Social security isn’t limited to social insurance.

Nevertheless, his typology of statutory social security inspired subsequent typologies which included social insurance, means-tested social assistance schemes, demogrant allowances and a variety of mandatory benefits provided by employers, as well as tax allowances and concessions. Kaim Caudle’s inclusion of employer mandates and the use of tax advantages by governments was particularly helpful in that it publicized the need to transcend the emphasis placed on social insurance as the primary and most desirable form of social security at the time. It is certainly recognized today that fiscal measures should be included in any account of social security. As is shown in Chapter 6 of this book, the tax system is now being used quite extensively by the government of the United States to provide income support, and there are signs that other countries, such as the United Kingdom, are also placing more emphasis on the use of fiscal measures.

Following the ILO classifications, many comparative accounts of social security now classify social security into four or five different types of schemes. In his formative study of social security in the developing countries, Midgley (1984) argued that the classification of social security schemes as social assistance, social insurance, employer liability schemes, social allowances and provident funds is a convenient way of proceeding and offers a reasonably comprehensive framework for analysis. Similarly, in his prodigious account of international trends in social security, Dixon (1999) also classified social security programmes in this way. The typology presented in Table 1.1 not only adopts the standard five-fold classification of social security but also recognizes the importance of the fiscal system in providing income maintenance and support.

Social assistance

Of the different approaches to social security, social assistance is the oldest. Its origins can be traced back to the charitable activities mandated by religious and cultural beliefs. For example, it is well known that the custom of giving charity to the poor is an integral part of

Judaism, Christianity, Hinduism, Buddhism and Islam. Obviously, the giving of charity is based on an assessment, however informal or subjective, of the recipient’s needs. It is this assessment that has been formalized in social assistance through the use of what is generally referred to as an income or means test. Although the use of the means test is historically associated with the English Elizabethan Poor Law of 1601, its use is far older. The Byzantians provided state-sponsored poor relief in addition to religious charity, and during the time of the Islamic caliphates, public treasuries or beit- ul-mal were created to aid the needy. Similar funds were subsequently established by various municipal authorities in Europe and formal assessment of the needs and circumstances of applicants for assistance was made. Poor relief was generally reserved for those who had no relatives to care for them and only those who were believed to be deserving of aid were assisted. This definition usually applied to widows with small children, the elderly and people with disabilities. The able bodied were usually excluded.

The Elizabethan statute is particularly important because it created the first centralized, nation-wide system of public poor relief. It recognized that traditional forms of familial and community support were not always able to cope and that religious charity needed to be augmented by public provision. In addition, the Elizabethan law strengthened earlier statutory sanctions against vagrants and able-bodied beggars and required that they be apprehended and put to work. It prescribed punishments such as whippings to control vagrants and those who refused to work. Many social policy scholars believe that the Elizabethan Poor Law marked an important phase in the history of social security and that it shaped its subsequent evolution. It also served as a model for many social assistance programmes that were subsequently created in the United States and in many parts of the developing world. The Elizabethan statute was replicated in the Massachusetts Bay Colony in 1642 and in Virginia in 1646. It was also adopted in other parts of the British empire beginning with Jamaica in 1682. Although social assistance was originally intended to provide limited and meagre benefits to a small proportion of the population who were in dire need, it has also been used more generously to fund old-age pensions for a sizable proportion of the elderly population in countries such as Australia and South Africa. In Mauritius, it was originally used to pay child benefits to low-income families, but it has since been replaced with a universal family allowance scheme. An interesting development is the use of what are known as conditional cash transfer schemes in some Latin American countries. These schemes pay benefits to poor families on condition that their children attend school and that their parents ensure that they are immunized.

The ILO (1942, p. 84) defines social assistance as a service or scheme which ‘provides benefits to persons of small means granted as of right in amounts sufficient to meet a minimum standard of need and financed from taxation’. Three distinctive features of social assistance are emphasized in this definition. First, it is available only to those who fall below a defined minimum level of income, and the means test is used to determine eligibility. Other eligibility criteria such as invalidity, old age, widowhood or desertion may be employed as well. Second, social assistance is financed entirely from public revenues. Third, because social assistance schemes have a legislative basis, there is a right to entitlement. Once assessed as qualifying for aid, applicants have a legal right to be helped. Although it has been argued that the notion of right to entitlement is more firmly established in social insurance and social allowances, it also applies to social assistance.

Although widely used, social assistance has been subject to much criticism over the years. Critics on the political right believe that social assistance programmes are widely abused by indolent and irresponsible people who are able to persuade the authorities that they are unable to work and earn a living. The media often portrays social assistance recipients in a negative way and cases of abuse are often sensationalized. Critics on the left believe that social assistance is an ineffective form of income protection because it stigmatizes those who seek aid and provides meagre and limited benefits which do not meet the income needs of those experiencing financial difficulty. Although they recognize that claimants have a legal right to be helped, they contend that social assistance is often administered in ways that deny these rights or otherwise limit the ability of claimants to receive benefits. They believe that the stigmatization of claimants is a major deterrent and an important reason why many elderly, disabled and other needy people fail to apply for benefits. It is for this reason that social insurance is usually preferred by those on the political left who believe that the right to benefit is more effectively enshrined in these programmes.

