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3.6 Securing incomes: Working Out of Poverty

Written by: International Labour Organization

Article Overview: Societies at all levels of development face the challenge of organizing systems to provide security against contingencies such as sickness, accident, death of the main breadwinner, disability, old age, maternity and unemployment that make individuals, families and communities vulnerable to poverty. Through solidarity and fair burden sharing, social security systems contribute to human security, dignity, equity and social justice. They are also a foundation for political inclusion, empowerment and the development of democracy. Half of the world’s population is excluded from any type of social security protection, with the rate of coverage varying from almost 100 per cent in some industrialized countries to less than 10 per cent in the poorest developing countries.

3.6 Securing incomes: Working Out of Poverty

Societies at all levels of development face the challenge of organizing
systems to provide security against contingencies such as sickness, accident,
death of the main breadwinner, disability, old age, maternity and unemployment
that make individuals, families and communities vulnerable to poverty.
Through solidarity and fair burden sharing, social security systems contribute
to human security, dignity, equity and social justice. They are also a foundation
for political inclusion, empowerment and the development of
democracy. Half of the world’s population is excluded from any type of
social security protection, with the rate of coverage varying from almost
100 per cent in some industrialized countries to less than 10 per cent in the
poorest developing countries.

In June 2001, at the 89th Session of the International Labour Conference,
governments, employers and workers reached a new consensus on
social security. They agreed that the highest priority should be given to “policies
and initiatives which can bring social security to those who are not
covered by existing systems”. The Conference therefore proposed that “a
major campaign should be launched in order to promote the extension of
coverage of social security”.

ILO work with developing countries over many years demonstrates
that progress is possible, especially where a strategy of gradual expansion of
systems is planned and integrated with other strategies to combat social exclusion.
The ILO is currently providing technical advice on the extension of
social security in more than 30 countries. It is also working with eight developing
and transition countries on social protection expenditure and performance
reviews that help in the design of policies aimed at closing
coverage and protection gaps within given fiscal and financial limits.

In conjunction with a growing economy and active employment policies,
social security is an instrument that can enhance productivity and support
sustainable social and economic development. Social security facilitates
structural and technological changes that require an adaptable and mobile
labour force. As globalization intensifies, effective social security systems
support people through changes in the world of work. Well-designed systems
improve economic performance and thus contribute to the comparative
advantage of countries on global markets.

Each society must determine how best to ensure income security and
access to health care and the pace at which systems are introduced. However,
experience shows that the most effective systems are underpinned by
certain basic principles. In particular, benefits should be secure and non-discriminatory;
schemes should be managed in a sound and transparent manner,
with administrative costs as low as practicable; and the social partners
should have a strong role. Public confidence in social security systems is a
key factor for their success, making good governance essential. 29

The issue in many developing countries was, until recently, whether
they could afford a social security system; in the wake of the 1998-99 Asian
financial crisis, however, countries are now facing the question whether they
can afford not to have a system. The Republic of Korea, for example, decided
that if the country were to recover from the impact of a sudden increase
in unemployment and at the same time prepare for the risk of future
sharp economic contractions, it needed to invest in more extensive social
protection. 30 For China, too, faced with the challenge of massive restructuring,
social security is a priority.

In most low-income developing countries, not more than 10 to 25 per
cent of the working population and their dependants are covered by statutory
social insurance, mainly for pensions and sometimes for health-care
costs. By extending such systems to all regular workers and some workers in
the informal economy, perhaps another 5 to 10 per cent of the workforce
could be covered. At the other end of the income spectrum are the 30 per
cent of poor households that probably cannot afford even very low insurance
contributions on a regular basis. They need some form of solidarity income
transfers. However, about 40 to 60 per cent of the working population with
incomes above the poverty line have some contributory power. Experience
and research in many countries show that people in this group are interested
in joining social insurance schemes tailored to their needs, within which
health care and protection in the event of death and disability are seen as priorities.
31 Many in this group have low incomes and are vulnerable to falling
into poverty.

Particularly in low-income countries, micro-insurance and mutual
health organizations have emerged to provide members with health-care
coverage. They are often rooted in self-help or cooperative movements, and
aim to contribute to local development. The advantage of such schemes is
that contribution rates are often low because they focus on providing only
those benefits that are perceived by members as urgently necessary. The disadvantages
are that they are rarely large enough to cover costly medical expenses
and cannot offer a replacement income in the event of incapacity to work. However, they need outside help and technical assistance to be sustainable
and increase their coverage.

Micro-insurance is therefore most likely to succeed where a public
agency is able to provide financial and technical support for local initiatives.
Such support can include help with set-up costs, including the training of administrators,
subsidies in the form of matching contributions to extend the
risks insured and reinsurance of the whole scheme. 33 In Ghana the ILO is
currently testing a system to enhance the enrolment rates of the poor by subsidizing
the premiums they are able to pay. It is also important that
governments create a regulatory framework to ensure, amongst other
things, democratic and economically sound financial management of microinsurance
schemes.

