Social Security for All: Trade Union Policies

Social security for all: Trade union policies

Labour Education 2006/4 No. 145

Contents

Editorial V Social security for all – A human right must become reality, by Guy Ryder 1 The current pension debate for trade unionists: A brief canvass of the issues, by Bob Baldwin 9 Social security for all: Investing in global social and economic development, by Michael Cichon 21 Challenges of old-age security reform in developing and transition countries: A trade union perspective, by Peter Bakvis 37 Addressing the bases of insecurity of the Philippine social security system, by Melisa R. Serrano 43 The role of trade unions in reforming social security and pensions in Ghana, by David Kwabla Dorkenoo 53 SEWA’s health insurance programme, by Mittal Shah and Tara Sinha 61 New challenges for social protection in the European Union, by Maria Jepsen and Janine Leschke 69 Pension reform in Austria and the role of trade unions, by Eva Belabed 83 Reforming the Romanian state pension system and the role of trade unions, by Petru Sorin Dandea 93 Pension reform and trade unions in the Slovak Republic, by Mária Svorenˇová 99 Trade union role in the Slovenian pension system, by Metka Roksandic´ 109

III

Editorial

his issue of Labour Education focuses on unions and their role in de- Tveloping social security policies, particularly protecting and reforming national pension systems. Included are several country studies by union activists which describe the reforms, challenges and union campaigns surrounding pension systems in their countries. The context for these country studies and the other articles in this issue is the joint ILO, European Commission and Government of Portugal World Conference “Social protection and inclusion: Converging efforts from a global perspective”, held in Lisbon in October 2006. The conference was part of the ILO’s current campaign globally to implement universal social protection. An article by the ILO’s Social Security Department reﬂ ects the analysis provided to the world conference: that the public provision of pensions is an effective and affordable method of alleviating poverty. The country studies in this issue were presented at a workshop of the Global Union Research Network (GURN) which followed the world conference. The GURN (www.gurn.info) is a platform for trade unionists and researchers dealing with the challenges of globalization from a labour perspective. It is a cooperative project of the International Trade Union Confederation (ITUC), the Trade Union Advisory Committee to the OECD (TUAC), the Global Union Federations (GUFs), the ILO’s In- ternational Institute for Labour Studies (IILS) and the ILO’s Bureau for Workers’ Activities (ACTRAV). Most of the articles in this edition of Labour Education focus on age pensions and the issues surrounding their reform, in both the developing and industrialized world. The industrialized world usually operates a complementary scheme of an income replacement, contributory 1 pension system underpinned by some form of safety net of pension support for those without a qualifying history of employment or pension contributions. In contrast, for most in the developing world age pensions are, or would be if they existed, simply a form of essential poverty alleviation. In practice, however, age pensions are rare in many developing countries except for civil service workers. Over the past decades paid employment has been growing in most industrialized countries, but an increasing number of workers are not engaged in a long-term employment relationship. In the industrialized world there is a declining proportion of workers in standard forms of employment, and associated with this there is a trend of more workers not being covered by contributory pensions and other social insurances. With women disproportionately represented in precarious employment, there are serious gender implications in this trend.

V In the developing world the wide spread of informality in the labour market is a major obstacle for extending the coverage of social security through payroll contributions. Many articles in this edition discuss the impact of demographics on the fi nancial sustainability of their country’s pension schemes, but so too is the size of precarious and informal employment having its impact. Extending social security is impossible by merely increasing the tax burden of the formal sector: precarious and informal employment undermines the potential of contributory pension schemes as mechanisms of universal social protection. Having their origins in pension schemes for certain professional groups, these schemes have evolved to now cover the entire workforce. Today some proponents of universal social pension schemes argue that comparatively generous employment-based pension schemes which benefi t a select proportion in the workforce exist at the expense of a more egalitarian distribution of pension benefi ts to all in the community. It is further argued that unions protect their members’ entitlements to the detriment of the community at large. However asking for burden sharing between the very poor and the poor is most likely to be neither a viable nor a fair solution. The provision of social security to all is a responsibility of the whole society. Singling out the pension provisions of one group of the population as a funding source for a universal pension is a very arbitrary approach to identifying the required fi nancial resources. Progressive taxation of the entire wealth in a nation is a much fairer and transparent approach to provide resources to fi ght poverty through universal basic social security. Social solidarity does ask that persons with higher incomes in society fi nance a larger part of the social benefi ts of another group. The experience in the industrialized world is that a combination of contributory pensions and a universal tax fi nanced safety net pension is a viable combination of solidarity and individual responsibility to protect against old-age poverty and to move towards income security in older age. Trade unions are often pursuing in parallel the twin objectives of extending social security coverage and securing decent living standards for retirees. However, with changing patterns of work, pension schemes need to be restructured to provide protection for a more hetergeneous workforce. International conventions and standards, particularly the ILO’s Dec- laration of Philadelphia, the Universal Declaration of Human Rights and the Social Security (Minimum Standards) Convention 1952 (No. 102), establish the right of all to social security and express the responsibility of national governments and the international community to guarantee that right in practice. Unions have been and are agents for social change towards greater equity through their ability to mobilize working people and bring pressure upon government to afford citizens their human right to social security. Today unions face the challenge of how to continue to pressure government and employers in an environment where free market reforms have increased in social inequality and shifted economic risk to the individual worker. It is diffi cult to defend and promote pension systems based on standard employment relationships and intergenerational solidarity if a growing number of younger workers are in precarious employment with little hope of earning suffi cient pension entitlements themselves. There is a

VI need for unions to organize and represent workers in non-standard employment and to ensure that they are not excluded from social security. This raises the question of the policies pursued by trade unions. In the longer term social security for all is clearly a desirable outcome for trade unions as representative organizations, because it shifts the balance of power in the labour market in favour of workers. But in the shorter term the special interest of trade union members might in some cases confl ict with these wider social policy needs. Unions are and have been most successful as agents for social equity and equal opportunity. This role came about through combining advo- cacy on behalf of their immediate members’ interests with the needs of working people as a whole. The pressure that unions can bring to bear on governments in the pursuit of the basic human right of universal social security is a measure of the extent to which unions can mobilize all the potential benefi ciaries of that right. With a signifi cant proportion of the world’s workforce being in the informal economy, the challenge is how unions can better represent and mobilize informal workers. We live in societies where the term “working people” now represents a broader spectrum of self-employed workers, piece workers, independent contractors and “consultants”, as well as employees. And employees are themselves engaged in a variety of traditional and non-standard employment types. All of these people are subject to selling their labour in the “labour” market, all would benefi t from the solidarity of collective action and representation, and all have a right to social security. Suffi cient funding is a key problem of ensuring that social security becomes a human right in reality. However, calculations by the ILO have shown that most countries can afford basic social security for all. It is often not a question of resources per se, but of effi cient, fair and economically sound mechanisms of resource collection. This requires a constant debate in society about the best forms of fi nancing and providing social security. The answers change over time as societies themselves change. If and where contributory systems are failing to ensure universality then an ex- amination of national tax systems may provide solutions. This is particularly true when there is now increasing evidence that contributory social insurance deters workers and employers from formally declaring their activities. Funding mechanisms which incorporate the informal economy, such as “user pays” systems, licence fees, wealth or consumption taxes, could be explored and debated by unions. Guy Ryder, General Secretary of the International Trade Union Con- federation, makes the case in support of social security. In the face of some of the ideological and economic forces driving globalization, and despite the international standards which underpin social security as a human right, it remains necessary to argue and explain the multifarious benefi ts of social security. He notes its many facets: it is a human right; it protects people from fear and insecurity; is an instrument to strengthen gender equality; is a pillar of democracy; creates fairer labour markets and increases fl exibility; contributes to development; and benefi ts the wider public good. In her article, Melisa Serrano of the University of Philippines School of Labor and Industrial Relations, describes the efforts of the Philippine Social Security System to increase the participation of informal economy

VII workers, employers and the self-employed. She highlights the importance of making contribution mechanisms physically accessible, even to the extent of ensuring that Overseas Filipino Workers are able to contribute towards their pensions. The experience of the Philippines is that increased accessibility, coupled with an emphasis on reducing contribution avoidance by employers, has created the capacity for higher benefi ts. David Kwabla Dorkenoo of the Ghana Trades Union Congress outlines the pension reform process currently underway in his country, which will see a three-pillar system introduced. The history to these changes lay in dissatisfaction with the functioning and benefi ts under the various contributory pension systems. However, this article highlights the gap between contributory systems and universal systems. Ghana has a formal economy of only 10 per cent of the working population, representing 90 per cent of people without access to pensions. The Ghana Trades Union Congress is making attempts to broaden its representation within the informal economy by creating Labour Enterprise Trust. Union members contribute to a trust which is then used to create employment projects and insurance schemes, thus expanding formal employment and expanding the ability of unions to represent people from the informal economy. The focus of the article by Mittal Shah and Tara Sinha of the Self-employed Women’s Association (SEWA), India, is on SEWA’s health insurance scheme for self-employed workers in the informal economy. With around 90,000 women insured, with a further 80,000 other family members also covered, it represents a signifi cant system of social protection. In 1972 SEWA started organizing self-employed women for their economic rights, and now boasts 796,000 members from the informal economy. The association established banking services for its members before it ex- panded into health services, noting the risk to fi nancial security from ill-health. In the boxed section at the end of their article, Mittal Shah and Tara Sinha describe the current campaign for national social security legislation launched by SEWA and other unions representing informal economy workers. This is a clear example of the potential for unions to mobilize these workers in the pursuit of human rights. Petru Sorin Dandea, Vice-president of the Romanian National Trade Union Confederation, Cartel Alfa, sets out in his article the diffi culties faced in transforming the communist-era state pension system to deal with the post-communist environment. The main problem was that the pension system became a de facto unemployment benefi ts scheme, with workers allowed to retire early in order to deal with the high rates of unemployment in the early 1990s. During the 1990s benefi ciary numbers rose nearly 100 per cent while contributor numbers nearly halved. Again, along with unemployment (or early retirement) the growth of the informal economy contributed to the drop in contributors and consequent fi s- cal imbalance. Following reforms to deal with the lack of sustainability of the scheme, the Romanian pension system, based on social insurance contributions from employers and employees, still faces a dependency ratio of about 1. Petru Sorin Dandea notes the estimates that there are 2 million people [out of a workforce of 9.3 million (Ed.)] who do not contribute to the scheme. The two articles by Mária Svorenˇová of the Trade Unions Confeder- ation of the Slovak Republic and Metka Roksandic´ of the Association of

VIII Free Trade Unions of Slovenia both detail the pressures upon pension systems in European transition countries. Both systems were inherited from the communist era and provided universal coverage. However, the pension systems in the two countries faced budgetary pressure during the transitional phase of the 1990s. The established systems of social dialogue gave unions in both countries a strong voice in dealing with these reforms, and unions were the main social actors in campaigning for better protections in the reform process. Eva Belabed, of the Chamber of Labour, Upper Austria, articulates many of the economic pressures and social trends impacting on Euro- pean pension systems, mostly due to globalization, noting that “…we fi nd ourselves in a process which aims at reversing the historical consensus in many European countries about the participation of all in the decisions and the wealth of society”. Demographic change and the consequent threat to the sustainability of pension schemes are often the catalysts for reforming pensions. However, as Eva Belabed discusses, the reforms often go beyond the necessity to address demographics and sustainability and venture into ideological-driven reforms. The obvious example of this is the privatization of pensions, motivated by the desire to benefi t the markets and business. Other examples are the introduction of individual pension accounts and non-defi ned benefi t schemes, that drive the intergenerational solidarity which has underpinned European pension schemes for decades. But the individualism inherent in these models has a deeper worrying consequence, as touched on by the citation above. Workers are divorced from control of their assets as they are shifted into privatized schemes which leave them, individually and collectively, with a mere commercial relationship with their retirement assets and no political infl uence. The impact of globalization is noted as infl uencing a convergence of social protection spending within the European Union. In their article, Maria Jepsen and Janine Leschke of the European Trade Union Institute for Research, Education and Health and Safety, discuss the catch-up in per capita GDP spending by the newer EU members, while the more established economies have moderated their spending, partly due to increased economic competition within Europe. However, they note that there remains a commitment within the EU to the welfare model. At the same time “solidarity” as the basis of the welfare model appears to be changing. Rather than the emphasis being on solidarity between groups in society, Maria Jepsen and Janine Leschke discuss the concept of “competitive solidarity”, where the collective welfare of Europe is based on the “joint competitive and productive success” of Europe. Bob Baldwin of the Trade Union Advisory Committee to the OECD, and Peter Bakvis, Director, ITUC/Global Unions – Washington Offi ce, have produced articles which canvass a broad spectrum of issues surrounding pension policy and the debates that engage unions. Bob Bald- win gives an overview of the differing models being employed around the world, their limitations and advantages, and posits this within the central trade union concern about “whether they can provide adequate incomes to the largest possible number of people”. Peter Bakvis frames his response to the ILO discussion paper mentioned at the outset of this editorial, a shorter version of which is contained in this publication. In

IX noting the ILO has taken “head-on” the World Bank’s three-pillar model, he analyses the role the World Bank’s ideological adventure has had in undermining the capacity of national governments and workers to retain control over pension policy, and how this continues despite the Bank’s own analysis of the shortcomings, in practice, of the three-pillar model.

Jim Baker Director ILO Bureau for Workers’ Activities

Note

1 The term “contributory” refers to the range of pension systems which are funded through work-related contributions, generally from both the employer and employee, including pay-as-you-go, social insurance, privatized capital funded, etc., and for which beneﬁ ts are dependent on a history of employment and/or contributions, as distinct from schemes funded from budgetary sources and tax income.

Special thanks go to Tim Wallace who edited and coordinated preparation for this issue of Labour Education.

X Social security for all – A human right must become reality

This article discusses the ethical imperative and economic case for social security, the challenges facing the extension of social protection coverage, and the policies the trade union movement sees as necessary to move towards social security for all as a core element for decent work and decent lives. It notes that social policies are a question of political will and are only sustainable if they are based on a stable consensus.

Guy Ryder General Secretary International Trade Union Confederation (ITUC)

“There is enough for everybody’s need, but not enough for everybody’s greed.” MAHATMA GANDHI

umans have developed the capacity abilities – compete on equal terms leads to Hto produce goods and services to very unequal outcomes that do not meet such a degree that no one need endure any criteria of social justice. hunger or malnutrition. The barriers to Survival of the ﬁ ttest is the law of the achieving this objective are institutional market. What is called “competitive crea- and political. tive destruction” generates success and Equality before the law is not enough hardship simultaneously where the win- to address the inequalities and injustice in ner takes all. This is deeply polarizing and today’s world. The French writer Anatole does not meet the common understanding France captured the limitation of this clas- of justice, in particular if the different start- sical liberal concept in a single sentence: ing conditions are taken into account. Un- “The law, in its majestic equality, forbids limited market competition forces around rich and poor alike to sleep under bridges, 1.3 billion people,1 including more than beg in the streets or steal bread.” 200 million children,2 to work for wages People start unequal in life: billions are below the poverty line. born into poverty while others grow up in In light of the above concerns, this more privileged families. Many have little article discusses the ethical imperative access to formal education, some are hand- and economic case for social security, the icapped and not everyone has the same challenges facing the extension of social ability to learn and work. Some are also protection coverage, and the policies the suffering from chronic illness – but oth- trade union movement sees as necessary ers are lucky and rarely need any medical to move towards social security for all as treatment. Some inherit property; others a core element for decent work and de- are advantaged by being exceptionally in- cent lives. telligent, good-looking or athletic. In most The ﬁ rst priority must be to put an countries it makes a difference if you are a end to poverty. Solidarity and adequate man or a woman. Making people – despite taxation at local, national and interna- their very different starting conditions and tional levels can mobilize the necessary

1 resources to meet the basic needs of all ment in conditions of freedom and dignity, of people. Effi cient social protection systems economic security and equal opportunity; can ensure that those who cannot work All national and international policies and themselves out of poverty are not left measures, in particular those of an economic behind. Universal access to food, water, and fi nancial character, should be judged in health, shelter and education is key for de- this light and accepted only in so far as they velopment; a basic income fl oor is needed may be held to promote and not to hinder the to ensure a bottom line against poverty. achievement of this fundamental objective. Social justice requires basic social services, reduction of inequalities of opportu- This moral consensus has not yet material- nities, a basic income fl oor for everyone and ized in practice and too many people are special care for those who are disadvan- suffering from poverty and insecurity. They taged by disabilities or social conditions. lack adequate health care, access to educa- In many industrialized countries today tion, child benefi ts and basic income secur- the discussions focus on adapting and ity. Too many governments seem to be un- modernizing the welfare state. These are able or unwilling to collect suffi cient taxes complicated and controversial processes or to spend the money prudently to fulfi l for trade unions also. However, in this art- their minimum obligations towards their icle I want to focus on a more fundamental citizens. It is often the lack of democracy issue: how to extend social security to those that allows governments to ignore the poor, who have hardly any or no social security and it is brutal poverty that deprives people at all. Nearly 60 years ago, in a much poorer of the ability to make their voice heard. world, the principle for universal social se- Maybe one reason is that the costs of curity was already laid out in the Universal social security appear directly in public Declaration of Human Rights:3 budgets while the benefi ts are much more diffi cult to trace. How much growth does a Everyone, as a member of society, has the right dollar invested in health, education or safe to social security and is entitled to realization, working conditions generate? How do we through national effort and international co- value an increase in life expectancy? operation and in accordance with the organ- However, trade unions have no illu- ization and resources of each State, of the eco- sions that the lack of social security is nomic, social and cultural rights indispensable merely a lack of knowledge or enlighten- for his dignity and the free development of his ment. Social security is a contested terrain. personality. In many instances trade unions and workers had to fi ght hard for social protection All modern societies in one way or the despite the fact that it has been essential for other recognize the need for basic social development. There is hardly any social re- protection. Only a few marginal, but some- form that has not been opposed by vested times vocal, ultra-liberals are questioning interests. Entrepreneurs, landowners and this. Social security is, indeed, recognized other members of the economic elite were as a right enshrined in the most important not and, often are not, prepared to share human rights instruments. It is not charity more fairly the wealth and income that has for the poor, but a right, a claim that citi- been created or to concede their economic zens can make against the State. Following power, which is stronger when workers are the bitter experience of the world economic living under the permanent threat of un- crisis and the horror of the Second World employment, poverty and insecurity. War, the ILO’s Declaration of Philadelphia Social policies are a question of polit- in 1944 proclaimed:4 ical will. The level of development is an important factor, but even more important All human beings, irrespective of race, creed is the balance of power in a society. In all or sex, have the right to pursue both their ma- societies and at all levels of development terial well-being and their spiritual develop- there are diverging views about how much

2 social security is necessary, desirable and quality of life if medical treatment is avail- affordable. Critics of redistributive pol- able, children go to school instead of work icies argue that these policies aim at equal and old people retire in decency. outcomes despite unequal efforts and tax hard-working people to support welfare thefts. But except for some ultra-egalitar- An instrument to strengthen ian radicals no one is suggesting equal- gender equality ity of outcomes and, whatever may be the problems of today’s world, they certainly A modern approach to social security of- do not include too much equality. fers an important instrument to empower Social policies are only sustainable if women by overcoming traditional patri- they are based on a stable consensus. A archal structures of families and societies. serious discussion about social security Social services and cash transfers can be for all should not waste time on the pos- designed in a way that strengthens indi- itions of ultra-libertarian or ultra-egali- vidual independence. Child benefi ts for tarian ideologues. An informed debate school attendance benefi t girls in par- should begin with identifi cation of general ticular. Pre-natal health services protect considerations and basic principles. I sug- women and child care provision is cru- gest the following. cial to enable women to re-enter the labour market. Pension credits for periods of raising children reduce female old age Social security: poverty. A basic non-contributory pen- Identifying key characteristics sion is an important safeguard against the transmission of labour market inequali- A human right ties into social security provisions.

To deny people access to health and education, to force people to work for less than A pillar of democracy a living wage, to accept constant malnutrition and deprivation: these are all viola- Meaningful democracy requires citizens tions of the universal principles of human who enjoy genuine freedom – based on dignity and respect. It is the obligation of legal, political, religious and economic any State to provide these minimal social independence. Very few people have suf- rights to its citizens. Where States fail to fi cient private property to enjoy fi nancial meet their obligations, this failure and its security in case of sickness, unemploy- consequences become a responsibility also ment, injuries and old age. In this respect for the international community. Human the common availability of social security rights are universal and it is immoral to provisions is the functional equivalent to ignore poverty just because it occurs be- suffi cient private property. Social security yond national borders. provisions strengthen the independence of people. It affords them choices. It provides workers and their families with the basic A protection from fear and insecurity security that is a precondition to be fully capable of exerting citizen rights. Millions of people in the world live in insecurity, dependency and fear of unemployment, sickness, work accidents and old age. A mechanism to create fairer labour Social security is a crucial instrument to markets and increased flexibility equip people with the basic protection and capabilities that allow them to plan their The balance of power in a labour market is lives, to make choices and take risks. It is inherently unequal. Social protection limits impossible to overestimate the increase in the power of employers to abuse or exploit

3 workers. People whose basic social rights and desperation feed crime, individuals are secured are more able to demand re- are forced to buy security privately. Even spect at the workplace. They are less likely wealthier middle classes lose quality of life to endure abuse, dangerous working con- as they retreat in “golden cages” to protect ditions and miserable pay. Social security themselves against the excluded majority. takes labour partly out of competition and A basic package of protection including rewards employers that innovate and in- health care, primary education and a basic vest in people. It is a key instrument to re- income fl oor are not seriously disputed. It duce unfair competition and avoid a race to is rather a question of how to achieve these the bottom. Trade unions support the idea modest objectives. In the public debate a that innovations and productivity gains are number of challenges for internationally rewarded with higher profi ts, but we see no applicable social standards are discussed. value in higher profi ts that are gained by Diversity of countries and local conditions, hazardous working conditions, exploitation participation of the people in the design of children or denial of decent wages. and implementation of social security systems, and the tax-raising ability of nation states in a competitive global open econ- A vital tool for development omy are key issues in this respect.

Social security is an investment in people. There is ample evidence5 that coun- Universality and diversity tries can grow in equity. The argument of welfare critics of an inevitable trade-off Trade union policies are based on an in- between growth and equity is empiri- clusive concept of solidarity and advocate cally wrong and it does not become true universal social policies to improve work- through constant repetition. Social securing and living conditions for all workers ity is not only compatible with growth; it and the population at large. Historically is in many instances a vital tool for devel- trade unions have often pioneered social opment. It pays to invest in public health, security provisions through collective bar- education, health and safety at the work- gaining that have subsequently been uni- place and maternity protection. A healthy versalized through legislation. Extension and educated workforce is the precondi- of social security requires a broad cross- tion for productive employment. We also society alliance in order to create the nec- know that pensions and social transfers essary political support. It improves the function as automatic stabilizers and re- bargaining position of workers in the la- duce demand volatility. Social stability is bour market and is a stepping stone for an asset that makes countries attractive for many informal economy workers to get long-term investment. some basic social rights. Although social security is a universal human right there is a huge diversity in A producer of public goods possibilities for achieving this objective. The overarching and universal principles Social security contributes to social peace need to include respect for the dignity and which beneﬁ ts everybody, not just transfer autonomy of citizens in need, solidarity in recipients. The way to public security and sharing the costs of social security, promot- lasting social peace is through fairness, ing equality of opportunities and ensuring equal opportunities and social protection that those who are protected participate and not through more police and prisons. in the development and execution of so- What is the value of economic growth cial security policies. Societies constantly if it is invested in barbed wire, security change and social security systems have guards, walls and fences? If the social fab- to adapt continuously to maintain their ric of a society breaks down and poverty protective function. There is no one social

4 security model that could serve as a stable engaged in subsistence activities largely reference point over time. Social security outside the formal economy. systems are products of specifi c historical In such a situation, public work schemes processes and local conditions. There is will be needed that offer socially mean- bitter experience of grand design schemes ingful employment at the legal minimum that were ridiculed by government or by wage. This will give people the possibility market failure. In any country there are to earn at least the minimum wage instead traditional, cooperative, state and market of being forced to accept the worst forms of elements of social security. Each of these el- exploitation or being without any income ements needs to be judged not on the basis at all. This is an approach currently being of its organizational form but on its merit developed on a large scale in India. to contribute to the overall objective of ex- Such an approach needs to be comple- tending social security to those in need. mented with infrastructure development and a wide range of active labour market policies to create more and better jobs, and Getting the design right with social assistance or other cash transfers where others forms of support have failed. Social policies must address the needs of the Extension of social security faces not people in a way that supports the dignity only the challenge to meet the basic and and autonomy of the individual and enables urgent needs of people but also to develop people as much as possible to develop their effi cient and effective organizational and own capabilities and to strengthen their administrative structures. In the last dec- independence. A system needs to provide ades there has been an ideological battle universal basic social services and a basic to privatize social security systems. How- income fl oor, but it should be designed in a ever, the results have at best been mixed way that helps to develop income opportu- and often driven by ideology rather than nities where possible. Incentives that result reason. Instead of continuing these ideo- in a dependency culture or abuse are not logical battles I would like to reiterate the desirable. We are not talking about people pragmatic position of the trade union move- resting in a social safety net, but a right for ment. The fi rst and foremost function of so- everybody to walk with dignity and respect cial policies is the effi cient delivery of union a basic social fl oor. versal social services and adequate social In any case, the extent of welfare abuse transfers at low costs, in systems leading to is in most cases highly exaggerated. It is universal coverage and based on responsi- diffi cult to see how the universal access to ble management and public accountability. health care or the provision of a basic in- In this regard, the much heralded Chilean come in the form of child benefi ts or basic privatized pension scheme has just seen its old-age pensions can set wrong behav- Waterloo – insurance companies got rich ioural incentives. Child benefi ts, in par- yet real pension rates and coverage are low ticular when linked to school attendance, and the burden on the State as provider of can in the right circumstances help reduce last resort remains high. It was an expen- child labour. Pensions are not addressing sive but sobering experience and we should the active labour force. Social security sys- learn from this, as it shows that miraculous tems need to be designed in a way that schemes that simultaneously offer high motivates and enables people to seek and profi ts for insurance companies, create dy- fi nd decent employment. But it needs to be namic capital markets, increase the level of stressed: employment that does not gen- investment and provide attractive pensions erate a living wage is not decent employ- at low costs only exist in fl awed economic ment. A legal minimum wage is an impor- textbooks and not in the real world. tant instrument to provide a basic income Pure market solutions can provide for fl oor. However, this will not be suffi cient (limited) risk pooling, but not for redistri- in countries where many workers are bution. Without redistribution coverage of

5 the poor will not be possible. It is an illu- per se, but the ability of the State to collect sion to believe that without a strong role of suffi cient taxes and to manage these funds the State either as provider or as regulator prudently. Research by the ILO has shown universal social security is possible. that only very limited resources are required globally to provide basic social security for all. Even in the poorest countries Public accountability and participation in Africa devoting about 4 per cent of GDP of the protected to a basic set of cash benefi ts can reduce the poverty headcount by 40 per cent.6 While technical expertise is important to Global tax competition creates pres- build viable social security systems this sure on national tax rates and reduces the should not lead to the illusion that the wis- available fi scal space. Simultaneously with dom of experts alone is the best way to an increasing interest in corporate social design and implement social security sys- responsibility, the willingness by compan- tems. Systems will not work if they are not ies to pay their fair share of taxes has been based on the values, tradition and convic- decreasing. Companies are going to great tions and participatory learning processes lengths to avoid taxes and often reorgan- of the people. The often cumbersome, con- ize themselves so as to avoid the obliga- fl ictual and contradictory process of pub- tions national law places on employers lic debate is indispensable in creating the with respect to social security. consensus that viable solutions require. It is not true that international tax ar- Workers have again and again had to rangements are impossible. In Europe bear the costs of poorly administered or governments agreed to harmonize con- badly protected public or private social sumption tax years ago. They agreed that security schemes. Schemes using partic- there should not be unfair retail competi- ularly high shares of their contributions tion through extreme differences in VAT. for administrative costs are likely to have In a similar way there is a need to prevent governance defi ciencies. This is not only unfair competition on corporate taxation bad governance but unethical enrichment. and to act jointly against tax evasion. It is The money in social security schemes is regressive to tax disproportionately con- workers’ money. It is deducted from their sumption and wages. It is not true that salaries or paid via taxes. The use of these governments cannot do anything in the resources and the administration of these face of global capital mobility. To ensure funds must be transparent and under con- a suffi cient level of fi scal revenue for so- stant public scrutiny. Those who pay as cial security a wide range of additional workers as well as those who receive bene- tax policy options are available. Further- fi ts must have a say in the governance of more public procurement policies should these resources. Resources must be avail- exclude companies that do not provide the able to enable worker representatives to re- legally required social protection to their ceive the technical training and the access workers or are found guilty of tax fraud. to expertise that they need to fulfi l their controlling function. Global challenges require global responses Creating and defending the fiscal space for social policies The protection of workers’ interests requires that poverty be addressed by pol- The best design and the most honest gov- icies which provide a regulatory frame- ernance of social services and social secur- work that ultimately extends social security are meaningless if the necessary fi nan- ity to all. This is possible but it will require cial resources cannot be mobilized. This is building a greater political will than exists in most societies not a question of resources currently. We need to forge a broad alliance

6 to move forward from a moral human Mexico, the “30 baht” health scheme in rights consensus on social security to fi rm Thailand, the universal basic pension legal and fi scal commitments and policies in Namibia and Lesotho, and the Na- that use the well-tested instruments of re- tional Rural Employment Guarantee Act distributive social security provision to (NREGA) in India. These pioneering ac- make poverty history. Investing in provid- tivities can contribute to a global debate ing a basic set of social security benefi ts to about the best instruments, rules and tools all the world’s poor will cost less than 2 per to extend the coverage of social security. cent of global GDP – a cost that will be paid The ILO as the responsible UN organ- back many times over through increased ization for social protection is the place productivity of the global workforce. where this debate needs to take place. The In a global economy social security can- trade union movement is an active partner not be dealt with in national isolation. in this process to build networks and alliances for universal social protection. The failure of any nation to adopt humane con- Social security for all is an investment ditions of labour is an obstacle in the way of in global social and economic develop- other nations which desire to improve the con- ment. Economic growth does not automat- ditions in their own countries. 7 ically lead to poverty reduction. Volun- tary charity cannot provide the necessary The best strategy to avoid a race to the bot- funds and cannot create the mutual rights tom is the creation and application of in- and obligations that are indispensable for ternational labour standards. During the social security as a concept of human general discussion on social security at the rights and personal dignity. It is govern- International Labour Conference in 2001 ments that have the ability to provide the governments, workers and employers re- framework and resources for sustainable iterated the need to “anchor the ILO activ- social security provisions. ities in social security in the Declaration of Making the human right to social se- Philadelphia, the decent work concept and curity a reality for all is a moral obligation relevant ILO social security standards.”8 at the national and international level. The This common commitment at the ILO necessary resources are globally available; is important but more political momentum it is essential for development and equity; is required to achieve a basic social protec- and it can and must be done. tion package as outlined earlier. The ILO must play a key role in building a global platform for social justice as a core element Notes of the Decent Work Agenda. Important social security standards 1 ILO, Governing Body, Implementation of the have been adopted by the ILO over the Global Employment Agenda: An update, 2007. last decades. These technical standards 2 ILO, The end of child labour: Within reach, 2006. together with the principles enshrined in 3 Universal Declaration of Human Rights, 1948, the ILO Constitution, the Declaration of Article 22. Human Rights and the International Cov- 4 Declaration of Philadelphia Art. II a and c. enant of Economic, Social and Cultural 5 “Social protection as a productive factor”, doc. Rights provide guidance and need to be GB. 294/ESP/4, 294th Session, Geneva, 2005. ratifi ed more widely. 6 ILO, Cash benefi ts in low-income countries: Simu- Recent years have seen the emergence lating the effects on poverty reduction for Senegal and of new initiatives at the national level to Tanzania, 2006. extend social security coverage, such as 7 ILO Constitution, 1919. Bolsa Familia in Brazil, Oportunidades in 8 Conclusion ILC, 2001.