Social insurance

Social insurance schemes are distinguished from other forms of social security in that they are financed from the regular contributions of those who participate in these schemes. Although these contributions are sometimes said to be similar to commercial insurance premiums, contributions to public social insurance schemes differ from insurance premiums in that they are obligatory and, unlike private insurance, contributions are usually supplemented by employers and the state (Burns, 1936). Also, benefits are not usually assessed on an actuarial basis. While it is generally assumed that benefits are directly linked to contributions, this is frequently not the case. For these reasons, it is recognized that social insurance contributions are a form of taxation or, more precisely, that they comprise a payroll tax on labour income.

Social insurance schemes have been described as ‘occupationalist’, because they cater for designated categories of workers on the basis of occupational status (Pavard, 1979). These categories are comprised of workers in regular wage employment and, with the exception of a few countries, benefits are restricted to the members of the scheme and their dependants. Membership of social insurance schemes is defined by legislation, and it is compulsory for those who fall into the designated categories to join. Coverage is said to be universal or comprehensive when all workers, including those who are self-employed, are members of social insurance schemes. However, with the exception of the Western countries, universal coverage is rare.

However, social insurance schemes are similar to commercial insurance in that they have a connotation of indemnity against contingencies or risks. As noted earlier, the notion of protection against risk is closely associated with industrial employment and the loss of income that wage employees experience when incomes are interrupted, reduced or terminated because of illness, injury at work, invalidity, maternity, retirement, death and other reasons. Most authoritative definitions of social insurance refer to these contingencies. Recommendation 67, adopted at the 26th International Labour Conference in 1944, encouraged governments to extend social insurance rather than other forms of social security. These schemes, the organization pointed out, protect workers against the contingencies which prevent persons in wage employment from earning a living whether by inability to work or inability to obtain remunerative employment or in which the worker dies leaving a dependent family. The recommendation urged that contingencies which ‘involve an extraordinary strain on limited income in so far as they are not otherwise covered’ should also be included.

Today many social insurance schemes provide protection against the contingencies enumerated in the ILO Social Security (Minimum Standards) Convention of 1952. As noted previously, nine contingencies are covered by this convention. The principles anchored in the Convention are four-fold in that they define and guarantee benefits, require the participation of employers and workers in the administration of the schemes, accord general responsibility to the state for the due provision of the benefits and the proper administration of the institutions and finally require the collective financing of benefits by way of insurance contributions or taxation. Social insurance is widely used today to provide old-age retirement, sickness, invalidity, unemployment and survivor’s benefits. To qualify for benefits, claimants (or their dependents) must have paid contributions for a specified period of time. There are also obvious eligibility conditions that apply in the case of illness, accident, invalidity and retirement. Claimants must also meet other qualifying conditions such as citizenship or lawful residence. Social insurance benefits are usually paid in cash although, as was noted earlier, the insurance method is also used to provide medical and other services in some countries, particularly in Latin America.

The link between social insurance and industrial employment is revealed in the historical origins of these schemes. As is well known, Germany was the first nation in the world to introduce a national, mandatory social insurance programme in 1883. This programme provided sickness benefits to low-income workers who were temporarily unable to work because of illness and who were often summarily dismissed by their employers. This practice had caused great resentment, and promises by the Social Democratic Party to address the issue mobilized a great deal of working-class support. It was largely for this reason that the Chancellor, Otto von Bismarck, used both repressive and conciliatory measures to attack the Social Democrats and their union allies. The creation of a statutory, mandatory sickness insurance programme sought to out-manoeuvre the Social Democrats and to neutralize the threat they posed to the government and established interests.

The insurance idea had actually emerged much earlier among nonformal mutual associations, the unions and neighbourhood savings and burial associations. Prior to Bismarck’s introduction of sickness insurance, thousands of small sickness funds operated in Europe. Similar associations known as the friendly societies had also emerged in Britain and, as in the rest of Europe, they laid the foundations for both commercial and statutory insurance. Germany’s sickness insurance programme was supplemented in 1884 by a work injury insurance programme and in 1889 by an old age retirement insurance scheme. Unemployment insurance was introduced in 1927. Britain was the first country to establish an unemployment insurance scheme in 1911. It also established a retirement insurance scheme in 1925. Several other European nations also introduced old-age insurance and other forms of social insurance in the early decades of the twentieth century. In the United States, retirement pensions were originally provided through social assistance by the states but, with enactment of the Social Security Act by the Roosevelt administration in 1935, these programmes were replaced with a federal retirement programme that now covers the vast majority of the country’s workers (Karger, 1996; Leiby, 1978).

Social insurance has also been used to provide medical care. Although Britain and the Soviet Union funded their health services from general revenues, most other industrial nations have used the insurance mechanism for this purpose and, as was noted earlier, many countries, particularly in Latin America, include the provision of medical care in their definition of social security (Roemer, 1997). In non-European countries, Japan took the lead in offering health insurance in 1922, finally providing universal coverage by 1946. Japan was also an early pioneer of social insurance retirement pensions as was Chile, which was the first developing country to establish statutory social insurance funds in the 1920s. However, different groups of workers in Chile and other Latin American countries were covered by different insurance funds. Because the different funds had different eligibility requirements and paid different levels of benefits, social insurance in Chile became quite fragmented causing administrative and fiscal difficulties that eventually undermined the system’s credibility.

