 10 bln UAH/ 1.2 bln USD). Payments from these funds are very likely to be delayed. Most likely, unemployment rate by the end of the year will be less than the forecast figure (8.5-9%) There will be no massive return of labour migrants

Forecast of the Impact of the Crisis on Household Poverty in 2009 Incidence of relative poverty by the end of the year will stay at 28% level, since there will be no significant changes in income distribution Compared to country averages, poverty risk will increase for the households with unemployed (especially in hholds with children); household with exclusively elderly people (older than 70); combined households both with children and elderly people. Households with working adults and households with working parents and one child will be relatively better off. Probably in 2009 the situation will be relatively better for families with children under 3 if birth grants are paid without delays. In 2009 the gap will be smaller between the poverty indicators for rural and urban areas, because the financial crisis will affect urban population much more than rural. Geographically, poverty indicators will reflect impact of the crisis on different branches of industry.

Poverty Dynamics in Absolute criterion Relative criterion Poverty Level

Structural criterion – percentage of expenditure for food is more than 60% Non-monetary criterion – 4 and more deprivations National criterion – 75% of median expenditure Poverty in Households with Children: concentration of monetary, structural and non-monetary criteria 9,5% 22,8% 13,7% 14,9% 43,0 30,1 34,7

Poverty Measurement Based on Two Criteria (monetary and non-monetary) Type of HouseholdPoverty incidence, % Households with 2 adults capable to work and 1 child8,9 Households with 2 adults capable to work and 2 children14,7 Households with 1 adult capable to work and 1 child12,0 Households with incapable and capable to work adults and 1 child11,9 Households with incapable and capable to work adults and 2 children17,1 Families with many children35,4

Poverty Measurement Based on Two Criteria (monetary and non-monetary) (continuation) Household Type Poverty incidence, % Households with 2 working adults and 1 child4,8 Households with 1 working and 1 not working adults and 1 child15,0 Households with 2 working adults and 2 children11,5 Households with 1 working and 1 not working adults and 2 children18,5 Households with 1 child and all non-working adults17,0 Households with 2 children and all non-working adults20,6

Social benefits by function in 2007, % of total expenditure on social benefits and as % of GDP % of total expenditure on social benefits% of GDP Old-age and survivors*69,418,2 Sickness / Health care15,94,2 Disability3,60,9 Family/ children5,21,4 Unemployment2,00,5 Housing and social exclusion4,01,0 *Old-age and survivors - include pensions, privileges and social assistance to pensioners and veterans of war and labour

Expenditure for social programmes in in prices of 2004, mln. UAH.

Proportion of Social Transfers within Households Income Pensions Child benefits Targeted low income benefit Other benefits Housing subsidies Social privileges Households with children9,462,750,260,470,070,72 Households without children31,760,000,010,540,171,44 All households21,401,280,120,510,121,10

Impact of Social Assistance on Poverty (poverty incidence before and after receiving assistance) Child benefits Housing subsidies Social privileges All types of assistance Targeted low income benefit Before receiving assistance After receiving assistance Poverty level

Incidence and depth of poverty of households with children before and after social assistance, % Social privileges Housing subsidies Targeted low income benefit Child benefits Poverty incidence Poverty Depth Before social assistanceAfter social assistance

Poverty incidence among households with children before and after transfers for different types of child benefits, % All types of child benefits Birth grant Benefits to single mothers Benefits for children under 3 After social transfers Before social transfers

Depth of poverty among households with children before and after transfers for different types of child benefits, % All types of child benefits Birth grant Benefits to single mothers Benefits for children under 3 After social transfers Before social transfers

Number of recipients of the different types of child benefits in , families

Recommendations on poverty reduction policies (improvement of a system of social assistance benefits) Determine benefits to low income families as the main type of the targeted social assistance Improve coverage of poor population by the program to support low income families (as a first step by 8%) Improve adequacy of the benefit by raising the size of the benefit to low income families; respective increase in the cost of the program can be covered by improving effectiveness of the program itself and savings possible within other programs (first of all at expense of the social privileges programme) Improve the methodology of calculation of the total household income to define eligibility for targeted assistance Save funds within the program of housing subsidies through reducing the number of non-poor recipients (from 696 to 205 mln. UAH. per year based on 2007 data) Improve targeting of the categorical benefits, free up funds for targeted social assistance Radical reform of the social privileges programme, transfer of the resources saved to fund targeted programmes

Modelling based on the size of the low income benefit Adults able to work Children from hholds with 1-2 children Children from hholds with 3+ children Adults not able to work Scenario 0 (basic)*121*170*205*170* Scenario Scenario Scenario Scenario Scenario Scenario Scenario 7420 *Scenario 0 – based on the social guarantees set in UAH. – poverty line of extreme poverty in UAH. – 50% of subsistence minimum of 2007 Conditions of the model: All eligible will receive the benefit; Those not eligible will not receive the benefit.