The current pension debate for trade unionists: A brief canvass of the issues

Across the differing retirement pension models being employed around the world, the central trade union concern will always be whether a particular model can provide adequate incomes to the largest possible number of people. However, where there is a significant informal economy other questions arise: whether the cost of payroll- based pension contributions discourages formal economy employment and whether tax-financed universal schemes more appropriate.

Bob Baldwin Trade Union Advisory Committee to the OECD Paris

n the fi rst several decades following administered arrangements; and, tighten- Ithe Second World War a great deal of ing the relationship between contributions progress was made across much of the made and benefi ts received by reducing globe in putting pension arrangements in cross-subsidies. (OECD, 2000) Acting as a place, which in turn transformed for mil- central policy “think tank” for its mem- lions of workers the latter part of one’s life. ber governments, the OECD endorsed The ages-old pattern of working until one these reforms as a necessary response became disabled or died was replaced by to the combination of population ageing, a period of retirement when one could decelerating population growth and ever look forward to material comfort without earlier retirement. It viewed this combin- having to be employed and while enjoy- ation of forces as a threat to the totality of ing good health. A signifi cant period of economic growth, budgetary balances and retirement became one of the most impor- the sustainability of public pensions. tant forms in which the benefi ts of rising Outside the OECD area, the World productivity were widely shared. Trade Bank became a very active player with re- unions played a signifi cant role in bring- spect to pension reform. It focused much ing about this new state of affairs. of its attention on pay-as-you-go (PAYG) Over the course of the past decade earnings-related, publicly administered and more, the progress established in the pension plans which, in many World Bank earlier period has been eroded. In 2000, a client countries, tended to dominate pen- document prepared by the Organisation sion systems. The Bank urged that these for Economic Co-operation and Develop- programs be replaced in whole or in part ment (OECD) noted that 26 of the 29 mem- by mandatory individual savings ac- ber countries at that time had imple- counts.1 The Bank shared the OECD con- mented reforms to their pension systems cern about future budgetary balances and (OECD, 2000). Reforms included: raising also foresaw the possibility that manda- the age of eligibility for benefi ts; lengthen- tory retirement savings programs might ing the number of years over which earn- stimulate innovation in fi nancial institu- ings are averaged for purposes of calcu- tions and instruments that might encour- lating benefi ts; changing the method of age economic growth. In many of its cli- indexation from wage indexing to price ent countries, the publicly administered indexing; increasing the role of privately defi ned benefi t (DB) programmes then in

9 place suffered from any or all of limited two criteria: are incomes above a nation- coverage, fi nancial problems and poor ally recognized measure of poverty or administration. low income; and, do the incomes allow Generally speaking, the reforms of people to maintain their standard of liv- the recent past have not been welcomed ing as they move from work to retirement by trade unions. In some cases, trade and throughout the period of retirement. union movements have been somewhat Given that retirement periods have been unhappily resigned to change. In other increasing with life expectancy, the ques- cases trade union movements have been tion of how pensions are adjusted to re- prompted to initiate strikes and demon- fl ect changes in prices or wages through strations to protest proposed changes. To the retirement period is an increasingly date most of the trade union debate and important question. It is also of somewhat dialogue on pension reforms has been greater importance to women in light of conducted at a national level. their greater life expectancy, as is the ques- The general purpose of this article is tion of whether some portion of retirement to establish a basis for international trade benefi ts carry on to surviving spouses. union dialogue on pension reform. The In addition to being concerned about article reviews and comments on a number the adequacy of benefi ts, trade unions of common issues that trade union move- have also shown a concern that retirement ments are forced to address in pension income programs should have a substan- reform debates: demographic change, the tial core that is predictable. Thus, they role of publicly and privately administered have shown a widespread but not univer- pensions, defi ned benefi t (DB) versus de- sal support for DB plans over DC plans, fi ned contribution (DC) plans, and so on. and have also seen a strong positive role It also notes some of the special issues that for publicly administered plans. Although confront low-income countries. In the fi nal it has seldom been articulated, in practice section an attempt is made to articulate, at trade unions have shown a concern that a high level, a general approach to pension the pension system not be subject to con- reform for trade unionists.2 tinual change. Given the broad scope and short length The values that trade unions bring to of this article, it passes rather lightly over a bear on pension debates seem so obvious number of important issues. The treatment as to be not worth stating. Yet, part of what of pension issues in low-income countries has made the pension reform debates dif- warrants much further attention than it fi cult is that these basic considerations can be given here. are often missing from the debate. Pen- sion reform prescriptions endorsed by the OECD have tended to focus increasingly Trade union values on the supply of labour of older workers, and a murky debate and protecting budgetary balances in the future. The World Bank has shared the Not only have the outcomes of reform concern about future budgetary balances processes been awkward but the debates and the future development of fi nancial themselves have been diffi cult, in no small institutions and instruments. Whether part because they are often quite discon- one shares them or not, these objectives nected from the central concerns of trade are recognizable as being signifi cant, but unions. beside the point of why pension plans At the centre of trade union concerns exist. about pension arrangements is the ques- To the extent that the question of in- tion whether they can provide adequate come adequacy gets dealt with, it tends to incomes to the largest possible number get dealt with as a problem that has largely of people. The question of whether in- been solved in the OECD area, with only comes are adequate is assessed against subsets of the population (e.g. widows

10 and immigrants) being a source of ongo- 142 per cent between 1950 and 2000 and ing concern (OECD, 2001). This compla- is expected to grow by 49 per cent by the cency refl ects, on the one hand, the reality mid-twenty-fi rst century. that the incomes of older people in OECD There are quite different start and end countries did improve signifi cantly in points among countries and continents both absolute and relative terms in the lat- for these trends. Generally, Europe and ter part of the twentieth century (Yamada, Northern America (Canada and the United 2002). But in many countries the incomes States) start out as older populations and of retirees who have totally withdrawn remain older. But, there is a tendency to from the labour force are seldom looked convergence with respect to age structures at, and they are often well below the aver- and some of the most rapid ageing will age incomes of the elderly. Furthermore, take place in the most prosperous parts in countries with signifi cant pre-funded of East Asia (e.g. Japan, China, Republic components to the retirement income sys- of Korea and Taiwan). While population tem, the incomes that they produced in the growth will decelerate in all continents it late twentieth century were strengthened will remain more robust in less developed by: very high returns on fi nancial assets; regions. It will be negative in Europe. low infl ation and low wage growth. These Two factors underlie the ageing pro- pension arrangements will not produce cess. The fi rst is increased life expectancy the same incomes under different eco- at older ages. Again this is a worldwide nomic circumstances. development that shows signs of conver- Not only have the central concerns of gence among continents. Thus, the life trade unions tended to be pushed to the expectancy of 65-year-old European men margins of debate, but sometimes key increased by only 0.8 years between 1950 terms in the debate are left with no clear and 2000, while the average life expect- defi nition. An important case in point is ancy of Asian women increased by 5.5 the term “sustainability”, which has en- years over the same period. joyed a central place in much of the dis- The second factor is declining fertil- cussion of future pension expenditures. ity which is also happening worldwide The term is seldom if ever defi ned clearly. and in each continent, and again shows Sometimes it is implied that if future ex- signs of convergence. Worldwide, fertility penditures would require tax increases declined from 5.02 in 1950-55, to 2.65 in they are unsustainable. If earlier genera- 2000-05, and is expected to decline to 2.05 tions had adopted this approach, much in 2045-50. In 1950-55, fertility rates in less of what is now in place would have been developed regions were more than twice deemed unsustainable years ago. those in more developed regions, and by 2045-50 they are expected to be 1.13 times those in more developed regions. Demographic change A fertility rate of 2.1 is required to maintain a population. By 2000-05, Eu- Across the world and in every continent, rope and Northern America had fertility two demographic trends are underway rates below this level and Italy, Republic that are very important to the debates on of Korea and Spain had fertility rates of pension reform. Populations are getting 1.2. Africa is the only continent expected older and population growth is decelerat- to have a fertility rate above this level in ing. Thus, the portion of the global pop- 2045-50. The decline in fertility rates more ulation over 65 was 5.2 per cent in 1950, than offsets the effect of increased longev- 6.0 per cent in 2000 and is expected to be ity and accounts for the deceleration in 16.1 per cent in 2050.3 The older subsets of population growth. the over 65 populations (e.g. 75 to 84 and Many a horror story about the pen- 85 and older) will be growing even more sion burden is told around these demo- rapidly. The world population grew by graphic trends. As the retired population

11 grows in relation to the population as a countries that want to encourage more whole, it is true that the share of national employment of older workers should un- income claimed by the elderly will grow dertake a vigorous effort to increase em- too, assuming that their relative incomes ployment overall. are more or less constant. They are also likely to claim a larger share of government budgets. But, it does not follow that Balance between publicly and they impose an intolerable burden on the privately administered pensions working-age population as is sometimes alleged because several forces will offset The respective role of publicly and pri- the impact. vately administered pension arrange- First of all, it is important to remem- ments varies widely in the OECD area ber that the elderly will be claiming a (OECD, 2005). larger share of a larger per capita income. The right balance between public and In most countries, wage and productivity private arrangements is bound to be a increases of 1.0 to 1.5 per cent per year will political issue that will never be fully re- be suffi cient to keep wages net of pension solved. On the one hand, the fi nancial sec- contributions growing. These are not triv- tor will always tend to look at publicly ad- ial rates of growth, but neither are they ministered pensions as a market opportu- extreme. Moreover if population ageing nity lost. On the other hand, trade unions and decelerating population growth give and many social policy groups will have rise to labour shortages as is often sug- opening biases in favour of a strong role gested, these rates of wage and produc- for publicly administered programmes. tivity growth will be easier to achieve. There are many good reasons for the Second, the increase in the portion of trade union bias in favour of publicly ad- the population of pensioner age will be ministered programmes. They have the offset in large measure by a decline in the greatest possible risk pooling potential portion of non-working young. Thus, pub- which is vital to operating DB programs lic and private transfers from the work- and making retirement incomes predict- ing-age population to youth will be de- able. They do not require pre-funding for clining as the transfers to the elderly will purposes of insuring benefi t promises as be increasing. This can be politically dif- is typically required in privately admin- fi cult as transfers to the elderly take place istered arrangements. They can achieve largely within the public sector while administrative economies of scale and, if transfers to the young take place in pri- they are funded to some degree, they can vate households. capture effi ciencies in the investment area Finally, it is important to note that the as well. In addition, compared to an alter- actual ages of retirement have stopped native of “voluntary” workplace pensions, their downward trend in a number of they have the advantage of solving chronic countries. (Sudén, 2006) Moreover, many problems of limited coverage, portability young workers have delayed key tran- and limited protection against infl ation. sitions in the early life course (Beaujot, The coverage issue is particularly im- 2004) and, as a result, will fi nd it diffi - portant as coverage for a signifi cant part cult to retire as early as their parents and of working life is a prerequisite of end- grand-parents. ing work with a decent pension. In con- Given the persistently high unemploy- text it is worth noting that the only OECD ment in many high- and low-income coun- countries where private pension cover- tries, the greater worry in many countries age is well beyond 50 per cent of the paid would be that encouraging greater em- workforce is in countries where coverage ployment of older workers will succeed is effectively mandatory due to legislation at the expense of job opportunities for that requires it or due to collective bar- younger workers. High unemployment gaining in countries with high degrees of

12 collective bargaining coverage (Queisser power, it may not be appropriate to en- and Whitehouse, 2006). courage people to rely too heavily on a In countries where employers can major public pension programme. It may choose whether to put private pensions in be possible to develop decision-making place, it is generally labour market pres- structures that involve social partners that sures and collective bargaining that cause might mitigate this risk. them to do so. As a consequence, there is Sometimes, concern about political risk a general tendency for workers who are is embellished by concerns about corrup- vulnerable or disadvantaged in the labour tion and/or incompetence of the politicians market (e.g. women, immigrants and mi- and public offi cials who are responsible grant workers) to be less likely to be cov- for overseeing public pensions. Unfortu- ered. In recent years these long-standing nately, history has offered some support concerns have been accentuated by the for this concern. On the other hand, pri- growth in non-standard forms of employ- vate arrangements also require substantial ment (part-time and temporary contract regulation and tax support, and if public work). People who are engaged in these offi cials are too corrupt or incompetent to forms of employment are often left out manage a public programme, they prob- of voluntary private pension plans. An- ably cannot be counted on to regulate a other development of the recent past that private one effectively. is important in the Anglo-Saxon world There is also the question of whether in particular, is a growing unwillingness retirement income needs are suffi ciently of companies to sponsor DB pension ar- homogenous to allow them all to be sub- rangements. This tendency has become stantially met through one or more pub- quite extreme in some cases and raises lic programs. This issue is likely to be as- serious questions about the usefulness of sessed differently in different countries, employment as the platform for providing and may look different depending on pension benefi ts. what kinds of programs are currently in Despite the clear advantages of pub- place and/or seem plausible in the foresee- licly administered programs, there are able future. both theoretical and practical reasons why To this point, publicly administered a trade union movement might choose pensions have been referred to as if they not to propose a pension system that is are an homogenous entity. Yet there are entirely publicly administered. at least three generic types that are com- The fact that the balance between pub- monly found: lic and private provision is contested terri- 1. means or income-tested programmes; tory is always a consideration, as are prevailing values and beliefs. In countries 2. universal fl at-rate programmes; and dominated by liberal thought, including 3. compulsory earnings-related programmes. all of the English language high-income countries, it is diffi cult to move beyond The fi rst two types focus on age versus the belief that some room needs to be left retirement as the basis for payments, and for market solutions to retirement income they focus more on minimum income pro- needs. Moreover, if there is an effective tection than on earnings’ replacement. political limit on the ability to raise taxes, They tend to play a relatively more prom- major public pension programs may be inent role in liberal societies, other than seen as a barrier to achieving other public the United States, than they do elsewhere policy objectives. The same problem can in the OECD area. They are also found in arise in low-income countries where the Nordic countries where, except for Den- tax collection capacity of governments is mark, they exist side by side with sub- limited for practical reasons. stantial publicly administered earnings- Also, if a political system is prone to related plans. However, it is worth adding major swings in the outlook of those in that fl at-rate benefi t plans also contribute

13 to earnings replacement and do so in a re- Defined benefit versus distributive manner. defined contribution The third type of plan is designed specifi cally to replace pre-retirement earn- Most, but not all trade union movements ings. In continental Europe plans of this have shown a clear preference for DB sort often form a substantial part of the pensions versus DC pensions, and this entire pension system. This type of plan widespread preference refl ects the greater has substantial advantages over most al- certainty of the benefi ts that will be pro- ternatives as a way to provide retirement vided on retirement by DB plans. The gen- income to people retiring from long peri- eral absence of risk pooling in DC plans ods of formal employment. For others, they means that individuals bear virtually all function less effectively. They may or may of the risks entailed in the lack of certainty not include signifi cant internal redistribu- about future wages and salaries; rates of tion and the self-employed may or may return on investment during working life; not participate in them. Because plans of annuity prices at the date of retirement; this sort are fi nanced by earnings-related and so on. Where participation in a DC contributions, they can drive a substan- plan leads to the purchase of an annuity, tial wedge between take home pay and there is pooling of longevity risk which is total labour costs. Thus, they can induce taken on by the vendor of the annuity. But, tax avoidance, particularly on the part of where participation leads to a “phased low-wage workers and/or their employers. withdrawal” of assets, the longevity risk They are also vulnerable in periods of se- is also born by the individual plan partici- vere economic distress when their revenue pant and there is a chance that retirement base may contract, while their benefi ciary assets will be exhausted while the plan base does not. member is still alive. An important consideration with re- In addition to the general risks to spect to the operation of each of these which DC plans give rise, there may be types of programme is how, if at all, they subtle (or not so subtle) differential im- deal with the pension rights of immi- pacts by gender. In the absence of direct grants and migrant workers. Ideally, glo- subsidization of years spent bearing and bally mobile workers would accumulate raising children, it is likely that women rights to retirement pensions as they move whose working lives are interrupted from country to country. But making sig- by these events will end up with lower nifi cant progress in this direction is by benefi ts than their male counterparts. In no means easy. Global migration patterns addition, there is some evidence in the are dominated by movement from low-in- United States that women are more cau- come to higher income countries. Many of tious investors than men and may, as a the source countries still have rudimen- result, end up with lower DC accumula- tary social security pensions so migrants tions (Turner, 2001). may have had no pension coverage in their Two other aspects of DC arrangements home countries. Moreover, because earn- are worth noting. First, because DC bene- ings in the source countries are very low fi ts rely on compounding interest during compared to those in receiving countries, the accumulation phase, benefi ts tend to a benefi t based in large part on a pension grow exponentially rather than propor- entitlement in the country of origin may tionately over time. Second, DC plans not mean much in a host country. Com- take a signifi cant period of time to ma- pensating fully for the differences in earn- ture and to deliver benefi ts whereas DB ings and the development of social secur- plans, whether they are pay-go or pre- ity between countries of origin and host funded, are capable of delivering newly countries creates dilemmas of its own. established benefi ts relatively quickly. In recent years, mandatory DC plans have become common place in World Bank

14 client countries and in some OECD coun- As was suggested above, it is likely eas- tries as well. The risks that are inherent in ier to phase in benefi ts quickly under pay- these plans can be mitigated by: assign- go DB plans and pre-funded DB plans, than ing a small place in the pension system as under DC. Moreover, while fully funded a whole to mandatory DC plans; having DB plans can achieve this objective, they strong fi rst pillar arrangements in place; require very high levels of contribution providing rate of return guarantees; and in the early years if any element of past allowing older workers (or all workers) to service is recognized under the plan and choose between old and new systems. Op- funding targets are linked to the plans’ erating examples of all of these mitigating liabilities in whole or in part. The relative measures can be found. ease of phasing in benefi ts quickly under The shift from DB to DC in both second pay-go plans is one of its virtues. But, this and third pillar arrangements has given strength of pay-go is accompanied by the rise to important questions about the ap- common need to increase pay-go contribu- propriate regulatory arrangements for tions with no increase in benefi ts as larger DC plans and what needs to be done to portions of the elderly population become provide plan members with the necessary eligible for the new benefi ts. This source knowledge to manage their DC accounts of upward pressure on required contribu- effectively. These issues are now in front of tions may be accentuated by an increase in national authorities and are an important the size of the older population. These con- part of the work of the OECD’s Working tribution increases may cause the plans party on Private Pensions. to be vulnerable to political attack. (The relative ease of phasing-in pay-go benefi ts causes some commentators to suggest that Pre-funding versus Pay-Go pay-go DB plans are prone to “unsustainable” benefi t promises.) Historically, the chief concern of trade Levels of contributions required by unions in the pension arena has been the the two funding methods may differ even provision of adequate benefi ts to retired after the plans reach their maturity. Gen- people. Given this focus, the question erally, if aggregate wage growth exceeds whether pensions should be pre-funded rates of return on fi nancial assets, pay-go or pay-go has been addressed largely in contributions will be lower and vice versa. terms of which method would provide If labour force and employment trends fol- benefi ts more quickly and securely than low the population trends noted above, the other. aggregate wages will be at or below levels In the context of recent pension debates, of individual wage growth. Rates of return the issue of pre-funding has taken on new on fi nancial assets might be expected to signifi cance as pre-funding has come to exceed aggregate wage growth on aver- be equated in both policy discourse and age over the long term, but much more actual pension reforms with a move to pri- caution on this point is required than is vately administered individual accounts. found in much of the commentary sup- Yet, there is no reason in principle why porting pre-funding. the objective of a higher degree of funding There will be feedback from demo- could not be achieved by increasing the graphic change into the operation of pre- size of reserve funds under second pillar funded systems and in general the feed- DB plans. There are, in fact, a number of back will lead to an increase in the contri- examples of large reserve funds being as- butions required of pre-funded pensions. sociated with second pillar DB plans. Even if pre-funded contributions are lower, From the point of view of achieving they will not be on a dramatically differ- improvements in benefi ts, there are some ent trajectory than pay-go contributions. aspects of pre-funding versus pay-go that If increased funding lowers required are worth considering. contributions, it does so by supplementing

15 contribution income with investment in- great deal and left an important, positive come. Investment income comes generally economic and social legacy. The fact that from the capital income stream in the econ- they are on the receiving end of an inter- omy, which is much narrower and more generational transfer through the pension volatile than labour income. 4 Thus, if in- system is an acceptable quid pro quo.5 creased funding is associated with very precise DB funding targets, the targets are likely to be exceeded or missed on a regu- Special considerations lar basis. This reality can translate into vol- in low-income countries atility in pension contributions which may be more troublesome than higher but more In low-income countries there are formal stable contributions in a pay-go regime. sector workers who have every reason to Also, in a closed economic context, look forward to a fi nancially secure retire- pre-funding is no different than pay-go in ment, just as in the high-income countries terms of the share of national income that there are people who never succeed in es- will be paid out by a pension scheme. The tablishing a lasting attachment to paid em- amount paid out is determined entirely on ployment and for whom pensions and re- the benefi t side of the programme. What tirement are not a meaningful concept. But changes with pre-funding is the income the balance between the two groups can streams that are tapped to pay for the pen- be quite different in high- and low-income sions. But, even here, one could conceive of countries and this can lead to somewhat a pay-go tax base that included non-wage different considerations in terms of how a income. Indeed, most fi rst pillar programs pension system might be designed. rely on the general tax base of govern- Where informal employment predomi- ments as a source of fi nancing. nates it goes without saying that earnings- Much of the argument in favour of in- related pensions will be limited in their creased funding bears little relation to the scope of operation. Coverage rates for adequacy of the retirement benefi ts that employment-related pensions outside the will be provided or to the best way of OECD area are seldom as high as 50 per providing them. It focuses largely on the cent, even for mandatory second pillar re- economic consequences of different fund- gimes, and coverage rates are often less ing systems and relies generally on some than 10 per cent (Asher, 2006, Barrientos, variant of the unproven, noting that pre- 2006, Mesa-Lago, 2006 and Phang, 2006). funding will enhance savings, investment Moreover, close attention needs to be paid and economic growth. to the question of whether fi nancing earn- Another argument that has been made ings-related pensions from payroll contri- in favour of pre-funding that has the ap- butions is increasing the numbers of peo- pearance of a pension argument is that ple engaged in informal employment by pre-funded systems are fairer between driving a wedge between labour costs and generations. But the key term has no fi xed take home pay. meaning (Wolfson and Rowe, 2006) and To provide pension benefi ts to people much of what is said about it relates more who have spent much of their working life to the rate at which benefi ts are phased in in informal employment, a tax fi nanced, than to the funding method. fi rst pillar programme may be most ap- It is also worth questioning how im- propriate. Bearing in mind that tax-rais- portant it is to establish intergenerational ing capacity can be a problem in low-in- equity within a pension system. Many of come countries, an income- or means- the early benefi ciaries of net intergenera- tested version of a fi rst pillar programme tional transfers in second pillar DB plans may be attractive because it will involve are the currently elderly and the elderly a lower level of government expenditure of the recent past. In many societies it is than a universal programme that provides accepted that these generations endured a the same income guarantee. However, an

16 income- or means-tested programme may that in low-income countries the balance be administratively expensive and also in the overall provision for the elderly involve perverse interactions with pro- should focus more strongly on the provi- grammes that are in place for workers in sion of necessary services (health, housing the formal economy. and transportation) rather than on income The tax-back rate under the income- provision. This could be particularly im- or means-tested programme will reduce portant where the elderly have been sep- the value of income from other sources arated from other generations in their ex- for people who receive benefi ts from the tended family and where HIV/AIDS has means- or income-tested programs and broken up networks of family support. other sources as well. These perverse interactions can become extreme in cases where the income range to which the Conclusions tax-back applies overlaps with income to which a personal income tax applies, The past decade has been a diffi cult period and/or the income range to which tax- for many trade union movements as far backs under social service programmes as pension policy is concerned. Pension like subsidized housing apply. reforms have been implemented that do While there are many important is- not refl ect trade union priorities. In many sues to resolve in designing fi rst pillar cases, unions have mounted substantial programmes, they can overcome the cov- opposition to them. Moreover the debate erage problems of the employment-related on pension reform has been frustrating. programs that tend to be predominant in It has often focused on issues that are not low-income countries. Moreover, they are germane to either the purpose of pension generally judged to make an effective con- plans or the central concerns of trade un- tribution to poverty reduction (Barrientos, ions. In addition, arguments in favour of 2006 and ILO, 2006). They can also have recent reforms have often relied too heav- a variety of positive side effects for the ily on unreasonably pessimistic predic- households that include elderly recipients tions about the demographic future and of fi rst pillar (Asher, 2006). its consequences. It is a legitimate aspiration of formal In considering a trade union response sector workers in low-income countries to to the current situation, it is important to have a decent retirement pension and it acknowledge the reality of a wide vari- is reasonable for governments to support ation in national circumstance in all of this aspiration. However, a question that is the economic, political and demographic relevant in almost all contexts takes on par- spheres. These national differences will ticular signifi cance in low-income coun- (and should) have an impact on what trade tries and that is the question of how much unions recommend with respect to pen- revenue should be sacrifi ced through tax sions systems, and to the likely outcome support for third pillar pensions, given the of future reform processes. possible alternative uses of the revenue. Despite national differences, there is Also, since formal employment in low-in- likely to be common ground among trade come countries is heavily concentrated in union movements on a few basic points: the public sector, it is important that public Pension and retirement income sys- employee pension costs be reasonable in a tems should be judged primarily, if not total compensation context. exclusively, on their ability to deliver In high-income countries, the elderly adequate retirement incomes, without who are poor are often treated more gen- imposing an inequitable burden on the erously than the lower income non-elderly. working-age population; It is not clear how this logic does or should apply in countries where low income and Adequate retirement incomes should poverty are pervasive. Also, it might be allow people to retire from extended

17 periods of formal employment without age groups. But, one reality of the youth a signifi cant loss in living standards, population at any point in time is that they and provide all older people with in- will be the older population at a later point comes above nationally recognized in time. It is necessary to encourage among low-income measures; today’s youth a sense of interest and concern for how they will be provided with Pension systems should have core pro- income and cared for in old age. grammes that provide benefi ts which Finally, it is important for trade union are reasonably predictable; representatives to engage in dialogue on Publicly administered pension plans pension issues with employers and gov- have a positive role to play in any ernment representatives, as well as policy pension system, and universal fl at- specialists. But, there are likely very few rate programmes can be useful in both political contexts where a trade union high- and low-income countries; movement on its own will be able to es- Pay-go fi nancing of public programmes tablish the political support required to has many desirable features and should implement a progressive pension agenda. not be readily abandoned; and Trade union movements need to identify and engage other groups in society that Representatives of workers/plan mem- are likely to share a common perspective bers should play an important role in on pension issues. the governance of second and third pillar programmes. Notes Moving forward on pension issues creates some important challenges for trade 1 World Bank reform programmes typically unions. It will be diffi cult to stem the supported some form of tax-fi nanced minimum income programme for the elderly (i.e. a fi rst pillar), tide on undesirable pension reforms un- and greater reliance on “voluntary” retirement pro- less trade unions succeed in bringing the grammes (i.e. a third pillar). Many commentaries focus of pension discourse back to income and critiques of the World Bank’s efforts are now adequacy. This is an issue that needs to be available. One important source of critical commen- addressed in terms of the well-being of the tary is the International Social Security Review (Black- well Publishing on behalf of the International So- retired population overall. It also needs to cial Security Association). Many of the issues and be addressed with particular populations the intensity of the debate are captured in a collec- in mind, notably women and immigrants. tion of papers prepared by the Bank itself: (World Trade unions also need to do general Bank, 2001), and by World Bank, 2006. A self assess- pension education work with all levels ment of the Bank’s work is provided by: Holzmann and Hinz, 2005. A trade union commentary on the of their membership. Trade union lead- Bank’s approach was prepared by Peter Bakvis of ers need to be knowledgeable and con- the ICFTU. (See: Bakvis, 2006). fi dent advocates of progressive change. 2 A more complete version of this paper is available More specialized training is required for from http://www.ilo.org/public/english/standards/ those who take on governance roles. Not relm/gb/docs/gb294/pdf/esp-4.pdf. It has benefi ted all of this training has to be provided from comments from Frank Hoffer of the ILO AC- TRAV, colleagues from the Trade Union Advisory within the trade union movement. But Committee to the OECD and from the ICFTU, as well the trade union movement does have a as trade unionists from many countries who partici- responsibility to be sure that the training pated in a seminar organized by the Global Union is available. Research Network in Lisbon in October, 2006. It is also important to encourage a life- 3 All actual demographic data are from the UN course perspective on pension and retire- population database and projections represent UN mid-range projections. ment issues. These issues often get dealt 4 To the extent that pre-funded pensions are in- with as if they are only relevant to the cur- vested in government bonds, the income streams rent elderly, whose interests are sometimes that are paying for pensions are those that make pitted against those of currently younger up the general tax base of a government. This will

18 be predominantly labour income. In practice, many Mesa-Lago, Carmelo, 2006. “Structural Pension of the new mandatory DC schemes have been regu- Reform – Privatization – in Latin America” lated so that they are invested largely in govern- in Gordon L. Clark, Alicia H. Munnell and J. ment bonds. Unless this changes in the years ahead, Michael Orszag (eds) The Oxford Handbook of these plans will function very much like pay-go Pensions and Retirement Income (Oxford: Oxford plans with somewhat different distributional char- University Press). acteristics than the old earnings-related DB plans. OECD, 2005. Pensions at a Glance: Public Policies Across (World Bank, 2006) OECD Countries. (Paris: OECD). 5 The issue of intergenerational fairness is a OECD 2000. Reforms for An Ageing Society. (Paris: serious one. But, while much of the commentary on OECD). the issue focuses on fi nancial issues, the main issues have non-fi nancial defi nitions. It is important OECD, 2001. Ageing and Income: Financial Resources that each generation of young people inherit from and Retirement in 9 OECD Countries. (Paris: their predecessors: a capital stock of suffi cient size OECD). and quality to permit full employment at high in- OECD, 1998. Maintaining Prosperity in an Ageing So- comes; an environment that is useful for both pro- ciety. (Paris: OECD). duction and consumption; the skills and knowledge Phang, Hanam S., 2006. “Retirement Income Sys- required for production, civic responsibility and tems in Asia” in Gordon L. Clark, Alicia H. personal enjoyment; and social peace. Munnell and J. Michael Orszag (eds) The Oxford Handbook of Pensions and Retirement Income (Ox- ford: Oxford University Press). References Queisser, Monika and Edward Whitehouse, 2006. “Pensions: the Work of the OECD Social Policy Asher, Anthony, 2006. “Pensions in Africa”, in Gor- Division” (presentation to the OECD Working don L. Clark, Alicia H. Munnell and J. Michael Party on Private Pensions). Orszag (eds) The Oxford Handbook of Pensions Sudén, Annika, 2006. “Unending Work” in Gor- and Retirement Income (Oxford: Oxford Univer- don L. Clark, Alicia H. Munnell and J. Michael sity Press). Orszag (eds) The Oxford Handbook of Pensions Bakvis, Peter. 2006. “ICFTU/Global Unions” ana- and Retirement Income (Oxford: Oxford Univer- lysis of Pension Reform and the Development of Pen- sity Press). sion Systems: An Evaluation of World Bank Assist- Turner, John, 2001. Women and Portfolio Choice (Wash- ance by the Independent Evaluation Group of the inton, D.C.: American Association of Retired World Bank (Washington, D.C.: World Bank). People). Barrientos, Armando, 2006. “Pensions for Devel- Wolfson, Michael and Geoff Rowe, 2006. “Ageing opment and Poverty Reduction” in Gordon L. and Intergenerational Fairness – a Canadian Clark, Alicia H. Munnell and J. Michael Orszag Analysis” (paper presented to the International (eds) The Oxford Handbook of Pensions and Retire- Association for Research on Income and Wealth, ment Income (Oxford: Oxford University Press). Joensuu, Finland, August, 2006). Beaujot, Roderick. 2004. Delayed Life Transitions: World Bank, 1994. Averting the Old Age Crisis: Policies Trends and Implications (Ottawa: Vanier Institute to Protect the Old and Promote Growth (Washing- of the Family). ton, D.C.: World Bank). Gillion, Colin, John Turner, Clive Bailey and Denis World Bank, 2001. New Ideas about Old Age Security Latulippe. 2000. “Social Security Pensions: De- (Washington, D.C.: World Bank). velopment and reform”. (Geneva: ILO). World Bank, 2006. Pension Reform and the Development Holzmann, Robert and Richard Hinz. 2005. Old Age of Pension Systems: An Evaluation of the World Bank Income Support in the 21st Century: An Interna- Assistance (Washington, D.C.: World Bank). tional Perspective on Pension Systems and Reforms. Yamada, Atsuhiro. 2002. “The Evolving Retire- (Washington, D.C.: World Bank). ment Income Package: Trends in Adequacy and International Labour Offi ce (ILO), 2006. “Social secur- Equality in Nine OECD Countries” Labour Mar- ity for all: Investing in global social and economic ket and Social Policy Occasional Paper No. 63. development – A consultation”. (Geneva: ILO). (Paris: OECD).

