Social security reforms a must for achieving inclusive growth

The themes raised in a recent report by the International Social Security Association (ISSA) entitled, “Dynamic Social Security for Asia and the Pacific: Integrated Responses for More Equitable Growth”
(http://www.issa.int/aiss/content/dowload/82785/1604370/file/2DT_Asia-Pacific.pdf) merit serious consideration of policymakers including those in India.

The report reviews the current trends and developments in social security, particularly in pensions and healthcare reforms in Asia-Pacific countries. It highlights rapid ageing, increasing informalisation of labour and varying fiscal and institutional capacities across the Asia-Pacific.

Four themes emerging from the report are worth highlighting. 

1. First, there is a strong case for viewing social security systems as an integral part of the overall economic, social, and political management of a country, rather than giving them secondary importance. In many countries in the region, this will require a change in mindset of social security organisations and policy makers from welfare-orientation to professional-technocratic-service orientation.

The need for effective management and applying principles of pension economics and finance in social security policy making, and administration must receive much greater recognition than is the case currently. Social security arrangements must be sustainable over the long period between 60 and 80 years, yet be flexible to adjust to changing demographics, labour market and other conditions. Moreover, the tyranny of small numbers is particularly prevalent in pension arrangements. As an example, an unplanned increase in longevity of the members by one or two years could disproportionately affect the financial viability of the pension and healthcare schemes. 

2 The second theme concerns the need for considering social security arrangements as a system rather than focussing on individual components. Mostly social security systems have evolved over time and there is limited co-ordination among different schemes such as those for the civil servants and for the private sector workers. There is also need to understand the systemic risk as the ultimate contingent liability of major social security schemes is usually on the state, and therefore borne by tax payers.

There is a strong case for a multi-tiered social security system under which an individual obtains retirement income not from just one scheme, but from a variety of sources. This permits risk diversification for the individual and for the society as a whole. A multi-tiered approach can help balance the retirement risks borne by the individuals, and by the society; and develop different mix of financing from taxes, contributions, and other methods.

The report suggests that in many countries retirement income transfers, partly or fully financed from the budget will be needed as one of the tiers. The extent to which this tier can be developed will depend on the fiscal capacity and on the effectiveness of government service delivery systems. In India and Indonesia, the presence of strong microfinance institutions and community organisations could be utilised to reach relatively low income and self-employed workers, particularly women.

In our view, two aspects of a systemic approach to social security arrangements are worth considering. The first is the need for an overall National Social Security Council for strategic policy direction and coherence among different components of a social security system. The second is the need for a pension regulator to ensure that the provident and pension fund organisations are undertaking their core functions with requisite professionalism, and their governance structures meet international best practices. In many Asian countries, the composition of the provident and pension fund boards is insufficiently placed on the type of expertise needed, and there is insufficient autonomy and transparency in their operations. 

3. The third theme highlights that effective social security reform requires complementary reforms in areas such as labour markets, fiscal policies, civil service, financial and capital markets and family policies. Thus, any increase in social pensions financed from the budget will require reallocation of expenditure priorities, progress towards fiscal consolidation and better delivery mechanisms. This suggests that to be in favour of more robust social pensions, but simultaneously be against fiscal reforms, is to be inconsistent.

A provident fund that invests nearly all of its assets in gilts and does not take advantage of the trading opportunities will forego opportunities to benefit its members by more professional portfolio management. There may be a reduction in national saving to the extent such a practice may weaken the government’s fiscal discipline due to the availability of cheap funds. This defeats the main purpose of mandatory saving, which is to intermediate these savings into productive investments that in turn could up the core rate of economic growth. 

4. The fourth theme concerns the need for more empirical evidence-based social security policies, particularly in pensions and healthcare policies, which require sophisticated price-discovery mechanisms; and the need to encourage indigenous analytical capacities and professionals. In most Asia-Pacific countries, this will require focussing developing robust databases, establishing professional programmes relating to pensions, health policy and management, and actuarial sciences. More than half of the two billion global elderly by 2050 will reside in Asia-Pacific, but currently the region lacks the requisite expertise and manpower.

Each of the above four themes is of relevance for constructing more robust, sustainable, professionally managed and regulated social security systems in India.
It is often far easier politically to increase demand for pension or healthcare services. But, if there is no commensurate increase in supply and in fiscal, institutional, and organisational capacities, the outcomes can be dysfunctional, leading to disillusion and cynicism. Careful planning and homework is required before introducing new social security schemes or reforming existing ones.

There is a case for revamping the recruitment policies, and organisational and governance structures of major provident and pension organisations in India such as the Employees Provident Fund Organisation, as well as of the Employees State Insurance Scheme, which is responsible for delivery healthcare services. India also needs to end using the Government Provident Fund to finance current expenditure, and must establish sinking funds to systematically meet future healthcare and pension obligations of its public sector organisations.

The report concludes that while the global economic crisis represents potential opportunity to progress towards strengthening current social protection systems, it is up to each country to grasp this opportunity. India has the favourable demographic profile, and the capabilities to harness this potential opportunity and make measurable progress towards its professed goal of inclusive growth.

Mukul G Asher is a professor and Azad Singh Bali an instructor at the Lee Kuan Yew School of Public Policy, National University of Singapore. Views are personal.