Social security in times of crisis

Social security in times ofcrisis

Florence Bonnet, Ellen Ehmke and Krzysztof Hagemejer

International Labour Office, Switzerland; University of Kassel,

Germany; International Labour Office, Switzerland

Abstract To counter the negative social consequences of thepresent crisis, States must take measures to provide incomesupport and new employment opportunities to affectedworkers and their families. This article reviews crisis responsesin a number of countries with respect to support from unem-ployment programmes, the branch of social security mostdirectly affected by economic downturn. It also discusses thetrade offs that all social security schemes face during economiccrises, when revenues from contributions or taxes earmarked tofinance programmes fall and expenditures on benefits rise. Inturn, concerns about pension policies receive special attention.The article concludes by discussing the initiative, launched bythe United Nations, for a global “social protection floor”: toextend, at the very least, basic social protection to the largemajority of the world’s population who are currently withoutand who remain vulnerable to all economic and social risks.issr_1361 47..70

Keywords social security scheme, economic recession, unem-ployment, unemployment benefit, pension scheme, socialprotection, social security reform, international

Introduction

In the context of the current global economic and financial crisis, a major concernmust be the millions of workers in the formal and informal economy alike who havelost income opportunities. According to International Labour Organization (ILO)

Address for correspondence: Florence Bonnet, Social Security Department, International Labour Office,4 route des Morillons, CH-1211 Geneva 22, Switzerland; Email: [email protected]. Ellen Ehmke, Interna-tional Center for Development and Decent Work, Universität Kassel, z.H., Kurt-Schumacher-Str. 2,DE-34117 Kassel, Germany; Email: [email protected]. Krzysztof Hagemejer, Social Security Department,International Labour Office, 4 route des Morillons, CH-1211 Geneva 22, Switzerland; Email: [email protected].

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© 2010 The author(s) Journal compilation © 2010 International Social Security Association International Social Security Review, Vol. 63, 2/2010

Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

estimates, in 2008 alone, 8.4 million people were pushed into unemployment; up toanother 50 million could follow in 2009 (ILO, 2009a). Additionally, the number ofthose working and living in poverty with income less than USD 1.25 a day may riseto more than 850 million in 2009, and the vulnerable living on USD 2.00 a day mayreach 43 per cent of the global workforce, or 1.4 billion workers. This massive lossof income opportunities adds to existing levels of underemployment and poverty,and has already contributed to a rise in the share of the world population that ismalnourished. The Food and Agriculture Organization of the United Nations(FAO), estimates that in 2009 more than one billion people — the highest figuresince data on hunger was first collected in 1970 — suffer from chronic hungerworldwide (FAO, 2009).

To avoid an aggravation of the negative social consequences of the crisis, Statesmust be prepared to take measures to provide support to affected workers and theirfamilies: in the shorter term, to provide income support and, in the longer term, toprovide new employment opportunities.

This article is structured as follows. First, it reviews crisis responses in a numberof countries with respect to the support provided to unemployed persons. It thendiscusses the trade offs that all social security schemes face during economic crisis,when revenues from contributions or taxes earmarked to finance social securityprogrammes fall, while expenditures — because of an increased number of benefi-ciaries — rise. Special attention is then given to pension policies. The current crisishas produced financial constraints leading to cuts or restrictions in benefit levels —specifically for pre-funded defined-contribution pensions — and negative rates ofreturn on pension fund investments, undermining the benefit levels of those alreadyretired, those close to retirement and those who will retire in future. The biggestchallenge that remains to be addressed is that of the large majority of the world’spopulation that has no access even to basic social security protection, leaving themvulnerable to all economic and social risks, including those brought by the currentcrisis. To tackle this intolerable situation, a recent initiative for a global “socialprotection floor” has been launched by the United Nations (UN) under the leader-ship of ILO and World Health Organization (WHO).

Social security in times of crisis: Lessons from the past

A feature of economic crises of the recent past, such as in Asia and Latin America,is that when they impacted countries that lacked social security schemes, unem-ployment and poverty rates soared. In the absence of social security schemes, itproved difficult — if not impossible — for countries to introduce new schemes orad hoc measures that were capable of reacting quickly enough to help cushion theimpacts of the crisis. When income opportunities are lost and no replacementincome is available, households have to cope with less resources for food, education

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Social security in times of crisis

International Social Security Review, Vol. 63, 2/2010 © 2010 The author(s) Journal compilation © 2010 International Social Security Association

and health, and this is especially hard for the poor who in most cases have limitedcoping strategies (Barrientos and Hulme, 2008). Past crises have therefore led tohigher drop-out rates from school among the poor. Of longer-term significance,when children are taken out of school, and maybe even sent to work as childlabourers, and when crucial health expenditure is delayed, this may lead to retardedgrowth and lower cognitive and learning abilities (World Bank, 2009). Individualand collective future perspectives of the poor may deteriorate irreversibly as aneffect of an economic crisis. On a societal level, the difficulties that poor householdsface in adjusting to external shocks because of their resource constraints conse-quently lead to a fall in demand for goods and services. For developing countries,where the poor often form a substantial part of the population, the absence of asocial security scheme that provides replacement income means that aggregatedemand is strongly affected (Justino, 2007).

Countervailing evidence comes from those countries that had introduced unem-ployment schemes before the onset of earlier crises, such as the Republic of Korea(hereafter, Korea), that could relatively easily scale up these measures and realize anappropriate and timely response (Kang et al., 2001). The Korean example, and alsothat of Argentina, shows that timely investment in social security enables countriesto protect their populations more effectively from the impact of the crisis (Prasadand Gerecke, 2009a). A number of other countries (such as Chile and Mexico) usedthe lessons taken from earlier crises that engendered massive “social fallout” as anappropriate starting point for the introduction of new schemes offering incomereplacements for the unemployed or social assistance to the poor (Freije-Rodriguezand Murrugarra, 2009). Today, these countries are better prepared to cope with theconsequences of the crisis. Other examples are most of the countries of the globalNorth, where comprehensive social security schemes effectively cushion the nega-tive effects of economic downturns to the extent that memories of hunger anddestitution have nearly faded.