Social security for all: Investing in global social and economic development

There is a need to arrive at a new consensus on the responsibilities of the global society, the nation State, communities, social partners, civil society and individuals for the provision of social security. Global minimum social standards and global financial transfers are to some extent substitutes. The key role of the nation State needs reconfirmation but the complementary and supporting role of the global community also has to be defined. The wider the implementation of minimum social standards at the national level – enabled by sufficient fiscal space – the less international transfers will be needed to combat poverty.

Michael Cichon Director Social Security Department ILO

his article seeks to explore the frame- Aspects of rights and principles Twork within which the ILO should promote a principled, practical and respon- Social security has been a core element sive approach to social security policy 1 in of the ILO’s mandate, virtually since its the new millennium. This is an abridged creation in 1919. At the ground-breaking version of a consultation paper issued by 26th Session of the International Labour the Social Security Department of the ILO Conference in Philadelphia in 1944, the in August 2006.2 ILO enshrined its recognition of the need The most important single reference to provide an adequate level of social pro- source is the general discussion held at the tection in the Declaration of Philadelphia. 89th Session of the International Labour Both before and after 1944, the Organ- Conference in June 2001. The vision of so- ization has developed a series of Conven- cial security that emerged during this dis- tions and Recommendations concerned cussion gave rise to a set of 21 conclusions, with social security. Over time, the notion which conﬁ rmed the validity, within the of social security as a basic human right developing paradigm of decent work, of the has gained wide acceptance, and has been general approach to social security which progressively developed in many other had been developed by the ILO through- forums and Conventions. out almost all its history since 1919. That approach is rights-based and formulated in terms of a speciﬁ c set of contingencies, Aspects of social solidarity most of which threaten the capacity of an individual worker and her or his family to A vital role for social protection is to pro- generate their own income. vide income security in the event of such contingencies as old age, sickness, invalidity, maternity and unemployment – in

21 addition to the provision of appropriate framework of good governance and the medical care for all. assurance that benefi ts will be paid as A number of issues have come to the and when due; fore in recent years which impact so- social security should be organized on cial security provision in many, if not all the basis of social solidarity between, countries, particularly those which are inter alia, men and women, different economically less well developed. Fore- generations, those in and out of work, most among these is the need to extend and the rich and poor; social security provision to those lacking coverage, who are largely represented in social security systems must be the so-called informal economy and gen- sustainable; erally very diffi cult to enrol in formal sys- the rule of law must prevail at both the tems of social security. For this reason, the national and international levels. conclusions adopted by the Conference in 2001 stressed the overall responsibility of In support of these specifi c principles, the State in the promotion, facilitation and wider linkages are also needed to: extension of coverage. the principles enshrined in ILO legal There are a range of gender-related is- instruments; sues which are specifi c to social security. These relate not only to the principle of the further principles enshrined in gender equality at the workplace but also the concept of decent work, the pro- to the problems encountered by women motion of which will ensure an ad- if family responsibilities preclude them ditional linkage with all other ILO from accruing adequate benefi ts under activities, in particular employment social insurance. generation; strong and well-functioning social dialogue, involving social actors – spe- Guiding principles cifi cally the ILO’s social partners – in building and managing social security The discussion at the Conference in 2001 policy. also considered the way social security systems have evolved over time, the manner in which each country might develop a 1. Social security national strategy, and the role of the ILO in is a basic human right working effectively with its member States towards extending social security. It was In order to capture adequately the scope agreed that ILO activities should be an- of the measures and provisions for dis- chored in the Declaration of Philadelphia, cussion, this article is based on a rather the decent work concept and the relevant ILO broad understanding – rather than a pre- social security standards. Finally, a major cise defi nition – of social security as: the initiative was recommended in the form set of institutions, measures, rights and obli- of a campaign to be launched to promote gations whose primary goal is to provide – or the extension of social security coverage. aim to provide – according to specifi ed rules, In sum, the following principles, which income security and medical care to individual should underlie the ILO’s future work in members of society. social security, may be distilled from the This formulation may be interpreted in conclusions adopted in 2001: relation to societies – nations – as a whole, to social groups and to both formal and coverage should be universal and bene- informal economies. On an operational fi ts adequate; level, social protection or social security the State bears the ultimate and gen- systems may therefore be understood as eral responsibility of guaranteeing a incorporating:

22 those cash transfers in a society that 2. The need and demand seek to provide income security and, of people for social security by extension, to prevent or alleviate poverty; A large majority (about 80 per cent) of the global population live in conditions of so- those measures which guarantee ac- cial insecurity, i.e. they have no access to cess to medical care, health and social formal social security beyond the limited services; possibilities of relying on families, kinship other measures of a similar nature de- groups or communities to secure their signed to protect the income, health standard of living. Among these 80 per and well-being of workers and their cent, 20 per cent live in abject poverty – the families. cruellest form of insecurity. An alternative model of poverty pre- From a global legal perspective, the rec- vention and alleviation relies largely on ognition of the right to social security has the positive “trickle-down” effect of eco- been developed through universally nego- nomic growth. While a variety of ap- tiated and accepted instruments that pro- proaches may well complement each claim that social security is a fundamental other, there is no doubt that the benefi ts societal right to which every human is en- of the trickle-down effect will take much titled. This principle is laid down in: longer to reach those in need unless policies of direct and immediate poverty re- Article 22 of the Universal Declaration lief though social transfers are in place. of Human Rights; and The ILO estimates that only 2 per cent of Article 9 of the International Cove- global GDP would be needed to provide nant on Economic, Social and Cultural the entire world’s poor with a minimum Rights. package of social benefi ts and services (access to basic health care, basic income The International Labour Conference transfers in case of need and basic edu- adopted the fi rst international labour cation). Most of these resources could be Conventions on social security at its very raised nationally. Nonetheless, substantial fi rst session in 1919. Social security as a global transfers would be needed to help human right is part of the ILO’s mandate the poorest countries with a GDP per cap- and is enshrined in a series of ILO Con- ita close to – or below – the global poverty ventions; most prominent among these is line to cope with their problems. the Social Security (Minimum Standards) There is clear evidence from Europe Convention, 1952 (No. 102), which became and OECD countries that social transfers the blueprint for the European Code of So- successfully reduce poverty and social in- cial Security. security and that there is a strong correla- This legal framework implies that any tion between the size and levels of these State that has decided to become a mem- transfers and the strength of the poverty ber of the United Nations and the ILO has reduction effect. As a recent OECD study the general and fundamental legal obliga- pointed out: tion to put in place decent social protection for its people. The relationship between government policies and poverty outcomes is striking: across countries, relative poverty rates among the working-age population are lowest where (non- health) social spending on the working-age population is highest. Within each country, the combined effect of the tax and benefi t systems is to lift out of relative income poverty more than half of the population at risk, on average.

23 This effect, which ranges between around one- security is income security. Income secur- fourth of those below the poverty threshold ity is about living in a situation in which before taxes and transfers in the United States basic needs, such as food, housing, health and more than two-thirds in Denmark, de- care and education, can be secured in an clined however over the second half of the uninterrupted way. This not only requires 1990s in most OECD countries, as the growth having both an adequate and regular of real benefi ts most often lagged that of me- source of income; it also requires being as- dian disposable income.3 sured that there are mechanisms in place if something unexpected happens to the Experience with social transfers in devel- regular source of income. These mech- oping countries is more ambiguous, since anisms should be able to provide income overall transfer volumes are comparatively replacement to close the emerging income small. However, some basic social protec- gap and/or to guarantee access to goods tion transfers, such as benefi ts of social and services necessary to meet those un- health insurance and basic non-contribu- expected needs. tory pension schemes, have proven to be potent means in the fi ght against poverty. Ill health is the main reason for poverty: 3. Social security not only does it lead to high costs – e.g. in and economic performance the form of user fees – but it is likely to impact signifi cantly on income generation. It National social protection systems and has been observed4 that social health pro- their perceived effects on economic per- tection can effectively address health-re- formance have been subject to intense pol- lated poverty if benefi ts are adequate and icy debates in many countries over recent affordable. Recent experience with modest decades. There are experts who claim that universal pension systems in a number of social redistribution of up to 35 per cent developing countries has also shown posi- of countries’ GDPs is an impediment to tive poverty-reducing effects for whole growth, with negative effects in both the families. They not only provide benefi ts short and the long term. Others hold an for the old and disabled but also use this opposite view and consider social protec- disadvantaged group – whose status in tion – if well managed – to be a genuine families is greatly enhanced through the productive factor. A team of ILO writers cash income they receive – as effective concluded recently:8 “Once all the argu- agents of social transfers for whole fami- ments are on the table, the outcome of the lies. Pension recipients redistribute cash theoretical debate on the potential positive income in the household, fi nance school versus negative economic effects of the fees and medication, etc.5 welfare state appears to be a draw …”. It is calculated that such social secur- Social transfers may well have a dir- ity benefi ts in most countries would cost ect positive impact on growth; but the between 1 and 2 per cent of GDP or 5 and key issue is to recognize that substantial 10 per cent of national budgets.6 Imple- levels of social expenditure and economic menting this benefi t would be, for many growth can coexist9 and that such trans- countries, a fast fi rst step towards attack- fers are the tool to make the economic ing a chronic poverty pocket. Another ILO growth equitable, thus strengthening its simulation exercise shows that even a very sustainability. modest universal pension, costing about The substantial global economic 1 per cent of GDP, would reduce the pov- growth rates in many countries over re- erty gap in Senegal and the United Repub- cent years have not translated into an lic of Tanzania by more than 20 per cent.7 equally fast decline in poverty or social An important dimension of overall insecurity. Indeed, social insecurity has human security is economic security – been increasing in many countries along- and one of the main aspects of economic side cuts in social protection. Neverthe-

24 less, since the mid-1970s major welfare through public social security interven- states such as Austria, France, Germany, tions (along with the tax systems) and can- the Netherlands and others broadly main- not be delegated to private arrangements tained their social expenditure, as meas- – either market ones or even traditional ured by the percentage allocation of GDP, ones based on extended family or commu- at the levels reached in the mid-1970s. nity income sharing. According to the paradigm of contain- The importance of equitable growth is ment, low European growth rates have meanwhile recognized widely. A World come about mainly as a result of social Bank source states: “Others have suggested protection provisions which are too high that greater equity comes at the expense of and wrongly designed. All that can be ob- lower growth and that there is a trade off served at present is that social expenditure between growth and equity […]. A large in European OECD countries (measured number of recent empirical studies […] in percentage of GDP) has stabilized at have found that there is not necessarily long-run levels – and this applies equally such a trade off and that equity in its vari- to low and to high growth economies. It ous dimensions is growth enhancing”.“… is evident that cost containment policies most developing countries will likely have have not brought about higher economic substantial scope for enhancing the qual- growth. ity of growth […] through policies aimed Some believe that too much security, at improving income distribution.”10 That particularly income security, undermines is precisely what a well-designed social people’s incentives to engage more in security system does. economic activities and to be inventive But how much social security is afford- and productive. But the truth is likely to able? OECD countries spend between 10 be exactly the opposite: the less secure and 30 per cent of GDP on social security – we feel, the more averse we are to take usually between one-third and one-half of risks. Studies reveal that poor people are total public expenditure. Countries at the risk-averse. Rational risk-averse individu- same level of economic development differ als will only take a risk if the potential signiﬁ cantly in how much they spend on loss is relatively small compared to their social security. wealth. The poor are usually not eager to In the OECD region there is a strong risk even small amounts as this threatens positive correlation between social ex- their very survival. Wealth provides se- penditure (per capita of the population) curity, and more can be risked. For many and labour productivity (GDP per hour people, social security substitutes wealth. worked). The correlation between “sim- Those who have no access to relevant pro- ple” per capita (per worker) productivity tection mechanisms against numerous so- and social expenditure (per capita of the cial risks will avoid taking any additional population) is also positive but less tight. economic risks, as they have to focus on While the nature of the actual causality protecting themselves. behind this correlation may not yet have Social protection, however, is not only been fully researched, one conclusion is about risk management. Providing income obvious: an extensive social security sys- security to the poor is one of the important tem is not incompatible with a highly pro- mechanisms to provide greater equality of ductive economy. opportunity, income and wealth than that at present experienced in the world. Social transfers are usually expected to result in a distribution of income in society that dif- fers from the one brought about by market forces. No private market mechanisms can redistribute income in this way. Income redistribution has to be provided mainly

25 4. The main challenges national social protection systems operate to social security systems – in particular in developing countries. Among infectious diseases expected to The global demographic transition become a pandemic, HIV/AIDS is the most acute. In some regions of Africa, The demographic environment of a so- the infection rate is estimated to have cial protection system, which includes reached almost 40 per cent. This implies, the morbidity structure of the popula- in all probability, that within the next fi ve tion with which the health system has to to ten years at the latest, 40 people out of cope, co-determines the system depend- every 100 alive today will have died. It is ency ratio. Demography is not the exclu- probably fair to say that HIV/AIDS will sive determining factor, as governance wipe out all the fi nancial and fi scal room too has a marked impact on dependency. for improvement in social protection that The economy co-determines the number growth in Africa might have produced of unemployed while national law, which under normal conditions. But it should is a governance factor, co-determines the not be forgotten that malaria, although number of people who are retired and of less prominent and confi ned to the poor- those receiving education. est regions of the world, has an even more The other determinants – economic de- dramatic effect on population structures velopment and governance factors – being and morbidity structures. equal, ageing is the most important factor of infl uence on social transfers to elderly populations (both formal and informal) Migration and family composition which are, in turn, the biggest expenditure items in developed national social protec- The ILO estimates that, at the beginning of tion systems. However, while developed the new century, about 175 million people regions are substantially “older” than less worldwide were living outside their coun- developed ones, the pace of ageing is actu- try of birth or citizenship,11 among which ally much faster in the developing world. about 90 million were migrant workers. At The less developed countries in relative the same time, there has been a movement terms will face an even more serious age- of people from rural to urban areas. From ing problem between 2000 and 2050 and 1995 to 2005, the share of rural employment have to build strong transfer systems well in total world employment fell by three per- prepared to face this challenge. centage points, or around 90 million work- One of the most dramatic aspects of the ers, to about 40 per cent. Together with mi- demographic transition is rapidly drop- grating dependents, the total number of ping fertility rates. The global average fer- persons moving from rural to urban areas tility rates dropped within the three dec- might be in the order of 200 million peo- ades between 1970-75 and 2000-05 from ple within decades. Including migrants 4.49 to 2.65, i.e. by about 40 per cent. This in national social security systems is one is by no means a phenomenon that only way of helping them integrate into their applies to developed countries. new countries or the cities in which they choose to live. In addition, the remittances of migrant workers have become the major Changes in health, society source of income for many families in a and the labour market large number of countries. These fi nancial fl ows might help to fi nance more income Public health issues security in the “labour-exporting” countries and regions. New public health threats constitute another factor that may rapidly change the demographic environment in which some

26 Informalization of labour markets spread defi ned-benefi t pension schemes, and economies fi nanced on a pay-as-you-go basis into pre-funded defi ned contribution schemes, The “dual economy” model had assumed would help to ensure the availability and that most agricultural workers would move affordability of pension schemes. There from rural into urban areas into higher were several assumptions: productivity manufacturing jobs. This Despite ageing populations levels of assumption simply no longer holds true. contributions and costs would be main- Manufacturing has ceased to be a major tained because people would contrib- sector of employment growth in many re- ute longer and retired later in order to gions and the rural-to-urban movement maintain benefi t levels. of labour is largely absorbed by trade, in particular informal petty trade. Hence the Linking amounts contributed with expectations that there would be a grad- future benefi ts would provide very ual movement towards the formalization strong incentives to contribute, even of the largely informal agricultural labour on a voluntary basis. force have also not been met. The ILO has Those incentives would thus extend estimated that, at the end of the 1990s, the coverage to all those who were uncov- share of informal employment in non-ag- ered, particularly the self-employed. ricultural employment was 48 per cent in North Africa, 72 per cent in sub-Saharan Privatization would strengthen these Africa, 51 per cent in Latin America and incentives by providing higher rates 65 per cent in Asia.12 of return and also by gaining higher public confi dence than allegedly bank- rupt public schemes. Globalization and the new uncertainty The Chilean pension reform, introduced The increased international economic in- already at the beginning of the 1980s, was tegration during the last decades of the the fi rst attempt to implement policies twentieth century coincided with rising following this new paradigm. The World income inequality in some countries. In Bank’s publication, Averting the old-age addition to the impact of internationali- crisis (1994), announced this new pension zation on wages and employment, which policy paradigm as relevant globally. Over reduces the national tax base, there is an the past few years, the ILO has undertaken erosion of the capacity of national gov- numerous studies13 of the reformed pen- ernments to set their own targets with sion systems, particularly of those in Latin respect to social protection. Critics of the America and of the transition countries in “welfare state” have argued that increased Central and Eastern Europe. These studies international openness creates diffi culties confi rm that the outcomes of the reformed in raising suffi cient revenues, and there- pension schemes may: fore requires a downsizing of the “welfare reduce the income security of those state”. There is some evidence that coun- covered when they become old; tries are currently engaged in tax competition – although the effects seem to be reduce the actual effective coverage of much smaller than might be expected. In those previously covered; a number of OECD countries, average tax fail to increase coverage of those not rates on labour have increased, perhaps to previously covered; and compensate for the loss of capital tax income although it could also be due to the fail to increase national savings rates. shrinking tax base of employed people. There was a strong belief in some quar- ILO concerns have in the meantime ters that the reforms converting wide- been echoed by the World Bank’s own

27 Figure 4.1. Theoretical gross replacement rates in selected European Union Member States: Average earnings, 40 years of contributions, retirement at age 65

2005 2050 70

0 Poland France Sweden 1 Sweden 2 Czech Latvia Republic

Notes: 1 National pension system only; 2 Including occupational pensions. Source: Own comparative analysis of data included in national pension strategy reports as available on http://europa.eu.int/comm/employment_social/social_protection/pensions_en.htm.

Independent Evaluation Group (IEG). those who – like the self-employed – ob- The Group’s report on the evaluation of ligatorily contribute only a certain low the World Bank’s assistance to pension minimum amount). reforms14 concluded, inter alia: “There is Figure 4.1 shows expected theoretical little evidence that privately funded pil- replacement rates for selected EU Mem- lars have succeeded in increasing national ber States as reported in their national savings or in developing capital markets pension strategy reports. From these pro- …” and “… the Bank’s preoccupation with jections it is obvious that it is not only fi scal sustainability tended to obscure schemes which go through so-called the broader goal of pension policy, that paradigmatic reforms or privatization is, to reduce poverty and improve retire- (Poland, Sweden and Latvia) which will ment income adequacy within a fi scal see reduced replacement rates: public constraint.” schemes will also experience declines Some countries in Europe have intro- (France and Czech Republic). The alter- duced – or are considering introducing – native to decline would be for people to reforms similar to those in Latin America, contribute signifi cantly longer and retire aimed mainly at reducing future costs of much later, to increase contributions or pensions to the public budgets in the hope for the State to subsidize contributions that such systems will encourage later re- via increased tax revenue. tirement. ILO studies, quoted above, also point to high and long-lasting transitional costs, high administrative costs and expected low replacement rates, especially for women or other persons with short, broken careers and lower incomes (or

28 Between universalism and pluralism: care, fi ght HIV and AIDS, provide more The changing pattern of solidarity clean water and sanitation, and offer social protection”.15 In contrast to the demographic challenge, At the same time, the question of the the possible detrimental effects of global responsibility of the State in providing tax competition on the level of social se- basic benefi ts is once again central to the curity in some countries are less easily debate taking place in countries which un- manageable. What is required is interna- dertook a partial “privatization” of their tional recognition – and corresponding social security systems in the 1980s and agreements – that the extension of social 1990s. security coverage and the ensuing eradi- Some say that the acceptance of the cation of poverty would be an investment; concept of solidarity is deteriorating as this would avoid the resentment that cre- many social protection schemes are bro- ates national social unrest and potential ken down into smaller and smaller risk global security problems. pools (right down to the fi nancing of risks The past few years have witnessed by individual accounts). Others observe new developments in this area. There that the commonly accepted notion of soli- seems to be increasing recognition of the darity is simply changing, now focusing role of social security as an investment more on the attainment of basic security in poverty alleviation. There is growing for more people rather than equal secur- support for a new social security develop- ity for a few. In any case, social security mental paradigm based on the introduc- systems are becoming more pluralistic. tion of basic universal benefi ts. Following Pension schemes are turning into sys- the “new consensus” on social security tems in which the basic public provision reached by the International Labour Con- of income security mechanisms is topped ference in 2001 and the launching by the up by social insurance or privatized sav- ILO in 2003 of the Global Campaign on ings arrangements with benefi ts that have Social Security and Coverage for All, the a much closer link to earned insured in- World Commission on the Social Dimen- come – which in turn are topped up by sion of Globalization promoted the idea of voluntary or mandated arrangements. The a socio-economic fl oor for the global econ- consequence is a wide range of different omy and indicated that social security and income levels at retirement between vary- wider social protection had to become an ing population groups. important component of such a set of min- Community-based health schemes are imum social standards (see box 4.1). springing up everywhere in the develop- Almost unnoticed, the global commu- ing world, most frequently in Africa and nity has already assumed more respon- parts of Asia. At present, the global cover- sibility for the provision of basic services age of such mutual schemes is estimated in a number of developing countries. In to be about 40 million persons. There is Ghana and the United Republic of Tan- certainly room for further growth and zania, for example, direct budget support qualitative improvements in governance from donors already accounts for sub- of these schemes. They cannot constitute stantial proportions (i.e. 40 per cent and or substitute a universal basic layer of se- 50 per cent, respectively) of the national curity based on national solidarity. Com- health budget. A “White Paper” on inter- munity-based schemes have the potential national development, entitled “Making to increase the overall resource base, at the governance work for the poor” and pub- national level, for social security. The de- lished by the Government of the United velopment of these schemes represents a Kingdom in 2006, commits “at least half fi rst step forward to the “formalization” of of all future UK direct support for de- the informal economy. veloping countries to public services, to get children into school, improve health

29 Box 4.1 Socio-economic floor A minimum level of social protection for individuals and families needs to be accepted unequivo- cally as part of the socio-economic “floor” of the global economy. Donors and financial institutions should contribute to the strengthening of social protection systems in developing countries.1 In his Report to the International Labour Conference in 2004, the Director-General identified four major areas in which the ILO had found positive experiences. He considered that they could make a major contribution to developing the concept of a socio-economic floor: First, community-based health insurance. The demand for health insurance is strong, particularly among those without any form of protection. One option for workers and families in low-income countries is community-based social security schemes. The ILO has acquired experience and knowledge on the strengths and weaknesses of such funds. Their financial viability is often called into question if one considers these funds in isolation. However, innovative mo- dalities have been introduced in some cases, combining local contributions, public expenditure and international assistance. Linking local initiatives with national insurance schemes is another method that merits further exploration. Second, minimum pension schemes. A number of countries have shown that minimum pension schemes financed from tax revenues for poor elderly persons, disabled people, single moth- ers and orphaned families affected by the HIV/AIDS pandemic are affordable. The manifold benefits of these schemes – from gender equality to family cohesion and school attendance – are well documented. The ILO could consider extending assistance to demonstrate the viability of these programmes in other countries and develop guidelines. Where fiscal constraints currently prevent such an option, proposals for international financial assistance should be elaborated. Third, cash grants for primary education. Scores of millions of children are unable to go to school or complete basic education because of family poverty. Most of them are driven into some form of child labour. A few countries, most notably Brazil and South Africa, are considering or experimenting with schemes for cash grants to poor families tied to school attendance for their children. The ILO’s International Programme on the Elimination of Child Labour (IPEC) has gained considerable experience with schemes that combat child labour by combining family support for education and other essential needs. There is scope for scaling up these successful initiatives to national levels and extending them to other countries facing similar problems. A combination of national efforts with generous international assistance is required. Fourth, reorienting public expenditure for expanding basic coverage. Statutory social security systems, even with modest coverage, are faced with severe constraints of overall governance, technical and administrative capacity and financial viability. Although higher social expenditure can be financed through faster economic growth, the costs are often perceived to exceed fiscal capacity in the short term. In many countries, the first objective is not to increase spending but to reorient present expenditure towards basic coverage. There is sufficient knowledge and experience worldwide to enable social security systems to achieve long-term financial and administrative viability. The ILO can assist in making such expertise available when and where required. A code of good practice or basic principles in the management of social security schemes could be considered.2 Notes: 1 World Commission on the Social Dimension of Globalization: A fair globalization: Creating opportunities for all (Geneva, ILO, 2004) p. xiii. 2 ILO: A fair globalization. The role of the ILO, Report of the Director-General on the World Commission on the Social Dimension of Globalization (ILC, 92nd Session, Geneva, 2004), pp. 36-37.

5. A policy vision: Establishing European OECD countries would not the appropriate paradigm have experienced such great economic and social development as they did dur- Some people may not want to believe that ing the post-war period had they not intro- social security is a prerequisite for growth duced such comprehensive social security because it is impossible to demonstrate programmes. the exact logical causality. The evidence, Seeing social security expenditure simply, that economic performance and only as an additional cost that may neg- solid social security can and do coexist atively affect economic performance is is compelling.16 Many European and non- short-sighted. Social security responds

30 to the basic needs and clearly expressed Income security requires social protection preferences of societies, a public good that in the form of public social security inter- people are willing to pay for in terms of ventions. Indeed, core security remains a taxes and contributions – provided these task for the State – which is also the only are well spent. Social security transfers are institution that can formulate an overall na- the only direct means to overcome poverty tional social security development plan. and social insecurity in the short term. Private insurance fails to deal adequately with social risks: fi rst, not all risks are insurable in full or in part; and, sec- The role of the agents of change ond, more pragmatically, the poorer sections are unable to pay for a full level of The role of individuals insured coverage. and communities It is also not enough to rely on informal, traditional social protection arrangements Many social insurance schemes provide to provide basic security through extended income-replacement payments in the event family and community networks. Not of certain contingencies. The replacement only are these traditional arrangements rates of these benefi ts are inevitably lower slowly disappearing on account of ur- than unity. A 100 per cent income replace- banization and industrialization but they ment is unrealistic and would most likely very often provide security at a high cost provide adverse incentives. Income re- and are not usually based on altruism. In placement beyond a certain level there- addition, mutual support by families and fore has to be provided for by individuals communities tends to be distributed in a through secondary and tertiary security very unequal way. In other words, poor systems or the accumulation of assets that people can usually only expect support may be turned into income streams when from their almost-as-poor families and such contingencies strike. While the ulti- communities; providing support (e.g. in mate responsibility of the State is indis- the case of catastrophic health costs) may, pensable, paternalism that restricts indi- in fact, force entire families and communi- vidual responsibility is highly unlikely ties into lasting distress. to be compatible with modern societies. However, it is simply not feasible to Community-based initiatives – where the implement appropriate programmes and top-down approach through the nation establish the necessary institutions to se- State is not forthcoming and particularly cure decent work in countries where gov- when the State is failing – might be a fi rst ernments are not able to collect the taxes step towards developing national social or contributions needed to provide for security systems through a bottom-up ap- basic public and social services and basic proach, potentially paving the way for a infrastructure. Equally, citizens must have gradual development of governance ethics confi dence in the government’s capacity to and good practices. manage social protection, and this can only be built in a democratic environment. But, within the context of globalization Reconfirming the responsibility and having regard to the evidence of tax of the nation State competition between nation states in at- tracting investment, the global commu- While private schemes and arrangements nity has to organize the global economy can improve the level of income replace- and the global society in such a way as to ment in the event of certain contingencies enable nation States to achieve nationally for various groups in a society, basic social and internationally defi ned policy objec- security, i.e. a fair distribution of income tives. This would mean searching for ways even in times of economic distress, can in which the global community might pro- only be underwritten by societies at large. tect the fi scal space of the nation State.