As is well known, the Chilean social insurance system attracted international attention when General Pinochet’s military dictatorship sought to privatize the system in 1981 by introducing commercially managed retirement accounts. Although social insurance had long been the preferred social security funding mechanism in international circles, the involvement of the World Bank in social security debates in the 1990s (World Bank, 1994) offered an alternative to the standard ILO social insurance model which had been adopted in many parts of the world. Through its policy influence and lending resources, the Bank aggressively promoted savings accounts as an alternative to social insurance claiming that they were a far more effective approach to income maintenance especially during retirement. A number of Latin American countries have emulated the Chilean innovation, and recently Hong Kong established a retirement security system based on personal savings. On the one hand, the governments of several other developing countries have elected to introduce or retain social insurance and, as shown in Chapter 4 of this book, the Bachelet government in Chile is reassessing the merits of the privatized retirement savings account system. On the other hand, as shown in Chapter 5, developments in China are noteworthy for introducing a combined social insurance and savings account approach.

As will be shown later, funding is a major issue in social insurance policy debates today. It was shown earlier that social insurance is funded from special payroll taxes known as contributions that are levied on workers and their employers. Often, these contributions are supplemented by governments. The revenues raised by social insurance contributions are pooled and may be placed in a trust fund administered by a special government agency. The accumulated revenues are invested and the income is used to pay benefits. However, in most Western countries today, trust funds have not maintained a reserve and revenues are immediately transferred to pay benefits. In this case, the social security programme is described as a pay-as-you-go system. In the former case, it is known as a funded system. Critics of social insurance claim that these programmes are not sustainable because of the growing income needs of the increasing numbers of retired people and others claiming benefits and the declining numbers of workers who contribute to social insurance funds. Although this problem applies largely to the Western countries, it has been argued that it is only a matter of time before similar demographic and fiscal challenges will arise in the developing world. In addition, social insurance is said to pose a major challenge to economic development. As will be shown in Chapter 2, social insurance schemes are said to stifle investments, distort labour markets and negatively affect work incentives.

Provident funds and commercial savings accounts

The introduction of a system of commercially managed mandatory retirement accounts in Chile was viewed by many as a daring policy innovation, which was in keeping with the needs of dynamic capitalist economy and suited to the times. However, few advocates of this approach recognized that mandatory retirement accounts known as provident funds had been established in many Anglophone developing countries in the middle decades of the twentieth century. These provident funds have many similarities with the commercial savings account except that they are managed by public bodies and do not provide opportunities for their members to choose from a variety of investment options (Dixon, 1982, 1993).

Provident funds have certain similarities to social insurance in that they are financed by regular payroll contributions but, unlike social insurance, contributions are not pooled. Instead, a personal, designated account into which workers pay contributions is established and usually contributions are matched by employers. Accumulations in the personal account is accessed when a specified contingency arises. Most provident funds are designed to provide retirement pensions. Contributions paid into the account are invested by a public or quasi-public body, and the total accumulated amount plus interest is withdrawn when the worker retires either in a lump sum or as phased payments. Lump sum payments have been used in many countries and are generally preferred by the members of these schemes. Sometimes the lump sum is used to purchase an annuity from a commercial provider. In addition to paying retirement pensions, provident funds are also used to cover disability. If the worker becomes unemployed, and is unable to find work, the accumulated contributions may also be withdrawn prior to retirement. In many cases, partial withdrawals are also permitted in the case of temporary unemployment.

Provident funds were established in many British colonial territories in the middle decades of the past century in the period preceding independence. Unfortunately, little historical information has been obtained to clarify the reasons for this decision or to highlight the role of British politicians and civil servants in promoting the spread of provident funds in the Anglophone developing world. However, it appears that the nationalist independence movements were exerting growing pressures for the creation of social security, particularly in the light of the publication of the Beveridge report, which attracted international attention. The British authorities were mindful that the proportion of the labour force engaged in regular wage employment was relatively small, and they were reluctant to establish social insurance programmes for a small minority of the population. In addition, the ILO conventions required that social insurance funds be supplemented by government, and because of these costs, an alternative form of income protection was sought. It is also likely that the provident fund was modelled on similar retirement pension programmes that had been established in Britain. They were also reminiscent of the civil service pension schemes that had been established for colonial administrators during the imperial period.

One of the first provident funds was created in India in 1952 to cover workers with low or moderate incomes in designated industries. The programme was administered at the state level, and a lump sum benefit was paid when the worker reached the age of 55 years. Other Asian countries such as Malaysia, Singapore and Sri Lanka emulated the Indian innovation, and in the 1950s and 1960s, provident funds were established in a number of African countries including Nigeria, Ghana and Uganda. Several Caribbean and South Pacific territories subsequently establish provident funds, and in the 1970 new funds were introduced in the Seychelles and Swaziland. The Singaporean provident fund is perhaps the best known, having been extensively documented in the literature, largely because of the effective use of accumulations by the government for housing construction and economic development projects.

In addition to the British territories, provident funds were also established in other developing countries including Indonesia and Taiwan (Dixon, 1982, 1993; Midgley, 1984). On the other hand, several British territories chose not to establish provident funds but instead opted to introduce social insurance to provide retirement pensions.

As the Singaporean experience reveals, provident funds have the advantage of accumulating substantial reserves which can be used for investment, and many governments have found them to be a useful source of credit (see Chapter 10 of this book). On the other hand, as the International Social Security Association (1975) pointed out, provident funds have the disadvantage of not providing adequate protection to those who have been in employment for a relatively short period before retirement or invalidity, and they are especially disadvantageous to the dependants of younger workers who die before they are able to accumulate adequate funds in their accounts. They have also been criticized for paying lump sum benefits and failing to ensure that members have a steady income during retirement. As Gobin (1977, p. 9) puts it, ‘The lump sums paid at retirement are often frittered away by purchasing consumer goods and, in the long run, recipients must still revert to relief from the public assistance programme.’ This observation has relevance for the private savings account retirement programmes that have been established in several Latin American and other countries.

