financing social security schemes

7/27/2019 financing social security schemes

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FINANCINGSOCIAL SECURITYSCHEMES

CHAPTER

FIVE5

FINANCING SOCIAL SECURITY SCHEME



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

5.1 Describe the factors affecting cost

5.2 Determine sources of finance5.3 Describe the financing methods

5.4 Analyze trends and issues




Cost of Social SecuritySchemes

- 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 andsystematic ways, even though the benefits fall due

at irregular inteval.

- How the money should be raised (taxation or

contributions – employer?? Employee??) 3



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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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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




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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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FACTORS AFFECTING COST

• INTERNAL

FACTORS

– Financial condition of

the social securityorganization

– Allocation of

government

– Number of cases &applications

• EXTERNAL

FACTORS

– Economic conditions

– Cost of living

– Demographic




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Internal factors

• Financial conditionof the socialsecurity

– The management of fund

– How they generate thefund / income

– Based from thenumbers of contributors

• Allocation from thegovernment – Socio-economic

sector – Welfare programme

– Financial strength

– Government policy




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External factors

• Economic condition

– Inflation

– Recession

– Fiscal policy

– Economic stability

• Cost of living

– Linear relationship

– Consumptions / labour

market / consumer

price

– Medical cost




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External factors

• Demographic

– Quality of life (life-

span)

– Long range financing

– Pension scheme &

medical benefits

– Us : 1956 (77.5)

2003 (82.5)


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4 pillars in financing socialsecurity

• 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 insuranceschemes and get tax deduction

• Voluntary personal saving – pay to pay for

ourself- saving, trust fund, ASB11



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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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SOURCES OF FINANCE / FINANCING METHODS

• Tripartite financing – Bismarck’s social insurance

– Joint contributions by:• Employer

• Employee

• Government subsidy

– Sustain responsibility of the contributors and thedignity 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 employees’s productivity capacity




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• Government fully funded

– Government contributes to program costs fromgeneral funds

– USSR and Eastern Europe, employee pays nocontributions

– 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 / FINANCINGMETHODS

• Joint Fund

– Employees &employers

– Through contributions – Employers withholds

the contributions &send to social security

organization – Must fulfill qualifyingconditions

• Private fund

– Fully funded by theemployee

– Conventionalinsurance

– Insuree will get fullbenefits




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SOURCES OF FINANCE / FINANCINGMETHODS

• Trust funds

– Sources are form

members’contributions,

– government grant

– Donations

– Income

• Investment

– Unit trust

– Projects




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5.4 TRENDS AND ISSUES

5.4.1 Social Security Administration

• Most of social security programmes are mandatory publiclyadministered

• The plan is legislated by law and compulsory for every

employer and employee

• It is an obligation for employer to ensure that employees inthe organization are covered by the particular program in theplan.

• The plan is employer-employee funded

• Government manages the plan with broad power over it.




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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 growthby providing greater room to pursue appropriate macroeconomicpolicies, and by providing long-term, predictable, and large flow of funds for investment.

• Defined contribution plans are by nature fully funded, and do notinvolve use of the tax-transfer process in a major way

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



Homework

• Make a mind mapping of the methodicalrising 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