31 The nature of rights derived from ILO standards can be seen as a tool in the glo- and other international instruments bal process to protect the fi scal space of social security systems. New and wider There is a range of international legal in- instruments might have to follow. struments through which Member States of the United Nations or the ILO derive an obligation to provide some degree of Building a policy vision: social security to all their citizens. Binding Development approach to social instruments are: security – Towards universal coverage 1. the ILO Constitution; The ILO policy development vision focuses 2. the Universal Declaration of Human on building country-specifi c effective and Rights; effi cient national social security systems, affordable to countries at different levels 3. the Social Security (Minimum Stand- of development. Such an approach has ards) Convention, 1952 (No. 102); and thus to be: 4. the Social Policy (Basic Aims and (a) fl exible, to accommodate to national Standards) Convention, 1962 (No. 117) circumstances; as it relates to developing “broad systems of education, vocational training (b) progressive, i.e. it has to permit a grad- and apprenticeship”. ual build-up of more comprehensive systems as societies mature (in an eco- Additionally, there is a series of recom- nomic sense); and mendations and conclusions, which are (c) normative, i.e. it has to accept the benefi t weaker than ratifi able instruments, which levels and entitlements defi ned by the contribute to the obligations upon mem- ILO’s minimum standards (for exam- ber States: ple, Convention No. 102) as an ultimate 1. The Income Security Recommenda- minimum desired level of protection. tion, 1944 (No. 67); Such a basic social protection package 2. The Medical Care Recommendation, would have a major impact on the reduc- 1944 (No. 69); and tion of poverty and the improvement of 3. The conclusions of the general discus- living standards. Access to basic social sion on social security at the 89th Ses- services, notably health care and educa- sion of the Conference in 2001. tion, undoubtedly has marked effects on increasing productivity and reducing pov- The ILO interprets the entirety of the above erty in the short and long run. In addition, instruments as a mandate to defi ne a basic cash transfers can play a major role in minimum protection package (that could providing basic income security to those also be described as a “social fl oor”) to ful- who do not have any earnings capacity, as fi l the international recommendations, no- shown in a GTZ17-sponsored pilot project tably the requirements of Article 22 of the in the Kalomo district of Zambia.18 Recent Universal Declaration of Human Rights. ILO micro-simulations reveal, in the case The fl oor should, in fact, consist of a hi- of the United Republic of Tanzania, that erarchy of fl oors that has to be reached at the combination of basic universal old- different levels of development. age pensions and child benefi ts to school Setting global fl oors for social rights children and orphans under the age of and social transfers may halt “the race to 14 would reduce overall poverty rates by the bottom” – when it comes to curbing about one-third.19 social rights and social spending – at an The key objective is universality. That acceptable decent level. ILO social security is the core mandate of the ILO global cam- standards with a support of core labour paign on social security and coverage for

32 all. As mentioned above, the International Extending access to affordable health Labour Conference in 2001 unanimously care should also be linked to employment entrusted the ILO with conducting that and income policies, as well as to occu- campaign. “Universality” may refer to pational safety and health policies, with a the various dimensions of social security. particular stress on providing security in Here, the main emphasis is on universal- the event of an employment-related sick- ity of access of individuals to formal sys- ness, injury or accident. This applies both tems of social protection. The notion of a to employees and the self-employed. As re- universal benefi t, payable without distinc- gards the self-employed, the focus should tion to all qualifi ed members of a scheme, also be on awareness raising and the cre- on the other hand, fi ts well into the con- ation of mutual insurance schemes. cept of a rights-based scheme, but may in Family/children cash benefi ts (condi- practice have to tempered by some form tional or not on school attendance and/ of targeting of resources, when these are or participation in preventive health pro- limited. grammes) will be effective only if com- Attention should fi rst be focused on bined with an attempt to make the human building up benefi ts with a strong social and physical infrastructure of health and investment character. We thus believe that education systems available. All these fac- social security in the poorest countries tors together would be a major input of so- can gradually start with basic elements cial protection to policies aimed at eradi- such as: cating or preventing child labour. Expanding social protection/social se- access to basic health care through plu- curity systems is always tantamount to in- ralistic national systems that consist of tegrating those in the informal economy public tax-fi nanced components, social into more formal structures. Alongside and private insurance components, eq- this “formalization” and subsequent eco- uity funds and community-based com- nomic development, social protection may ponents that are linked to a strong cen- gradually extend beyond the minimum tral system; package described above. a system of family benefi ts that helps to As stressed by the International Labour combat child labour and permits chil- Conference in 2001, social security should dren to attend school; promote and be based on the principle of gender equality: a system of targeted basic cash transfer programmes of social assistance asso- … this implies not only equal treatment for ciated with public work programmes men and women in the same or similar situ- and similar labour market policies ations, but also measures to ensure equitable (like cash-for-work programmes); and outcomes for women. Society derives great a system of basic universal pensions benefi t from the unpaid care which women for old age, invalidity and survivorship in particular provide to children, parents and that in effect support whole families. infi rm family members. Women should not be systemically disadvantaged later in life Extending access to health care, if neces- because they made this contribution during sary supported by additional donor fi - their working years. … Social security and so- nancing, should undoubtedly be a priority cial services should be designed on the basis of everywhere – but particularly in countries equality of men and women. Measures which affected by mass diseases like malaria and facilitate the access of women to employment the HIV/AIDS pandemic. The provision will support the trend towards granting of free or affordable access to basic health women social security benefi ts in their own services should, in the fi rst place, be ex- right, rather than as dependents. tended to children, disabled persons and the elderly.

33 6. Conclusions Notes

Social security systems are powerful tools 1 A global framework, yet one within which the to combat poverty and social insecurity ILO would work with its member States to develop appropriate national policy perspectives and instru- and to achieve greater levels of income ments. equality. People need and want social 2 ILO, 2006; Social security for all: Investing in glo- security. Social security systems foster bal social and economic development – A consultation long-term economic performance, social at http://www.ilo.org/public/english/protection/ peace and international security. secsoc/downloads/publ/1519sp1.pdf There is a need to arrive at a new con- 3 M. Förster and M. Mira d’Ercole: Income distri- sensus on the responsibilities of the global bution and poverty in OECD countries in the second half of the 1990s, OECD Social, Employment and Migra- society, the nation State, communities, so- tion Working Paper No. 22 (Paris, 2005), p. 28. cial partners, civil society and individu- 4 X. Scheil-Adlung et al: What is the impact of so- als. Clearly, global minimum social stand- cial health protection on access to health care, health ex- ards and global fi nancial transfers are to penditure and impoverishment? A comparative analysis some extent substitutes. The key role of of three African countries, (Geneva, ILO, ESS Paper the national State needs reconfi rmation. No. 24, 2006). 5 The complementary and supporting role See: HelpAge International: Age and security: How social pensions can deliver effective aid to poor older of the global community has to be defi ned. people and their families (London, 2004). The wider the implementation of mini- 6 See: K. Pal, C. Behrendt, F. Léger, M. Cichon, K. mum social standards at the national level Hagemejer: Can low-income countries afford basic social – enabled by suffi cient fi scal space – the protection? First results of a modelling exercise, Issues less international transfers are needed to in social protection series, Discussion paper 13, ILO combat poverty. Social Security Department (Geneva, 2005). 7 The ILO global tripartite structure is See: F. Gassmann, C. Behrendt: Cash benefi ts in low-income countries: Simulating the effects on poverty optimal for initiating a global debate with reduction for Tanzania and Senegal, Issues in social pro- a view to reaching a necessary consensus tection series, Discussion paper 15, ILO Social Secur- on the new roles and the potential new ity Department (Geneva, 2006). instruments. It is also the ideal place to 8 M. Cichon, W. Scholz, et al.: Financing social empower the different players in social protection (Geneva, ILO, 2004), p. 121. security with knowledge and skills that 9 P. Li nder t : Growing public: Social spending and might contribute to sound national and economic growth since the eighteenth century, Vols. I and global governance of social security. II (New York, Cambridge University Press, 2004). 10 J. Kingman (ed.): A sourcebook for poverty re- But fi rst and foremost the ILO seeks a duction strategies (two volumes) (Washington, DC, comprehensive vision of a national and World Bank, 2002), Vol. 2, Chap. 12 (Macroeconomic global social security: a system that is fl ex- issues), sections 12.2.4 and 12.2.5. ible to adapt to the state of economic devel- 11 ibid., p. 26. opment and yet pursues the key objectives 12 ibid., p. 28. of universality, poverty alleviation, the 13 For a list of these studies, please see footnotes containment of social insecurity through 25 and 27 in the ILO full consultation paper on which social rights, the promotion of long-term this article is based: ILO, 2006; Social security for all: growth and national and international Investing in global social and economic development – A consultation at http://www.ilo.org/public/english/ security and a fair distribution of income protection/secsoc/downloads/publ/1519sp1.pdf and non-discrimination. The discussion 14 World Bank: Pension reforms and the develop- at the International Labour Conference in ment of pension systems: An evaluation of World Bank 2001 was a step in that direction. assistance (Washington, DC, 2006) pp. xvi and xvii.

34 15 Department for International Development ized as a private company owned by the German (DFID): Eliminating world poverty: Making governance Federal Government. It works on a public beneﬁ t work for the poor, White Paper on International De- basis, using all funds generated as proﬁ ts exclu- velopment (London, 2006). sively for projects in international cooperation. 16 P. Li nder t, op. c it. 18 See, B. Schubert: Social cash transfers – reach- 17 Deutsche Gesellschaft für Technische Zusam- ing the poorest. A contribution to the international debate menarbeit (GTZ- German Technical Cooperation In- based on experience in Zambia (Eschborn, GTZ, 2004). stitute). The GTZ was established in 1975. It is organ- 19 See, F. Gassmann, C. Behrendt, op. cit.

Challenges of old-age security reform in developing and transition countries: A trade union perspective

There is union support for the ILO’s global campaign for social security, although there is still scope in which unions believe the ILO can play a greater role. But the capacity of the ILO to shape global pension policy is itself shaped by the dominating and at times damaging influence of the World Bank on national pension debates.

Peter Bakvis Director ITUC*/Global Unions Washington Office

he ILO’s consultation paper Social The ILO’s consultation paper TSecurity for All: Investing in Global Social on social security and Economic Development 1 expresses several objectives that trade unions will cer- The ILO’s consultation paper notes that tainly agree with regarding the future one of the conclusions of the 2001 ILC dis- of social security in the world. The ILO cussion was that the ILO should undertake paper follows the path set out by the 2001 a global campaign to promote the exten- International Labour Conference (ILC) sion of social security coverage. The glo- in the conclusions of a general discus- bal union movement hopes that this con- sion on social security held at the confer- sultation paper represents the start of an ence. This ITUC response identifi es some intensifi cation of the campaign. The ILO points of the ILO consultation paper that should expect that the union movement in unions particularly endorse and makes a all countries will be a willing and active few suggestions where we think the ILO partner for such a campaign. Unions are could play a stronger role than it has done particularly in agreement with the paper’s up to now in promoting social security. affi rmation that social security is a basic Lastly, this paper delves with some addi- human right, but a right that is not being tional detail into the particular challenges respected for the majority of the world’s of reform of old-age security in developing workers, who do not currently enjoy even and transition countries, focusing on the minimum coverage. very important role that the World Bank The ILO’s consultation paper provides has played in recent years in these coun- a very useful calculation of the relatively tries by promoting a model of reform that modest cost – about 2 per cent of global has proved to have serious fl aws. GDP – of providing the entire world’s poor with a minimum package of social benefi ts and services.2 This shows very forcefully that the objective of social security for all * The International Trade Union Confederation is not only a pressing need but one that is (ITUC) is the new organization formed in November 2006 by the amalgamation of the ICFTU (Interna- eminently attainable, provided the world’s tional Confederation of Free Trade Unions) and the decision-makers put their priorities in World Confederation of Labour. the right place. The ILO’s demonstration

37 would be reinforced if it were to show how demographic patterns between countries.4 the basic package it suggests would per- A particular challenge will be to ensure mit achieving several of the Millennium the access of migrant workers to social se- Development Goals (MDGs), notably the curity, and the international trade union MDGs related to minimum income, health movement believes the ILO can contribute and education objectives. Some organiza- more to achieving that objective. tions have done a total costing of achiev- In addressing various facets of the im- ing the MDGs and what is striking is the pact of globalization on social security, the relatively modest cost involved – only a ILO paper states that there is “some evi- small fraction of what some countries cur- dence that countries are currently engaged rently devote to military expenditures, for in tax competition” which undermines fi - example. Demonstrating how the ILO’s nancing of social security systems.5 A re- campaign on social security is central to cent ICFTU (International Confederation the attainment of the MDGs by 2015 would of Free Trade Unions)6 study demonstrates lead any sceptics to support the campaign convincingly the destructive impact of one more seriously. particular type of tax competition, that Another particularly cogent part of the concerning corporate income taxes.7 The ILO’s paper is the discussion on how sub- ICFTU in its publication suggests some stantial levels of social expenditure, high strategies for international organizations productivity and strong economic growth to resolve the problem or, as the ILO put are not only compatible, but also how the it in its consultation paper, “ways in which fi rst can reinforce the latter two.3 This eco- the global community might protect the nomic relationship is reinforced by the fi scal space of the nation State”.8 Some of complementary interaction between social these could include phasing out export security and the labour market. For exam- processing zones and other institutional ple, the paper notes that Denmark is the arrangements that give certain companies European country having both the high- tax advantages over other actors, taxing est level of social security expenditure and corporations where their workers are and the highest employment rate. This fl ies real value is added rather than in artifi cial in the face of those who claim that high tax havens, and establishing standards social expenditures are an employment that require multinational corporations to disincentive! refrain from harmful tax avoidance and An area in which the ILO could expand evasion. its analysis is the interaction between so- Appropriately, the ILO has affi rmed cial security and labour market institu- the primary role of the State as “the only tions. While the tax system and social se- institution that can formulate an over- curity expenditures play a crucial role in all national social security development providing income redistribution, this is plan”.9 This emphasis on the role of the but one facet of the decent work equation. State in social security provision, which Given the international role of the ILO in was also a strong point of the 2001 ILC ensuring respect for workers’ rights, the resolution, contrasts with the approach ILO should also spell out that the guar- taken by some international institutions, antee of fundamental workers’ rights most notably the World Bank. Such insti- through adequate labour market institu- tutions have put most of their emphasis tions, in combination with social security on reducing State responsibility for old- systems, are the key factors for ensuring age security and on shifting this “respon- equitable income distribution. sibility” in a large part to the private sec- In detailing some of the current and tor, often with unsatisfactory results (as future challenges to social security sys- discussed below). tems, the ILO paper notes the expecta- Unions welcome that the ILO consul- tion that labour migration will continue tation paper refrains from asserting that to intensify, in part to respond to differing in providing social security for all it is

38 necessary to destroy it for some who al- even the right-wing candidate agreed ready have it. Again, this contrasts with with the victorious Michelle Bachelet the approach of the Washington-based that the privatized system was costly, un- international fi nancial institutions (IFIs), fair and ineffi cient, and required a major which have put so much of their efforts overhaul.11 into reducing government commitments The ILO consultation paper lists a to current social security systems that they number of studies carried out by the have forgotten that, they too, have agreed ILO on World Bank-sponsored pension with the objective of extending social se- reforms in developing and transition curity to those not covered. There is no countries. In doing so the ILO notes the evidence that savings from reduced so- reforms’ many failures, including re- cial protection – or for that matter, from duced income security for those covered, lower wages or working conditions – in reduction of effective coverage for those the formal economy will automatically already covered, and lack of progress in transfer as increased benefi ts for workers extending coverage to those not previ- in the so-called informal economy. Yet ously covered.12 The trade union move- this is the simplistic approach one hears ment endorses all of these points and at times from the IFIs. If anything, the adds some others: existence of an adequate level of protec- high administrative costs in privatized tion for some workers is likely to create schemes; social and political pressures to provide improved social protection for those who the unpredictability of pension benefi ts are unprotected. paid out from the private funds; and the growing inequality between women and men under these schemes. The World Bank’s pension reform model Starting in the 1990s, trade unions in Latin America and Central and Eastern Europe, Satisfyingly, the ILO discussion paper the two regions where the World Bank deals head-on with the multi-pillar model was most active in trying to disengage the put forward by the World Bank. In reform- State from pension provision, were among ing the pension regimes of developing and the fi rst to call attention to the problems transition countries over the past several of the Bank-sponsored reforms. In 1998 in years, the World Bank has advocated and Slovenia, the unions waged a public cam- pushed a shift from public, defi ned-bene- paign highlighting the negative effects fi t schemes, fi nanced on a “pay-as-you- of pension privatization and managed to go” basis, to pre-funded defi ned contri- convince the government to roll back a bution schemes managed by the private Bank-sponsored reform that the govern- sector.10 The paper notes that Chile fi rst in- ment had agreed to implement. In 2001, troduced this new pension model during the ICFTU issued a statement which ex- the Pinochet regime and later, in 1994, the pressed alarm at the negative impact of World Bank declared that the model was the Bank-sponsored reforms: “the World relevant globally. Over the years, the Bank Bank’s haste to scale back or dismantle made some airlines happy by organizing public pension schemes is troublesome in multiple pilgrimages of pension admin- view of the high level of corruption and istrators from around world to Santiago, administrative costs associated with the Chile, to witness the glories of privatized privatized ‘multi-pillar’ schemes”.13 pensions. However these missions have The Bank initially rebuffed trade un- fallen off sharply in recent years since the ions when they attempted to raise these is- major fl aws of Chile’s privatized pension sues. The Bank’s attitude started changing system have become evident. In fact, dur- around 2003, when the Bank’s own inter- ing the 2006 presidential election in Chile, nal reports confi rmed the claims unions

39 had been making for years. The ILO’s showed, including the high administra- consultation paper cites a 2006 report of tive costs, the unpredictability of benefi ts the Bank’s Independent Evaluation Group and the failure to extend coverage.16 The that echoes many of the concerns of the new paper also largely abandoned one of ILO.14 An earlier report by the Bank’s Latin the Bank’s major but unproved arguments American department, the fi rst version of for shifting to pre-funded privatized which was issued in 2003, went even fur- schemes, namely that they offered better ther in declaring that the Bank’s priva- protection against demographic changes, tized schemes had failed to extend cover- i.e. an ageing workforce, than public “pay- age to the previously uncovered and had as-you-go” systems. The paper announced such high administrative costs that future that the Bank would adopt a more fl exible pension benefi ts would be drastically re- approach as to whether countries should duced. According to this report, the so- privatize their pension systems and stated called transition costs to the new systems that trade unions should be involved in had created serious new public sector li- all stages of pension reform processes. abilities in some countries, and overall, The latter constituted a refreshing change the much-vaunted fi nancial sector devel- from the Bank’s earlier attitude. In 2001, opment the reforms were supposed to infor example, the Bank’s lead pensions spe- duce had not materialized.15 cialist told an international trade union delegation that the Bank would not com- mit to consulting unions on the reforms it A new World Bank approach? sponsored because “unions have nothing useful to say on pension reform”. Looking forward, there is some evi- However neither the announced fl ex- dence that the World Bank may fi nally ibility nor the intention to consult system- be budging from the dogmatic pro-pri- atically unions on pension reforms have vatization approach on pension reforms been incorporated into all of the Bank’s that it has taken for well over a decade. interventions to reform pension systems. Some, who point out the strong infl u- Some of the Bank’s current Country As- ence of the United States over the World sistance Strategies continue to push gov- Bank, have seen the shift as being due ernments to take steps to create partially to the spectacular defeat of US president privatized “multi-pillar” systems. In the George W. Bush’s proposal, launched in following telling passage, the Bank’s 2005 November 2004, to partially privatize the pension policy paper confi rms that Bank country’s public pension scheme, called staff are likely to persist in prioritizing the Social Security. The plan, for which the creation of a privately managed “second World Bank had offered a degree of moral pillar”, despite enunciated claims of tak- support, encountered such strong public ing a more fl exible approach: “Most Bank opposition that members of Congress staff see the potential economic benefi ts of from the president’s own Republican a multi-pillar scheme with a major second Party compelled Bush to abandon it in (mandated) or third (voluntary) funded mid-2005. However the shift within the pillar …”.17 World Bank has by no means been linear, As for the promise to consult trade un- and the Bank has certainly not lost its bias ions on pension reforms in which the Bank in favour of at least partial privatization is involved, there seems to be no consistent as the preferred option where political practice. In countries where progressive circumstances permit it. governments have been elected with the In 2005 the Bank issued a new pen- support of trade unions, the Bank has con- sion reform policy paper, Old-Age Income sulted unions on reforms, perhaps because Support in the 21st Century, which admit- the government gave the Bank no choice. ted many of the defi ciencies of the priva- Such is the case currently in Uruguay, for tized systems that the Bank’s own studies example. In other countries, however, the

40 Bank appears to continue the practice of not covered is that the Bank has prioritized consistently seeking the support of the fi - goals that have nothing to do with improv- nancial services industry, which stands to ing old-age security. It is remarkable that benefi t from pension privatization. But the the Bank’s latest pension policy paper, Old- Bank does not necessarily seek the views Age Income Security in the 21st Century, has of trade unions on pension reform, despite not yet abandoned the idea that one of the the fact that unions represent workers and main aims of pension reform should be to present and future retirees; in other words, help the fi nancial service industry develop. those directly affected by the reforms. This, in spite of the total lack of evidence, Nor has the World Bank placed any as confi rmed by the Bank’s own evalua- importance on collaborating with the ILO tions, that pension privatization has been on pension reform, despite the ILO’s long- a necessary condition for fi nancial market standing expertise in setting social se- development in any country. Despite re- curity standards and providing technical peated questions from trade unions, the advice. The Bank’s latest Social Protection World Bank has never offered a rationale Sector Strategy, which was launched in the as to why workers and retirees should be same year that the ILO’s annual conference forced, through the creation of privately devoted an important discussion to social managed “second-pillar” funds, to sacrifi ce security, not only completely ignored the part of their income to ineffi cient private- ILO’s role in social security system design sector administrators. Surely the ILO, by but boasted that the Bank had become the giving priority to improving old-age secur- “key player and recognized depository of ity systems in the interests of workers and knowledge on pension reform”.18 retirees rather than prioritizing unrelated The ILO could certainly play a much goals, can and should play a much more more infl uential role in putting forward important role in social security reform. alternative approaches to pension reform. As the 2001 International Labour Con- ference affi rmed, these activities should Notes consist of ILO technical cooperation with governments and social partners that 1 ILO, Social Security for All: Investing in Global puts a priority on goals such as “extend- Social and Economic Development. A Consultation (Ge- ing and improving social security cover- neva, 2006). For an abridged version of this paper, see pp. 21-35 of this issue. The full ILO consulta- age”, “developing innovative approaches tion paper is available at http://www.ilo.org/public/ in the area of social security to help peo- english/protection/secsoc/downloads/publ/1519sp1. ple to move from the informal economy pdf, to which the relevant footnotes below refer. to the formal economy” and “introducing 2 ibid., pp. 7-8. means to overcome discrimination in out- 3 ibid., pp. 11-14. 19 comes in social security”. None of these 4 ibid., p. 18. goals has been an important objective for 5 ibid., p. 19. the World Bank’s country-level interven- 6 Amalgamating partner in the newly formed tions in reforming pension systems. Even ITUC. if the Bank has stated its commitment to 7 ICFTU, Having their Cake and Eating it Too: The goals such as extending social security Big Corporate Tax Break (Brussels, 2006). coverage, major reviews by the Bank’s 8 ILO, op. cit., p. 31. Latin America department and the Inde- 9 ibid., p. 29. pendent Evaluation Group both show that 10 ibid., p. 20. the Bank never made them priorities in its 11 “Chile’s Candidates Agree to Agree on Pen- country-level work and therefore failed to sion Woes”, New York Times, 10 January 2006. achieve them. 12 ILO, op. cit., p. 20. Perhaps the principal reason why the 13 ICFTU, TUAC & ITS, Statement by the ICFTU, World Bank has not contributed more to TUAC and the ITS to the Spring Meetings of the IMF and extending social security coverage to those World Bank (Washington, April 2001), p. 8.

41 14 ILO, op. cit., p. 20. 17 ibid. 15 For more details on the internal World Bank 18 World Bank, Social Protection Sector Strat- debate on its pension reform policy see Peter Bakvis, egy: From Safety Net to Springboard (Washington, “Social security systems and the neo-liberal chal- 2001). lenge” in upcoming publication of the Deutsches In- 19 ILO: Report of the Committee on Social Security, stitut für Menschenrechte (Berlin). Record of Proceedings, International Labour Con- 16 World Bank, Old-Age Income Support in the 21st ference, 89th Session, Geneva, 2001, pp. 33-37; see Century: An International Perspective on Pension Sys- http://www.ilo.org/public/english/standards/ tems and Reform (Washington, 2005). relm/ilc/ilc89/pdf/pr-16.pdf.

42 Addressing the bases of insecurity of the Philippine social security system

The publicly-run Philippine Social Security System has reversed the trend of fund deficit through a combined strategy of improving accessibility to self-employed workers and employers, targeting fraud and non-payment of contributions, and an increase in contributions, while also being able to increase benefits in 2006. With sustainability forecast to 2031, the Philippines demonstrates that privatization is not the sole solution to sustainability.

Melisa R. Serrano* University Extension Specialist U.P. School of Labor and Industrial Relations Philippines

Social security and growing is continuously faced with the problem of labour insecurities sustainability. Asher (1998) stresses that the SSS is unlikely to be sustainable in the The uncertainties brought about by glo- medium term if no signifi cant reforms are balization continue to threaten the Phil- undertaken to improve compliance levels, ippine Constitutional mandate to “afford increase tax rates or reduce benefi ts, lower protection to labor”. Social security is the ratio of administrative costs to contri- a key area in this protective mantle. As butions, and signifi cantly improve the rate the trend towards liberalization acceler- of return on investment. These areas along ates, workers all over the world are facing with issues of governance (or the need for greater insecurity of work. Standing (1999) more workers’ voice in the SSS) are the stresses that the era of fl exibility is also bases of insecurity of the SSS. an era of more generalized insecurity and precariousness, in which many more men as well as women have been pushed into Enabling urgent reforms through precarious forms of labor. Without doubt, the Republic Act 8282 the increasing fl exibility of work arrangements erodes traditional systems of social Taking cognizance of urgent reforms and security in the workplace. the need to adopt corrective measures to At the same time, the Philippine So- protect and strengthen the life of the social cial Security System (SSS), the state- security fund, the Philippines enacted the owned and operated social insurance pro- Republic Act 8282 (RA 8282) in 1997, which gramme for workers in the private sector, amended the original pension law of 1957. The enactment of RA 8282 was crucial to * This article is a revised and an updated ver- render social security schemes more rel- sion of the publication by Melisa R. Serrano and evant in the present socio-economic envir- Mary Leian C. Marasigan, 2003, The Bases of Insecur- onment. When the SSS was established in ity of the Social Security System. Quezon City: School 1957, the Philippines was at the threshold of Labor and Industrial Relations and Friedrich Ebert Stiftung. Acknowledgment is due to the Frie- of economic development, recognized as drich Ebert Stiftung-Philippine Offi ce for funding among the leading economies in Asia. support of the said publication. Jobs were abundantly available and the

43 economy was robust. But times have What has happened since? changed. The economy remains lacklus- An assessment of the impact tre, often stagnant, and insecure jobs are of the key changes increasingly becoming the norm. The enactment of RA 8282 has enabled Expanding membership coverage the SSS to take on certain measures to address major issues and problems confront- Pursuant to RA 8282, the SSS has been ing the system. RA 8282 empowered the moving towards universal coverage. As SSS to undertake the following reforms of June 2006, there were 26.4 million in- and adjustments (Amante et al., 1999: dividuals registered with the SSS (SSS pp. 33-38): web site) or 79 per cent of the total employed (33.23 million) in July 2006. Of the Expand membership coverage to non- total membership, 20.9 million are private covered sectors, to include agricul- sector employees (including household tural workers who are not paid regu- helpers) and 5.5 million are self-employed lar daily wages or who do not work for workers and voluntary members (SEVM). an uninterrupted period of at least six Registered employers counted 774,040. months, household helpers, informal Included in the SEVM count are 533,859 sector workers, parents employed by registered OFW-members (Overseas Fili- children, and children of minor age pino Workers). The total number of SSS employed by parents. members who have become pensioners Enhance and rationalize the benefi ts due to retirement, disability and death is for its members, namely the age pen- 1,138,755 as of June 2006 (SSS web site). sion, the funeral benefi t, and the ma- Although the SSS reported a total ternity benefi t. membership of 26.4 million individuals in 2006, lumping together private sector em- Broaden investment alternatives and ployees, the self-employed and voluntary improve the management of its reserve members, and the employers, the decline fund. on the number of employee-members Impose stiffer penalties for violators of should be noted, from about 22.6 million the social security law. in 2000 to 20.976 million in 2006 (table 1). This is indicative of the growing trend of Enforce penalties on delinquent employment insecurity, particularly in the contributors. formal sector. Table 2 shows the decrease Establish a voluntary provident fund in the number of new registrants begin- for members. ning the year 2001. Nonetheless, the SSS reported an over- In the years that followed, the SSS adopted all increase in membership of 3 million various programmes and schemes to im- since 2001 (SSS web site). This was due to plement these reforms. However, the 1997 a number of strategies adopted by the SSS, fi nancial crisis, the political instability in namely: coverage drives, regional infor- the country, and the frequent change of mation seminars, and the setting up of the leadership in the SSS bogged down im- Employer/Self-employed Online Business plementation and at one point put the SSS Clearance System using point-of-service in clear danger. It was only in 2001 that (POS) terminals in local government units reforms and programmes started to be ac- for the issuance and renewal of business li- tively implemented. cences. The latter strategy is covered by an agreement of the SSS with the Department of Interior and Local Government (DILG) that Republic Act 8282 formalized. Overseas Filipino workers (OFWs) are beyond the scope of the country’s social

44 Table 1. SSS membership growth, 1998-2006

Year Employee-members Employers Percentage increase/(decline) Employee Employers

1998 20,164,123 547,400 5.7 2.0 1999 21,316,172 573,314 5.7 4.7 2000 22,621,038 600,182 6.1 4.7 2006 (June) 20,976,613 774,040 (7.3) 28.9

Source: SSS 1998, 1999, 2000 Annual Reports and www.sss.gov.ph.

Table 2. SSS coverage for the year (new registrants)

Year Number

2000 1,304,866 2001 901,834 2002 775,367 2003 743,201 2004 615,152 2005 561,250

Source: SSS 2005 Annual Report.

security law. Their membership to the SSS miums and loan accounts while they are is thus voluntary. Like the self-employed in an SSS offi ce, in view of the limited members, they too shoulder the employer hours provided by banks for the accept- and employee’s counterpart of the monthly ance of payments from SSS members. This contribution rate. To capture more OFWs affects especially the self-employed and under its umbrella, the SSS has adopted a voluntary members. There are currently two-pronged approach: (1) forging of bi- 41 tellering systems and the SSS reports lateral agreements on social security for that plans are afoot to add 169 tellering Filipino immigrants; and (2) setting up systems in 79 branches by 2006. Other foreign offi ces to promote its programmes payment schemes are likewise being put for land-based OFWs who are excluded in place, such as remittance through over from the social security schemes of their 600 Bayad Center payment facilities na- host countries (SSS 2005 Annual Report). tionwide, collection through third party The SSS nonetheless recognizes that mem- agents like LBC Express, payment through bership of the OFWs should be mandatory Philpost, use of self-service payment ter- to allow full protection for all OFWs. In minals in SSS branches, payment through this regard, the SSS is now pursuing a text-messaging, and payment through co- shift towards mandatory membership of operatives (SSS web site). OFWs. This may be part of another round There have been many cases of fraud of proposed amendments to RA 8282. in the claim of pensions, i.e. members Other initiatives were also under- who are already dead or have remarried, taken to improve member services and or been re-employed and who continue to contribution collection. A new payment claim pensions. To safeguard the funds, scheme called the branch tellering project the SSS implemented the Annual Con- was introduced in 2004. This scheme al- fi rmation of Pensioners (ACOP) Program lows members to directly pay their pre- to verify members’ identities and status.