As was mentioned earlier, a number of countries have adopted the provident fund approach to create commercially managed individual savings accounts since 1981 when the Chilean military government privatized the country’s social insurance system. The privatized system created individual savings accounts into which the workers’ contributions deducted from wages are accumulated and then disbursed when they reach retirement age. A distinctive feature of the approach was the use of commercial fund managers to invest accumulations. Unlike conventional provident funds which are entirely state managed, the Chilean system provided new opportunities for the financial services industry to participate in the social security system. Workers, it was argued, would benefit from this arrangement because they would choose which management firms to use, and thus faced with competition, these firms would minimize cost and seek the best rates of returns for their participants. The World Bank (1994) enthusiastically endorsed this system claiming that the involvement of the private sector would greatly enhance efficiency and meet the needs of workers and retirees by the effective use of the market mechanism. Since the Chilean privatization, a number of other Latin American countries have introduced commercially managed retirement savings account schemes, but as various studies have shown, the claim that the marketization of social security will inevitably enhance efficiency and coverage has not been realized. Recently, the government of Hong Kong established a retirement security system based on personal savings, but unlike the Latin American funds, it designated the scheme as a provident fund. However, like the Latin American funds, accounts are commercially managed. Despite the efforts of the World Bank to promote commercially managed accounts, other governments that have created provident funds have not shown much interest in privatization and their funds continue to be state managed.

Employer mandates

Social security also operates through the mandates imposed by governments on employers to meet the income needs of their workers. Generally, loss of income arising from employment injury, temporary illness and maternity is most frequently covered by these programmes. The term ‘workmen’s compensation’ is often used to refer to programmes that mandate employers to pay compensatory benefits to workers who sustain injuries at work. Employer mandates are also used to require firms to pay terminated workers a lump sum, redundancy benefit. In some countries, employers are required to provide old-age retirement and disability benefits as well. In the Communist countries, the state enterprises were required to accumulate sufficient funds to meet the retirement and other income protection needs of their workers. In China, the state-owned enterprises were previously responsible for meeting the income protection and particularly the retirement income needs of their workers, but as shown in Chapter 5 of this book, many were unable to meet their obligations, and today the new social insurance system operated by the provincial governments under the direction of the central government has covered most workers in regular wage employment.

The employer liability approach to social security is based on the premise that the costs of meeting contingencies should be borne by employers, usually backed up by legislation which specifies what type, amount or level of benefit is to be paid under what circumstances. Although imposed by governments through legislative dictate, mandates are funded by employers. Unfortunately, employers are not always able to meet their obligations. Some evade payment and, in the case of employment injury, the costs of the compensatory benefit may be very large. Many employers complain that mandates impose significant costs which affect their profitability and even their commercial viability. For these reasons, many social security experts recommend that employer mandates be replaced with social insurance. However, in some countries, a hybrid employer mandate has emerged by which governments require employers to insure themselves with a commercial carrier to meet worker’s claims. In some countries, insurance is provided by a government agency.

Like social insurance, employer mandates are historically associated with the risks of industrial employment. The first employer mandates sought to address the contingency of work injury and were known as worker’s compensation. One of the earliest was established by the English Fatal Accidents Act of 1846 and required the payment ofcompensation to workers who died as a result of injuries sustained at work. The statute responded to the problem that industrial workers who were injured at work were compelled to litigate to secure compensation. It recognized that they were disadvantaged in having to establish employer negligence and incurred considerable legal expenses to press their claims. Although the statute made it easier for workers and their families to claim compensation, it upheld the principle that litigants had to prove negligence on the part of the employer and many still found it difficult to secure redress. As a result of growing dissatisfaction and union agitation, the government responded by enacting the Workmen’s Compensation Act of 1897 which required the payment of compensation without proof of negligence. This statute inspired similar legislative developments in other countries – notably in the English-speaking world. New Zealand established an employment injury mandate in 1898, and similar statutes were enacted in several of the American states and in Australia in the years before the First World War. Denmark was the first continental European nation to establish an employer mandated employment injury scheme in 1898. However, employment injury provisions in many other countries were often based on social insurance principles. This was the case in Germany and in other European countries, and in time, employment injury mandates were either augmented by the practice of insuring employers or otherwise by replacing them with social insurance schemes funded by payroll taxes levied on employers.

Although employer mandates which require employers to insure themselves with a public carrier are very similar to employer-financed insurance provisions, the use of the payroll tax in the latter case is widely regarded as a key difference between the employer liability and social insurance approaches. Today, employer mandates are not particularly popular with social security experts and policymakers, but nevertheless governments continue to use this approach. It remains popular in the United States, where it is also been used to require the payment of minimum wages and to direct employers to provide leave when workers or immediate family members become ill.

Universal social allowances

Universal social allowances are funded directly out of government revenues and are paid to those who meet specified eligibility requirements. Income or wealth is not taken into account when determining eligibility, and benefits are paid to all who fall within a specific population category. Because social allowances cover specified demographic groups irrespective of their incomes or assets, they are also known as demogrant social security schemes. Merriam (1969, p. 56) reports that the term ‘demogrant’ was first used by Evelyn Burns in 1936. As she points out, the great strength of these programmes is that they do not divide people into ‘those who have and have not’. Social allowances are designed to supplement the income of those who incur additional costs because of their needs or social obligations. Although the benefits paid through social allowance programmes are generally small, they nevertheless cover all of those in the population who are in the designated demographic category and provide a measure of income support to meet their additional income needs. They may be viewed as a form of collective compensation paid by the state to those who face additional demands on their income, whether or not they have the resources to meet this burden comfortably.

