Debunking myths about social protection
How do we finance the social protection we need?
Paraguay has advanced the technical solutions to develop a solid and broad social protection system. However, according to experts, it is important to focus on political solutions, which may mean opening up discussions about tax reform and reach compromises that can benefit the whole Paraguayan population.
30 May 2023
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A social protection system has two funding mechanisms: the contributory component and general government revenue. The first case, as its name indicates, refers to the existence of a sort of direct relationship between the contributor, their contributions, their rights, and the benefits they will receive. This source of funding comes from the contribution that workers and employers usually make as part of their employment relationship. It is one of the main sources financing of the national social security institute (IPS) and the Caja Fiscal.
“Formal workers contribute to this funding, that’s why it is important in social protection to understand the informality of the labor market”, researcher Claudina Zavattiero mentioned, author of The political economy of social protection in Paraguay.
As for taxes as a source of funding, they are the contributions that every citizen makes. Taxes, and general government revenue, can also be destined to subsidize contributory programs, but they are commonly used to fund non-contributory programs, which can be universal or focused, and they target the social exclusion of some particular groups.
According to Zavattiero, in Paraguay the institution that finally decides how that investment will be distributed is the Ministry of Finance. “Common practice has shown that every institution with an implementation role designs and presents the social protection program they wish to develop to the Ministry of Finance. And it is during this dialogue with this ministry with a focus on the expected results and the program's financial component that resources are assigned”.
In the study, the expert notices significant obstacles when making social protection funding decisions. She mentions, on the one hand, the deficiency in production and maintenance of updated information about citizens. And on the other hand, the institutional weakness to carry out estimations of the potential population or that needs to be attended by the programs.
In the implementation of the new Sistema de Protección Social ¡Vamos! funding is one of the fundamental components, since by anticipating that aspect the planned goals can be achieved. “To move forward towards changes in the level and form of funding, as well as in the distribution and sustainability of social inverstment, a perceived need for a tax reform is recurrent, accompanied by reforms in the pension system, in the public procurement system, and in the public and civil service”, the author emphasized in her work.
Other funding possibilities
For Guillermo Mott, Social Protection Specialist in the International Labor Organization (ILO), in Paraguay there is a fiscal space to promote a tax reform and through this, funding for social protection programs. “Little is paid in taxes here, in comparison to the region and to other countries with the same development level”, he indicated.
Keeping in mind that there is a possibility of installing a debate, Guillermo suggests that we start asking ourselves which taxes could be promoted or expanded, how we would do it, who would they be directed at, who would be affected, etc.
Value-Added Tax (VAT), for example, is common and visible in tax reform debates, but it tends to be regressive. As it is collected through consumption, lower income people direct a higher proportion of their income to VAT tax payment. Ideal alternatives should not be sustained by the contribution of those who have less.
“I would prioritize other collecting possibilities, such as personal income tax, property tax, business profit tax, import tax on certain goods, certain products that are more harmful to the environment or health, or that are luxury goods; these tend to be more focused from the point of view of tax collection equity”, Guillermo suggested.
In addition to this kind of tax allowing to expand the coverage of social programs, the purpose is also to link taxes to certain products to discourage their consumption. For example, taxes on sweet beverages, alcohol or tobacco, commercial goods considered harmful to the individual and society, could also be considered as they entail treatment costs or health problems that the State must pay for.
“It is a legitimate conversation, that is needed given Paraguay’s existing development level, so that Paraguay’s GDP (Gross Domestic Product) is in accordance with the level of development experienced by the people and citizens”, the specialist assured, who also considered that this disassociation has a direct expression in social protection. Social protection coverage is lower than it could be given the country’s income level.
While those debates are pushed, Claudina’s study proposes thinking about other financing sources that could be considered, such as earnings from national and binational companies; territorial level resources within the budgets of municipal and departmental governments, supported by their respective laws, among others.