45 The programme resulted in the suspen- robust contribution collections, sustained sion of some PHP2 billion in pension pay- investment earnings and tempered oper- ments and recovery of PHP723 million ating expenses. from accounts of pensioners who were The contribution rate, on the other confi rmed to have either died, remarried, hand, had been increased only four times or were re-employed (SSS web site). – in 1974, 1978, 1979, and 2003. The contribution rate has remained at 8.4 per cent since 1979 (SSS News and Updates, 31 Au- Expanding coverage, gust 2001). From March 2003, the total increasing liability: contribution rate went up by 1 percent- The benefits-contributions issue age point to 9.4 percent, of which 6.07 per cent is the employer’s counterpart and Concomitant with expanding membership 3.33 per cent the employee’s share. The coverage, the SSS aims to increase benefi t contribution increase was shouldered by levels. The SSS now provides an average the employers. Nonetheless, the SSS Pres- monthly pension of PHP2,546. To date, the ident, Mrs Corazon dela Paz, emphasized minimum monthly pension is PHP1,000 that although this contribution increase, and the maximum is PHP14,970. Since 1991, along with other initiatives, may have ex- self-employed farmers and fi shers with intended the life of the fund to 2031 from come between PHP1,500 and PHP18,000 the previous estimate of 2015, the current per annum are covered. With the inclu- 9.4 per cent contribution rate should be sion of the more marginalized sectors of gradually raised to at least 12.5 per cent workers in SSS coverage, the SSS will have to bring the SSS fund life back to perpe- to subsidize the benefi ts, particularly the tuity (SSS website). retirement pension that would be paid to Between 1999 and 2004, SSS benefi t these workers – a function of the social payments exceeded contributions collec- adequacy principle which means that the tion in view of the weak link between benefi ts paid provide a certain standard of the contribution rate vis-à-vis the bene- living to all contributors. fi t structure of the program (table 3). It The low-income groups receive rela- should be noted that the fund’s invest- tively larger retirement pensions than do ment earnings make up for any contri- other groups compared to their contribu- bution shortfall. Reforms undertaken in tions. According to Amante et al. (1999: the SSS helped remedy the imbalance and p. 17), in the SSS those who are in the enabled the SSS to make headway in re- lower income brackets benefi t more. The versing the defi cit into a surplus so that benefi t payments for the poorer groups the gap between contributions and bene- are much greater compared to the confi ts narrowed down from PHP7.6 billion tributions ratio for all income levels. For in 2001 to PHP0.9 billion in 2004. In 2005, example, given 15 years of service, the the SSS reported a record surplus of monthly retirement pension of a worker PHP1.3 billion, the fi rst in the last seven with a PHP1,000 average monthly salary is years (SSS web site). more than 14.2 times his/her monthly con- The SSS does not get any funding sub- tribution, but the monthly retirement pen- sidy from the government. Member con- sion for a worker with a PHP6,000 average tributions are the primary funding source monthly salary is more than 4.7 times his/ of benefi ts, so that SSS has been putting her monthly contribution. greater effort into increasing collections. Since its establishment in 1957, the SSS For the period 2001 to 2005, contribution has implemented 20 pension increases, the collection grew at an average of 10 per cent last being a 10 per cent increase in Septem- annually. According to the SSS, the steady ber 2006. This last pension increase was growth of contributions since 2002 was a made possible because of the improved result of several policy measures, most sig- fi nancial standing of the SSS as a result of nifi cant of which were:

46 Table 3. SSS benefits and contributions, 1997-2006 (in million pesos)

Year Benefits paid Contributions

1999 28,770.80 27,124.00 2000 34,479.51 30,320.53 2004 44,882.52 43,935.82 2005 46,269.82 47,602.07 2006 (June) 25,045.98 25,517.63

Source: SSS Annual Reports, 1998-2000 and www.sss.gov.ph.

Table 4. SSS investment ceilings

Area of investment Ceiling (%)

Private securities 40 Housing 35 Real-estate related investments 30 Short- and medium-term member loans 10 Government financial institutions and corporations 30 Infrastructure projects 30 Any particular industry 15 Foreign-currency denominated investments 7.5

Source: SSS Finance and Investments and Information Systems Group.

the one percentage point increase in the Broadening investment alternatives SSS contribution rate in March 2003, to and prudent fund management 9.4 per cent from the previous 8.4 per cent (which dated back to 1979), In the past, the SSS came under serious attack due to its questionable investment un- the increase in the monthly salary credit dertakings as well its operational expenses ceiling from PHP12,000 to PHP15,000, (particularly the alleged “fat” salaries and more stringent redefi nition of credited benefi ts of some of its top executives and years of service, some employees). This article does not dwell on these issues as cases have already the revision of the instalment payment been fi led in the appropriate courts. scheme for delinquent employers and During periods when benefi t pay- the pursuit of legal actions against ments exceed contributions collected the them, SSS undertakes investments to generate expansion of the tellering system to 41 income higher than infl ation, to preserve major branches, assets’ real value. RA 8282 provides specifi c ceilings on the SSS’s investment areas increased resources for collection ef- (table 4). forts, foremost of which was the hiring Data from the SSS indicate that the av- of additional accounts offi cers (now at erage return on investment (ROI) of the 598), and SSS is about 12 per cent. In other countries, implementation of the accounts moni- the average ROI of social security institu- toring system (SSS web site). tions is between 16 to 18 per cent. If in the

47 short run the SSS benefi ts will be increas- to June 2006, operating expenses totaled ingly dependent on investment income, PHP2.84 billion, lower by 4.4 per cent and considering the subsidies required to than the budgeted PHP2.97 billion, and ensure the universal coverage of the sys- representing only 9.7 per cent of SSS’ total tem to certain sectors, the SSS must en- revenues (SSS web site). deavor to be more prudent and maximize its remunerative investment portfolio. The SSS reported that as of June 2006, Labour campaigns to ensure its investment portfolio amounted to the financial health of the fund PHP200.48 billion, higher by 6.5 per cent than the PHP188.25 billion investment In 1999, a research team of the U.P. School level at the end of 2005. The four biggest of Labor and Industrial Relations, with items in its portfolio are as follows: equi- the support of the Friedrich Ebert Stif- ties, PHP68.5 billion; government secu- tung, Philippine Offi ce, conducted a study rities, PHP48.45 billion; member loans, entitled “Social Security and Labor Inse- PHP32.61 billion; and housing loans, curities Under Globalization”. The study PHP29.86 billion. About PHP20.37 billion is came up with the following recommenda- invested in properties and in development tions and proposals for policy reforms for loans. Earnings from investment in the fi rst the SSS (Amante et al., 1999: pp. 33-38), a six months of 2006 totaled PHP5.92 billion, number of which were contributed by the an average return on investment rate of trade unions. 6.2 per cent (SSS web site). The SSS recognizes that investments in government securities are the most liquid Recommendations to fill and highest yielding, at 12 per cent per the gaps in policy reforms year as of 2006. However, the institution points to the liquidity needed to service 1. Target the inclusion of selected disad- member loans and pensions as the reason vantaged and vulnerable groups in the for the decline in its holdings of govern- agenda for long-term reforms. ment securities, from about PHP32 billion 2. There must be clear provisions for the in year-end 2000 to PHP19 billion in 2003. social security of retrenched, laid-off Beginning in 2004, however, SSS invest- workers and those with reduced work- ments shifted back to government secu- days and workload. rities reaching PHP45 billion as of March 2006 (SSS web site). 3. Provide incentives for voluntary cover- Controlling operational expenses has age of self-employed individuals. also been part of the corrective measures 4. There should be a better balancing of on prudent fund management under- the social protection and member-de- taken by the SSS. It should be recalled velopment function of the SSS/GSIS that the SSS came under serious attack in (Government Service Insurance Sys- the past due to its huge operational ex- tem) and their fi nancial growth. penses. For the period 1991 to 2000, op- 5. Limit the acceptance of delinquency erating expenses increased at an average and enforce penalties. rate of over 24 per cent per year. With the cost-cutting measures adopted since 2001, 6. There is a need to supplement social the SSS was able to limit operational ex- security pensions. penses to just 6 per cent per year. Austerity measures such as cutbacks on employee benefi ts, offi ce space rentals, rent esca- lation rates and equipment rentals have resulted in savings totaling PHP2 billion for the period 2001-2004. From January

48 Recommendations of operational expenses, reviewing the sal- on future institutional reforms ary and benefi ts of SSS offi cers and employees, refl ect the recommendations of 1. The SSS should be more union-friendly, the 2002 publication. by accrediting unions as “whistle blow- Cognizant of the call for reforms, the ers” and active partners/implementers SSS from the beginning of 2001 embarked to discourage delinquent employers. on various programs and measures aimed at restoring the fi nancial health of the so- 2. The need for new employers or inves- cial security fund and extending the life tors to provide for separation pay; em- of the SSS fund, hopefully for perpetuity. ployers’ premium contributions for As discussed earlier in this article, these separation pay will form the unemploy- initiatives include: ment fund reserve for the purpose. 1. Increasing contribution collection; 3. Organized consumer groups should have a voice in the SSS Commission. 2. Increasing earnings from investment and other sources; 4. Need for social security coverage for excluded groups who are not necessar- 3. Managing benefi t payments; and ily of low income. 4. Controlling operating expenses. 5. Putting fl esh and muscle to tripartism, through greater sectoral consul- These programmes and projects have sig- tations and accountability for labour nifi cantly improved the fi duciary life of representatives. the fund so that in the 2003 actuarial study done by the SSS, the life of the fund has Meanwhile, trade unions never wavered been extended up to 2031. in their call for reforms in the SSS. Box 1 Nonetheless, much needs to be done highlights a recent initiative from the trade to further extend the life of the social unions who aim, among other things, to insurance fund. The SSS may have ex- propose reforms in the SSS. The initiative tended the fund life to 2031 but it must was a follow-up to a series of national be stressed that this expansion assumed conferences and forums on social secur- that the SSS would not provide any pen- ity from 1998 to 2001 convened by the U.P. sion increases to its members. However, a School of Labor and Industrial Relations 10 per cent across-the-board increase was and the Friedrich Ebert Stiftung-Philip- implemented in September 2006. More- pine Offi ce. These activities provided ven- over, as emphasized by the SSS President, ues for dialogue and consultation between the current 9.4 per cent contribution rate organized labour and the offi cials of social should be raised to at least 12.5 per cent security institutions in the country. A pub- to bring the SSS fund life back to perpe- lication entitled The Bases of Insecurity of the tuity. For the SSS, the best way to do this Philippine Social Security System (Serrano is to add actuarial years to the SSS fund and Marasigan, 2002), an output of these life gradually. consultations, was presented to the SSS. The President of the SSS, Mrs Corazon de la Paz, acknowledged in writing that the Some recommendations proposals put forward in the book would be seriously studied and considered by Corrective measures undertaken by the the SSS. Some of the corrective measures SSS from 2001 may have averted a potential adopted by the SSS in recent years, i.e. ad- fi nancial crisis in the SSS. Today however, justment in contribution rate, marketing with the uncertainties and insecurities new products to capture OFWs as mem- brought about by intense globalization pro- bers, strategies to expand membership in cesses, the premises that created the SSS in micro and small enterprises, fi scal control the late 1950s are no longer the norm. The

49 Box 1. Towards a joint policy agenda for labour – Security at work and social protection In 2004, representatives from various labour centres, labour federations in the private and public sectors, other labour federations and alliances, labour research institutions, and solidarity support organizations came together to discuss in a series of meetings a proposed policy agenda for labour. The outcome was a handbook which documented the process from April to July 2004 and which initially catalogued the various proposals. The handbook entitled Towards a Joint Policy Agenda for Labor – Managing the Social Impact of Globalization through Stronger State Adher- ence to Decent Work which was presented to the President and the legislators in time for the May 1 (Labor Day) celebration in 2005 included the trade unions’ proposals for reform in the SSS. Trade unions called for the extension of social security and health insurance coverage for all workers whether in the formal or informal sector, as part of decent work. To this end, the unions proposed the following:

Security at work/social protection Expansion of medical and health benefits by: ● increasing coverage of medical/health contingencies (coverage against contingencies is currently under 50 per cent of health costs); ● intensifying the PhilHealth indigent programme ● providing resources for effective implementation of the Philippine AIDS Law ● implementing appropriate action in the prevention of SARS, HIV/AIDS and work-related diseases ● reviewing occupational safety and health policies to make them more attuned to globalization trends ● massive promotion of and provision of technical assistance to enterprises on the ILO-designed “SOLVE Program” ● revival or revitalization of the Retirement Insurance Commission by broadening its functions and recomposing its membership to include more representatives from workers’ and employers’ groups which could recommend changes in the architecture, benefits, administration and financing of a more unified and comprehensive social protection scheme, including the beginnings of a workable Employment Insurance Scheme ● broaden opportunities for livelihood and social protection for women. Local government units should designate common terminal, vending and production areas for the informal sector ● review of the Government Service Insurance System (GSIS) and the SSS Laws and the PhilHealth Indigency Program with the participation of unions and informal sector associations ● implementation of the Law on Domestic Helpers.

Social dialogue and genuine representation Genuine representation of unions and workers’ associations in governing boards of welfare agencies, social security agencies, government-owned and controlled corporations and government financial institutions to further endure transparency and acknowledge unions’ role in ensuring public service delivery.1 1 Towards a Joint Policy Agenda for Labor – Managing the Social Impact of Globalization through Stronger State Adherence to Decent Work. 2004. Manila, Philippines, pp. 6-7, 8-9.

incremental strategies to stretch the life of Finding effective strategies to substan- the fund may not be enough to address the tially capture micro and small enter- sustainability issue confronting the SSS in prises for coverage by focusing on is- the longer term. Three other measures that sues of traceability and affordability of need to be seriously considered are: contribution rate;

50 Reforming investment portfolios by Note limiting or inhibiting fund exposure 1 in the stock market; and The Social Security Commission is composed of the Secretary of the Department of Labor and Enhancing workers’ voice in the Social Employment, the SSS President and seven mem- Security Commission. bers appointed by the President of the Philippines. Three of the seven appointive members represent the workers’ group, another three from the employ- Conclusion ers’ group, and one representing the general public. It is not clear how the President selects and appoints the representatives of the workers’ group, although Corrective measures undertaken by the a labour organization’s affi nity or link to the polit- SSS may have extended the life of the ical leadership, not the size of membership, appears social insurance fund but the question to be the main determining factor. of long-term sustainability still remains. Radical reforms in the SSS may be needed References in the near future. Some sectors are proposing privatization as a strategy to safe- Amante, Maragtas S.V., Melisa R. Serrano and Ina guard the fi nancial health of the system. A. Ortiz. 1999. Social Security and Labor Inse- However, experiences of many countries curities Under Globalization. Quezon City: U.P. on privatization showed that it did more School of Labor and Industrial Relations and Friedrich Ebert Stiftung. harm than good to the general public. As Asher, Mukul G. 1998. “The future of retirement pro- Ofreneo asks (2001), is privatization the tection in Southeast Asia”, in International Social issue or is it workers’ control? It should Security Review Vol. 51, Jan. be recalled that the labour sector has been National Statistics Offi ce (NSO). 1995. 1995 Urban clamouring for genuine representation in Informal Sector Survey in Metro Manila. the Commission, through greater sectoral Ofreneo, Rene E. 2001. “Social Security Challenges consultations and accountability for la- Facing the Tripartite Actors,” outline of paper bour representatives; even proposing that presented in the SSS Forum on ‘Is the SSS Se- cure?’, 30 Oct. 2001, U.P. School of Labor and In- the labour representatives should be cho- dustrial Relations, Diliman, Quezon City. sen or elected by the trade unions them- Serrano, Melisa R. and Mary Leian C. Marasigan. selves and not appointed by the President 2002. The Bases of Insecurity of the Social Secur- 1 of the Philippines. Moreover, the unions ity System – Issues, Concerns and Reform Propos- have been proposing that representation als in the SSS. Quezon City: U.P. School of Labor should be based on membership size and Industrial Relations and Friedrich Ebert among the trade unions. If this measure Stiftung. was to be implemented, a system of re- Social Security System (SSS). 2001. News and Up- dates, posted on 31 August 2001. www.sss.gov. call could be put in place so that a labour ph/news/feat2021.htm, visited 25 Oct. representative who fails to genuinely rep- —, 2001. SSS earns P23B income for the fi rst half of 2001, resent workers’ interests would be easily SSS News and Updates, posted on 20 August. replaced. In this light, a study on mech- www.sss.gov.ph/news/feat2021.htm, 25 Oct. anisms for greater workers’ control of the —, 2005. Annual Report. www.ss.gov.ph; accessed pension system may be able to address the on 8 Nov. 2006. issues of governance and equity that are Social Security System (SSS) website. www.sss.gov.ph crucial in the long-term sustainability of Standing, G. 1999. “Global feminization through the social insurance fund. fl exible labour: A theme revisited, World Devel- opment Vol. 27, No. 3. Towards a Joint Policy Agenda for Labor – Managing the Social Impact of Globalization through Stronger State Adherence to Decent Work. 2004. Manila, Philip- pines, pp. 6-7, 8-9.

The role of trade unions in reforming social security and pensions in Ghana

Ghana is currently considering the introduction of a three-pillar system of pensions. The capacity of unions to respond is hampered by their limited access to expertise to assist them analyse the proposal. But with 90 per cent of workers in the informal economy, wider questions exist as to how to extend social protection to all in Ghanaian society.

David Kwabla Dorkenoo Head of the International Department Ghana Trades Union Congress

he emergence of a formal social secur- Compulsory Savings Act of 1961 Tity system in Ghana was the result of colonization, industrialization and urban- The Government of Ghana soon after in- ization. With colonization, the British independence introduced the Compulsory troduced a new work culture into Ghana, Savings Act of 1961. This Act was passed to the then Gold Coast. This work culture provide pensions for formal sector work- entailed migration of workers from trad- ers. The Compulsory Savings Scheme col- itionally socially protected rural areas to lapsed because its operations were grossly take up jobs or employment in the urban mismanaged. The scheme was not able to areas. Workers and their dependants were keep records of all its contributors, many virtually uprooted from their “cozy trad- records were lost and many workers could itional set-up” to urban centres where they not get back their contributions. were exposed to social contingencies similar to those experienced by the British during their Industrial Revolution. Social Security Act 1965 The extended-family system is the bas- tion of social protection and serves as the On the demise of the Compulsory Saving cohesive unit its provides income security Scheme, a more rational comprehensive for not only aged and disabled, but also social security package was proposed. cares for the sick members of the family, Consequently on 17 February 1965 a new the new-born child and the mother, the or- Social Security Act was passed in the First phan, the widow etc. Republican Parliament. The law ﬁ xed re- To help adapt to the new social contin- tirement age at 60 years for men and gencies, the Government and some private 55 years for women and called for the es- sector actors introduced private social se- tablishment of a Social Security Fund for curity schemes to “create for urban wage the provision of the following beneﬁ ts: earners a rudimentary system of material superannuation security”. invalidity death/survivors emigration 1 unemployment.

53 The Social Security Act 1965 provided 1972: Social Security and National Insur- for the payment of lump sums or what ance Trust. This decree rectifi ed some of are known as provident funds. In terms the short comings of the 1965 scheme by of contributions to fi nance the scheme, the establishing the Social Security and Na- law made provision for workers to contrib- tional Insurance Trust (SSNIT) as an in- ute 7.5 per cent of their monthly basic independent body corporate to administer come while employers were to add 15 per social security schemes in the country. cent, thus making the total contribution of Under the NRCD 127, retirement age 22.5 per cent per month in respect of each was reduced from 60 to 55 years for men worker’s salary. However, six months into and 55 to 50 years for women. How- the scheme, it was realized that the con- ever, the new scheme was still providing tribution rates were too high. Therefore, lump-sum benefi ts to retired workers. the contribution rates were reduced from The scheme also provided coverage for 7.5 per cent and 15 per cent to 5 per cent workers in establishments that employ and 12.5 per cent for workers and em- at least fi ve workers. An establishment ployers respectively, being a reduction in with less than fi ve employees had the op- total contributions from 22.5 per cent to tion to join the scheme but there was no 17.5 per cent. compulsion. In terms of administration of the scheme, there were two main institutions, namely the Department of Finance under The current scheme – PNDC Law 247 the Ministry of Finance and the State In- 1991: Social Security and National surance Corporation. The Department of Insurance Trust Finance was responsible for the policy and general administration of the fund while In February 1991, the Government of the State Insurance Corporation was in Provisional National Defense Council charge of the inspectorate and operational (PNDC) repealed the 1972 Social Security divisions. Decree, NRCD 127, and replaced it with Ghana Trades Union Congress (GTUC) PNDC Law 247, captioned “Social Secur- noted that the provident fund nature of ity Law, 1991”. PNDC Law 247 was an at- the scheme was not in the interests of tempt to redress some of the major defects the working class. The GTUC called for of the defunct Provident Fund Scheme. the scheme to be reformed into a pen- The main thrust of this new law was to sion, so that retired workers would enjoy convert the system of one-off lump sums monthly pensions instead of the payment into a pension scheme of periodic monthly of a one-off lump sum which would be payments until a member’s death. quickly eroded. Trade unions also called for the establishment of a single institution for the administration of pensions Coverage of the PNDC Law 247 in the country. The above weaknesses of scheme the 1965 Social Security Scheme were ultimately addressed through the establish- Under the PNDC Law 247, coverage is ment of a subsequent, more comprehen- more encompassing than under the NRCD sive system. 127. Law 247 provides that the scheme is open to all classes of employees, both in the formal and informal economy. Unlike Earlier reforms the defunct provident fund scheme which exempted fi rms with less than fi ve em- The fi rst encompassing scheme estab- ployees, the new scheme covers even self- lished by Government to address the employed persons, who may opt to join short comings of the 1965 Provident Fund the scheme. The scheme does not cover of- Scheme was the passage of the NRCD 127 fi cers of the Ghana Armed Forces, Police,

54 Prison Service and Legal Public Service every 12 months worked a worker earns an Offi cers. For this category of public sector additional 1.5 per cent on top of the 50 per workers, the pension is non-contributory cent base pension. However, if a contribu- with defi ned benefi ts under the CAP 30 tor is not able to work up to 240 months scheme of 1946. before he or she retires either voluntarily or compulsorily, he or she would be entitled to receive his or her actual contribu- Financing of the scheme tion plus interest at half the Government Treasury Bill Rate. The social security scheme is to be self- fi nancing and self-sustaining through the contributions of members. Under the Death/survivors PNDC Law 247 of 1991, the Government and the social partners did not change the If a contributor dies while still a member, rates of contribution which are maintained his or her dependants qualify for a lump at 17.5 per cent: 5 per cent from employees sum of the earned pension. When a mem- and 12.5 per cent from employers. ber contributes to the fund for 240 months Employers are enjoined by the law to before dying, a lump sum equal to the remit within 14 days at the end of each value of his or her pension for 12 years month the contribution of their workers shall be paid to his or her survivors. If a and their counterpart contribution. A pen- member dies without having contributed alty of 3 per cent per month of the contri- to the fund for 240 months, his or her sur- bution payable is levied when contribu- vivors will be paid a lump sum equal to his tions are not paid within the prescribed or her proportional pension for a period of period. 12 years. Where a member who has retired dies before s/he is 72, his or her survivors will be paid in lump sum the pension up Benefits under the scheme to age 72. When a pensioner dies after age 72, his or her survivors or benefi ciaries are Although the defunct Provident Fund not entitled to any benefi t. Scheme made provisions for fi ve contingencies, the benefi ts provided for under PNDC Law 247 are only three: Invalidity pension superannuation/old-age pension To qualify for invalidity pension, a mem- death/survivors’ benefi ts ber shall have contributed to the fund for invalidity benefi ts. 12 months within the last 36 months before becoming disabled. In addition, the member should have been certifi ed per- Old age/superannuation manently disabled and incapable of gain- ful employment by a medical board in- For a worker to qualify for old-age full cluding a medical practitioner appointed pension payment, he or she should have by SSNIT. contributed to the scheme for at least 240 months or 20 years, and should have at- tained either the voluntary retirement age Ownership of SSNIT of 55 or compulsory age of 60. The minimum pension payable is calcu- One of the major challenges facing SSNIT lated based on 50 per cent of the average of has to do with the ownership status of the the three best years’ salary for a minimum trust. According to session 20 of PNDC contribution period of 240 months. For ad- Law 247 which established the scheme ditional months served after 240 months, and the trust, “the Board of SSNIT shall

55 cause to be maintained for each member Inadequate income and pension an account to which shall be credited all contributions”. Therefore, the true owners The current pension level received by re- of SSNIT are workers of all categories on tired workers is woefully inadequate. This whose behalf money is paid. is because pensions in Ghana are directly Hence, the Social Security Fund in linked to incomes which are very low. A Ghana is a private fund with Govern- 2004 study entitled Building State Capacity ment assuming custodial responsibility, in Africa: New Approaches, Emerging Les- and there is a legal and fi nancial basis for sons published by the World Bank com- stating that the fund belongs to workers. pared public sector salaries in Ghana with Government resources or public funds are those of countries in sub-Saharan Africa not used to administer the Fund: whatever with a similar level of economic devel- money the Government pays to the fund opment. It found Ghanaian public sector is in its capacity as employer of specifi ed salaries were lower than those in several employees. However, it has been observed of these countries. In 2001, for example, that succeeding governments have been the top public sector salary in Ghana was using the fund without any recourse to estimated at $3,275 (in dollar parity terms) the workers/owners of the fund. For ex- compared to $8,523 in Benin, $12,337 in ample, the current Government appropri- Tanzania, and $13,300 in Uganda. ated 2.5 per cent of workers’ contributions The bottom public sector salaries in to set up the National Health Insurance Ghana was estimated at $252 per annum Scheme when the previous scheme was compared to $923 in Benin, $1,045 in not able to provide adequate benefi ts to Senegal, $701 in Tanzania and $523 in its owners. Furthermore, the Government Uganda. did not hold discussions with stakehold- With the level of pension benefi ts being ers before deciding to redirect 2.5 per cent linked to previous salary levels, the direct of the national social security fund. impact of the low level of salaries in Ghana is that retired workers are paid low pensions. Currently, the lowest pension that Governance and policy SSNIT is paying per month is ¢150,000 per month Ghanian cedi ($17), whilst the In terms of governance and the policy for- highest pension is ¢77,000,000 per month mulation of SSNIT, the Board of Directors ($8726). We can also deduce from this that is to be in control. Session 8 (1) of PNDC not only are pensions low in Ghana but Law 247 states that “The Board shall, sub- that there is a huge wage differential in ject to the provisions of this Law, have gen- the country. eral control of the funds and investments Another very important challenge fac- of the scheme and the management of the ing pensions in Ghana has to do with in- Trust on matters of policy.” equality by gender. SSNIT has been de- In all, the board of directors, which is signed in such way that it favours formal tripartite with representatives of workers, sector workers, the majority of whom are employers and government, is made up men. Thus, in the informal economy where of 14 members. Although there is tripar- many women are found only a small pro- tite representation, the eight government portion of them benefi t from social se- representatives on the board exceeds the curity and pensions. In terms of the dis- six combined workers’ and employers’ tribution of pensioners by gender, out of representatives. Therefore, government the 66,971 SSNIT pensioners at the end of policy decisions or use of the funds are 2004, only 7,326 (11 per cent ) were women. almost always carried out. It is the Gov- As at the end of 2004, only 7,000 informal ernment who elects the Director-General economy operators had registered with and he or she usually holds allegiance to SSNIT compared to 1,068,728 formal sec- the Government. tor contributors.

56 There is not one universal social se- In its report, the commission recom- curity system in Ghana, with there being mended that to secure to retirement income more advantageous schemes for public security for Ghanaian workers a three-tier sector employees. Currently, there are four pension structure be implemented, com- different public sector pension schemes, prising two mandatory schemes and a vol- namely CAP 30, SSNIT, Ghana Universi- untary scheme. This proposal is described ties Staff Superannuation Scheme (GUSSS) in the following sections. and the Ghana Armed Forces Pension Scheme. Some of these schemes are defi ned contribution schemes while others First tier are run on a non-contributory basis, and so many workers are clamoring to join the This tier would be a restructured SSNIT, non-contributory scheme where benefi ts retained as a mandatory state social se- are also more generous. curity pension scheme, paying monthly and other pension benefi ts. The commission further stated that this should Current debates on reforming be a defi ned benefi t scheme. The exist- pensions in Ghana ing contributions rates of 5 per cent from workers and 12.5 per cent from employ- Pensions in Ghana cover just about 10 per ers would continue. Out of the total of cent of Ghana’s labour force of about 8.5 mil- 17.5 per cent, 5 per cent will be directed to lion. The majority of this 10 per cent with the second tier scheme (see below) to pay coverage are people employed in the formal for a lump-sum benefi t and the remain- sector. The vast majority of workers in the ing 12.5 per cent will be retained in this informal economy have no social security fi rst tier SSNIT scheme to pay monthly coverage. Even though membership of the pensions. SSNIT pension scheme is open to all workers in the informal economy on a voluntary basis, patronage has been very poor. Second tier It is important to state that those formal sector workers who are covered by This would be a mandatory, privately- SSNIT are not happy about the benefi ts managed occupational pension scheme. the scheme is providing to retired workers The commission proposes this to be a de- in the country. Many retired workers are fi ned contribution pension scheme, pay- not able to cater for their basic necessities ing mainly lump sum benefi ts. The com- of life like food, clothing and shelter with mission suggested that the minimum total their monthly pensions. Consequently, contribution into this scheme should be formal sector workers, particularly those legislated at a minimum of 5 per cent. in the public sector, have been campaigning for reform of the existing pensions, with many of them opting for CAP 30 in- Third tier stead of SSNIT. This campaign prompted the Govern- This tier would be comprised of a volun- ment to set up a Presidential Commission tary, privately managed personal pension on Pensions on 4 August 2004. The com- scheme offering attractive tax incentives mission was charged with the responsi- for contributions. bility of examining existing pension arrangements and to make appropriate recommendations for a sustainable pension Other reforms scheme that would ensure retirement income security for Ghanaian workers, with The commission also suggested review of special reference to the public sector. the SSNIT Law to:

57 reduce the “overbearing” government Governance and structural presence on the SSNIT Board and economic issues the de facto control of the Fund by Government; Let me start by stating that the role trade redefi ne the responsibilities of the unions representing their members have Board to reflect best governance played in improving pensions in Ghana practices; since independence has focused more on governance of the scheme than on techni- introduce a statutory reporting cal matters. This argument is supported system; by the TUC policy objective on pensions restructure the existing scheme to re- which states “On pensions, our policy is to fl ect the proposal for a three-tier pen- continue to pursue the goal of redesigning sion system. SSNIT to reform it to cater for the majority of workers, particularly those in the informal sector and women.” Current situation Therefore, the trade unions have focused more on reforming the institutional On 25 August 2006, the Government is- framework of social security in the coun- sued a White Paper on the commission’s try. Meanwhile, many of the issues that report, virtually accepting all the recom- have to do with reforming the scheme are mendations made by the commission. In imbedded in the legal instrument that es- early November 2006 the Government tablished the scheme. Even though trade announced its decision to implement unions have been calling for the need the pension model adopted in the White to reform the law establishing SSNIT in Paper. However, the Ghana Trades Union order to give more power to the real own- Congress had diffi culty in responding ers of pensions – the workers – and to give adequately to the Government’s White them a strong say in the management of paper. the scheme, governments have not supported such changes. It was trade unions who advocated for The role of trade unions in reforming a change in benefi ts paid to retired work- pensions in Ghana ers, to shift it from lump-sum payments to monthly payments of pensions. Although Trades unions in Ghana have been at the this has helped in improving the standard forefront in advocating improvements to of living of pensioners, it fails to address social security and pensions since the in- the challenges facing pensioners in Ghana. troduction of these systems of social pro- The fundamental problem has to do with tection in the country. Furthermore, one of the fact that incomes are woefully inad- the fundamental responsibilities of trade equate in Ghana, as pointed out earlier unions is to ensure adequate social protec- in this article. While incomes continue to tion for its members. This the trade unions be low it will be very diffi cult for retired do through collective bargaining and ne- workers to enjoy decent pensions. gotiations at national level. Trade unions have played an impor- For the purpose of this article, I will tant role in ensuring that many Ghanaians classify the role trade unions have played get decent work which will in turn allow in shaping and improving social security them to contribute fi nancially towards em- in Ghana into two parts, namely govern- ployment growth. In this respect, Ghana ance and technical issues. TUC has established Labour Enterprise Trust (LET). Union members contribute to a fund which has now opened an insurance company, a bank, a city car park, and radio taxi and water tanker services.