Child benefits are often paid as social allowances on the ground that families with children have greater demands on their resources than families without children. These programmes have conventionally been known as family allowances. In some countries, such as France, they were introduced to address the problem of a declining birth rate. On the other hand, family allowances were not established for pronatalist reasons in most other European countries but rather to supplement the incomes of families with children and particularly families with large numbers of children who were often among the poorest and most needy. In some countries, social allowances are paid to people with disabilities or to elderly people.

Despite their popularity with social security scholars who approve of their universal coverage, social allowances are not widely used around the world today. They are largely confined to European countries, although there are a few exceptions such as Canada and Hong Kong where they are used to fund retirement pensions. Another example is New Zealand which established an old-age allowance scheme in 1938. Originally, retirement pensions were based on social assistance principles, but coverage was extended to all residents over the age of 65 years irrespective of their income or assets. In 1965, Denmark enacted legislation, which replaced the country’s social assistance pension scheme with a universal old-age allowance. In Hong Kong, elderly people over the age of 70 receive a small old-age pension (known as a social allowance) irrespective of their income. Those with low incomes may apply for social assistance to supplement their pensions. The contingency of disability is also met through universal social allowance programmes in a number of European countries, notably the Scandinavian nations and Finland. In Finland, social assistance payments are used to supplement the universal social allowance paid to people with disabilities. A social allowance scheme for people with disabilities was established in Britain in 1975 to provide income support to those who had not qualified for social insurance benefits and who were, therefore, left without any income in the event of disability.

Social allowances are championed by those on the political left, who believe that social security coverage should be extended to all irrespective of their incomes and assets. It was this idea that played a major role in the creation of family allowance schemes in the early twentieth century, although as was noted earlier, pronatalist motives were also relevant particularly in France. However, in most cases family allowances in Europe were created to meet the additional income needs of low income, large families. In Britain, the Beveridge Report of 1941 strongly urged the introduction of universal family allowances, because it was argued that they would subsidize the incomes of low-incomes families without stigmatizing them or creating a ‘poverty trap’ that would discourage poor families from working and thus losing their benefits. On the other hand, universal allowances are opposed by those on the political right who believe that it is wasteful to pay income benefits to those who have adequate income and assets. Instead they advocate the use of social assistance schemes that ‘target’ the poor and direct benefits at the most needy sections of the population. They reject the argument that social assistance unfairly stigmatizes claimants and contend the claim that people in need fail to apply for benefits because they fear stigmatization is grossly exaggerated. The poor and needy, they believe, will seek public assistance when they need it. The real issue is not the stigmatization of recipients but rather the need for adequate measures that prevent fraud and abuse.

However, despite their attempts to eliminate universal social allowances and replace them with social assistance schemes, social allowances have been quite resilient. This is largely because they have extensive coverage and are popular. They have also helped to reduce the incidence of poverty among those receiving these benefits (Tang, 1997, 2000). The idea that direct, universal cash transfers are an effective anti-poverty measure has also inspired advocates of the basic income approach who believe that universal benefits currently directed at certain demogrant groups such as families with children, elderly people and people with disabilities should be paid to all citizens irrespective of their incomes or assets and irrespective of whether they are employed or not (Fitzpatrick, 1999; van Parijs, 1992).

Fiscal measures and social security innovations

Kaim-Caudle’s (1973) typology of social security, which was mentioned earlier, drew attention to the social security role of the tax system. Although social security has been primarily associated with direct income transfers and the provision of health care, Kaim-Caudle noted that governments have intentionally or unintentionally used the tax system to advantage different groups of people in ways that affect their incomes. The tax system is usually believed to mobilize resources to fund public services and the other activities of governments, but by creating concessions and advantages, it can also be used to transfer resources to different groups of people. The business community has historically benefited extensively from tax advantages of this kind, but they have also been used to benefit larger groups of people such as homeowners through mortgage tax relief. The use of the fiscal system in this way has numerous purposes. Often, governments grant concessions in response to political pressures, but they also use the tax system to create incentives. In the case of mortgage tax relief, the concession has the stated objective of promoting homeownership.

The tax system has also been used by governments to encourage employers to provide income protection and particularly retirement pensions. For example, after the federal government of the United States introduced tax concessions to reward firms that established retirement pensions, the number of occupational pension plans expanded significantly, so that by 1929 about four hundred occupational pension plans covering almost three million employees had been created (Howard, 1997). Tax incentives were again used during the Second World War by the Roosevelt administration to harmonize occupational pensions with the government’s newly established retirement insurance programme, and as Hacker (2006) reveals, this decision strengthened both systems. Similarly fiscal policies facilitated the expansion of occupational pensions in Britain and, as was noted earlier, inspired Titmuss (1958) to stress the important contribution that the fiscal and occupational systems make to social welfare. More recently, the federal government of the United States has also used the tax system to encourage individuals and employers to establish commercially managed, retirement savings accounts.

Although fiscal incentives of this kind generally favour middle- and higher-income workers in steady wage employment, they can also be used to direct resources to low-income earners provided they are covered by the tax system. As is shown in Chapter 6 of this book, the tax system of the United States has been used since the early 1970s to supplement the incomes of low-paid workers through what is known as the Earned Income Tax Credit or EITC. In the early 1990s, the Clinton administration extended the credit to cover many more workers and increased it value. Wage earners who meet specified eligibility requirement may claim a tax refund which functions as an income subsidy. It is estimated that in 2000, approximately twenty million households benefited from the credit and that it lifted more than four million people out of poverty (Hoffman and Seidman, 2003). In addition to its positive social impact, there is evidence to show that the EITC has strengthened work incentives and also increased the number of workers covered by the tax system.

In addition to the more frequent use of the tax system to provide income support and protection, a number of innovations such as matched savings accounts and stakeholder accounts have attracted attention from social security policy makers who are advocating that they be more widely adopted. Matched savings accounts are also known as individual development accounts or IDAs. Developed in the United States by Sherraden (1991) they are targeted at low-income people who are encouraged to contribute to a restricted account which is then matched to varying degrees by the government or other sponsors. Accumulated funds can only be withdrawn for retirement or other approved social purposes such as meeting educational or housing costs. Although IDAs are now well known in the United States, they have not been widely adopted in other countries, and even in the United States, government sponsorship is still limited. Indeed, as it is noted in Chapter 6, most IDA projects are operated by non-profit organizations although many of them do receive federal funds. Nevertheless, IDAs are a potentially useful social security mechanism which can assist low-income families to save, attain credit worthiness and utilize established financial services, including subsidized public lending services such as special mortgages which avoid the predatory activities that characterize credit facilities in many low-income neighbourhoods. In addition, as Sherraden pointed out, they transcend social security’s conventional emphasis on income transfers for consumption purposes. They seek to support asset development and promote investments among low- income people, who have not benefited from the various asset accumulation incentives available to higherincome earners.

Stakeholder accounts are similar to IDAs in that they promote asset accumulation, but they do not utilize the matching formula of the IDA. In addition, they are not usually targeted at people with low incomes but provide universal cash benefits. Most proponents of these accounts propose that they be created by governments for all children or young people. Ideally, these accounts are established with a lump sum provided by government into which subsequent deposits may be made (Ackeman and Alstot, 1999; Lindsey, 1994). However, although widely discussed in the literature, stakeholder accounts have not been introduced in many parts of the world. The major exception is Britain where the Labour government recently introduced a child savings account scheme for all children at birth. These accounts are opened with an initial deposit from the state and which may then be supplemented on a tax advantaged basis. Accumulated funds may be withdrawn on reaching maturity and may be used for various purposes.

Issues in social security

For many years after the Second World War, social security enjoyed strong support from both governments and the public. Governments believed that social security is an effective means of ensuring income protection and highly suited to the needs of industrial societies. Social security was also embraced by the governments of the developing countries, since it was believed that these countries were on the path towards industrialization and would soon need modern forms of income protection. However, support for social security has gradually lost ground partly because of the difficulties social security programmes have encountered, the extent of social and economic change and the ideological campaigns waged against state intervention by neoliberals and their allies. Supporters of social security have been slow to respond but, as was pointed out earlier in this chapter, the challenges presented by critics and by new social and economic realities are being more readily addressed. There is a greater recognition of the need to respond more effectively to new challenges and to deal with the issues facing social security. A readiness to debate and respond to these issues has strengthened the capacity of social security scholars and policy makers to address the challenges of the time.

Current social security debates are marked by more incisive analyses of the issues. While the field is now the subject of intensive disagreements, these disagreements have fostered a greater understanding of the issues and the formulation of policy responses that offer effective solutions. Of the many issues being debated in social security circles today, some merit further discussion. The first concerns the question of whether new demographic and economic realities will limit social security’s long-term effectiveness and sustainability. The second issue concerns the sustainability and fiscal viability of social security programmes. The issue of whether ideological beliefs significantly influence social security decision-making or whether decisions are governed by rational, technicist approaches is yet another important issue. The question of managerial efficiency versus administrative incompetence is also widely discussed. Debates have also revolved around issues of equity. These debates are concerned with the coverage of social security programmes and the extent to which they treat everyone equally. Another issue concerns the relationship between social security and economic development, but since this topic is extensively covered in this book, it will not be discussed separately here. These issues affect social security in both the Western and developing countries. There are, as Tracy (1996, p. 144) pointed out, major issues facing social security internationally with regard to ‘expanded coverage, credible administration, and sustainable economic development ... and growing disparity in wealth both within and among countries’.

With regard to the question of whether demographic and economic changes have affected social security’s relevance to current demographic, cultural and economic realities, some academic commentators claim that conventional approaches now have limited usefulness. They point out that modern social security programmes emerged in the context of rapid industrialization and urbanization in the Western nations. They contend that social security’s occupationalist commitments, which were mentioned earlier, were specifically intended to address the challenges of industrial life. This was primarily the case with social insurance, but provident funds, employer mandates and social allowances were also closely linked with the rapid extension of wage employment in the late nineteenth century. Social security programmes also responded to the demographic and cultural realities of the new industrial world. Most wage workers were employed in industrial occupations and most remained with the same employer over their working lives. Although life expectancy was rising, comparatively few workers survived into old age in the early stages of social security expansion and only a small proportion were therefore dependent on retirement pensions. Initially, wage employees were overwhelming male and the ‘breadwinner’ approach to social security was compatible with cultural realities. Social security programmes were primarily designed to provide income protection to male-headed families in which adults were employed in industrial occupations.

