CHAPTER FIVE

FINANCING SOCIAL SECURITY SCHEMES

FINANCING SOCIAL SECURITY SCHEME

Objectives of the lecture: After completing this lecture, the students should be able to:

5.1 5.2 5.3 5.4

Describe the factors affecting cost Determine sources of finance Describe the financing methods Analyze trends and issues

FINANCING SOCIAL SECURITY SCHEME

Cost of Social Security Schemes

- Amount needed to pay for the benefit - Expenses of administration - Basic problem?
- How to raise the necessary resources to meet the cost when it has to be paid, when:
- Resouces must be raised in a regular and systematic ways, even though the benefits fall due at irregular inteval.

- How the money should be raised (taxation or contributions employer?? Employee??)

INTRODUCTION
PUBLIC ASSISTANCE
Universal scheme, social assistance covering all taxation

SOCIAL INSURANCE
Occupational schemes, provident fund Specific group Financed out of contribution
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FINANCING SOCIAL SECURITY SCHEME

5.1 FINANCING PERSPECTIVE

SHORT-TERM BENEFITS
Sickness cash benefits Maternity cash benefits Medical care Temporary incapacity Family benefits Unemployment benefits

LONG-TERM BENEFITS
Old-age Invalidity (Continuing sickness) Survivors benefits Benefit for disablement Dependents payable under employment injury scheme

FINANCING SOCIAL SECURITY SCHEME

5.2 FACTORS AFFECTING COST The cost in financing the social security programs are derived from many factors. Thus, these factors may affect the cost of social security.
Internal Factors External Factors
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FINANCING SOCIAL SECURITY SCHEME

FACTORS AFFECTING COST

INTERNAL FACTORS
Financial condition of the social security organization Allocation of government Number of cases & applications

EXTERNAL FACTORS
Economic conditions Cost of living Demographic

FINANCING SOCIAL SECURITY SCHEME

Internal factors

Financial condition of the social security

The management of fund How they generate the fund / income Based from the numbers of contributors

Allocation from the government

Socio-economic sector Welfare programme Financial strength Government policy

FINANCING SOCIAL SECURITY SCHEME

External factors

Economic condition
Inflation Recession Fiscal policy Economic stability

Cost of living
Linear relationship Consumptions / labour market / consumer price Medical cost

FINANCING SOCIAL SECURITY SCHEME

External factors

Demographic
Quality of life (lifespan) Long range financing Pension scheme & medical benefits Us : 1956 (77.5) 2003 (82.5)
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FINANCING SOCIAL SECURITY SCHEME

4 pillars in financing social security

Mandated savings compulsory saving such as EPF, Sosco deducted by salary Redistributive features the rich pay more to cover the poor (taxation) Fiscal incentives government encourage people to saving in private insurance schemes and get tax deduction Voluntary personal saving pay to pay for ourself- saving, trust fund, ASB

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5.3 SOURCES OF FINANCE / FINANCING METHODS

There are five methods of financing the costs of social security program

Government fully funded Joint fund Private fund Trust fund Investment
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FINANCING SOCIAL SECURITY SCHEME

SOURCES OF FINANCE / FINANCING METHODS

Tripartite financing
Bismarcks social insurance Joint contributions by:
Employer Employee Government subsidy

Sustain responsibility of the contributors and the dignity of the beneficiary Supplies evidance of the insured person right to benefit and perhap the voice in the management of the scheme Maintain industrial peace Conserve the employeess productivity capacity
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FINANCING SOCIAL SECURITY SCHEME

 Government fully funded

Government contributes to program costs from general funds USSR and Eastern Europe, employee pays no contributions Entire cost of the social security systems is borne by the employers and the state Taken from public money / budget All persons has the right Social assistance programme Benefits are usually fixed/flat rate

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SOURCES OF FINANCE / FINANCING METHODS Joint Fund

Employees & employers Through contributions Employers withholds the contributions & send to social security organization Must fulfill qualifying conditions

Private fund
Fully funded by the employee Conventional insurance Insuree will get full benefits

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FINANCING SOCIAL SECURITY SCHEME

SOURCES OF FINANCE / FINANCING METHODS Trust funds

Sources are form members contributions, government grant Donations Income

Investment
Unit trust Projects

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FINANCING SOCIAL SECURITY SCHEME

5.4 TRENDS AND ISSUES

5.4.1 Social Security Administration Most of social security programmes are mandatory publicly administered The plan is legislated by law and compulsory for every employer and employee It is an obligation for employer to ensure that employees in the organization are covered by the particular program in the plan. The plan is employer-employee funded Government manages the plan with broad power over it.

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FINANCING SOCIAL SECURITY SCHEME

5.4.2 The advantages of the plan

Forced saving helps to inculcate the saving habit in the population The plan firmly establishes individuals (and family) responsibility for the provision of social security The pool of saving generated by the plan could help stimulate growth by providing greater room to pursue appropriate macroeconomic policies, and by providing long-term, predictable, and large flow of funds for investment. Defined contribution plans are by nature fully funded, and do not involve use of the tax-transfer process in a major way

Centralized public administration of the plan results in large saving in operating costs.

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Homework
Make a mind mapping of the methodical rising of resources of the:
Annual assessment system Assessment of constituent capitals system Systems of capital accumulation General average premium Scaled premium system (Introduction to social security, International Labour Office, Geneva, page 110-114)
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TUTORIAL
Financial issue in SOCSO Financial issue in EPF Financial issue in insurance agencies Financial issue in government

Look at the challenge of each sector

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FINANCING SOCIAL SECURITY SCHEME