58 These enterprises have contributed to job sions. Nevertheless, on other occasions creation in Ghana, thereby making it pos- trade unions have used their presence on sible for more Ghanaians to have access the Board to infl uence decisions in favour to decent jobs. of workers and pensioners. One other main reason why incomes Currently, the minimum pension of and pensions have become inadequate ¢150,000 is way below the poverty line. has to do with the effect of poor economic Pensioners should not be made to live management on the part of government. under the poverty line. We believe strongly Between the 1980s and the 1990s, high that the SSNIT scheme can pay pensioners infl ation became a regular feature of the over and above the poverty line if we re- economy, thereby eroding the value of induce the ineffi ciencies in the management come for both workers and pensioners. of the scheme. Currently, Ghana TUC is in the process The TUC and trade unions generally of setting up an independent Labour Re- have adopted a policy of attempting to search Institute to help trade unions inter- extend social protection to workers in the vene in national policy formulation. When informal economy, and have started or- this centre becomes more active, we be- ganizing workers in this sector. We have lieve it will contribute to shaping national also collaborated with SSNIT to organize economic policy formulation. programmes for informal economy opera- One of the major features of the Ghana- tors with the aim of introducing them to ian economy, particularly in the 1980s and social security and other social protection 1990s, was the fi nancing of budget defi - options available in Ghana. Issues pertain- cits through the printing of money. The ing to the ILO’s Decent Work Agenda have practice contributed to the collapse of the also been discussed with these informal economy to the extent that essential com- economy operators. modities became very scarce. For example, infl ation was as high as 123 per cent in 1983. During this period of high infl a- Technical issues tion, trade unions managed to convince the Government to link pension benefi ts to By the term technical issues, I mean the the level of the national minimum wage. ability of trade unions to scrutinize the in- As a result, once the National Tripartite vestment portfolio of SSNIT. Trade unions Committee has determined the national need the capacity to advise on the type of minimum wage, pensions are automat- investments the fund should make. Un- ically adjusted. Trade unions have thus ions need also to be able to be capable of ensured that the income of pensioners is initiating proposals on how to sustainably appropriately protected. Furthermore, to restructure pension benefi ts to improve address the problem of low incomes in pensioners’ incomes. Ghana, trade unions have managed to For example, the formula used in calcu- put on the agenda of the National Tripar- lating pensions is based on 50 per cent of tite Committee the discussion of a Living the average of the three years’ best salary Wage instead of the Minimum Wage. of the pensioner. We have not been able Even though the trade unions and to do any technical calculation to chal- other labour associations are represented lenge the basis of determining pensions. on the Board of Social Security and Na- It may be possible to use a 60 to 70 per cent tional Insurance Trust (SSNIT), experi- benchmark instead of the 50 per cent that ences over the years show that this repre- the fund is currently using. sentation has been cosmetic, since many Unfortunately, Ghana TUC does not a time government by-passes the SSNIT have the capacity to undertake this type Board in making decisions. On some oc- of technical work to propose alternative casions it simply uses its numerical advan- means of calculating pensions. There is tage on the Board to force through deci- a need for trade unions to work towards

59 building their technical capacity to match Note government and employers when it comes 1 to analysis of social security systems. Emigration allows immigrants or foreigners working in Ghana to contribute to the scheme and also beneﬁ t under the scheme when they leave the country. Conclusion

Issues of social security are too important References to be left in the hands of government, and so trade unions must build their capacity Ghana, Government of (2006), Presidential Commis- sion On Pensions Report. actively to engage government on social Gockel, A. F. (1996), The Formal Social Security System security issues. It is the desire of trade in Ghana, Friedrich Ebert Foundation, Accra. unions to create a society that avoids so- Kumado, K., and Gockel, A. F. (2003) Social Security cial alienation, and to create national con- in Ghana, Friedrich Ebert Foundation, Accra. ditions for genuine economic and social Adu-Amankwah, K. (2005) Presentation Made progress. In the democratic society that we During the 60th Anniversary Symposium of seek today, a solidarity based on a soci- GHANA TUC. ety which is caring is essential to ensure Adu-Amankwah, K. (2006) A Realistic Income and that those who participate in the political Pensions Policy: The Role of Trade Unions, A Pres- process develop conﬁ dence in it and begin entation Made During the 57th Annual New Year School. to see democracy as the means to securing economic and social justice.

60 SEWA’s health insurance programme

The labour union Self-Employed Women’s Association (SEWA) demonstrates that it is possible to create an accessible level of social protection, in this case, health insurance for workers in the informal sector, despite operating in the largest, private and unregulated health industry in the world.

Mittal Shah Secretary Self-Employed Women’s Association (SEWA) Tara Sinha Research Coordinator Vimo SEWA

he Self-Employed Women’s Association only one-sixth as likely to undergo hos- T(SEWA) is a labour union of 796,000 pitalization (Peters, Yazbeck et al., 2001). women workers engaged in the informal Poor health, when it results in lost wages economy, based in Ahmedabad, Gujarat. and/or health care expenditures, leads SEWA members have no fi xed employer- to indebtedness, loss of assets and fur- employee relationship nor are they cov- ther poverty. According to an analysis by ered by protective labour legislation. Peters et al. (2001, p. 157), at least 24 per SEWA’s membership can be categorized cent of all people hospitalized in India in into four main occupational groups: (1) a single year fell below the poverty line manual labourers and service providers, because they were hospitalized. In the- for example, agricultural labourers, con- ory, government provision of health care struction workers and cleaners; (2) street should cover the poor, but in practice it vendors; (3) home-based workers, for ex- often does not. ample, incense stick rollers and embroi- It was in this context that SEWA began derers; and (4) small-scale producers, for to organize women for their economic example, gum collectors and craft work- rights three decades ago. Our goals are to ers. These women work long, hard hours, organize workers for full employment and and because of the nature of their employ- self-reliance – both economic and in terms ment, they do not obtain even basic social of decision-making and control. Full em- protection such as health insurance, ma- ployment includes security of work and ternity benefi ts and sick leave. income, food security and social secur- Being the poorest of workers, and liv- ity. Social security, in SEWA’s experience, ing most often in environments without must include at least health care, child basic water and sanitation, SEWA mem- care, insurance and shelter. bers and their families are often sick. The One of SEWA’s fi rst initiatives, after its high cost of health care often prevents an inception in 1972, was addressing wom- informal sector worker from seeking treat- en’s needs for fi nancial services – sav- ment, which may result in the worsening ings and credit. This has been achieved of her state of health. The poorest quintile through women’s own micro-fi nance or- of Indians is 2.6 times more likely than the ganization, SEWA Bank. Over the years, richest to forgo medical treatment when through SEWA Bank, we have learned ill, and despite higher rates of illness, is that sickness is the major and recurring

61 Box 1. Woman worker’s injury reimbursed promptly by Vimo SEWA Shantaben is 52 years old and a resident of Bharoda village in Kheda district – the centre of Gu- jarat’s dairy and tobacco industries. Shantaben has been a member of Vimo SEWA for five years. She works for daily wages, either as an agricultural labourer or as an assistant with the mid-day meal programme at the village school. Recently, while closing a high window at the school, she fell and injured her back. Initially, she tried to treat the pain at home by applying salt and tur- meric, but the pain only worsened. She was taken by rickshaw to a nearby non-profit hospital, where she was admitted for ten days and treated with bed rest and medicines for her pain. The cost of hospitalization was around Rs. 1800 (US$40). She borrowed the money from her nephew free of interest. After just two weeks, she was reimbursed by Vimo SEWA. She has now paid back her nephew and says that because of the health insurance, she has been able to continue saving money to replace her kutcha house.

crisis in women’s lives. A study in 1977 2. The Health Insurance Scheme of women who were not repaying their loans regularly revealed that the major The HI scheme covers hospitalization ex- cause was sickness of the woman or her penses; it does not cover outpatient care. family members. We regularly witness Each member pays a composite premium women selling or mortgaging assets and from all four covers, viz. life, accident, utilizing their hard-earned savings dur- asset loss and health. The premium for the ing illness episodes. integrated package starting January 2007 is Rs. 125 (approximately US$2.75). Hos- pitalization expenses are covered upto 1. SEWA Health Insurance a maximum of Rs. 2000 (approximately US$44.5). Membership is voluntary, and SEWA’s Health Insurance activity was is available to women members of SEWA started in 1992, and is administered by and their husbands and children. Adult Vimo SEWA or SEWA Insurance. Health membership covers persons from 18 to 70 insurance was offered to members as part years of age. Child membership is from of an integrated package covering life, ac- three months of age to 17 years. cident, asset and health insurance (box 1). SEWA Insurance collects the premium In 2003, 90,432 women members were en- from the members and passes it onto the rolled in SEWA Insurance. The programme insurance company. Premium to the insur- offers two schemes, one with a lower pre- ance company is paid annually. Members mium and coverage (Scheme 1) and a sec- however, can choose between an annual ond with a higher premium and coverage membership and a long-term membership. (Scheme 2). The less expensive scheme is In case of the annual membership, mem- more affordable to SEWA members, and bers pay their premium annually. If they around 90 per cent of its membership is in choose a long-term membership, they pay Scheme 1. This article focuses on the health a lump sum to the programme. This lump insurance component of the scheme, and sum is put into a fi xed deposit at SEWA quantitative information refers to Scheme Bank. The annual interest earned on the 1 only. All other aspects of the discus- fi xed deposit goes towards the member’s sion pertain equally to both schemes. The annual premium. The scheme’s member- scheme has changed considerably since its ship has grown steadily over the years, as inception, and continues to change in re- shown in fi gure 1. sponse to members’ needs and priorities. In each section we describe briefl y the changes that have occurred to date.

62 Figure 1. Membership growth in Vimo SEWA from 1992 to 2006 200,000

150,000

100,000

50,000

0 1992 1994 1996 1998 2000 2002 2004 2006 1993 1995 1997 1999 2001 2003 2005

2.1. How the system works – wans. The aagewan is a grass-roots level Scheme administration union member who is the critical link between members and scheme administra- The key players in the HI programme are tors. She works as an insurance promoter. the members, the health insurance com- Enrolment is carried out by aagewans pany, the health care provider and SEWA. and staff members of SEWA. Aagewans Figure 2 illustrates the cash ﬂ ows between from SEWA Insurance and from the other the four players as they exist currently. activities of SEWA join in this effort. Mar- Vimo SEWA is run by a team of full-time keting is done through community level staff and local women leaders called aage- meetings and advertisements in the media.

Figure 2. Cash flows of premium and reimbursement in SEWA’s Health Insurance

2. Premium “Formal” SEWA insurance company 3. Reimbursement

Aagewan (grass-roots worker) critical link between member and programme 5. Reimbursement 1. Premium

Health care Out-of-pocket (OOP) payment insured provider

Source: Kent Ranson, 2002.

63 Marketing tools include video fi lms, post- gradually decentralizes parts of the ers and banners. scheme’s administration depending upon Claims processing is carried out by the the readiness of the local unit. Currently, SEWA Insurance team on behalf of the in- claims processing is decentralized in fi ve surance company. SEWA Insurance has in- districts of Gujarat state. stituted a claims committee which includes member representatives and programme staff. The claims committee meets regularly 3. Impact of the scheme and reviews each submitted claim. The participation of member representatives 3.1. Patterns in scheme utilization brings greater transparency in the claims processing and enhances the credibility of The scheme’s objective is to provide fi nan- the programme among the members. cial protection to its members for health SEWA Insurance has a customer service care expenditures, and claims reimbursed cell in its Ahmedabad offi ce. Members can to members are evidence of the fi nancial walk in at any time with queries and com- protection provided by the scheme. ments and are attended to by this cell. The claims rate, i.e. number of claims submitted by 1,000 members is shown in fi gure 3. As the fi gure shows, the rate has 2.1.1. Evolution of the scheme’s been going up steadily, indicating an in- administration crease in the proportion of members benefi ting under the health insurance scheme. When the integrated programme started in 1992, Vimo SEWA collected the premium from the members and passed it on to the 3.2. Protection against health health insurance company which bore the expenditures risk. Soon, diffi culties arose in part due to the nature of the risks covered and in part SEWA Insurance constantly tries to balance due to the procedural requirements for en- the affordability of its insurance scheme rollment and claims and subsequent poor with the fi nancial protection it provides its quality of service to members. In 1994, there- members. At the current premium rates, fore, SEWA decided to de-link from the in- the HI covers hospitalization expenses up surance company and carry the risk itself. to Rs. 2000. Among claims submitted, the This was an important period of learning rejection rate is around 11 per cent, and the for SEWA, and greatly strengthened its un- majority of claims are reimbursed. derstanding of the administration of health Despite the capped benefi ts, research insurance. In 2001 SEWA once again linked has shown that the scheme confers con- up with the insurance company for health siderable fi nancial protection. An analysis insurance. A rising claims ratio (claims of all claims submitted between 1994 and paid as a per cent of premium received) 2000 (Ranson, 2002) revealed that the me- made it fi nancially unviable for SEWA to dian rate of reimbursement for all reim- carry the health insurance risk. bursed claims was 92.6 per cent (mean 76.5 per cent). Reimbursement more than halved the percentage of “catastrophic” 2.1.2. Decentralizing scheme hospitalizations (i.e. those where total ex- administration penditures exceeded 10 per cent of annual household income). SEWA Insurance is headquartered in A later analysis done by Denis Garand Ahmedabad, Gujarat. The membership is (an actuary who works with SEWA Insur- spread across 11 districts in the state and ance) in 2006 found that in 50 per cent of seven states in the country. As its oper- the cases, 100 per cent of the hospitalization ations expand, the insurance programme expenses were reimbursed to claimants.

64 Figure 3. Health claims rate per 1,000 members, from 2002 to 2005 50

0 2002 2003 2004 2005

4. Health insurance as an organizing 5. Governance of SEWA’s Health tool in a trade union Insurance

SEWA Insurance was designed to meet the SEWA’s HI is a part of SEWA Union. While risk protection needs if the SEWA union it has an independent management and members. As of September 2006, 90,4321 operational team, it is governed by the un- of SEWA’s 796,000 union members are en- ion’s elected executive body. The union’s rolled in the health insurance programme. executive body comprises representatives SEWA aim is to provide health insurance from the different trade groups in SEWA’s coverage to all its members. However, the membership. All changes in the insurance HI programme is voluntary, and mem- programme, such as premium increase, or bers have to pay the required premium changing from an open-provider system to enrol. More and more union members to cashless tie-ups with hospitals, are ap- are steadily enrolling in the insurance pro- proved by the union executive. gramme, as seen in the increasing mem- The Coordinator of SEWA Insurance bership. SEWA Insurance directs its mar- is on the Union Executive and regularly keting efforts at all possible forums of the presents the insurance programme’s union, and grass-roots workers from all progress to the Union Executive. the different union activities are involved in enrolling members. In fact, the health insurance pro- 6. Sustainability of the scheme gramme has become an organizing tool for the union, and several union mem- SEWA Insurance is committed to build- bers enter the union through the HI pro- ing a sustainable insurance programme. gramme. Subsequently they get linked to It is following a two-pronged approach SEWA’s other activities. to make its insurance programme fi nancially self-suffi cient, viz. increasing its administrative effi ciency, and reducing the claims ratio.

65 6.1. Increasing administrative Vimo SEWA has initiated a system of efficiency Cashless Tie-ups with selected hospitals in Ahmedabad city. This initiative is de- SEWA Insurance is taking a number of scribed in section 7. By moving from a sys- steps to increase the administrative effi - tem of provider choice to one where mem- ciency of its programme. bers are required to select a provider from Since 2005, it has also consciously pro- a given list, it is hoped that unnecessary moted family membership as against hospitalizations will be controlled. Also, individual membership. Members who the thrust on family membership will purchase a family package receive a dis- reduce any adverse selection that may count in the premium. A thrust on fam- exist in the programme and thus reduce ily membership provides coverage to the the claims rate. Further, the insurance entire family. Additionally, it reduces the programme is moving towards greater administrative cost of enrolment. In a convergence with Lok Swasthya Mandli, single visit, a grass-roots worker is able to SEWA’s health cooperative, for strength- enrol an entire family instead of a single ening the preventive care received by the member. insurance members. The programme makes a conscious To contain the cost of claims paid, Vimo effort to renew its annual-pay members SEWA is gradually moving to a system of each year. This is done by making in- tying up with selected hospitals and ne- dividual contact with each member in gotiating a fair payment schedule for ser- their homes at least once after enrolment. vices rendered by the provider. These house-to-house visits build the programme’s credibility and are an opportunity for members to clarify any issues re- 7. Recent initiatives garding the programme. Membership in the state of Gujarat, An important recent initiative in SEWA’s (which accounts for approximately Health Insurance Programme has been to 90 per cent of members) spans a large provide Cashless Services to Health Insur- geographical area. Members are spread ance members. As mentioned above, the over hundreds of villages in 11 districts prevailing system has been for members and all over Ahmedabad city. In the last to get hospitalized with a provider of their two years, the programme is following choice, make out-of-pocket payments, and a strategy of deepening its membership upon discharge submit the required doc- in existing geographical areas. This re- uments for reimbursement. Research car- duces the cost of enrolling and servicing ried out in 2003 indicated that this system members. was preventing the poorest of SEWA’s members, particularly in rural areas, from benefi ting under the scheme. The burden 6.2. Reducing the claims ratio of making out-of-pocket payments and collection of all the hospitalization docu- SEWA’s claims ratio, i.e. the proportion of ments was proving to be a barrier to hos- benefi ts paid out to members as a propor- pitalization and claims submission (Sinha, tion of the premium paid to the insurance Ranson et al., 2005). company, has been more than 100 per cent To address these barriers a system of for the last several years. The high claims Cashless Services was piloted in eight ratio is due in part to its claims rate and sub-districts in 2004. Under this system, in part to the average claim amount paid. members who are admitted to selected The insurance programme is trying to im- hospitals are reimbursed for their ex- prove its performance on both counts. penses prior to discharge. Figure 4 il- To contain the claims rate, which is high lustrates this system. In essence, mem- particularly among its urban membership, bers telephone Vimo SEWA on getting

66 Figure 4. Functioning of the Cashless system in SEWA’s Health Insurance

Vimo SEWA

5. 4. Claim decision Information made and relayed relayed

2. Local Telephone representative call made 3. 6. Claim information Reimbursement and documentation paid collected

Insured 1. Health care provided Selected member hospital

Source: Sinha, T., Ranson, M.K. et al., 2005.

hospitalized. Vimo SEWA’s local repre- 8. Some lessons learned sentative visits the member in hospital, verifi es her status with Vimo SEWA and The steadily growing membership in the reimburses her while she is still in the hos- Health Insurance programme is an indica- pital. This facility is available in selected tion of its benefi t to union members. In the hospitals with whom Vimo SEWA enters course of providing health insurance for into an agreement to provide quality ser- the last 14 years, SEWA has learned useful vices at reasonable cost. This system has lessons which are shared below. now been extended to Ahmedabad city, 1. Health Insurance is the top priority of which houses about one-third of Vimo the poor. Since 1992, 17,879 women have SEWA’s members. obtained Rs. 2.5 crores or Rs. 25 million Care has been taken to select hospitals by way of hospitalization. This is quite that provide quality services. Payment pro- a substantial economic support. tocols for services provided by the hospital have been negotiated with the hospitals. 2. It makes sense to link an insurance The above ensure quality care to members scheme with other “development ori- at affordable rates, and contribute to the ented” activities (like provision of sav- sustainability of the programme. ings, credit, education, work-generation Analysis of claims paid from January and health care services). First, women to June 2006 indicate that the cashless sys- may be more likely to have money tem is not only benefi ting the members, it available, and to make plans for the is also contributing to the sustainability future, if their other needs (for exam- of the insurance progamme. On average, ple, work and food security) are being a claim paid under the Cashless system is seen to. Second, women are more likely lower than a claim paid under the regular to participate in a scheme if they have system. benefi ted from other services provided

67 by that organization in the past (i.e. if 8. Providing insurance to the poor, many they trust the insurer). Third, women of whom may be participating in an in- may be more willing to join an insur- surance scheme for the fi rst time, in- ance scheme if they feel a sense of trust volves substantial education, promo- and community with others who are tion, and communication costs. This joining the scheme. makes viability of health insurance 3. It is valuable to members to bundle more diffi cult but not impossible. health insurance with other kinds of 9. Making health insurance viable in insurance (for example, life and assets India is a huge challenge for several insurance). It has been the experience reasons, including the fact that we have at Vimo SEWA that life insurance is the largest, private and unregulated also in demand among poor women. health industry in the world. Women see life insurance as something that they can do for their children. Sell- 10. When workers run and control their ing life insurance as part of a package own health insurance and, preferably, that includes health insurance also en- their own insurance cooperative, they courages the women to do something feel empowered. It also gives a boost to for themselves. further organizing and unionizing. 4. Linkages with hospitals and clinics are critical. Without access to affordable, geo- Note graphically suitably located hospitals, 1 health insurance cannot succeed. Fur- In addition to the 90,000 women members, a total of 52,271 men and 30,235 children are also en- ther, cashless or “on-the-spot” claims rolled in the programme. The total membership is payment is preferable to workers, as thus 172,938. they then do not have to borrow from money-lenders or sell their land and other assets to pay for hospitalization. References 5. Simple, decentralized mechanisms and Chatterjee, M, (2005): “Microinsurance for Work- procedures are required to ensure that ers in the Informal Economy”, SEWA Social workers can actually avail of the ser- Security. vices offered. Workers are willing to Chatterjee, M. M.K. Ranson and M. Shah (2002): contribute for premium, provided they “SEWA’s Health and Health Insurance Activ- get good quality services at their door- ities: learning from experience and looking to steps. Implementation must be under- the future”, Vimo SEWA. taken by local organizations – unions, Peters, D. A. Yazbeck et al. (2001): “Raising the sights:better health systems for India’s poor”, cooperatives, self-help group, mandals Delhi, The World Bank (Health, Nutrition, Pop- and NGOs is essential. Implementa- ulation Sector Unit): p. 173. tion must be as close to local people as Ranson, M.K. (2002): “Reduction of catastrophic possible, by local women preferably. health care expenditures by a community based health insurance scheme in Gujarat, India: cur- 6. Health Insurance creates demand rent experiences and challenges”. Bulletin of the for public health services, as insured World Health Organization 80(8): pp. 613-21. members go these facilities fi rst, since Sinha, T., M.K. Ranson et al. (2005): “Barriers they are more economical. Faced by Low-Income Families in Benefi ting from Community-Based Health Insurance”: 7. Education and constant contact with Health Policy and Planning 2006 March; 21 (2) members is critical. It builds trust and pp. 132-42. gives regular feedback to improve the Sinha, S. and the Vimo SEWA Team (2006): “Vimo services. SEWA: A Case Study”: ILO, SEWA, PLAN.

68 New challenges for social protection in the European Union

The evidence within the European Union points to a convergence in social protection expenditure among the EU Member States. However, despite shared economic pressures and increasingly shared political pressures and direction, welfare policy has not shown the same degree of convergence, suggesting that the evolution of national social protection systems remains path-dependent.

Maria Jepsen Janine Leschke European Trade Union Institute for Research, Education and Health and Safety

here is a vast literature dealing with the ECJ orders. Timpact of European integration on social policies in the EU Member States (e.g. Probably even more numerous, however, Hemerijk, 2006; Jepsen and Serrano, 2006; are effects stemming from more indirect Zeitlin and Pochet, 2005; Taylor-Gooby, channels, such as: 2004). Issues covered range from the im- the need for stability in public fi nances pact of the European process on national stressed in European Monetary Union legislation and institutional settings to its (EMU) criteria and the Stability and effects on fi nancing and spending on so- Growth Pact (SPG), which implies cial policies. The conclusions converge in macroeconomic constraints stating that there is indeed an impact stemming from the EU level, but there would the various Open Methods of Coordi- seem to be less convergence with regard to nation (OMC) on social policy areas the nature and magnitude of this impact. that set the agenda on various issues, defi ning common challenges and common solutions in order to deal with Introduction emerging European social problems the creation of the internal market and National social policies are affected by Eu- the common rules entailed by it ropean initiatives through various channels (Hemerijk 2006, Jepsen and Serrano the political utilization of EU pressures 2006, Välimäki 2006). The most direct and in the national debates. tangible effects are those stemming from the “Community method” and the inter- Despite the fact that social policies are pretations of the European Court of Justice not a competence of the European Union, (ECJ), namely: and that any proposal for European-level binding initiatives is subject to unanimity the Treaties and Community law with voting, it is clear from the above list that which all acceding and Member States European-level action can have a consid- are required to comply. erable impact on national social policies adjusting to the EU social security co- through various indirect and/or non- ordination rules (1408/71) binding initiatives.

69 Figure 1. Total social protection expenditure per capita in purchasing power standards (PPS)

Latvia (LV)

Lithuania (LT)

Estonia (EE) 1997 Slovakia (SK) 2000 Poland (PL) 2003 Hungary (HU)

Malta (MT)

Czech Republic (CZ)

Portugal (PT)

Slovenia (SL)

Spain (ES)

Greece (GR)

Ireland (IE)

EU25

Italy (IT)

Finland (FL)

United Kingdom (UK)

Germany (DE)

France (FR)

Belgium (BE)

Netherlands (NL)

Austria (AT)

Denmark (DK)

Sweden (SE)

Luxembourg (LU)

0 2000 4000 6000 8000 10000 12 000 Note: 1997 data missing for some countries. Source: Eurostat, ESSPROS database.

70 EU-wide coordination on social protec- Evolution of social security spending tion and social inclusion has been strengthened over recent years but the European Figure 1 presents the evolution of total so- mandate in this sphere remains limited. cial security spending per capita in pur- Under the open method of coordination chasing power standards (PPS). Present- common objectives are defi ned, national ing social expenditure per capita in PPS action plans outlining the specifi c pol- allows us to account for differences in icies to achieve these goals are drawn up, population size as well as in living costs, and good practices exchanged between and hence to focus on those national dif- Member States. Key areas of coordina- ferences that are mainly a result of differ- tion in the fi eld of social protection are ent levels of wealth and, even more impor- poverty and social exclusion (since 2000), tantly, of the diversity in social protection adequate and sustainable pensions (since systems, demographic trends, unemploy- 2001) and high-quality access to health ment rates and social, institutional and care and long-term care (since 2004). As of economic factors. 2006 the parallel processes on these three Though, throughout the European areas have been brought together into a Union, an increasing amount of money new “streamlined” OMC on social protec- has been invested in the population, this tion and social inclusion. increase in spending is not evenly spread. The review of the Lisbon strategy in With only a few exceptions, the coun- spring 2005 reaffi rmed that strengthen- tries already spending a lot saw larger ing social protection and fostering social increases in absolute terms than those inclusion are key priorities; it therefore spending less. With regard to percentage stipulated a closer interaction between increase in per capita spending, there is OMCs on social protection and social in- no clear picture across the different coun- clusion and policies on employment and tries, the highest percentage growth in growth (cf. Commission of the European social spending between 2000 and 2003 Communities, 2006). Strong emphasis is having been observed in Hungary and placed on the interaction between social Ireland, and the lowest in Italy and Ger- inclusion and employment in the 2005 many. The reasons for these disparities Joint Report on Social Protection and Social are manifold and include economic cy- Inclusion. Among the seven key policy cles, fi nancial constraints and “catch-up” priorities identifi ed, the goal of increas- effects. This latter factor may indeed be ing labour market participation through signifi cant, it being a question of countries expanding active labour market policies with low spending and underdeveloped and ensuring a better linkage between so- welfare systems during a given period ex- cial protection, lifelong learning and la- periencing high percentage increases to bour market reforms is seen as the most align themselves with the level of social important priority by most Member States provision in the surrounding countries, in (Commission of the European Communi- order to provide better services to their ties, 2006). population. The next section will take a closer look Broadly speaking, the countries can at the evolution and composition of social be grouped into three categories. The fi rst security expenditure in the EU Member group with the highest per capita spend- States. The question of whether common ing consists of the Scandinavian and the problems and pressures among EU Mem- continental European countries as well as ber States lead to convergence of social ex- the United Kingdom. The second group penditure and fi nancing systems will be with medium expenditure levels includes examined in the following section, while the southern European EU15 countries, the last section discusses recent trends as well as Ireland and Slovenia, while the in dealing with social issues at the EU third group with spending levels consid- level.1 erably below the EU25 level consists of

71 Figure 2. Total social protection expenditure as a percentage of GDP

Estonia (EE)

Latvia (LV) 1997 Lithuania (LT) 2000 Ireland (IE) 2003 Slovakia (SK)

Malta (MT)

Spain (ES)

Czech Republic (CZ)

Hungary (HU)

Poland (PL)

Luxembourg (LU)

Portugal (PT)

Slovenia (SL)

Greece (GR)

Italy (IT)

United Kingdom (UK)

Finland (FL)

EU25

Netherlands (NL)

Austria (AT)

Belgium (BE)

Germany (DE)

Denmark (DK)

France (FR)

Sweden (SE)

05101520253035 Note: 1997 data missing for some countries. Source: Eurostat, ESSPROS database.

72 the other New Member States. Per capita real terms was observed only for “hous- social protection expenditure is lowest in ing and social exclusion”, while family-re- the three Baltic States. lated benefi ts showed the least increase, As shown in fi gure 2, the story is this being due to a drop in the population slightly different with regard to the ev- aged under 20 in these countries (compare olution of the percentage of GDP spent Eurostat, 2006b). on social protection. Since the beginning Figure 3 illustrates the frequently dis- of the 1990s, there has been a trend to- cussed phenomenon whereby the higher wards stabilization or even reduction, the GDP per capita, the higher is the so- as the economic situation has improved, cial spending per capita. The correlation of the share of GDP spent on social se- is very strong with an R-squared of 0.8. curity. In other words, the percentage of A correlation with a competitiveness GDP spent on social protection is coun- index will produce much the same re- ter-cyclical (see ETUI, 2005), and since sults, as the countries with a high score economic cycles and growth rates vary on the world competitiveness index are across EU Member States, this may partly also among those that spend the highest explain the differences in shares of GDP share of their GDP on social security. In spent on social protection. In countries terms of social policy theory this consti- faring well, one might therefore expect tutes a “productive factor” in the sense the rate to decrease, while in countries that it “feeds in” to economic growth by faring badly one might expect the share investing in the population and enabling to rise as the GDP growth rate decreases them to deal with economic and social and the proportion of people seeking changes by making them well-trained, benefi ts increases. healthy and motivated. Last but not However, more careful scrutiny also least, it ensures a stable and secure state raises the question of whether the “catch- characterized by social cohesion. On the up” effect of social provisions, which has other hand, countries must have a sound been the “rule” so far in the European economic foundation in order to fi nance integration process, will also occur in the encompassing social spending: in other current enlargement. This question has words, economic growth is needed to fi - its roots in the observation that, while nance social spending. These ideas con- countries spending a low share of GDP on stitute one of the main foundations of the social protection, but with high growth consolidation of the European Economic rates, might be expected to build up and and Social Model. Economic growth must consolidate their social protection sys- go hand in hand with social cohesion. tems, this is not the case in the three Baltic However, taking together the results from countries, Slovakia and Malta. In addition fi gures 1–3 we may well ask whether eco- to spending a relatively low share – in nomic growth will continue to cause an European terms – of their GDP on social increase in social investment in the popu- protection, these countries, in contrast to lation: the share of GDP spent on social most other EU25 countries, actually saw protection is not increasing, especially in this share decrease. Though there has the low-spending countries, despite their been a modest increase in spending per high economic growth rates. Since social capita, this has not been as high as the spending is a proxy for the level of social increase in GDP. protection and hence of the welfare state, Preliminary estimates provided by 10 states with minimal welfare states should EU-15 countries 2 for 2004 actually show a be encouraged to build them up and in- slight decline in the share of social pro- vest in their populations. tection expenditure in GDP. Measured in constant prices, benefi ts increased by 2.3 per cent in 2004 (compared to 3.7 per cent in 2003). A higher rate of growth in

73 Figure 3. Correlation between GDP per capita and social protection expenditure per capita in PPS in 2003 14 000 R2 = 0.809

12 000

LU 10 000

SE DK 8 000 AT FR NL DE BE FL UK EU25 6 000 IT

GR IE SK 4 000 PT ES CZ HU MT PL 2 000 EE SL LV LT 0000 0 5 000 10000 15000 20 000 25 000 30 000 35 000 40 000 45 000 50000

Source: Eurostat, ESSPROS database.