Today, the situation has changed dramatically. As Sherraden (1997) puts it, industrial era social security programmes, based on mass wage employment and the male breadwinner model, do not fit the economic realities of the contemporary information economy. Demographic realities have also changed in that many more people are now living longer and drawing retirement pensions. This trend is expected to increase not only in the Western countries but in the developing countries as well. Changing demographic realities are also revealed in the sizable increase in the proportion of women who work, the rise in divorce rates, the numbers of lone-parent families and particularly the families headed by women. In addition, with rising incomes and rising expectations, many people now resent having to pay social security taxes and at the same time demand more of government. A more individualistic culture has also emerged in which notions of self-determination and self- reliance have become more important. The weakening of working-class solidarity and the undermining of trade unionism has also contributed to the growth of individualism and a disinclination towards cooperative endeavour that were characteristic of industrial era social security programmes.

The effects on social security policy of these and other changes are widely debated today, particularly with reference to the issue of whether the changes that have taken place pose new fiscal challenges that require new approaches. Some critics of social security contend that they do, and that entirely new approaches that require greater personal responsibility and the utilization of markets are needed to provide effective income protection in the future. They point out that conventional social security programmes in many countries now face fiscal obligations that have become increasingly difficult to meet and require ever-greater government subsidies. These critics argue that commercially managed income protection accounts that encourage people to save for their retirement, health care and the risk of unemployment offer a viable alternative to conventional, state managed social security programmes.

The fiscal pressures on social security have come largely from the increase in the proportion of elderly people in the population and the prediction that many more elderly retirees will live into their eighties or even nineties and require retirement pensions for many years. This demographic trend, it is argued, will severely stretch the resources of social security programmes and eventually even government subsidies will be insufficient to meet the demand. The problem is compounded by the funding mechanisms used in social insurance programmes. When these programmes were created, it was intended that sizeable reserve funds would be established to meet the future needs of retirees. But the funded approach was eventually replaced by the pay-as-you-go approach by which the use of actuarial predictions was undermined resulting in the immediate transfer of contributions to pensioners. Although it was believed that an expanding economy, full employment, rising incomes and a generally stable proportion of people in retirement would guarantee the viability of the pay-as-you-go approach, these optimistic assumptions have not been realised.

Other factors aggravated the fiscal problems facing social security. The increase in divorce and rise in single-headed families has meant that income needs have increased placing a higher burden on social assistance schemes. In addition, social insurance contribution rates have remained relatively unchanged in many parts of the world while benefits levels have increased. This is partly because politicians have used social security to garner electoral support and partly because of political pressures from workers and the trade unions. In addition, administrative inefficiencies and even corruption have undermined the fiscal viability of social security. Because social security programmes have been exploited by politicians for electoral gain and managed by inefficient bureaucrats, critics argue that there is an urgent need to privatize these programmes.

In some parts of the world, these fiscal realities are believed to be quite serious. Social security programmes in many Latin American nations face imminent insolvency, and this fostered the privatization of some programmes. In Britain, the Conservative Government (1979–1996) raised serious concerns about the feasibility of containing social security costs, and as Evans and Piachaud, (1996) pointed out, measures were taken to restrict both the scope and level of benefits. As they noted, a report of the Conservative Government asked, ‘will the costs of social security outstrip the nation’s ability to pay for it?’ (p. 133). In the United States, much has been made of the looming crisis in social security funding despite the fact that the country actually has a sizable reserve fund. Nevertheless, some scholars such as Jackson (2004) claim that despite the system’s $1.4 trillion of accumulated reserves, future obligations will soon deplete these reserves and the government will soon be required to transfer scarce resources to the system if it is to meet its obligations.

However, it should be noted that claims about social security’s fiscal crisis usually come from those on the political right, while those on the left believe that the problem can be remedied through incremental changes such as adjustments to contribution rates and benefit levels and increases in the retirement age. Despite the claim that individual accounts offer an effective ‘technical’ solution to the problem, it is clear that this policy option is informed by neoliberal thinking. In fact, many commentators believe that debates attending social security issues are distinctly ideological. According to the neoliberal proponents of social security privatization, individuals should secure their welfare in the market, largely independent of subsidies or support from the state. The state should retain only a very minimal role by providing a last-resort safety net for the destitute. On the other hand, Social Democrats and social liberals believe that income security can best be provided through the collective agency of the state.

The neoliberal approach is being vigorously promoted by the World Bank and the International Monetary Fund, which have urged governments to abandon the insurance approach and replace it with commercially managed retirement accounts. In China, for example, the World Bank has made alarming estimates of the country’s implicit pension debt which it puts at 141 per cent of national income. To ensure that this debt is met, and that viable pensions are provided to the country’s elderly population, it estimated that additional pension costs of approximately $160 billion or seven per cent of national income will be incurred. Not surprisingly, it has urged the government to make a transition from the current pay-as-you-go system of social security to a fully funded system based on individual retirement accounts and, of course, a significant reduction in payroll taxes and employer’s contributions. On the other hand, the ILO remains committed to a statist approach that emphasizes statutory social protection. It has opposed the World Bank’s market-based approach and reiterated its commitment to government responsibility for social security (Deacon et al., 1997).