Evaluation of the Programme of Social Assistance to Low Income Families based on the size of benefits. Search for the optimal solution Error of inclusion Error of exclusion Effectiveness, % Efficiency Cost of the programme, mln. UAH/month

Considering different size of the benefit to low income families 1.Under conditions of a very limited fiscal space and impossibility to reform quickly the system of social assistance it is possible to choose the Scenario 1, which presupposes increase of the size of benefit only for children from hholds with 1-2 children up to the level of the benefit to children from 3+ children hholds. Under this condition the cost of the programme increases only by 7 mln. UAH per year, which can be saved at expense of improvement of the mechanisms of provision. In this case effectiveness of the programme stays the same, exclusion error is decreased 2.If more fiscal space becomes available or if the system of social assistance is reformed (and resources from other programmes are saved) it would be possible to proceed with Scenario 2, which presupposes increasing the size of benefit for all children up to the level of extreme poverty. The cost of the programme will increase to mln. UAH. Per year. Under this scenario poor population will be better targeted – exclusion error will decrease by 7 pp (from 99 to 92%), whereas effectiveness will still be high – 75%.

Recommendations for improvement of the social assistance benefits system Expand the programme to support low income families as the main poverty reduction instrument by: Increase in the size of the benefit (as a first step only for children up to the level of extreme poverty) Change differentiation of the size of the benefit for specific social and demographic groups, in particular, raise the size of the benefit for children compared to other population groups Improve take up of the benefit by improving access to information about the programme for socially vulnerable groups of the population; Lift restrictions on entry into the programme for vulnerable families with children; Introduce differentiated size of the benefit depending on the regional differences in the cost of living.

Cost of the Programme of Social Assistance to Low Income Families Depending on Methodology of Calculation of the Total Family Income, mln. UAH Options for calculating the total family income: А – include net, not gross wage В – include real income from land; С – use net wage and income from land Real income Income based on the methodology Model income A Model income B Model income C

Recommendations for improvement of the social assistance benefits system Improvement of the methodology to calculate the total income of a family to determine eligibility to targeted assistance: Use net income, free of tax and obligatory deductions (to insurance funds) Improve methodology to calculate income from land as a main source of income for rural people Improvement of legislative basis and implementation mechanism in order to improve targeting and reduce error of inclusion. Develop strict criteria to determine eligibility to the social benefit Introduce new methods to determine incomes and limit entry into the programme of non-poor families.

Modelling of options to limit eligibility to housing subsidies for non-poor population DecilesEligible to subsidies under the current rules, % of households in a decile group Eligible to subsidies under the current rules, but with the limitation based on the income level, % households in a decile group 111,14 26,02 311,876,26 411,78 510,73 68,94 76,10 84,37 92,66 101,01 Total number of eligible to subsidies, % of all households7,132,08 Programme cost, mln. UAH per year696,5205,3

Modelling coverage and cost of the housing subsidies programme under condition of tariffs increase and eligibility limitation Option 0 – current conditions of the programme Option 1 – increase in housing tariffs with all other conditions staying the same Option 2 – increase in housing tariffs with simultaneous limitation of eligibility Scenario А – tariffs increase by 40%, Scenario В – by 30%; Scenario С – by 20%

Recommendations for improvement of the social assistance benefits system (continued) Narrow down the program of housing subsidies and reduce costs by: Limiting eligibility to the program by the income level (of the one equal to subsistence minimum); Making the rules stricter for entry into the program – elimination of the system of exceptions; Cancelling regional differences in the subsidies size based on standard living space; Improve targeting and efficiency of the system of categorical benefits for children through better tracking of poverty profiles and taking into account the needs of different types of households with children.

The views expressed in this document are the views of the author and do not necessarily reflect the views or policies of the UNICEF. UNICEF does not guarantee the accuracy of the data included in this document and accepts no responsibility for any consequence of their use.