In addition to thinking about technical solutions, Guillermo calls for developing political proposals that involve the willingness and commitment from the authorities. “I think the obstacle nowadays is not technical, we know the solutions, we know the right path or which taxes could be increased. Where we need to focus on, what we have not worked through, is politically, if we want to do it”.
*For a deeper study of the subject, listen to the podcast series Debunking the myths about social protection.
*This contents do not necessarily reflect the views of the European Union.
“Formal workers contribute to this funding, that’s why it is important in social protection to understand the informality of the labor market”, researcher Claudina Zavattiero mentioned, author of The political economy of social protection in Paraguay.
As for taxes as a source of funding, they are the contributions that every citizen makes. Taxes, and general government revenue, can also be destined to subsidize contributory programs, but they are commonly used to fund non-contributory programs, which can be universal or focused, and they target the social exclusion of some particular groups.
According to Zavattiero, in Paraguay the institution that finally decides how that investment will be distributed is the Ministry of Finance. “Common practice has shown that every institution with an implementation role designs and presents the social protection program they wish to develop to the Ministry of Finance. And it is during this dialogue with this ministry with a focus on the expected results and the program's financial component that resources are assigned”.
In the study, the expert notices significant obstacles when making social protection funding decisions. She mentions, on the one hand, the deficiency in production and maintenance of updated information about citizens. And on the other hand, the institutional weakness to carry out estimations of the potential population or that needs to be attended by the programs.
In the implementation of the new Sistema de Protección Social ¡Vamos! funding is one of the fundamental components, since by anticipating that aspect the planned goals can be achieved. “To move forward towards changes in the level and form of funding, as well as in the distribution and sustainability of social inverstment, a perceived need for a tax reform is recurrent, accompanied by reforms in the pension system, in the public procurement system, and in the public and civil service”, the author emphasized in her work.
Other funding possibilities
For Guillermo Mott, Social Protection Specialist in the International Labor Organization (ILO), in Paraguay there is a fiscal space to promote a tax reform and through this, funding for social protection programs. “Little is paid in taxes here, in comparison to the region and to other countries with the same development level”, he indicated.
Keeping in mind that there is a possibility of installing a debate, Guillermo suggests that we start asking ourselves which taxes could be promoted or expanded, how we would do it, who would they be directed at, who would be affected, etc.
Value-Added Tax (VAT), for example, is common and visible in tax reform debates, but it tends to be regressive. As it is collected through consumption, lower income people direct a higher proportion of their income to VAT tax payment. Ideal alternatives should not be sustained by the contribution of those who have less.
“I would prioritize other collecting possibilities, such as personal income tax, property tax, business profit tax, import tax on certain goods, certain products that are more harmful to the environment or health, or that are luxury goods; these tend to be more focused from the point of view of tax collection equity”, Guillermo suggested.
In addition to this kind of tax allowing to expand the coverage of social programs, the purpose is also to link taxes to certain products to discourage their consumption. For example, taxes on sweet beverages, alcohol or tobacco, commercial goods considered harmful to the individual and society, could also be considered as they entail treatment costs or health problems that the State must pay for.
“It is a legitimate conversation, that is needed given Paraguay’s existing development level, so that Paraguay’s GDP (Gross Domestic Product) is in accordance with the level of development experienced by the people and citizens”, the specialist assured, who also considered that this disassociation has a direct expression in social protection. Social protection coverage is lower than it could be given the country’s income level.
While those debates are pushed, Claudina’s study proposes thinking about other financing sources that could be considered, such as earnings from national and binational companies; territorial level resources within the budgets of municipal and departmental governments, supported by their respective laws, among others.
In addition to thinking about technical solutions, Guillermo calls for developing political proposals that involve the willingness and commitment from the authorities. “I think the obstacle nowadays is not technical, we know the solutions, we know the right path or which taxes could be increased. Where we need to focus on, what we have not worked through, is politically, if we want to do it”.
*For a deeper study of the subject, listen to the podcast series Debunking the myths about social protection.
*This contents do not necessarily reflect the views of the European Union.