Nevertheless, it is clear that global trends in social security funding are indicative of a preference for market-based approaches and the privatization of social security. A recent study of pension policies in 15 Western countries (Rein and Schmahl, 2004) found that privatepension coverage has increased and that private provisions have been increasingly substituted for public programmes. This trend is also reflected in the decline of employer-provided occupational schemes and the growth of defined benefit pensions plans. In addition, public pension monopolies are weakening and there is a greater public-private mix in pension provision. These trends have been confirmed by Dixon and Hyde (2003) in their analysis of the privatization of social security, but the authors caution that the pattern is a complex one and does not involve a straightforward transition from public to private provision.

Another issue concerns the claim that social security schemes are failing to meet their stated goals due to poor budgetary decisions, inefficient management, political interference, the avoidance of contribution payments and other factors. Much has been made of the administrative inefficiency of social insurance funds in Latin American countries. In one of the first studies of social security in the region, Wolfe (1968) castigated the inefficiency of these schemes. He pointed out that social insurance claims took many months to process and that pension calculations were often inaccurate. Social insurance funds were governed by complex rules and bureaucratic procedures. Politicians frequently influenced decisions on behalf of constituents, and staff were often appointed on the recommendation of politicians and senior administrators rather than on meritorious searches for the best candidates. Writing 20 years later, Mesa-Lago (1989) reported that these problems had not been addressed. He also noted that the administrative costs of social security schemes in many Latin American countries exceeded those of Europe and North America. While European countries spent less than two per cent of revenues on administration, the comparable figure in many Latin American countries was in excess of ten per cent. The situation has apparently not improved as a result of privatization. As Borzutsky reveals in Chapter 4 of this book, the commissions and administrative costs incurred by commercial providers who manage individual savings accounts are extraordinarily high by international standards.

The issue of equity is given much more attention in social security debates today. Feminist scholars have challenged the breadwinner model on which social security programmes have traditionally been based, and they have drawn attention to the way many programmes discriminate against women (Charles, 2000; Lewis, 1993; Sainsbury, 1996; Wilson, 1977). Despite the claims of the proponents of individual retirement savings accounts, it is clear that privatization will not solve this problem since women earn less than men and are not able to accumulate as much in their accounts as men. Many women also leave their jobs to raise children and thus interrupts their working lives, again limiting their ability to accumulate sufficient funds in their savings accounts to adequately meet their retirement needs. The problem of inequity in conventional social security schemes is not likely to be remedied through privatization or any other quickfix solution but rather through a careful assessment of the causes of these inequities and the formulation of appropriate policies that can address them.

However, the problem of inequity in social security has today been more widely recognized, and progress has been made in remedying some of the most obvious inequities in these schemes. The bias in conventional social insurance programmes towards the male breadwinner and the insistence that benefit levels for both genders be equalized has been corrected in a number of countries. However, the problem of limited coverage remains a major inequity in social security provision in the developing countries of the Global South. As Midgley (1984) revealed many years ago, social security schemes in many developing countries fail to address the needs of agricultural workers and those in the informal labour market. The problem is exacerbated by the fact that taxes levied on workers who are not covered by a social security are sometimes used to improve the benefit levels of workers in the modern wageemployment sector who are already advantaged by having regular cash incomes. Although social security coverage has improved in some parts of the developing world, van Ginneken (2003) notes that more than a half of the world’s population is still excluded from any type of statutory social security protection and that in some regions, such as subSaharan Africa and south Asia, over 90 per cent of the population has no social security protection.

Recently, the ILO has renewed its commitment to improve the extension of social security coverage. The consensus between governments, employers and workers reached at the International Labour Conference in 2001 placed the extension of social security coverage high on the ILO agenda and was followed by the launch of the Global Campaign on Social Security and Coverage for All (Reynaud, 2002). In the face of globalization and structural adjustment policies, the Conference recognized that social security had become more necessary than ever, and it urged that that the highest priority be given to extending protection to the poor. In addition, specific efforts have been made in some countries to provide income protection to those in the agrarian and informal sectors. In India, about 400,000 mainly home-based beedi workers have been covered by the country’s Employees’ Provident Fund Act as a result of government action and innovative financing (Jain, 1999). However, it is clear that much more needs to be done to address current inequities. This will require innovative solutions as well as political will on the part of government to address the needs of the most disadvantaged groups. For example, crop insurance could be more effectively extended to peasant farmers to help them cope with the adverse effects of natural disasters if governments would provide the necessary leadership, subsidies and technical support.

Contrary to the claims of neoliberal advocates, it is clear that governments have the authority and resources to address these and other problems and are able to extend income protection to all citizens. This is not to deny that there are many different ways of responding to the challenges facing social security today. Indeed, many social security policymakers and academic researchers recognize that the challenges of insecurity in the modern world can be addressed in different ways and that the articulation of different approaches offers the most viable opportunities for ensuring effective income protection in the future. The idea that the state is the only agent capable of providing social security has been challenged, but the alternative argument that the market is the only viable means of achieving this goal is equally simplistic and misguided. Fortunately, the synergy of different partners in social security including the family, community, non-profit sector, the market and the state has been recognized. A carefully designed pluralistic social security system directed by the state and based on familial, community, occupational, fiscal and market-based approaches may indeed emerge to provide true security for all in the future. Needless to say, more debate on these issues will be needed if new and appropriate approaches are to emerge. An important question, which is addressed in the remainder this book, is how to provide income protection to the entire population and, at the same time, support national economic development efforts. The experiences of the different countries examined in this book will hopefully shed light on this critical issue.