The different functions situation attributable at least in part due of social protection benefits to its population profi le – it is the young- est in Europe with about 29 per cent of the With a share of about 46 per cent, old-age population under 20 years of age in Janu- and survivor’s benefi ts accounted for by ary 2003 (compare Eurostat, 2006b).3 Po- far the major share of total social protec- land and Italy, on the other hand, spend a tion expenditure in 2003. The next largest very large share of their social protection expenditure was sickness and health care, budget on elderly people. In Italy, for in- on average 28 per cent of total expendi- stance, 25 per cent of the population were ture. Invalidity as well as family and child aged 60 and over in January 2003 com- benefi ts on average accounted for about pared with an average of 21.6 per cent in 8 per cent each while the average for un- the EU25 countries (cf. Eurostat, 2006b). employment benefi ts was 6.6 per cent of Health expenditure exceeded old-age and total benefi ts. Housing and social exclu- survivor benefi ts in Ireland and was very sion took the smallest share with on aver- high also in the Czech Republic. Family age 3.5 per cent. There were hardly any dif- and child benefi ts were especially high in ferences between the EU25 and the EU15 Luxembourg but also well above the av- averages but fi gure 4 shows that on some erage in Ireland, Denmark and Hungary. indicators strong country differences can Cash family benefi ts actually accounted be observed. Expenditure for old-age and for more than 70 per cent of total expend- survivor benefi ts is very low in Ireland, a iture under this function group. Increases

74 in expenditure on family and child bene- recession occurs, with a decrease in eco- fi ts were recorded for the period 1999 to nomic growth, this is not then translated 2003, even though the population aged be- into a decrease in social spending, but tween 0 and 19 years fell during the same rather into stabilization or even an in- period. Family-friendly reforms have thus crease (phase 1). This divergence in move- taken place in a number of countries (comments results in a budget defi cit. Given the pare Eurostat, 2006b). aim of adhering to the Maastricht criteria and the refusal to increase taxation, governments will be led to reduce the growth Evidence of impact of Maastricht rate in social expenditure (phase 2). Once criteria on social expenditure economic growth increases, this will lead to a stabilization or even slight increase in Although countries do not simultaneously total social expenditure resulting in a de- and at the same rate cut and increase social crease or stabilization of the ratio of total protection expenditure, there does seem social spending to GDP (phases 3 and to be some similarity among countries in 4). Hence, EU Member States may be ex- this respect. It is a tendency that has led pected to display similar behaviour, even Bouget (2004) to establish the link between though the amplitude of the movements total social expenditure and economic might differ greatly between countries. growth depicted in fi gure 5. Developed Neither the establishment of a Euro- countries display very strong and imme- pean system of social protection nor the diate links between economic growth and harmonization of the national systems increase in total social spending. When a has ever been a real option in European

Figure 4. Social benefits by function group in 2003 (% of total social benefits) 100

20 Invalidity Housing/social exclusion Sickness/health care Unemployment

10 Old age/survivors Family/children

0 IE DK SK NL CZ FR BE SL EU15 PT AT MT PL FL LU SE HU DE ES UK EE EU25 LT GR LV IT Source: Eurostat, ESSPROS database.

75 Figure 5. The cycle of social expenditure and economic growth Social expenditure growth rate

Economic recession (1) Social protection extension (4) adjustment (2) Social protection

Economic expansion (3)

Economic growth rate

Source: Bouget, 2004.

policy-making. However, the notions of the results appear rather ambiguous, de- “catch-up” effect and convergence are pending on what indicators are used for often encountered in comparison of the the analysis. The picture becomes clearer, national systems (Bouget, 2004), and the however, if the analysis is based on the OMC and benchmarking have reinforced 1980–2003 period. For the EU15 there the notion of convergence and made it one seems to be a steady convergence for per of the aims in the modernization of social capita social expenditure, despite all the policies. The convergence of social wel- reforms that took place and the economic fare systems can be analysed from many upswings and downturns that charac- different angles, e.g. policy-making, pol- terized this period. When approaching itical, institutional, etc. One approach is convergence via total social expenditure to analyse the convergence of total social in GDP a very interesting phenomenon expenditure between countries, hence occurs. The period can be divided into adopting a quantitative approach on the four parts: fi rst, a period of steady and macro level, leaving the specifi c policy relatively strong convergence from 1980 areas aside. The divergence/convergence to 1989, secondly, a strong period of di- is then affected not only by the different vergence from 1990 to 1992, followed, stages of maturity of the welfare state, thirdly, by a strong convergence period but also by macroeconomic pressure and from 1993 to 1995 and, fi nally, a fourth public spending constraints, i.e. the Maas- period from 1996 to 2002 which displays a tricht criteria. steady trend of convergence, with a slight Bouget (2004) provides an analysis of divergence for 2003. Hence, while there is the period from 1980 to 1998 for which no strong overall convergence, there has

76 been a change in the way Member States is due to the effects of the Maastricht cri- use social protection to react to economic teria and the OMCs. Figures 6 and 7 seem recession. During the recession at the be- to offer hints in this direction, providing ginning of the 1990s there was a peak in some support for the idea that European- divergence; during the latest recession, level initiatives are having a convergence however, no such phenomenon can be ob- effect on expenditure. However, this evi- served. The question is to what extent this dence must be treated with caution, and

Figure 6. Standard deviation of per capita social expenditure in PPS for two EU countries between 1980 and 2003 0.25

0.20

0.15

0.10

0.05

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: Eurostat, ESSPROS database. The data refers to EU12 until 1989 and thereafter to the EU15 countries.

Figure 7. Standard deviation of the percentage of social expenditure in GDP in two EU countries between 1980 and 2003 6.0

5.5

5.0

4.5

4.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: Eurostat, ESSPROS database. The data refers to EU12 until 1989 and thereafter to the EU15 countries.

77 further in-depth research is required to (Bismarckian tradition) now use more tax see whether the results are robust and to revenues for social protection funding reveal the underlying mechanisms. The (France, Germany, Italy, Portugal for exam- good news is that, despite the slowdown ple), whereas countries with initially high in the growth in social expenditure rela- levels of government funding (Beveridgian tive to GDP, it does not seem to constitute tradition) increasingly use contribution fi - a race to the bottom, since there appear to nancing (Denmark, Luxembourg and Swe- be no signs of radical change but, rather, den for example) (Eurostat, 2006b). evidence of a need for “adjustment”. These conclusions are based, however, on evidence from EU15 and an important ques- The European instruments tion relates to the conclusions that might and their effects be drawn if the 10 New Member States were to be included in the analysis. Although, as mentioned in the introduction, there can be no doubt that the Eu- ropean agenda on social issues has ex- Convergence of financing systems panded greatly since the late 1990s, this has been achieved at the cost of two types In 2003 the main source of funding social of implicit trade-off (Goetschy, 2006). protection was social contributions. These Firstly, within the social sphere itself, made up about 60 per cent of all receipts, the achievement of the Maastricht Social while general government contributions Policy Agreement was offset by the incor- derived from taxes amounted to 37 per poration of the subsidiarity principle into cent (Eurostat, 2006b). In most countries the Treaty, thereby emphasizing the im- the employers’ share in social contribu- portance of the national level; similarly, tions is considerably larger than the em- at the end of the 1990s, the introduction ployees’ share. There are great country of the OMC and the fairly broad array of differences in the structure of social pro- topics covered was counterbalanced by tection funding and, while social contri- the non-binding nature of these meas- butions make up more than 70 per cent in ures. Secondly, in the 1980s and 1990s, the Belgium, the Czech Republic, Estonia and social progress contained in the treaties Latvia, more than 60 per cent of total re- or promoted by large-scale projects (1994 ceipts in Denmark and Ireland are from White Paper; Lisbon strategy of 2000) was tax revenue (Eurostat, 2006b). clearly part of a trade-off for backing the Social benefi ts can pursue two funda- onward march of economic integration, mentally different allocative aims: either i.e. for accepting the large internal mar- protecting accustomed living standards ket and EMU. These initiatives or trade- and therefore ensuring contributory jus- offs represent a clear break with previous tice, or preventing and mitigating pov- social measures, undertaken in the 1960s erty (Rolf, 1988). The fi rst aim is more and 1970s, which had merely been con- pronounced in insurance schemes which stituent elements in the workings of the are based on the equivalence principle markets themselves. Community social (predominance of contribution fi nancing legislation was in practice created largely – the Bismarckian tradition); the second “by default”, i.e. based above all on an ex- function is more evident in schemes that tensive and judicious reading of the suc- are in close accordance with the welfare cessive treaty articles and with a view to principle (predominance of tax fi nancing bypassing their limitations. – the Beveridgian tradition). This evolution has been analysed by Divergences between European coun- several scholars in an effort to understand tries regarding the different fi nancing whether the social dimensions that have systems are gradually diminishing. The been introduced have been able to balance countries with initially low tax fi nancing the economic integration and increase in

78 competition. The conclusions (Saari, 2006; goods and services, but also very much Scharpf, 1999; Streeck, 1995) seem to indi- with regard to capital and labour. And cate that the market-correcting “positive this intensifi ed competition calls for new integration”, i.e. social measures/initia- types of solidarity. Accordingly, it has in- tives, has failed to keep up with the eco- creased the responsibilities of national nomic integration, or “negative integra- politics, especially in relation to the mat- tion”, thereby putting the European wel- ter of upholding social standards, while fare states under strain. This situation has simultaneously transferring other policies created a “double-bind” for governments to the supranational level. Though a sub- who, in the light of increased economic in- stantial share of economic policy has been tegration, may be expected to shed some transferred to the European level, nation- of their welfare-state obligations – which states continue to be the principal sites of they cannot do, as this would jeopard- political action in Europe with respect to ize the political basis of their legitimacy social issues (Goetschy, 2006). – while remaining at the same time com- This paradigm shift about how solidar- mitted to deepen the economic integration ity should be organized – with respect both and thereby expose their welfare states to to types of policy and where the responsi- regulatory competition (Hemerijk, 2006). bility should be anchored – is, in a sense, Hence there seems to be a genuine need shared by many different actors on the Eu- for a fully fl edged commitment to the so- ropean level and in the nation states (Po- cial dimensions from the European level chet, 2006). All are therefore, to a certain ex- as this is one of the main elements in gain- tent, working towards the same goal. How- ing legitimacy from the European popu- ever, the question remains as to whether lation and responding to their concerns this is the right strategy, and whether, fur- (Jepsen and Serrano, 2005; 2006). thermore, it is an appropriate response to However, the main question remains, citizens’ demands for a Europe that takes namely, how this commitment should the high road and not the low road. Events be carried out and, secondly, what social of the past year have provided enough evi- commitment should be put forward in dence to claim that this perception of Euro- the light of the institutional and cultural pean integration is not sustainable, and that differences across Europe. These two key to uncouple the economic Europe and the questions are intertwined and are strongly social Europe is in certain respects highly related to the belief that Europe needs to naïve and at odds with reality, now that the turn away from solidarity as expressed by practice of regime competition is knocking redistributive policies towards a form of ever more loudly at the door. solidarity consisting of policies that would In taking stock of developments in re- effectively enable individuals, regions and cent years, as well as of the foundations, countries to operate successfully in an in- progress and viability of Social Europe, ternational market. This current trend in evidence seems to point towards a trend of public policy-making on a European as sidetracking social concerns, and empha- well as national level seems to point up the sizing competitiveness as the main item absence of any belief in Europe’s ability to on the agenda. The current lack of genuine sustain the national welfare states as cur- European-level initiatives with regard to rently confi gured. This is tantamount to a establishing a Social Europe, and the fi rm questioning of its capacity to insulate so- belief that competitiveness is the only key cial entitlements from economic pressure to solidarity, point in the direction of the and to take social and labour standards trends and mechanisms of a break with “out of competition”. the emphasis on the need for redistribu- This paradigm shift is rooted in the be- tive solidarity and towards what Wolfgang lief that European integration has inten- Streeck calls “competitive solidarity”. sifi ed competition rather than suspended What is meant by competitive solidar- it. This is true not only of competition in ity? This term is used to describe a “new”

79 solidarity that is based on accepting that, actually decreased rather than increased, given the need to “adapt to the new eco- in spite of the growing number of prob- nomic circumstances, national communi- lems and the inclusion of the social ques- ties seek to defend their solidarity, less tion in the Maastricht Treaty, a step orig- through protection and redistribution inally intended to accelerate the pace of than through joint competitive and produc- social policy-making. Moreover, and more tive success – through politics, not against importantly, the nature of regulatory acts markets, but within and with them, gradu- has also changed. The 1970s were charac- ally replacing protective and redistributive terized by binding regulations, imposing with competitive and productive solidarity” common standards on the Member States Streeck (1999). And it is at the national and their citizens; today’s social policy level that these policies are conducted. directives – insofar as they exist at all – This paragraph summarizes to a cer- typically allow for wide discretion in their tain extent the perception of what form sol- implementation. Furthermore, an increas- idarity among many political actors should ing number of social policy initiatives are take, and may explain why, on a European restricted to issuing non-legally-binding level, very few binding social policy initia- recommendations. This approach places tives are being taken, and also why certain the will of those affected by a rule, and so-called “social initiatives” do not seem the “voluntary” agreements negotiated in the least bit social in the eyes of a large between them, above the will, or potential section of European citizenship (Jepsen will, of the European legislature, thereby and Serrano, 2006). On the contrary, some refl ecting the principle of subsidiarity social actors perceive these initiatives – (Goetschy, 2006). for example, the attempted revision of the Hence, at a time when economic and working time directive – as a dismantling monetary policy is being raised to the of social Europe. The question that is being supra-national level, social policy is being asked, accordingly, is whether the future relegated once again to the national level. of Europe is to be only as a place where However, any conclusion that there is no goods and services may be swapped freely, interconnection between these two policy or whether Europe is also to be a political spheres, insofar as they are performed on – and hence a social – project. different subjects and at different lev- Many of the initiatives that emerge els, would be mistaken, for there are in- from the institutional European level are deed clear and well-established links and formulated in terms of competitive soli- spillover effects between the two policy darity, e.g. fl exibility and security, social areas, for example, excessive wage mod- policy as a productive factor, activation, eration, tax and regime competition, etc. growth and jobs. However, these concepts The question then arises of whether this are “open” concepts that leave room for development represents an ideal situation interpretation and design of the requi- or whether there may be a need to central- site implementing actions. As such, pol- ize, at least to an extent greater than is the itical actors have the opportunity to take case today, the question of solidarity on up these concepts and formulate them in the European level. ways that fi t the diverse social landscape of Europe. The way in which social issues are Conclusion dealt with on the European level has changed substantially. It is apparent that The national social security systems of the expansion of the social question on the the European Union countries are under European level has been at the cost of the strong pressure from a range of com- non-binding nature of today’s initiatives. mon factors: changing family structures Since the 1990s the number of social policy through a diversifi cation of lifestyles; de- regulations issued at European level has mographic shifts as a result of increased

80 life expectancy and low birth rates; and Notes enhanced economic competition driven 1 by globalization. In addition, European The fi rst two sections are heavily based on Benchmarking Working Europe 2006, chapter 6 and Union initiatives such as the Growth and Benchmarking Working Europe 2005, chapter 5. Stability Pact, the Open Method of Coor- 2 Belgium, Denmark, Finland, France, Greece, dination used in the fi elds of employment, Ireland, Italy, Luxembourg, the Netherlands and social inclusion and pensions, and judge- Spain. ments issued by the European Court of 3 The EU25 average was 22.8 per cent in Janu- Justice, limit national governments’ scope ary 2003. for action in the face of economic crisis. These developments call into question not only the fi nancial sustainability of social References security systems but also their ability to cater to the needs of diversifying careers Bouget, D. (2004) “Convergence in the social welfare systems in Europe: From goal to reality” in Tay- and household patterns. lor-Gooby, P. (ed.) Making a European welfare state?, Though one argument is that common Oxford: Blackwell Publishing, pp. 131-150. pressure should lead to at least a political COM(1994)333, A White Paper: European Social convergence (Taylor-Gooby, 2004), the still Policy – A way forward for the Union, Brussels growing literature on the convergence/di- 27 April. vergence of European welfare states pro- Commission of the European Communities vides no clear answer to this complex (23.3.2006) Commission Staff Working Docu- question. Despite the common pressures ment: “Implementation and update reports on 2003-2005 NAPS/inclusion and update reports and common policy solutions proposed on 2004-2006 NAPS/inclusion,” SEC(2006)410, by the non-binding European-level initia- Brussels. tives, the evolution of national social pro- ETUI-REHS (eds.) (2005) Benchmarking working Eu- tection systems remains path-dependent. rope 2005, Brussels: ETUI. On a macro level, however, the binding ETUI-REHS (eds.) (2006) Benchmarking working Eu- Growth and Stability Pact appears to have rope 2006, Brussels: ETUI. had some impact, since there is evidence European Commission (2006) Joint Report on Social of convergence in total social expenditure. Protection and Social Inclusion 2006, Luxembourg: Welfare states are not static entities, but in Offi ce for Offi cial Publications of the European a constant process of evolution; reforms Communities. have always taken place and will con- Eurostat (2006a) European social statistics. Social pro- tinue to take place in order to adapt and tection. Expenditure and receipts Luxembourg: Offi ce for Offi cial Publications of the European respond to the new and changing needs of Communities. populations. The cognitive and normative Eurostat (2006b) “Social Protection in the European framework shapes these changes within Union”, Statistics in Focus. Population and so- each national context, bringing the wel- cial conditions No. 14/2006. fare state to new forms of equilibrium. As Eurostat, ESSPROS database, extraction 2005 and such, there would seem to be no doubt that 2006. national diversity within social policy will Ferrera, M., Hemerijck, A. and Rhodes, M. (2000), The persist, and perhaps even increase (Fer- Future of Social Europe. Lisbon: Celta Editora. rera, Hemerijck and Rhodes, 2000), des- Goetschy, J. (2006) “Taking stock of social Europe: pite the increasing Europeanization of so- is there such a thing as a community social cial policy witnessed since the 1990s. The model?”, in M. Jepsen and A. Serrano Pascual question is what specifi c forms of diversity (eds.) Unwrapping the European Social Model, Bris- tol: Policy Press, pp. 47-72. will persist. Hemerijk (2006) Recalibrating Europe’s Semi-Sovereign Welfare States, WZB discussion paper No. SP I 2006-103, Berlin, WZB. Jepsen, M. and Serrano Pascual, A. (eds.) (2006) Un- wrapping the European Social Model, Bristol: Policy Press.

81 —. (2005), “The European Social Model: an exercise Streeck, W. (1999) “Competetive solidarity: Rethink- in deconstruction”, Journal of European Social Pol- ing the European social model”, MPI working icy, Vol. 15, No. 3, pp. 231-245. paper 99/8, Cologne. Pochet, P. (2006) “Debate around the social model: — (1995) “From market making to state building? Evolving players, strategies and dynamics”, in Reﬂ ections on the Political Economy of Euro- Degryse, C. and Pochet, Ph. (eds.) Social develop- pean Social Policy”, in Leibfried, S. and Pierson, ments in the European Union 2005, Brussels: ETUI- P. (e d s.), European social policy. Between fragmenta- REHS, pp. 79-100. tion and integration, Washington, DC: The Brook- Rolf, G. (1988) “Kontroversen über Begründung ings Institution, pp. 389-431. und Ausgestaltung staatlicher Versicherungs- Taylor-Gooby, P. (2004) “Introduction. Open mar- und Umverteilungspolitik”, in Rolf, G. et kets versus welfare citizenship: Conﬂ icting ap- al. (ed.) Sozialvertrag und Sicherung. Zur proaches to policy convergence in Europe”, in ökonomischen Theorie staatlicher Versicherungs- Taylor-Gooby, P. (ed.) Making a European welfare und Umverteilungssysteme, Frankfurt/New state?, Oxford: Blackwell Publishing, pp. 1-16. York: Campus. Välimäki, K. (2006) “Seeking a new balance”, in Saari, J. (2006) “The Europeanization of social pro- Saari, J. (ed.) The Europeanization of social protection”, in Saari, J. (ed.) The Europeanization of tection, Ministry of Social Affairs and Health, social protection, Ministry of Social Affairs and pp. 261-277. Health, pp. 7-46. Zeitlin, J. and Pochet, P. (eds.) (2005) The open method Scharpf, F. W. (1999) Governing in Europe: effective of coordination in action: The European employment and democratic? Oxford, UK: Oxford University and social inclusion strategies, Brussels: SALTSA, Press. P.I.E. Peter Lang.

82 Pension reform in Austria and the role of trade unions

The Austrian pension system is a case study of the process which seeks to reverse the historical consensus in many European countries about the participation of all in the decisions and the wealth of society and the role of trade unions in balancing reforms and preparing social protection for new challenges.

Eva Belabed Chamber of Labour Austria

A history of the pension system a massive decrease in the 1970s) continued and the role of trade unions to decrease in the 1980s (for women even in the 1990s). In Austria the fi rst pension system for civil The neoliberal backlash which started servants goes back to Maria Theresia 1 (1740- around the world in the 1970s and 1980s 80). In the nineteenth century the labour threatened the progress in the develop- movement played an important role in the ment of pension systems and the overall development of social protection in Aus- social achievements of the twentieth cen- tria. In the mid-1880s trade unions started tury. Social protection, social market econ- their fi rst broad attempts to organize work- omy, social dialogue and co-determination ers with a view to improving working con- were declared to be no longer affordable in ditions. Private sector employees created a globalized world. In order to become or their fi rst pension system (Pensionskasse) in stay competitive it was argued that Europe 1902. In 1909 the fi rst law on pensions for had to strengthen its economy and scale private sector white-collar workers entered down its social protection systems. into force. The fi rst pension for blue-collar The attacks on pensions are simply workers was created in 1939. part of a wider attack on living and work- After the Second World War, political ing conditions and on the European model leaders in Austria decided to build on co- of society. operation rather than confrontation. The From the 1980s on, reforms of the Aus- system of social partnership was devel- trian pension system were aimed at adapt- oped which gave social partners – and ing the system and its fi nancial viability thus trade unions – a big stake in the pol- to economic and social changes. But there itical decision-making process and in run- were fundamental differences between ning social protection systems. the reforms up to 1999 and those after 2000 The benefi ts of the Austrian pension when a right wing coalition government system were continuously improved. This took power. Up until the 1997 reforms one was doubly important because the pen- could argue that pension reforms tried sion system also served as a substitute for to make the existing system sustainable other policy areas, e.g. employment policy. without attacking the achievements of the In the 1980s and early 1990s the unem- past. From 2000 on, pension reforms were ployment effects of economic restructur- part of a reform agenda aimed at reversing ing were cushioned by early retirement. the existing scheme of the distribution of This is why the real retirement age (after income, wealth and participation.

83 Although at the end of the 1980s it was high coverage (93 per cent ).3 It is manda- widely accepted that additional pension tory for every worker except a small group reforms were necessary there was a broad of self-employed persons and those with disagreement on how and to what extent. very low earnings (such as atypical and The new Government in 2000 had a clear precarious types of employment). agenda of strengthening the second and The separate systems for workers third pillar of pension systems. In an at- (white-collar and blue-collar), farmers, tempt to keep public and political oppos- self-employed and civil servants were har- ition as small as possible, the government monized in 2005, although with long tran- tried to bypass trade unions and other sition periods which resulted in a compli- political and social groups by rushing a cated system. series of reform proposals through parlia- The public pension scheme provides ment, based on the principle that “speed old–age pensions, disability and survi- kills”. The result of their work was partly vor’s benefi ts. The statutory retirement so poorly executed that the political oppos- age for a standard old-age pension is 60 ition and the social partners successfully for women and 65 for men. In 1992 it was challenged some of the new laws in court. decided to raise women’s statutory retire- With this experience and in the light of ment age gradually until it reaches that increasing public opposition, the Govern- of men. Persons are entitled to an old-age ment changed their attitude and started pension if they have accumulated at least to consult social partners again – in part 15 years of contribution. because some of the issues were politically Replacement rates in Austria are rela- challenging and they preferred to share tively high compared to other countries: the risk with the social partners. gross replacement rates for lower and aver- The axis between the social partners, age incomes are around 78 per cent (OECD: which had been legendary over decades, 57 per cent ).4 This is expected to decrease experienced a more uneven period in the after the reforms. Figures on net replace- early years of the right wing government, ment rates differ: while the EU sees them as but in the last few years there has been being around 80 per cent (2005), the OECD more cooperation. A recent conference on sees them around 90-93 per cent (2005). the future of social partnership in Austria The Austrian pension system has no has confi rmed the conviction that social provision for a minimum pension. How- partnership is an important element in ever, a means-tested support is incorpo- Austrian politics.2 rated in the system for persons who do not reach a minimum income level. When the system for workers was cre- The pension system in Austria ated, the fi nance structure agreed upon was one-third by contributions of work- The central element of Austria’s pension ers, one-third by contributions of employ- system is its fi rst pillar, the public pay-as- ers and one-third by government. In the you-go (PAYG) pension system. Occupa- meantime the government’s contribution tional and private pensions (second and has been cut to 24 per cent (Knell, 2005). third pillars) do not have a signifi cant The pension insurance contribution presence (yet). rate is 22.8 per cent of the contributory wage (which is only that part of the wage which is below a defi ned upper earnings The public pension system – The first threshold) of which 10.25 per cent is paid pillar and the central element by the worker and 12.55 by the employer. The contribution rate for self-employed The Austrian public pension system is a persons in commerce, industry and comprehensive PAYG, defi ned-benefi t Bis- trade and for farmers is currently 15 and marck-type system. The system has a very 14.5 per cent, respectively. When the pub-

84 lic pension system was extended to farm- there are 14 single and seven multi-em- ers and other self-employed persons con- ployer pension funds.9 Twenty per cent of tributions were fi xed at a rate similar to the market volume is managed by single- the employees’ contribution rate, with the employer pension funds and 80 per cent government taking over a “fi ctitious em- by multi-employer pension funds; 90 per ployer share”. Some groups of freelance cent of the latter is managed by the four professionals pay 20 per cent.5 biggest funds. As a result of this the Government’s An employer and a pension fund sign share in fi nancing pensions is higher for a contract which is based upon an agree- farmers and the self-employed than for ment (Betriebsvereinbarung) between the workers. This preferential treatment for works council and the employer, and different parts of the workforce constitutes which determines the size of contributions one of the major criticisms raised by trade by an employee and the employer, as well unions. as the types of investments accepted. Numbers given on the share of pension The legal structure of the fund includes expenditure in GDP vary according to the a general assembly (all shareholders10 and ideological position of the authors. While benefi ciaries have the option to partici- the World Bank sees the share of pension pate). Trade unions and/or shop stewards expenditure in Austria at 14.5 per cent,6 are represented in the supervisory board other sources calculate it at 10-11 per cent, (four representatives of shareholders and depending on the year.7 When comparing two of benefi ciaries)11 as well as in differ- these numbers with other countries one ent advisory committees.12 must compare apples with apples, i.e. compare the respective pillars and take into account that benefi ts are higher in the The contribution of trade unions Austrian system. The Government’s reform of severance payments was a contentious issue. Occupational pensions in Austria Based on a model proposed by the ÖGB13 which was supported by 88 per cent Occupational pensions do not play an im- of the members who answered the ÖGB’s portant role in Austria. Only 7 per cent of questions on the reform, the social part- the pensions paid come from occupational ners reached an agreement with the Gov- pensions; 93 per cent come from the public ernment on the conditions for payment. PAYG system. 8 While the Government wanted to estab- In 1990 the government created the lish this as an element of occupational legal framework for establishing occupa- pensions, the reform in fact was limited tional pension funds (Pensionskassen) on to changing the eligibility and entitlement the basis of which a number of single-com- to payments. pany or multi-company pension funds During the reform process GPA,14 the were created. This created the possibility white-collar workers union, focused on for workers of maintaining their entitle- socially responsible and sustainable in- ments when they changed employer. vestment (SRI). Although there is no legal In 2003 the Government, in an attempt obligation, most pension funds (Pensions- to broaden the occupational pillar, started kassen) have committed voluntarily to SRI reform of the severance payment (Abfer- and some of them have agreed to be sub- tigung). The result, however, based on a ject to an independent evaluation.15 The In- model suggested by the social partners, stitute for Social Science and Economics only changed the conditions for eligibil- (ISW) 16 and the GPA jointly organized con- ity and entitlement. ferences and published a book on SRI.17 There are two types of pension fund: single and multi-employer. Currently,