Protecting the unemployed: Opening ways to recovery

Evidence from past crises clearly calls for income support as a crisis response. Sucha response can prevent those who lose their jobs from falling into poverty. Inaddition, social security income support benefits may have major economic impactsthrough stabilizing aggregate demand. When well-designed and combined withother labour market policies, unemployment benefits can prevent poverty but alsoprevent long-term unemployment and help to shorten economic recession thusopening the way to recovery. Here, three major categories of social security schemesshould be distinguished:

• Unemployment benefits: Typically, such benefits are paid by contributory socialinsurance schemes covering employees (and, in some rare cases, self-employed

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persons). These schemes offer, normally for a limited duration, cash benefits pro-viding an income replacement that is, most often, calculated as a specifiedproportion of the beneficiary’s previous earnings.

• Unemployment assistance and general social assistance benefits: These areusually not calculated on the basis of previous earnings, but are flat-rate tax-financed cash transfers payable to those who are unemployed but their entitlementsto contributory unemployment benefits have expired or to those who are unem-ployed and were never eligible to receive such benefits.

• Other labour market policies: These include public employment programmesproviding income support conditional upon participation in employment or train-ing programmes.Where they exist, unemployment insurance schemes are the social security pro-grammes that assume the brunt of the cost for income replacement for employeeswho have lost their jobs. It is part of the design of any unemployment protectionscheme that the extent of effective coverage1 automatically increases as moreemployees who meet the eligibility criteria become unemployed; and this is a sourceof its power as an automatic stabilizer. But, unemployment insurance schemes areonly in place in 78 out of the 184 countries for which information is available (42per cent). Social assistance, public works and similar programmes also have verylimited coverage globally. Even where the programmes exist, their effective outreachis often very limited. Hence, globally, there is a massive gap in coverage for theunemployed and underemployed working-age population who are in need ofincome support. This is highlighted by the map in Figure 1 and can be deduced inmore detail from Table 1.

As can be seen from Figure 1 and Table 1, the coverage gap is the starkest inlow-income countries, but still significant in middle- and high-income countries.This poses a problem: for a response to the crisis to be effective it has to beimmediately available and, hence, has to build upon existing administrative struc-tures, i.e. existing social security institutions, which thanks to their design eitherreact automatically to changing economic conditions or can be adjusted (i.e.

1. It is necessary to distinguish between legal and effective coverage. Legal coverage estimates refer to thepercentage of the economically active population that is legally protected in case of unemployment (thosewho have unemployment benefits guaranteed, but are not necessarily currently recipients of suchbenefits). A person or a group of the population is legally covered if there are existing legal provisionsstipulating that such a group should be covered by social insurance for a given branch of social security(here, unemployment) or will be entitled to specified benefits under certain circumstances (i.e. unem-ployment assistance or income support when having income below a specified threshold). Estimates oflegal coverage use both the information on the groups covered by statutory unemployment schemes(national legislation) and available statistical information to quantify the number of persons concerned atthe national level. The legal coverage rate is the ratio between the estimated number of people legallycovered and the economically active population. Effective coverage is measured in terms of the number ofunemployed persons receiving unemployment benefits and compared to total unemployment (measuredwith Labour Force Surveys). Effective coverage is usually different from, and lower than, legal coverage.

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extended) to crisis-induced requirements. Because these institutions are not widelyavailable, the options for policy responses at hand are limited. This assessment wasconfirmed in our empirical review of policy responses to the crisis and the provisionof income support to the unemployed in 46 countries, in which the global distri-bution of crisis responses reflects the earlier institutionalization and existence ofunemployment protection schemes (see Table 2).

Crisis responses in high-income countries

A closer look at the high-income countries in the sample reveals that modificationsto existing unemployment benefit schemes are the most common crisis response,but not the only one. Taking into account that previous recessions had contributedto higher structural unemployment in some Western European countries, the strat-egy of governments (such as in Germany, the Netherlands, and France) in this crisisaims at avoiding full unemployment by expanding the use of partial unemploymentbenefits.2 Partial unemployment benefits allow workers to stay in their employment

2. Partial (un-)employment benefits, also called “reduced working hour compensation” or discussed as“work-sharing”, are paid for employees who are working in enterprises that, as a result of specified(economic, cyclical, seasonal) conditions, have reduced working hours. The loss of income (of the hours

Figure 1. Proportion of unemployed persons receiving unemployment benefits fromstatutory unemployment contributory or tax-financed schemes (Effective coverage)

Recipients of unemployment benefits (% of total unemployed)

- No data (20)

- No unemployment social security coverage (113)- Over two-thirds of the unemployed (12)

- Less than one third of the unemployed (35)- Between one third and two-thirds of the unemployed (17)

Source: ILO Social Security Department.

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relationship, but may, for example, imply reduced working hours. This approachseeks to prevent the loss of skills and motivation in the workforce, which may occur

worked less) is partly compensated (50 to 70 per cent) by the unemployment scheme, the State budget,or both. Taking the example of Germany, partial unemployment benefit is organized as follows: Requestsfor partial unemployment benefit have to be made by the employer to the public employment agency(Bundesagentur für Arbeit). The employer has to prove that the enterprise is hit by an unavoidable lackof work, which affects at least one-third of the employed workforce in the enterprise, who loose at least10 per cent of their gross income for a period of a minimum of one month. If the claim is accepted, theemployee receives a benefit equal to 60 per cent (67 per cent when married with children) of thedifference between his or her full hours income and the actual net income received at reduced hours. In2009, on average, 1.3 million workers are expected to be on partial employment and the cost for thepublic employment scheme is estimated at EUR 3.5 billion.

Table 1. Legal and effective coverage of unemployment protection

Lowincome

Lower-middleincome

Upper-middleincome

Highincome

Total

Legal coverage

Existence of a statutory programme forunemployment (Absolute number of countries, inbrackets percentage of countries in a countrygrouping)

5 17 20 36 78

(8%) (35%) (54%) (80%) (44%)

Legal unemployment social security coverage(percentage of the economically activepopulation within the country grouping) |Contributory & tax-financed schemes

2.9 18.1 38.4 69.2 30.6

Legal unemployment social security coverage(percentage of the economically activepopulation within the country grouping) |Mandatory contributory schemes

2.9 15.4 30.3 58.9 25.7

Effective coverage

Unemployed receiving unemployment benefits— TOTAL (percentage of all unemployed in acountry group — LFS)

1.3 3.6 10.4 38.8 12.9

Unemployed receiving unemployment benefits— from contributory schemes (percentage of allunemployed in a country group — LFS)

1.3 3.6 9.8 31.3 10.9

Unemployed receiving unemployment benefits— from tax-financed schemes (percentage of allunemployed in a country group — LFS)

0.0 0.0 0.6 7.6 2.0

Percentage of all unemployed (LFS) in countrygroup NOT receiving unemployment benefit

98.7 96.3 89.1 60.9 86.9

Sources: ILO Social Security Department, based on SSA and ISSA (various years), national legislation textualinformation, and ILO Laborstat completed with national statistical data. ILO Social Security Departmentcalculations.Note: LFS = Labour Force Survey

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when individuals become fully unemployed. Obviously, it is too early for a fullassessment of any of the crisis response measures. Nevertheless, in cases such asGermany, the strategy of providing partial unemployment benefits seems to havebeen successful (see also Pisani-Ferry, 2009). In Germany, the number of workers inpartial unemployment has skyrocketed — an increase of over 1.1 million benefi-ciaries, or an eightfold increase between March 2008 and March 2009 — but themonthly number of newly-unemployed workers has remained comparativelystable. In other high-income countries, such as the United States, however, unem-ployment rates have soared, and crisis responses have included the prolongation ofentitlement to benefits and a rise in benefit levels (Figure 2).

Unemployment benefit programmes (providing benefits for partial or fullunemployment) are most effective when combined with, and linked to, other labourmarket instruments, such as training, that seek to improve the employability ofworkers. The crisis will lead to structural changes in many economies, and measuresto ensure the future employability of laid-off or partially-unemployed workers iscrucial. Training and related measures have been part of stimulus packages intro-duced in many countries. In most European countries this has often been done incombination with partial unemployment benefits. Elsewhere, for example in Korea,unemployed workers who undergo training are entitled to higher benefits. Korea

Table 2. Global distribution of unemployment protection responses

Countries byincome level(Brackets:number ofcases)

Countries withstatutoryunemploymentbenefit scheme

Number of countries and type of measure taken

Extensionof maximumpaymentperiod

Extensionof coverage

Increaseof benefitlevel

Introduction /extension ofpublicemployment

Extensionof cashbenefit andsocialassistance

Low income (5) • 2 / � 2 / – 1 — — — 1 4

Lower-middleincome

(9) • 5 / � 1 / – 3 2 1 / *1 — 5 5

Upper-middleincome

(14) • 10 / � 1 / – 3 4 5 3 5 3

High income (18) • 15 / � 0 / – 2 11 6 4 / *1 3 2 / *1

All (46) • 32 / � 4 / – 9 15 12 / *1 7 / *1 14 14 / *1

• At least one statutory unemployment scheme in place.� Unemployment scheme with limited provisions.— No scheme in place.* Indicates constraints (rather than extension), i.e. pro-cyclical measures.Notes: One-time payments are not included. Extension of cash benefits and social assistance appears to beespecially dynamic in the low and lower middle-income countries; data must however be interpreted withcaution as most of the measures are (donor financed) transitory pilot schemes with very low coverage effects.

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has also decided to invest in tools aimed at improving the availability of informationabout jobseekers and their qualifications and better linking jobseekers to availablepositions, which should help reduce the risk of long-term unemployment. Anothercrucial, but often forgotten, element of the design of any scheme providing protec-tion to those affected by unemployment is to secure continued access to other socialservices and benefits — such as health care, pensions, maternity and family benefits— not least when coverage for these services and benefits programmes isemployment-related.

3. Countries and unemployment programmes covered: Albania | Recipients of unemployment benefits;Argentina | Recipients of unemployment insurance; Armenia | Recipients of unemployment benefits;Australia | Jobseekers receiving newstart allowance and youth allowance; Azerbaijan | Recipients ofunemployment benefits; Belarus | Recipients of unemployment benefits; Belgium | Unemploymentbeneficiaries; Brazil| Ministry of labour data; Bulgaria | Recipients of unemployment benefits; Canada |Employment insurance beneficiaries receiving regular benefits; Chile | Superintendencia de Pensiones,unemployment insurance; Croatia | Recipients of unemployment benefits; Czech Republic | Recipients ofunemployment benefits; Denmark | Unemployed recipients of social assistance and unemployed recipi-ents of unemployment benefits; Estonia | Recipients of unemployment insurance and recipients ofunemployment allowance; Finland | Recipients of the basic unemployment allowance; France | Assedicrecipients of unemployment benefits; Germany | Unemployment insurance beneficiaries; Hungary |Recipients of jobseekers’ allowance and recipients of jobseekers’ assistance; Israel | Claims for unem-ployment benefit; Japan | Unemployment insurance: Basic allowance, actual number of beneficiaries;Kazakhstan | Recipients of unemployment benefits; Latvia | Recipients of unemployment benefits;

Figure 2. Weighted average for selected countries of the number of social securityunemployment benefit recipients

50

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Sources: Monthly data on unemployment benefit recipients are available from national social security programmesproviding unemployment benefits.3

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Crisis responses of middle-income countries

Partial unemployment benefits are also being extended in a number of middle-income countries or being added, as in the case of Poland,4 to existingunemployment benefit schemes. Although, in most middle-income Europeancountries, unemployment protection schemes potentially cover the majority of theemployed, in many middle-income countries in Asia and Latin America where theshares of self-employment and informal employment in total employment are high,the existing unemployment schemes are not accessible for many of those affected bythe crisis and who require some form of income support. When formal labourmarkets are small, coverage extension of the existing schemes solves only part of theproblem and additional special measures for both the formal and the informalsector become necessary.5

In Brazil, for example, crisis responses have targeted formal-sector workers inthose sectors of the economy most affected by the crisis. In this instance, eligibilityfor unemployment benefits has been prolonged by two months. In Brazil, only 7 per

Lithuania | Recipients of unemployment benefits; Luxembourg | Recipients of unemployment benefits;Macedonia | Recipients of unemployment benefits; Moldova | Recipients of unemploymentbenefits; Montenegro | Recipients of unemployment benefits; Netherlands | Recipients of unemploymentbenefits; New Zealand | Recipients of unemployment benefits; Russian Federation | Recipients of unem-ployment benefits; Serbia | Recipients of unemployment benefits; Slovenia | Recipients of unemploymentbenefits; Slovakia | Recipients of unemployment benefits; Republic of Korea | Unemployment insurancebeneficiaries; Spain | Unemployment beneficiaries contributory scheme and non-contributory scheme;Sweden | Recipients of unemployment benefits; Turkey | Recipients of unemployment benefits; UnitedKingdom | Claimants of jobseeker’s allowance; Ukraine | Recipients of unemployment benefits; Uruguay| Recipients of unemployment benefits; United States | Continued claims.4. In Poland, until recently there were no provisions for partial unemployment. In autonomoussocial dialogue, workers and employers organizations represented in the Tripartite Commission agreed,in March 2009, on a desired package of anti-crisis measures and formulated postulates towards thegovernment. Among these were postulates aiming at opening a possibility for partial and technicalforms of unemployment status and respective benefits. As a result, in July 2009, Parliament adopted alaw allowing — for the next two years — collectively-agreed reductions of working time and propor-tional reduction in wages without a need to change individual work contracts, establishingcompensation (financed from the Guaranteed Employee Benefits Fund) to employees with reducedworking time and wages (70 per cent of the unemployment benefit) or in technical unemployment(100 per cent of the unemployment benefit). It also establishes support to train employees affected byreduced working time or technical unemployment by financing (from the Unemployment Benefits;Labour Fund) up to 90 per cent of the costs of training (the rest being financed by employers fromtheir training funds) and training stipends paid to employees equal to 100 per cent of the unemploy-ment benefit.5. However, even if legal coverage is limited to formal-economy workers and effectively reaches only partof those unemployed, unemployment protection schemes are crucial pillars of social security systems,offering income replacements but also representing a resource of technical knowledge and administrativecapacity, which can be used to extend coverage and improve outreach.

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cent of the unemployed receive benefits from the existing unemployment scheme.Nonetheless, the prolongation of eligibility for unemployment insurance benefitswill reach around 103,000 individuals, or 20 per cent of the scheme’s beneficiaries.Those who lack formal income opportunities will be targeted through extendedaccess to the Bolsa Familia programme (ILO, 2009b). The government aims toextend the programme, which covered 11.1 million families at the end of 2008, toanother 1.3 million families in 2009, and has raised the income threshold determin-ing eligibility from BRL 120 to BRL 137 per capita.

The most common form of response to unemployment in middle-income coun-tries is the extension of existing public employment schemes or the creation of newones. Public employment schemes are often of an ad hoc character: they may beimplemented more rapidly than social security schemes, and discontinued once thecrisis is over. Such schemes are often praised for being “self-targeting”, as the lowremuneration they provide attracts only those most in need. If strict targeting ofcrisis responses is a policy objective, public employment schemes may prove easierto implement in contexts where social security infrastructure and expertise islimited. Notwithstanding these issues, past experience advises caution as regardspublic work schemes. Their ad hoc character often prevents them from deliveringsustainable and reliable support in the form of adequate income to those in need.The design of public employment schemes often exclude, albeit indirectly, morevulnerable groups such as women.

Nevertheless, some public employment schemes, such as the rights-based Indianapproach of the National Rural Employment Guarantee Act (NREGA), have provedto be useful tools to provide income to the otherwise unemployed or underem-ployed. As a crisis response, India is currently discussing the extension of theNREGA to urban areas (Kannan, 2009). Another interesting example comes fromthe Philippines where government departments and offices have been directed tomobilize the available resources, at the level of at least 1.5 per cent of their operatingbudgets, for emergency job creation under the pro-poor Comprehensive Livelihoodand Emergency Employment Programme (CLEEP). By May 2009, nearly 100,000jobs had been created, and the programme aimed at creating another 700,000 by theend of 2009.

The coverage gap in low-income countries

The availability of crisis-response measures is most limited in low-income coun-tries. Although national differences remain, low-income countries face a tripleconstraint in responding to the crisis: they are adversely hit through declines inglobal demand, remittances, foreign direct investment (FDI) and trade; they havelimited access to foreign capital; and the scope of existing social security pro-grammes is very narrow, with coverage limited to a minority in formal employment

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and coupled with a general absence of schemes providing income support for theunemployed (see Table 1).

In addition, well before the recent global economic crisis, many of these coun-tries, in particular in sub-Saharan Africa, were already confronted by endemicpoverty and mass underemployment; a situation that had been exacerbated by thefood crisis of 2008. For these countries, it is possible to talk of a permanent crisisdefined by a lack of income opportunities and subsequent poverty. In such acontext, the main concern is widespread underemployment rather than unemploy-ment. Open unemployment normally applies only to urban areas and to those whoare (or were) employed in the formal economy. In rural areas and in the informaleconomy many workers have to accept any type of employment (even if poorly paidand regardless of working conditions) in order to survive.

In parallel, in low-income countries, comprehensive social security systems donot exist and social assistance, which could provide income support to the unem-ployed or underemployed working-age poor population, is very limited.Consequently, the majority of those in need in low-income countries do not receiveany support. For countries where unemployment benefit schemes have been insti-tuted recently, such as in Viet Nam (in 2006) or Bangladesh (in 2008), it is notappropriate to expect an exhaustive response yet.

However, there is evidence that new unemployment protection schemes andsmall-scale pilot income support schemes that provide cash benefits and/or employ-ment to various targeted groups of the population, which exist in many low-incomecountries, contribute growing knowledge on benefit delivery and administrativecapacities. Nevertheless, in response to the current crisis, these schemes are usuallytoo small to provide help that reaches further than the relatively small groupsalready covered. The decisive and missing factor in many cases is sustainablefunding, which has to come through the joint long-term commitments of govern-ments supported on a temporary basis — when necessary — by the donorcommunity (see IDS, 2009).

Trade offs for social security during economic crises

During economic crises, social security system revenues from contributions andtaxes fall, while the number of potential beneficiaries rises. In response, States arefaced with two options: the expansion (which requires additional funding or deficitfinancing) or the contraction of social security spending.

The majority of countries reviewed with social security schemes have expandedthe coverage and benefit levels of their existing schemes or increased the overallsocial budget. Spending on unemployment benefits has increased, and so too hasspending on other benefits. Additional resources were made available for health (e.g.Egypt, France, Pakistan, Philippines, and the United States), family benefits (e.g.

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Germany, South Africa, and the United Kingdom) and pensions (e.g. Australia,Bangladesh, Chile, China, Costa Rica, Kenya, Spain, and Tanzania).6 Of course, thereare differences in the scale of the impact of such measures. In countries wherecoverage is comprehensive, the expected positive impact in terms of the individualincome levels of the covered recipients and in terms of the overall aggregate demandchange is significant. The social security schemes are, in most cases, allowed to playtheir role as automatic stabilizers, acting as a counter-cyclical measure. Also, recentresearch suggests that there is no negative effect on economic growth of increasedsocial spending during or after crises (Prasad and Gerecke, 2009b). In countrieswhere social security coverage extends only to those in the small formal economy,however, the positive impact of such measures may be important from the point ofview of the effective protection of the covered recipients. But from the point of viewof aggregate demand, it is likely to be negligible.

Only a limited number of countries (e.g. Hungary, Ireland, Latvia, and Ukraine)have announced cuts or freezes in social spending and in social benefits, usually aspart of a wider plan of consolidating public finances and reducing public deficits. Inview of the, often dramatic, crisis situation in these countries, imposing restrictionson public spending has become a priority. For some of these countries, cuts orfreezes in social spending and in social benefits were adopted as a condition toreceive large-scale loans to support the financial sector and the economy. It is tooearly to fully assess the potential negative social impacts of these cut-back measureson individuals and whether they will have any bearing on the longer-term economicimpacts as regards the depth and length of the recession in these countries.However, lowering benefits and limiting access to income replacement and othersocial security schemes certainly aggravates the consequences of the crisis forworkers and their families and may have economic consequences that negativelyaffect aggregate demand and slows down recovery.

The opposing responses of the expansion and contraction of social securityspending highlight that there are political choices to be made as regards how muchpriority should be given to social security spending in times of economic crises.Funding for increased expenditure does not come automatically (beyond usingexisting social security system reserves, for those countries that have such contin-gency reserves) and has to come either from the reallocation of existing publicspending, from increased social security contributions and taxes, or from increasesto the overall deficit financing of public finance. Clearly, increasing taxes or socialsecurity contributions during an economic crisis is highly unpopular. A far more

6. In addition to changes in the benefit levels of existing social security schemes, some governments haveannounced special one-off payments, usually to low-income households (e.g. Australia, France, Indone-sia, Italy, Thailand, and the United Kingdom). Such measures give temporary relief and may also boostaggregate demand if large in scale, but do not have a long-term impact on household income (in contrastto the extension of coverage or permanent adjustments in benefit levels).

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common response is therefore to do the opposite: introduce temporary exemptionsfrom contributions or lower contribution rates. Such measures have been intro-duced with a view either to reduce costs for employers and thus stimulateemployment or to raise net earnings of (low-income) workers (e.g. Canada, People’sRepublic of China, Czech Republic, Germany, Japan, and Spain). Although suchreductions may be tempting, such measures require ensuring that the reductions inreceipts are fully compensated for, to guarantee the financing of benefits currently inpayment and of future benefit entitlements when these are calculated on the basis ofthe amount of contributions paid.

The emergency-sustainability trade off: The caseof Sweden

The question of whether or not to expand social security spending in times of crisisis closely tied to the inherent conflict between long-term financial sustainabilityconcerns and the counter-cyclical role of social security (and wider public) spend-ing. This is illustrated by the case of the Swedish old-age pension system, a mainelement of which is a pay-as-you-go Notional Defined Contribution (NDC)scheme. A special feature of the NDC scheme is the “automatic balancing mecha-nism”. Within the NDC scheme, special calculation methods have been establishedto make it possible to estimate long-term assets and liabilities. If estimated liabilitiesexceed assets, the annual indexation, both, of the acquired pension rights andpensions in payment is supposed to be (automatically) reduced for a period neces-sary to re-establish financial equilibrium. By design, such a mechanism should makethe system financially stable. However, to achieve this, it reduces current and futurepensions by as much as is needed in order to restore financial equilibrium.7

Up until 2007, the “balance ratio” of the Swedish pension system was above one(i.e. assets were higher than liabilities) and there had been no need for the automaticbalancing mechanism to be activated. However, this situation has changed with theeconomic crisis. In 2008, the balance ratio was calculated to be less than one (i.e.liabilities surpassed assets). As defined by the guiding principles of the automaticbalancing mechanism, this implies that pension levels should be decreased in 2010and that the rate of growth of pension benefits should be slower for several years tocome. However, the prospect of these changes opened a debate about whether this

7. Automatic adjustment mechanisms linking pension entitlements to the health of pension systemfinances also exist in different forms in the Netherlands (occupational pensions), Canada, and Germany.For the latter, the “sustainability” factor of the pension system should have lead to pension increases in2008 and 2009 of 0.46 per cent and 1.76 per cent, but the German government over-rode the “automatic”mechanism and increased pensions by 1.1 per cent and 2.41 per cent, respectively (OECD, 2009a, p. 7).Additionally, a “pension guarantee” has been introduced, which ensures that pension levels are notreduced even if the wage level (to which they are tied) declines.

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should be undertaken in the present context of crisis. The debate concluded infavour of a discretionary intervention to suspend the existing rule. This will reducethe expected decrease in pension levels for 2010 and spread the decrease over alonger period in order to reduce the immediate impact on pensioners’ living stan-dards and aggregate demand (see Scherman, 2009).

The Swedish example illustrates well an important dilemma. On the one handthere is a willingness to introduce automatic budgetary mechanisms, which shouldhelp to ensure the long-term sustainability of specific programme expenditures oroverall public finances and make these immune to discretionary political decisions.One can see this not only in Sweden but also in other recent reforms of socialsecurity pension programmes in many countries. It is also apparent in wider publicfinance reforms requiring permanently balanced budgets at the local or nationallevel. But, on the other hand, in times of economic downturn these long-termautomatic mechanisms and rules may act as “automatic destabilizers” (Stiglitz,2009), rather than stabilizers. This may be the case, unless politicians — as inSweden or Germany — intervene with discretionary corrections of the “rules” inorder to pursue the desired policy outcomes appropriate to the current circum-stances. A recent report from the Organisation for Economic Co-operation andDevelopment (OECD) apparently supports such discretionary interventions andcomes to the conclusion that the design of automatic balancing mechanisms “needsa re-think” as “it does not seem sensible to reduce benefits in a pro-cyclical way,taking money from the economy when it is weak” (OECD, 2009a, p. 8). But, in timesof the crisis, should benefit adequacy be left to discretionary political interventions?Certainly not:

A preferable approach may be to supplement the approach to maintaining financial and

actuarial equilibrium by a set of rules or principles that would ensure that benefit

amounts do not fall below accepted levels. Criteria certainly exist in the international

arena, which would provide the basis for establishing national standards. However, such

national levels must clearly reflect the prevailing circumstances and considerations in each

country. A key prerequisite must be to ensure through social dialogue the full participa-

tion of each group of stakeholders — workers (together with their families), employers

and governments — in establishing the relevant standards, and in creating and maintain-

ing the permanent structures through which they may be monitored, verified and

adjusted (Woodall and Hagemejer, 2009, p. 6).

A special concern: Pension schemes

When considering the role of and trade offs for social security in times of crises,special attention has to be given to pension policies. Reforms of the past decadeshave made pension schemes far more vulnerable to economic and, in particular,financial crises. The effects of the current crisis on pensions are not uniform, but

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depend on the type of pension scheme (defined contribution, defined benefit,pay-as-you-go (PAYG) or fully funded) and whether individuals are retirees, close toretirement, or can be expected to continuing contributing for many years to come.

In defined benefit (DB) schemes, where pension amounts are calculated withoutregard to the level of reserves, the immediate impact will be less than in definedcontribution (DC) schemes, where benefit guarantees are less effective by nature(see Table 3). However, the long-term contraction of employment, and hence thenumber of contributors, will also force governments to make downward adjust-ments in DB schemes.

Notwithstanding these observations, for some fully-funded pension schemes,pension entitlements might be lost completely. In OECD countries, private pensionfunds lost 23 per cent of their value in 2008 (OECD, 2009a). If the crisis turns intoa long-term downward adjustment of asset prices, the outcome in DC schemes willinevitably be lower benefits paid at retirement. Any prolonged suppression of inter-est rates and asset prices will to lead to serious difficulties by way of destabilizedannuity rates (prices) and the management of annuity reserve funds. The size of thelong-term effect will depend on the depth and the duration of the downturn of assetprices. If the present price reductions turn into permanent level adjustments thenold-age income will be reduced; if the downturn is short-lived the effect will betransitional.

While these losses may not be permanent, they still show the vulnerability ofpension levels in DC schemes, notably for individuals that are close to retirementand whose savings’ portfolios might not recover during their remaining period ofworking life. The individuals most affected are those that will retire within the nextmonths and years, those with a long period of membership in DB funded pensionplans and, in particular, those who are members of pension schemes with invest-ment policy heavily exposed to riskier assets (many in the United States, UnitedKingdom, and Australia). Also, pensioners in private pension plans who did notannuitize their balances on retirement may be seriously affected. The reason whyILO Social Security (Minimum Standards) Convention No. 102 requires that old-age pensions be paid as a life annuity (periodical payment throughout thecontingency) is exactly to protect the income security of the elderly against theimpact of events such as financial and economic crises.

At present in the OECD countries, private financial sources constitute, onaverage, a fifth of retirement incomes. In five countries (Australia, Canada, theNetherlands, the United Kingdom, and the United States) private financial sourcesconstitute more than 40 per cent of retirement incomes). However, in a different setof five OECD countries (Austria, Czech Republic, Slovakia, Hungary, and Poland),private financial sources constitute less than 5 per cent of retirement income.Nonetheless, the importance of private retirement income is expected to grow. Inthe coming decades, private pensions (mandatory and voluntary) are expected to

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Tabl

e3.

Impa

ctof

the

finan

cial

cris

ison

diff

eren

tty

pes

ofpe

nsio

nsc

hem

esan

ddi

ffer

ent

grou

psof

prot

ecte

din

divi

dual

s

Youn

ger/

prim

e-ag

ew

orke

rsIn

divi

dual

sne

arre

tirem

ent

Ret

irees

Stro

ngly

affe

cted

Indi

vidu

als

inm

atur

e,pr

ivat

eD

Csc

hem

es(e

spec

ially

:i)w

here

expo

sure

toris

kier

asse

tsis

grea

ter;

and

ii)w

here

indi

vidu

als

are

requ

ired

toan

nuiti

zeth

eirb

alan

ces

atre

tirem

ent).

Ret

irees

who

did

nota

nnui

tize

thei

rDC

bala

nces

atre

tirem

ent

(esp

ecia

llyth

ose

with

grea

tere

xpos

ure

toris

kier

asse

ts).

Mod

erat

ely

affe

cted

Indi

vidu

als

inm

atur

e,pr

ivat

eD

Bsc

hem

es.

Publ

icPA

YGsy

stem

sw

ithde

ficits

.R

etire

esin

plan

sw

ithau

tom

atic

bene

fitad

just

men

ts(e

.g.

cond

ition

alin

dexa

tion,

bala

ncin

gm

echa

nism

s,or

sust

aina

bilit

yad

just

men

ts).

Less

affe

cted

Mos

tind

ivid

uals

inth

isgr

oup.

Indi

vidu

als

inre

cent

lyes

tabl

ishe

dpr

ivat

eD

Csc

hem

es.

Ret

irees

who

annu

itize

dD

Cba

lanc

esbe

fore

the

cris

is.

Mos

tret

irees

with

DB

priv

ate

pens

ions

orpu

blic

,PAY

Gbe

nefit

s.

Sour

ce:O

ECD

,200

9b.

62



provide 75 per cent of retirement incomes in Mexico, 60 per cent in Slovakia, 50 percent in Poland, and 30 per cent in Hungary. As many of these schemes are relativelyyoung, and despite the fact that recent losses suffered by pension funds have beensignificant (in Poland, in real terms, the ILO estimates that members lost on averagethree years of their contributions; see Hagemejer, 2009), the impact of the crisis onthe incomes of future retirees might be relatively minor. As the OECD stresses,however, these developments highlight “the need for resilience to a future crisis”(OECD, 2009a, p. 3).

The way forward: Next steps8

The experiences and lessons of past crises, and the problems surrounding pensionpolicies that have come to the fore in the current crisis, call for action. Two things areneeded. The first is a fundamental overview of existing social security systems anda correction of the mistakes made during the last three decades in countries withdeveloped social security systems. The second, and perhaps more fundamental, taskis to develop comprehensive social security systems in countries that are currentlywithout. This task should aim first at providing basic income security and affordableaccess to essential health care to all in need. There is a risk that responses to the crisisprioritize short-term “quick fixes” to poverty and insecurity, while neglecting thelonger-term solutions that would help to correct fundamental and global inequitiesin the economy and society.

Correcting past mistakes

Corrections are needed first and foremost in the design of pension systems. Theintroduction of reforms over the last three decades that link pension levels, and thusrender these vulnerable in times of financial crisis, to the performance of capitalmarkets was a mistake that stands to be corrected. What is needed is immediateaction to protect the pension levels of those individuals who are close to retirement.As an “automatic stabilizer” to protect the living standards of retirees, strongminimum pension guarantees represent one option. Some countries already haveminimum pension guarantees. Some countries have opted for one-off, temporaryrelief payments to older people as part of stimulus packages (Greece, Australia, theUnited Kingdom, and the United States). Others, as a consequence of the currentcrisis, have strengthened and expanded their pension systems’ minimum guarantees(Finland, Belgium, France and the United Kingdom, and also countries withhigher-than-average poverty incidence among the elderly e.g. Australia, Korea, andSpain).

8. The following section refers to analysis and arguments developed in Diop (2009).

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Policies that strengthen pension guarantees for low-income earners, and whichsignificantly correct past reform trends, will have to be reinforced. As the OECDshows, in the coming years, low-income earners in Germany, Japan and the UnitedStates will receive pensions equating to 20 to 25 per cent of average earnings. TheOECD average will be 36 per cent, with Denmark at the top of the list with 62 percent (see OECD 2009a, p. 5).

In the short run, the State may authorize pension schemes to reduce the level ofcapitalization for a transitional period (as has been done in the Netherlands). Thisis probably the only realistic option at the moment because of global resourceconstraints. If asset prices rebound at some point, then the overall cost of theguarantees will be only a fraction of the momentary loses of pension assets.

In observing responses to the crisis, the OECD has suggested that governmentscould play a more active role in managing risks associated with the payout phase ofpensions and annuities, with the idea that they could encourage the development ofthe market for longevity hedging products by producing an official longevity index.Other OECD experts’ proposals include suggestions that governments should issuelongevity bonds that “would set a benchmark for private issuers”, while they “shouldalso consider” (OECD, 2008, p. 3) issuing more long-term and inflation-indexedbonds, a move already taken by a small number of countries; most recently by theDanish government with the release of a 30-year bond that was primarily bought bydomestic pension funds and insurance companies.

Fundamentally, the time is right for a systematic and overall reassessment ofglobal pension policies. The ILO does not have a specific pension model — but itdoes have a set of basic requirements for pension systems. These are included in thesocial security standards that have been built up over many decades, which specifythe way in which social security systems should perform. At the current juncture, itis entirely appropriate to reiterate these ILO principles:

• Universal coverage: Everybody has a right to affordable retirement throughpension systems that provide all residents with at least a minimum level of incomeprotection in old age. Similarly, everybody has a right to income security in case ofthe loss of a breadwinner or disability.

• Benefits as a right: Entitlements to pension benefits should be precisely specifiedas predictable rights.

• Equity and fairness: There should be no discrimination and equal treatment ofall, including equal treatment of national and non-national residents. Entitlementconditions and benefit provisions should be gender-fair.

• Protection against poverty: Pension systems should provide a reliable minimumbenefit guarantee that effectively protects people against poverty in old age, the lossof a breadwinner or disability.

• Lost income replacement: Contributory earnings-related systems should provideguaranteed replacement rates at least to those with earnings lower than the average.

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• Collective actuarial equivalence of contributions and pension levels: Benefitamounts for all contributors should adequately reflect the level of the contributionspaid.

• Guarantee of a minimum rate of return on savings: The real value of contribu-tions paid into savings schemes wherever these are part of the national pensionsystems should be protected.

• Sound financing and fiscal responsibility: Schemes should be financed in such away as to avoid uncertainty about their long-term viability. Pension schemes shouldnot crowd out the fiscal space for other social benefits in the context of limitedoverall national social budgets.

• Policy coherence and coordination: Pension policies should be an inherent partof coherent and coordinated social security policies aimed at providing affordableaccess to essential health care and income security to all those in need.

• State responsibility: The State should remain the ultimate guarantor of the rightto affordable retirement and access to adequate pensions.Such guarantees can be applied, both, to PAYG and fully-funded pension schemes.They can be legislated by any government. Most likely they will not lead to majorreal expenditure. Even so, such guarantees would cost a fraction of what the presentbailout of the financial system has cost.

Building social security for all

Social security will effectively cushion the negative impacts of the crisis if its foun-dations, rooted firmly in the principles of solidarity, are strengthened. The ILO ispromoting the reshaping of national social security systems based on the principleof progressive universalism. The ILO seeks to ensure a minimum set of socialsecurity benefits for all: the “social protection floor”. Based on that floor, higherlevels of social security should then be achieved as economies develop and the fiscalspace for redistributive policies widens. While many higher-income and somemiddle-income countries are relatively well equipped in social security and haveeffective instruments for preventing poverty, this is far from being the case in manyother countries, where only a small minority has access to even basic levels of socialprotection.

In the framework of its Campaign for the Extension of Social Security to All, theILO has identified four main components of a social protection floor:

• universal access to essential health services for all residents;• income security for all children through child or family benefits;• targeted income support for the working-age poor that may be combined with

employment guarantees through public works programmes; and• income security for the elderly, the disabled and families that have lost the main

breadwinner, through basic tax-financed pensions.

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The concept of the social protection floor is specifically designed for (primarilylow-income) countries with no or only deficient social security structures in place.The social security minimum guarantees are aimed at the protection of the mostvulnerable groups of society and individuals in critical situations that render themvulnerable to impoverishment. In countries with social security systems that excludeparts of the population, the social protection floor is a meaningful concept to closethis gap and to ease the socio-economic pressure on excluded groups. The concept ofthe social protection floor has been criticized for not providing more comprehensiveand extensive social security guarantees and because it might, potentially, underminemore advanced systems of social protection already in place. The ILO’s response is toargue that the notion of the social protection floor is embedded in a concept ofprogressive universalism, within which the “floor” may constitute only a first step.However, universal and comprehensive social security coverage is the final objective.

Recently, the concept of the social protection floor has received the support ofthe Chief Executives’ Board of the UN System (CEB, 2009). One measure that theUN is promoting as a response to the financial and economic crisis is “Initiative VISocial Protection Floor”. The aim is to ensure access to basic social services for, andthe empowerment and protection of, the poor and vulnerable. Alongside the pro-vision of essential social transfers, the UN is calling for geographical and financialaccess to essential public services (such as water and sanitation, health, and educa-tion). Additional support for the social floor has come from the InternationalLabour Conference (ILO, 2009c) in adopting the Global Jobs Pact, which requestscountries to develop:

adequate social protection for all, drawing on a basic social protection floor including:

access to health care, income security for the elderly and persons with disabilities, child

benefits and income security combined with public employment guarantee schemes for

the unemployed and the working poor [and urges] the international community to

provide development assistance, including budgetary support, to build up a basic social

protection floor on a national basis.

Also, donors appear favourable to the call for support to expand social protection inlow-income countries in response to the crisis and beyond. The OECD Develop-ment Assistance Committee declares (OECD, 2009c):

Donors’ support for social protection programmes should provide adequate, long-term

and predictable financial assistance to help partner governments establish gender-

sensitive social protection programmes and create the conditions for those programmes

to be politically and financially sustainable. This is especially important in the current

situation of contracting fiscal space and declining financial inflows. Such support must be

provided through harmonised and co-ordinated financing mechanisms in support of

nationally defined strategies and programmes.

For such coordinated efforts it is crucial that all international and national actorswork coherently towards the same objectives. The United Kingdom Government in

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its recent White Paper on International Development, “Building our CommonFuture” (DFID, 2009) also urged the World Bank to “pay greater attention to socialprotection” and use the Rapid Social Response Programme to more effectively helplow-income countries to build necessary basic social protection programmes.

The crisis appears to have helped foster a wide consensus on the necessity ofinvesting in social protection, including for low-income countries. This view isconfirmed by the OECD Development Assistance Committee (OECD, 2009c),which has argued that:

social protection directly reduces poverty and helps make growth more pro-poor. It

stimulates the involvement of poor women and men in economic growth, protects the

poorest and most vulnerable in a downturn and contributes to social cohesion and

stability. It helps build human capital, manage risks, promote investment and entrepre-

neurship and improve participation in labour markets. Social protection programmes can

be affordable, including for the poorest countries, and represent good value for money.

Conclusion

The above acknowledgement of the necessity of basic social security was overdue;however, we must not forget the benefits of comprehensive social security. In thehigh- and middle-income countries, past achievements in the field of social securityhave been questioned by talk of over-burdened welfare states. Such questioninggenerally occurs in the context of high-income countries where the memories of thedevastating effects that economic crises can have on households and individualshave nearly faded; ironically, and where this is the case, this success can be attributedlargely to the role played by comprehensive social security systems. The presentcrisis gives new visibility to the crucial role played by social security systems inhelping society weather economic storms, now and in the future. Thus, for alleconomies, comprehensive and state-organized social security systems based on theprinciple of solidarity should not be treated as a relict from the past — such systemsremain powerful tools for economic and societal development in the future. It isthus of central importance for government policy to sustain the fiscal space forpublic social security schemes. Moreover, a policy approach that is supportive of therole of social security is crucial if the countries in the global South are to beconvinced of introducing and extending social security schemes.

Economic crises and post-crisis recovery efforts have often been milestones inthe development of social security systems. The United States’ Social Security pro-gramme can be traced to the New Deal policies of the 1930s that were aimed ateconomic recovery as well as preparing the economy and society to meet thechallenges of future economic downturns. In the United Kingdom, Lord Beveridge’ssocial security reform was developed during the Second World War, a period asso-ciated with extreme economic austerity, and implemented as part of the post-war

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economic recovery plan. And now we see the United States — in the middle of itsbiggest economic crisis for decades — discussing how to bring social health pro-tection to all its citizens. We also see the international community voicing stronglythe need to bring better social protection to all globally, not only as a way to cushionthe impacts of the crisis but also to ensure the realization of the long-term goal ofpoverty reduction. If countries in the North and South can form a global coalitionin support of the role to be played by social security, then social security has a realchance to make a difference, to help the majority who are currently without cover-age to become better protected. As one response, one may hope that the currentcrisis will mark another positive step in the direction of realizing social security forall.

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Social security in times of crisis

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