The low administrative costs of micro-insurance need to be weighed
against the low coverage of such schemes and the risk that they may fail.
Compulsory schemes enlarge the pool of contributors, the number of people
covered and the risks insured, but entail higher administrative costs in ensuring
compliance. Many developing countries have compulsory schemes,
usually for public sector employees and larger private enterprises. Such
schemes were often envisaged as a starting point for more comprehensive
systems. This ambition was rarely achieved for various reasons, including a
limited administrative capacity to cope with a much larger number of small
employers, often on the margins of formality, and the self-employed, and the
lack of health-care facilities outside the urban centres. In addition, the weak
political voice of the uninsured, combined with financial constraints, has left
proposals for extension low on the list of government priorities.

The vision of universal social insurance schemes was and continues to
be based on the idea that workers and employers should provide for themselves
in the event of being unable to work. As well as appealing to a wide
constituency, including higher income groups, the insurance principle has
the advantage of insulating – at least to some extent – the steady long-term
flow of contributions needed for actuarial soundness from the annual vicissitudes
of budget making. Since benefits are usually linked to contributions,
those unable to contribute regularly or at all are not covered. This group includes
many of those most in need, such as women who have worked at
home caring for children or other family dependants, casual labourers and
persons with disabilities. Countries with a large informal economy also face
a major problem of linking the extension of social insurance systems to the
measures needed to integrate progressively micro and small businesses,
own-account workers and the rural sector into formal systems of labour market
governance.

Social insurance systems therefore need to be supplemented with taxfinanced
social assistance programmes to provide for the needs of those unable
to contribute regularly or at all. Such benefits are usually less generous
than those under the social insurance scheme and are sometimes meanstested.
Targeting of social assistance in this way is costly, however, and often
fails to reach many in need because they resent the social stigma involved in
applying for welfare, are unaware of their rights, and find the process too
complicated and time-consuming. In addition, the discretion left to administrators
by means-tested systems can give rise to problems of clientelism and
discrimination. For most developing countries, means-tested welfare is not a realistic option, given the needs of those who are unlikely to be brought
within a comprehensive system for many years.

One of the most cost-effective means of tackling family poverty is
through the provision of a flat-rate child benefit paid to all mothers and a
minimum old-age pension. In developing countries where modest basic universal
pension schemes exist, such as Botswana, Namibia and South Africa,
they have proven to be beneficial to whole family units. The simplicity of
such schemes makes administrative costs relatively low, although of course
some expenditure will go to families that do not need extra income. In some
countries child benefit payments are conditional on school attendance for
children of school age. By contrast with more narrowly conceived “safety
net” policies, insurance and minimum income systems offer an entitlement
rather than temporary relief, thus avoiding the danger of stigmatizing the
poor as welfare recipients. The ILO is studying the fiscal implications of
basic tax-financed schemes in developing countries to determine the extent
to which external subsidies would be needed.

Extending social security to the poorest in developing countries will require
an integrated mix of schemes that can be progressively enlarged as the
administrative capacities and economic resources of the country grow. Technical
expertise and advice are important, but the most vital ingredient is the
cultivation of a broad societal consensus on needs and the best mechanisms
for meeting them. This requires trust in the institutions for the delivery of
social solidarity – yet there is frequently lack of confidence in the government
as a provider of social services and income security. However, successful
incremental growth of social security schemes will show that solidarity
works and will build confidence and enlarge the scope for more ambitious
measures. Wealthier countries can accelerate this process by increasing
financial transfers to supplement nationally generated resources.

The four main components of a medium-term strategy for extending
social security in developing countries are:
● Support to various forms of micro-insurance schemes and local mutual
health organizations to secure their financial stability, professional
quality and sustainability. Promotion of federation of such organizations,
so as to extend their coverage and to develop their negotiating
strength towards other socio-economic groups and the government.
● Governments and international partners should consider introducing
tax-financed minimum income schemes, such as a universal old-age
pension and child benefits paid to mothers in cash and conditional only
on regular attendance at school.
● Reform and extension of existing compulsory social insurance schemes
to include employees of smaller enterprises, based on sound actuarial
assessments of social expenditure resources and affordably low contribution
rates. International donors should be ready to pledge predictable
multi-annual grants for a given period of time to such schemes to
ensure that benefits are set at attractive levels and sustainability can be
developed.
● Establishment of national social security advisory committees, including
representatives of trade unions and employers’ organizations, to
help governments and voluntary institutions develop a broad social
consensus on the implementation of a medium- to long-term strategy
aimed at achieving social security for all.

Related Articles
  1.5 Skills development for sustainable livelihoods: Working Out of Poverty
  3.0 Community action for decent work and social inclusion: Working Out of Poverty
  1.19 Building trust: Working Out of Poverty
  1.0 Overview: Working Out of Poverty
  5.9 Employment and enterprise development: Working Out of Poverty

Article Tags: breadwinner, contingencies, developing countries, employment policies, empowerment, existing systems, half of the world, human security, individuals families, industrialized countries, international labour conference, organizing systems, performance reviews, political inclusion, social exclusion, social justice, social security protection, social security systems, technical advice, transition countries



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