85 Private pensions in Austria to the fi rst nationwide strikes in Austria in more than 50 years. Private pensions do not play an important As a result of these massive protests, the role in Austria. Traditionally they take the Government watered down their proposals: form of life insurance. Cuts to pension benefi ts were limited Since 2003 the Government, in an at- to 10 per cent; tempt to develop a third pillar of pensions, has supported and subsidized a new in- Transition periods were introduced for strument (prämienbegünstigte Zukunftsvor- the abolition of early retirement; and sorge) to which currently 470,000 persons An alternative was created that al- have subscribed.18 lowed for early retirement via long- In addition, the Government is publi- term insurance (Hackler-Regelung). cizing the view that people will not receive suffi cient pensions from the public system This outcome clearly shows the impor- and they therefore need to prepare indi- tance of strong worker organizations. vidually for their retirement. These cam- Trade unions and the Chamber of Labour paigns are already showing effects.19 in a combined effort analysed the effects of the government proposals and successfully mobilized resistance. Pension reform in Austria since 2000

The Austrian pension system has been sub- The 2004 pension reforms ject to numerous reforms, which until 1997 were primarily aimed at improving the sys- As a result of the unions’ campaign in tem and making it sustainable. The post- 2003 the Government, when it started a 2000 reforms, however, focused not only on process of reform in 2004, involved the the sustainability of the system but also at social partners from the beginning. Al- fundamentally changing its structure and though it was not possible to reach agree- benefi t levels. These changes aimed at de- ment during the process of negotiations, creasing the relative importance of the pub- the trade unions developed a model for lic pension by introducing and promoting pension reform – the “Austria Pension” occupational and private pensions. There (Österreich-Pension) – which the Govern- were two major reforms in 2003 and 2004, ment could not ignore. which are briefl y outlined below. The unions were successful in having their own reform agenda refl ected in the government’s fi nal package: The 2003 pension reforms The newly created personal pension account is a defi ned benefi t scheme: the The original plans of the Government in- Government had wanted a defi ned cluded the following elements: contributions (DC) account with un- 1. Immediate reduction of the value of defi ned benefi ts; new pensions by at least 20 per cent, Fair revalorization of former employ- in some cases by up to 50 per cent; ment periods; 2. Reduction of pensions for younger people by up to 40 per cent; and Federal payments remain an essential element of the pension system; 3. Immediate abolition of early retirement. Improved (although still inadequate) revalorization of child care periods; and Although the social partners jointly asked Early retirement remains an option the Government to withdraw the plans, through a "corridor pension" – a pension the Government pushed ahead. This led can be claimed in an age corridor between

86 62 and 65 with a reduction and between pensions. The opposition parties say that 65 and 68 with an addition – although pensions have not been made safe, but have this corridor disadvantages women, as been cut, with decreased purchasing power it is available only from age 62 and the for retirees, especially women’s pensions statutory retirement age of women is 60. which are barely at a subsistence level. The IMF in its Article IV Consultations Some points were simply not acceptable, with Austria in 2005 concluded that: but the Government insisted: … pension reform is well advanced, including Double reductions for the corridor pen- through the recent harmonization of pension sion (lower benefi ts through shorter schemes. Additional tasks remain regarding the periods of contributions plus an ad- need to also include pensions of civil servants ditional reduction to discourage early at the subnational level in the unifi ed system.22 retirement), exclusion of women from the corridor pension and an increase Some authors point out that Austria has in retirement age for long term insured one of the world’s highest pension expen- (Hackler-Regelung); ditures relative to GDP, largely because of There will be three parallel systems of the generosity of its pension system.23 The pensions for decades to come; OECD welcomes the reforms but is critical about the remaining possibilities for early Harmonization has not been achieved; retirement and part-time employment for An erosion of public confi dence in the older workers.24 public pension system; The Council of the European Union stated that: Increasing unemployment amongst older workers is not refl ected in the … the pension reforms of 2003 and 2004 are set pension reforms; and to provide substantial budgetary relief in the Devaluation of the guaranteed mini- long term. After the pension reform of 2003, mum interest rate on the capital in the Austria passed a further pension reform in occupational pillar. 2004 (Pensionsharmonisierung), with the aim of bringing all groups of private and public sector employees into a harmonized pension system. Pension Reform in Austria – The signifi cant contribution of the 2004 law to Internal and external views long-term fi nancial sustainability is being back- loaded to take effect only after 2030, while the In a survey carried out by the WIFO,20 medium-term savings from the 2003 law are 59 per cent of respondents were concerned partly reduced.25 about the fi nancing of the public pension, 40 per cent thought occupational pensions Trade unions are aware of the need for were very important and a further 35 per reform of pension systems to meet the cent thought they were very important, challenges of demography and changes and 58 per cent were concerned about the in the economy and society. This does not effects the fi nancial markets were likely to include, however, the aim of replacing ex- have on occupational schemes.21 isting and well-functioning PAYG systems Evaluations of the pension reforms dif- by funded systems just for the sake of pri- fer depending on the interests and polit- vatizing existing systems, developing the ical agenda of the actors. capital markets and creating business op- The Austrian government is convinced portunities for fi nancial actors. they have secured pensions “until 2050” At the same time reforms within the and that “for future generations” there will system – such as increasing the statutory be increased pensions (indexed to infl ation) and early retirement age – have to be ac- and the benefi ts of occupational and private companied by complementary policies in

87 the labour market and economic policies was considerable change. In contrast to to create the necessary jobs. Austria’s long tradition of tripartism on The fi nancial basis of pension sys- social security policy, the government tems needs to be adapted to changes in launched far-reaching reform without the creation of value added. This means such consultation, thus challenging the instead of shifting the burden more and system of social partnership. more on to the shoulders of workers alone However, May and June 2003 marked a there needs to be a broader fi nancial base, turning point. Pension reform in 2003 pro- including contributions by workers and voked the largest strike action in Austria employers, value added elements (e.g. the for 50 years. 28 For the fi rst time in decades contributions of employers to be based on the ÖGB called for a national day of action, the value added and not just on salaries) including strikes. About 500 000 work- and eventually tax elements. Further- ers participated all over Austria in about more, funded systems face demographic 10 000 activities, such as workplace meet- challenges as much as do PAYG systems, ings, rallies, strikes, blockades and dem- albeit in a different way. onstrations. This was followed a week later In addition to this, the short-termism with a major manifestation on Heldenplatz of capital markets has negative effects on in Vienna’s inner city. On 3 June more than the real economy and the increasing crea- one million workers, which is around a tivity of fi nancial actors (hedge funds and third of the country’s total workforce, from the like) even worries the European Cen- 18 000 workplaces all over Austria, heeded tral Bank, which is concerned that hedge the strike call and took industrial action. funds increase the systemic risk for the world economy. The main challenges to reforming pension systems The influence of trade unions on pension policy and governance The challenges to pension systems are the vested interests which lay behind the most Trade unions in Austria are part of the recent reform agenda. Pension reform is social partnership and thus involved in not just about securing pensions; it is part political decision-making. Social policy in of a broader attack on living and working Austria has long been shaped by the social conditions which aims at dismantling the partners whose proposals have then been achievements of the twentieth century. debated by parliament. The Minister for For several years now there has been a Social Affairs has for decades been a rep- general attack on the levels of social protec- resentative of the trade unions. The social tion. Cohesion and solidarity within soci- partners have managed the pension sys- ety are values losing weight as philosophies tem, which is a self-governing body.26 of individualism gain importance and the Austria together with Denmark, Ireland role of the State is questioned increasingly. and the Netherlands, are the four small Public services and social protection sys- countries in Europe which the ILO identi- tems are reduced and/or privatized and fi ed as having been particularly successful the participation of social partners in polit- in coping with their economic problems. ical decision-making is cut back. This had mainly been due to a process of The driving forces behind these de- concertation or consensus-building which velopments are those who benefi t from resulted in political success. The result a deregulated world – among them the was better economic performance, higher fi nancial institutions and investors – where labour market participation rates for men the strong get their way and the weak are and women and lower unemployment.27 left behind. In Austria, when the right wing coali- We are moving from a society based tion government took power in 2000 there on economic and social cohesion, oriented

88 around the principles of consensus and 5. The room for action by companies and social and civil dialogue, towards a soci- especially actors on the fi nancial mar- ety with increasing inequality of income kets is increased; and and wealth, decreasing infl uence of some 6. Workers fi nd their opportunities for groups of citizens on the decisions taken participation in society’s decision- in society and an increasing orientation making reduced and their economic towards confl ict. situation deteriorating, with the conse- Is the welfare state truly no longer af- quence that they have less capacity to fordable? Or is the debate instead about oppose unfavourable policy decisions privatizing social protection – and pension while conversely the opportunities in- – systems? What models of society under- crease for private sector actors to infl u- pin the reform options? Do countries with ence and drive the policy agenda. an active labour market policy and social dialogue cope better with the problems? This presents a considerable challenge for Against the background of globaliza- all those who support a policy of consen- tion, liberalization, privatization and de- sus and economic and social cohesion. So- regulation, we face an increasing competi- cial partners and organized civil society, tion between two models of society with along with political parties, have an im- differing sets of values and objectives: the portant role to play in the development of European model of society based on the democracy. principles of economic, social and terri- Against this background – and in a torial cohesion on the one hand, and the world where 80 per cent of the working- Anglo-Saxon model based on individual age population do not have access to basic risk and responsibility on the other. social protection29 – Europe has a crucial For some time now, we fi nd ourselves role to play in defending, developing and in a process which aims at reversing the promoting its European model of society, historical consensus in many European so as to present an alternative. countries about the participation of all in The actors concerned and involved in the decisions and wealth of society. pension systems and their reforms have The aims are clear: Reduce the role of different interests: the State where decisions are subject to Workers and citizens want guaranteed democratic participation by citizens and reliable incomes for old age; social partners and where the aim is a fair of overall wealth; at the same time, enlarge Employers want low contributions on private systems and the space for action by wages and salaries (if they contribute); private actors. Governments want to stabilize The consequences of this trend include: their budgets and thus reduce their 1. Citizens – and workers – have less in- payments; fl uence on decisions; The fi nancial sector wants to increase 2. The distribution of income and wealth its business possibilities; and created in society becomes more International organizations (IFIs, uneven; OECD) want to drive reforms in the direction of privatization, free markets, 3. The fi nancial risk, e.g. in funded pen- reducing the role of the State. sion systems, is transferred entirely to the workers; The challenge for trade unions is to fi nd ways 4. The original principle in pensions of of building political support on both the na- cost-sharing between employers, work- tional and international level to defend and ers and the State is increasingly aban- develop sustainable pension systems which doned and replaced by placing the bur- secure decent old-age incomes. At the same den on workers alone; time, unions must deal with the challenges

89 of the increasing impact of fi nancial actors 15 The Austrian Trade Union Federation. and markets on the real economy. Con- 16 Institut für Sozial- und Wirtschaftswissenschaften versely, unions should attempt to exploit (ISW – Institute for Social Science and Economics), the new levers offered by workers’ partici- which is the research institute of the Chamber of pation in funded pension systems, which Labour in Upper Austria. 17 Sallmutter, Freyschlag (2001). see workers as the indirect owners of an in- 18 creasing part of the corporate world (which Knell (2005). 19 was certainly not the intention of those who See the section “Pension reform in Austria – internal and external views”, below. drove pension reforms). 20 WIFO = Österreichisches Wirtschaftsforsc- Building support includes continuous hungsinstitut (Austrian Institute of Economic Re- dialogue with workers and citizens on de- search), available at: www.wifo.at velopments and challenges, and identify- 21 See http://globalpensions.com/?id=me/17/ ing potential allies and cooperating with news/27/31663/19 them, thereby strengthening trade union 22 See www.imf.org cooperation on the supra-national level. 23 Manfred Koch, Christian Thimann (2004). The strange thing in the ongoing de- 24 See http://www.oecd.org/document/54/ bate on the need for reform of pension sys- 0,2340,en_2649_201185_34932982_1_1_1_1,00.html tems is the argument that the richest and 25 Council of the European Union, Brussels, 18 most productive economies in the world January 2005, 5498/05, UEM20, Stability Programme are not able to fi nance a decent life for of Austria. their decreasing population! 26 Although there have been some changes over the past years such as trying to reduce its independence and to increase the infl uence of government. Notes 27 Peter Auer (2002). 28 1 Empress of Austria and Queen of Hungary See http://www.eiro.eurofound.eu.int/ and Bohemia (1740-80). 2003/05/feature/at0305202f.html; http://www. 2 oegb.at/servlet/ContentServer?pagename= Social Partner Conference in Bad Ischl, Sep- OEBGZ/Page/OEGBZ_Index&n=OEGBZ_e_ tember 2006, celebrating 60 years of social partner- 0.a&cid=1061374664784 ship in Austria and issuing a Declaration of the So- 29 cial Partners, http://www.sozialpartner.at. Juan Somavia (2001). 3 Buzolich et al. (2003), p. 202. 4 OECD: Pensions at a glance, 2005 References 5 Buzolich et al. (2003), p. 202ff. 6 Robert Holzmann (2004): Toward a Reformed Arbeiterkammer – Positionen und Forderungen zu and Coordinated Pension System in Europe: Rationale den Pensionsreformen, available at: www.arbe- and Potential Structure, The World Bank, Washington, iterkammer.com D.C., March 2004, p. 36. Arbeiterkammer (2003): Stellungnahme der Bunde- 7 Cf. http://www.reformmonitor.org/httpd- sarbeitskammer an das BM für soziale Sicherheit cache/doc_reports_2-2739.html; Gerald Reiter und Generationen und Konsumentenschutz vom (2005), p. 186. 24.4.2003 zum Budgetbegleitgesetz 2003. 8 Christian Böhm (2007). Arbeiterkammer (2004): Stellungnahme der Bun- 9 desarbeitskammer an das BM für soziale Sicher- Christian Böhm (2007). heit, Generationen und Konsumentenschutz vom 10 Shareholders of Pensionskassen are the com- 7.10.2004 zum Pensionsharmonisierungsgesetz. panies involved as well as banks and insurance Arbeiterkammer Wien (2006): Das neue Pensionsrecht companies. – für wen gilt was im Jahr 2006, Vienna, 2006. 11 Benefi ciaries are the workers involved; they Arbeiterkammer Wien (2005): Pensionsreform 2004 are usually represented by shop stewards or trade – ungerecht – unharmonisch – unverständlich, unionists. Vienna. 12 Christian Böhm (2005). Arbeiterkammer Wien (undated): Zur Geschichte der 13 Österreichischer Gewerkschaftsbund (Austrian Arbeiterkammern in Österreich, available at: www. Trade Union Federation). wien.arbeiterkammer.at 14 GPA = Gewerkschaft der Privatangestellten, Auer, Peter (2002): Institutionelle und politische Vo- which is the private sector white-collar workers’ raussetzungen für Arbeitsmarkterfolge in Europa, in trade union. WISO Nr. 2, 2002, pp. 13-44, ISW, Linz, 2002.

90 Böhm, Christian (2007): Pensionskassen – die zweite Mum, David (2004): “Die Auseinandersetzungen zur Säule der Alterssicherung, Presentation in Bad österreichischen Pensionsreform 2003, Nach- Mitterndorf, Austria, 2007. haltige Pensionssicherung; Pensionsreformen — (2005): Pension Fund Governance of Occupational und die Interessen der ArbeitnehmerInnen”, in: Pension Funds in Austria, OECD, 2005. ISW (ed.): WISO No. 3/2004, pp. 98-118. Buzolich Gerhard, Bernhard Felderer, Reinhard OECD (2005): Pensions at a glance: Public policies across Koman und Andreas Ulrich Schuh (2003): in: OECD countries, Paris, 2005. Arno Tausch (ed.): The Three Pillars of Wisdom? A — (2003): OECD Economic Survey of Austria 2003: Reader on Globalization, World Bank Pension Mod- Pensions; Paris, 2003. els and Welfare Society, Nova Science Publishers, Österreichischer Gewerkschaftsbund (2003) (ed.): New York, 2003. Abfertigung Neu – Die praktische Info-Broschüre Die Presse (2006): Österreichs Pensionskassen im inter- für ArbeitnehmerInnen, Vienna, 2003. nationalen Vergleich; Mercer untersucht Performance — (undated): Positionen und Forderungen zu den Pen- in neun europäischen Ländern, available at: http:// sionsreformen, available at: www.oegb.at www.pressetext.at/pte.mc?pte=060228014, vis- Österreichische Sozialversicherung (undated): avail- ited on 28.2.2006. able at www.sozialversicherung.at Council of the European Union (2005): Council Opin- Part, Peter and Hans Stefanits (2001): Public Pension ion on the Updated Stability Programme of Austria, Projections 2000 – 2050, Contribution to the Work of Brussels, 18 January 2005, 5498/05, UEM20. the EU Economic Policy Committee on the Financial Die sozialrechtliche Entwicklung in Österreich seit Impacts of Population Ageing, Working Paper 7/2001. 1889, available at: www.demokratiezentrum.org Pensionskassen: Firmenpension wichtiger als Be- Gewerkschaft der Privatangestellten (2004): Pension- triebskantine, available at: www.fondsprofes- sreformen in der EU: Risikoprivatisierung oder not- sionell.at, visited on 8.11.2005. wendige Zukunftssicherung?, Vienna, 2004. Reiter, Gerald (2005): Neoliberalismus und “Pen- Gligo, Claudio (undated): Pensionskassen in Österre- sionsreformen” in: ISW (ed.): WISO No. 1/2005, ich – Struktur und Funktionsweise, Österreichische pp. 182-193. Volksbanken-AG, Vienna. Sallmutter, Hans (2004): Nachhaltigkeitsprüfung Global Pensions, available at: www.globalpensions. von Mitarbeitervorsorgekassen auch ein Er- com, various articles. folg der GPA, available at: http://www.oegb. Hauptverband der österreichischen Sozialver- at/servlet/ContentServer?pagename=OEGB sicherungsträger (2006): Die österreichische Z/Page/OEGBZ_Index&n=OEGBZ_Suche. Sozialversicherung in Zahlen, 17th ed., Vienna, a&cid=1080806640843, visited on 2.4.2004. August 2006. —, Fritz Freyschlag (2001), (ed.): Ethische Investments, Ivansits, Helmut (2006): Warum die Pensionsreform Sind Moral und Rendite vereinbar? ÖGB Verlag, nicht hätte scheitern müssen – eine kritische Bestand- Wien, 2001. saufnahme, in: Sepp Wall-Strasser et al. (eds.): Schmitz, Stefan W. (2005): “Die Governance-Struk- Tatort Sozialstaat – Angriffe auf das Netz der Gener- tur der Pensionskassen in Österreich und ihre ationen, Vienna, ÖGB-Verlag, 2006, pp. 105-125. polit-ökonomischen Konsequenzen”, in: AK IMF (2005): IMF Executive Board Concludes 2005 Art- Wien (ed.): Wirtschaft und Gesellschaft, 31. Jahr- icle IV Consultation with Austria, available at: gang (2005), Vol. 3, pp. 407-443. www.imf.org, visited on 25.7.2005. Somavia, Juan (2001): Decent work – A global challenge, — (2004): IMF praises Austria for “courageous” pen- Speech at the European Commission Confer- sion reform, available at: www.globalpensions. ence on the European Social Agenda and the com, visited on 14.5.2004. EU’s International Partners, Brussels, Novem- Keuschnigg, Christian und Mirela Keuschnig ber 20-21, 2001. (2004): “Aging, Labor Market and Pension Re- Url, Thomas (2003): Die Entwicklung der betrieblichen form in Austria”, in: FinanzArchiv 60 (2004), Altersvorsorge in Österreich, WIFO Papers and pp. 359-392, Mohr Siebeck 2004. Proceedings, Vienna, 2003. Knell, Markus (2005): Situation und Probleme der Al- Wirtschaftskammer Österreich (2005), http://por- terssicherung in Österreich, ZHW Winterthur, 18- tal.wko.at und www.pensionskassen.at, various 20 May. articles and information on occupational pen- Koch, Manfred and Christian Thimann (2004): sions, e.g. http://www.oepag.at/bilder/FV_Be- From Generosity to Sustainability: The Austrian triebspensionen_0623.pdf; http://www.oepag. Pension System and Options for its Reform, avail- at/bilder/FV_Zusatzpension.pdf able at: http://www.springerlink.com/content/ Wirtschaftskammer Österreich (2005): Pensionskas- w580145r6v610440/ sen – Jahresrückblick 2005. Leutner, Richard (2003): “Pensionsreform: Geldbe- Wöss, Josef (2006): Sozialpolitik 2000 – 2006: Bilanz schaffung statt Pensionssicherung”, in AK Wien Arbeitsrecht, in: AK Wien (ed.): Arbeit & Wirt- (ed.): Arbeit & Wirtschaft, 7-8/2003. schaft 7-8/2006, pp. 8-11, Vienna.

Reforming the Romanian state pension system and the role of trade unions

In post-communist Romania, the state pension was used as a de facto unemployment benefits scheme. The consequent growth in beneficiary numbers, coupled with a halving of the formal sector workforce, caused huge fiscal imbalances in the pension system. The governmental response has been to implement a three pillar system, characterized by poor benefits for workers and poor investment returns. As unions campaign for reforms they are hampered by a lack of access to technical expertise.

Petru Sorin Dandea Vice-president National Trade Union Confederation “Cartel Alfa”

The pre-reform scene as for artists, the clergy, handicraft cooperatives and lawyers. Until the early 1990s, Romania had sev- These social security systems, due to eral social security systems, each of them the low and generally decreasing number traditional models of defi ned contribu- of contributors, could not fi nancially meet tion/defi ned benefi t and pay-as-you-go their obligations to pay pension benefi ts. (PAYG) schemes. As a result, between 1992 and 1997 the These social security schemes were smaller schemes were integrated into the generally based on an employment rela- state social security system. tionship. In respect of all employees there The Ministry of Labor and Social Pro- was a legal obligation for both the em- tection managed the state social security ployer and employee to contribute to the fund, the supplementary pension fund (as pension fund. For self-employed persons described above) and, from 1992, the farm- and those with atypical work contracts the ers’ fund. The latter was largely non-con- system was voluntary and the level of par- tributory, and special contributions were ticipation low. imposed on companies producing and/or Regulations also existed regarding the commercializing agricultural products to compulsory supplementary pension sys- fi nance the scheme. tem, based on contributions paid by em- In the early 1990s, the state pension sys- ployees. The covered risks were: old age, tem was also used as a cushion for more disability, survivorship, sickness, mater- than 600,000 employees who lost their jobs. nity and work-related injury and illness. The Government introduced some meas- The social security system in Romania ures to allow early retirement fi ve years was characterized, until 1992, by a high before pensionable age if a person had con- degree of diversifi cation, with eight inde- tributed towards insurance for 25 years for pendent systems related to certain sectors men and 30 years for women, even though of activity or professions. Besides the state it was clear that the state pension budget social security system, at that time there defi cit would only continue to increase. were pension schemes for farmers and the During the transition decade in the military, as well as smaller systems such 1990s, the pension system was used as a

93 mechanism to absorb redundant labour. Having had no expertise in pension Although the legal retirement age was systems, the trade unions supported the 62 for men and 57 for women, under re- measures taken by the Government. Pri- forms introduced in 1990 workers had the marily the unions’ leadership believed it option to retire fi ve years early, without fi - would be better for employees to receive nancial penalty. The number of people re- a pension than to become unemployed. ceiving disability benefi ts also accelerated However, after just a few years trade un- due to lax rules and due to workers claim- ions realized that they had made a mis- ing invalidity as a means of coping with take: the majority of pensioners were high unemployment. The total number being pushed below the poverty line. of benefi ciaries from state and farmers’ During these years shortfalls appeared schemes rose from 3.4 million to 6.2 mil- between total contributions and total bene- lion between 1990 and 2001. fi ts paid. Thus it became necessary in 1996, During the same period, the number for the fi rst time, to allocate funds from of insured nearly halved from 8.2 million the Treasury, on the basis of an interest- to 4.5 million in the decade from 1990 to bearing loan. 2000. This dramatic decline in the number Among the diffi culties facing the pen- of contributors was due to the combined sion fund defi cit was a signifi cant increase effect of the contraction of the labour force in contribution evasion from the mid- participation rate, the rise in unemploy- 1990s onwards. Many businesses, includ- ment, the growth in the informal sector and ing large businesses, ceased to pay their an increased number of self-employed. social security liabilities due to general This decline in the number of contrib- solvency problems. Due to this trend legis- utors, coupled with the policy of absorb- lation was enacted in 1996 to strengthen ing redundant labour into the pension the enforcement of the obligation to pay schemes, led by the end of the 1990s to a pension contributions. Between 1998 and dependency ratio of around 80 per cent. 2001, for example, pension scheme reve- Figure 1 illustrates the decline in the nue spent on debt recovery increased by sustainability of the pension system. nearly 1600 per cent.

Figure 1. Pension system participants, Romania, 1990-2001 (millions) 9

State Farmer 8 pensioners pensioners Employees

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

94 Social security reform defi ned benefi t to a defi ned contribution scheme, with a new pension calculation Due to the huge imbalances recorded by formula. Again, trade unions accepted the state pension system the Government this change, but realized after implemen- started a reform programme with two tation that the replacement rate decreased main objectives: to rebalance the state from 60 per cent to 35 per cent. pension system and to introduce two sup- In 2000 the fi rst reforms took effect in plementary pension pillars based on the the state pension system. The Ministry World Bank model. of Labour and Social Solidarity oversees Trade unions negotiated with the Gov- the National House of Pensions and other ernment during the development of the re- Social Insurance Benefi ts – the agency set forms. Unfortunately, due to a lack of pen- up by Law No. 19/2000. This legislation sion expertise trade unions focused solely regulates the state system of pensions and on the question of retirement age and did other social insurance benefi ts, and took not focus on other important aspects such effect in April 2001 (table 1). as the proposed increase of contributions Following a decade of short-term pol- by 15 per cent or the reduction of benefi ts icies, the new state pension scheme repre- from a 60 per cent replacement rate to just sented the fi rst attempt in the post-com- 35 per cent. This lack of expertise in social munist era to implement more consistent security matters affected the outcomes of parametric reforms. The main changes in- negotiations in several ways. As an exam- corporated in the new legislative frame- ple, the trade unions accepted the Govern- work were: ment’s proposal to increase contributions by Enlarging the coverage of the state pen- 15 per cent, mostly because of government sion scheme to the entire formal sec- undertakings that by the time the contributor labour force, including the self-em- tions were increased wages would have in- ployed, farmers, the unemployed 1 and creased, preserving employees’ net wages. civil servants; Unfortunately, even though employees’ net wages did not decrease their real wages de- Increasing the required retirement age creased in the medium term. from 57 for women and 62 for men to 60 The most important reform of the pub- and 65 by 2014, and concomitantly rais- lic pension system was the change from a ing the minimum length of service;

Table 1. The reformed state pension scheme, Romania, 2001

Contribution Contribution rate – 2001

Social insurance – employee contribution 11.67 per cent Social insurance – employer contribution 33.33 per cent – special conditions 28.33 per cent – outstanding conditions 23.33 per cent – normal conditions Unemployment – employee contribution 1 per cent Unemployment – employer contribution 5 per cent Health – employee contribution 7 per cent Health – employer contribution 7 per cent Employer contribution for disability 2 per cent Total – of which: 57 per cent (in normal conditions) Employee 19.67 per cent Employer 37.33 per cent

95 A new benefi ts formula (using a points After the implementation of the new system) calculated on the entire con- law in 2001, trade unions recognized tribution history and which penalizes the negative effects of the law on the la- early retirement on a near actuarially bour market and started a strong cam- fair basis; and paign to convince the Government to An increase in the contribution rate introduce amendments. from 14 per cent to 35 per cent, 40 per cent and 45 per cent (for normal, hard The most important union demands were: or hazardous working conditions and Reducing the retirement age for men special working conditions), calculated back to 62 years; on the basis of gross salary. Eliminating penalties imposed on The main elements of the state pension re- employees working for companies forms related to the contribution base and that did not pay contributions on time the method of collecting contributions for (their pension benefi t was reduced to the distinct subgroups of insured per- refl ect the reduced contributions); sons. However, the high rates of contribu- Maintaining the former retirement tion have proved to be a factor that fosters conditions for a fi ve-year period for evasion and slows down labour market people working in hard or hazardous recovery. conditions; The main problem that persists with the pension system six years after imple- Extending the status of “special work- mentation is the very low replacement ing conditions” to more sectors, thereby rates, which is due to a very high de- allowing earlier retirement; pendency ratio of about 1. Low levels of Giving trade unions the power to re- employment plus a lack of political will quest on behalf of workers that the to create a compulsory universal pension workers’ employment be recognized as system are the principal factors which hard or hazardous work, thereby win- maintain the public pension system’s poor ning them a higher level of employer performance. Some statistics suggest there contribution (previously only employ- are more than two million people, such ers could make this request, which they as the self-employed, military personnel, often did not wish to do because of the lawyers and farmers, who do not partici- higher contributions this required); pate in the scheme, either due to refusal or through legal exemption. Obliging employers to improve employees’ working conditions (often employers would choose to maintain The role of trade unions hazardous conditions and pay higher in pension reform contributions, rather than investing in health and safety improvements); The role of trade unions before the reforms Other measures to improve the stand- in 2001 could be summarized as follows: ard of living for pensioners and Being in a weak position in negotia- employees. tions because of a lack of expertise in social security With only one exception – the improvement of living standards for pensioners – all the More concerned with maintaining ex- other demands where fi nally accepted after isting retirement ages more than four years of campaigning and Limited appreciation of the other key after very diffi cult negotiations. After the issues of parametric reform, for exam- new legal provisions came into effect in ple, the impact of changes to the benefi t 2001, trade unions became members of the formula autonomous, tripartite National House of

96 Pensions and Other Social Security Rights. Trade unions negotiated with the Gov- The power to infl uence pension policy is ernment on the proposed supplementary limited through this body because it has pension pillars. This time, however, the a mainly advisory rather than administra- trade union confederation had pension tive role. That is why trade unions con- expertise as a result of technical training tinue to prefer public campaigning and organized by the ILO, the World Bank and direct negotiations with government to the ETUC. promote the interests of workers. The trade union confederation strongly opposed the regulations passed by parliament because they promote the interests of The World Bank-backed reforms insurance companies at the expense of the interests of workers. The administration Since 1998 the Government, assisted by fees established by law are very high and the World Bank, has been trying to in- will lead to administration costs of over troduce funded, privately managed pen- 30 per cent. The Government’s guarantee sion schemes along the World Bank’s pre- to underwrite contributions only, and not ferred three pillars model, as have been to guarantee a future pension, is com- introduced in other countries in Central pletely inadequate. