Turning crisis into an opportunity: The role of social security in response and recovery

Even before the current economic crisis, national social security systems were under intense political and economic strain. In industrialized countries, the cost was considered too high, while in many developing countries they were simply considered unaffordable. Now, the economic and social crisis has changed perceptions. Social security systems are seen more and more as useful economic stabilizers in crisis times. Michael Cichon, Director of the ILO’s Social Security Department, looks at social security in times of crisis and the possible dawn of a new development paradigm.

The ongoing economic and social crisis poses a threat to the wellbeing of millions of people in the global economy. In the coming years, it is expected to push millions of people out of employment and further into poverty.1

For most people in the world existence was already a crisis, with 40 per cent of the world population living on less than 2 dollars per person, per day. Millions of children were dying before the age of five because their parents couldn’t buy adequate nutrition or health care. Hundreds of millions of workers lacked enough income to support a family, and millions of elderly people worked literally till they dropped because there was no pension or social assistance available to them.

The fastest working instrument for poverty relief is social security. So what we need most today are instruments and measures that address – beyond the present crisis – the permanent social needs of people worldwide.

Over decades, social security programs in the European Union (EU), and the OECD countries have been effective in reducing income inequality and poverty. Broadly speaking, the higher the social expenditure rate is, the lower the poverty rate.

Equally important, social security systems not only respond to social needs, they are an economic necessity. A new understanding of the importance of social security as a prerequisite to growth rather than a burden to society was slowly taking root in the development policy debate already before the crisis hit the global economy. However, the crisis acted as an accelerator in the social security debate.

In times of crisis, transfer incomes, notably social assistance and social security benefits paid to unemployed workers and other vulnerable recipients, act as social and economic stabilizers. Benefits not only prevent people from falling further into poverty but also limit the contraction of aggregate demand, thereby curtailing the potential depth of the recession.

This stabilizing role of social security schemes is explicitly accepted by most governments today. Industrialized countries have implemented stimulus packages, which aim to tackle the problem of growing unemployment and social vulnerability of their citizens through social security schemes. The main measures taken include higher and more flexible unemployment benefits, increased social transfers to vulnerable households and additional funding for the extension of social security coverage in other programs.

Most governments used existing social transfer systems to respond to the heightened need for protection during the crisis, demonstrating how important permanent social security systems are for crisis management. The ILO report to the G20 summit in Pittsburgh (see article in the News section of this issue) found that the employment effects of the so-called ‘automatic stabilizers’ (i.e. the social security schemes) through the stabilization of aggregate demand was probably just as important as the employment effect of the much discussed stimulus packages.2

Social security challenges

Besides the direct impact of the crisis on social security financing and increased demand on social security systems (see article “Social security: Responding to the crisis” in this issue), the latter face a number of long-term systemic challenges.

The challenge to the financial sustainability of social security systems in industrialized countries that regularly makes the headlines is the changing demographic environment (see article on ageing societies in this issue). Ageing was put forward as the most important reason for pension reform over the last 20 years. Underlying this is the fallacy that by replacing the amount of solidarity financed benefits by individual savings-based financing, expenditure will reduce automatically. Changing the financing system, however, will not change an expenditure problem unless it leads to a reduction in benefit levels. The income of inactive persons has to be financed one way or another out of the current GDP, and the employed will have to finance the transfer income of inactive and retired people.

It is obvious that a greater number of older persons will drive up expenditures on pensions and health care in the decades to come. However, given the expenditure consolidation measures that many countries have deployed during the last two decades, they need not pose a major threat to the financial equilibrium of national social protection systems and/or the fiscal balance of government budgets.

Even if, in the worst case, the demographic challenge is not well managed, the effects on the sustainability of national social transfer systems, even in countries with highly developed systems, may be less dramatic than is commonly assumed. The latest available forecast by the European Union Economic Policy Committee on the combined cost of the most important social security benefits as a result of ageing populations indicates that the expected average increase in national social expenditure is less than five percentage points of GDP over the next five decades, which is substantial but not unmanageable.

However, there are significant differences between individual countries, which have less to do with the ageing process itself than with the specific characteristics of programs, including their financing, eligibility and benefit generosity. Some of these issues will have to be addressed through a combination of cost containment measures, increasing revenues and reallocation of resources among different branches of social security. Ageing will pose a management problem, albeit not an insurmountable one.

Extending social security

While developing countries will also face these demographic challenges at some stage, the main problem for them today is the extension of social security coverage. Current estimates suggest that 80 per cent of the world’s population currently lives without adequate social security protection.

The first priority is to provide them with basic social security that allows them to live a life without permanent existential angst. The ILO has shown through financial studies that it is possible to finance all or some of the elements of such a basic “social protection floor” even in low-income countries. In some cases a phased introduction and limited donor support may be necessary. Or as ILO Director-General Juan Somavia put it a few years ago, the “world does not lack the resources to abolish poverty, it only lacks the right priorities”.

Some 30 developing countries have already successfully taken measures to introduce elements of a national social protection floor in the form of cash transfer programs (see article on ‘Social security for all’). Consequently they are now in a much better position to cope with the social fall-out of the crisis, as the cash transfers systems can be used as flexible response mechanisms.

Even if international experience and ILO calculations show that a modest social protection floor or parts thereof are affordable in nearly all countries, the concept needs to be explored in the framework of a realistic national dialogue process that may involve setting priorities and making difficult choices. There is a variety of options. Increasing taxes, making taxation more progressive and tax collection more efficient, and ensuring the efficiency of existing systems are among the main challenges.

Common UN and ILO policy responses

The UN’s High Level Committee on Programmes is developing a common “One UN” concept for a Social Protection Floor. Together with the World Health Organization (WHO) and a number of other agencies, the ILO is leading the task. The building of a coalition of international agencies and donors enabling countries to plan and implement sustainable social transfer schemes on the basis of the social floor concept is at the core of the Program.

The social floor approach was endorsed by the Global Jobs Pact that the ILO’s International Labour Conference adopted in June 2009. The Pact requests countries that do not yet have extensive social security to build “adequate social protection for all, drawing on a basic social protection floor” and urges “the international community … to provide development assistance, including budgetary support, to build up a basic social protection floor on a national basis”.

In the context of its Global Campaign on Social Security and Coverage for All, the ILO is already promoting the social transfer component of the social protection floor. The conceptual strategy for the campaign consists of two dimensions. The first “horizontal” dimension comprises the extension of basic income security and access to health care, even if at a modest level, to the whole population. The second “vertical” dimension would seek to provide higher levels of income security and access to higher quality health care at a level that protects the standard of living of people even when faced with fundamental life contingencies such as unemployment, ill health, invalidity, loss of a breadwinner and old age.

However, no discussion of the guarantees can avoid the question of affordability. A national forward-looking social security strategy and diagnosis of priority needs can help to sequence the implementation of various social programs and policy instruments. As countries achieve higher levels of economic development, their social security systems can also advance in parallel, extending the scope, level and quality of benefits and services provided. This can be done within the framework of ILO Conventions, particularly a wider ratification of the ILO’s flagship Convention No. 102.

So the issues at stake can be resumed by the following questions.

How can a basic level of social protection for all – including first and foremost the most vulnerable – be implemented? How can the fiscal space for social transfers be secured or increased – through greater efficiencies in existing spending, reallocation of budgets, or new types of revenues? How can mature social security schemes be financially stabilized and adequate benefit levels secured in view of budgetary pressures and loss of reserves that are caused by the crisis?

The answers to these questions lie in good governance rather than in the exploration of new designs. Recent history has shown that good design and sufficient fiscal space are a necessary condition for the sustainability of social security schemes. A reasonable amount of fiscal space for social transfers can be negotiated in all societies.

The crisis is a stark reminder that the global economy requires and deserves bold global social concepts and safeguards that seek to ensure that all people are integrated in and benefit from the process of global development. The worldwide growth of inequality and insecurity and the heightened perceived risk of civil unrest speak for themselves. Social security must reach out further.

The question today is whether we are at a critical juncture in the history of development policies that allows us to pursue a new paradigm combining economic and social policies or whether we will return to business as usual once the present signs of a recovery become stronger.

1 This was discussed last September at the “ILO Tripartite Meeting of Experts on Strategies for the Extension of Social Security Coverage”.

2 See Protecting people and promoting jobs – A survey of country employment and social protection policy responses to the global economic crisis. An ILO report to the G20 Leaders’ Summit, Pittsburgh, 24-25 September 2009.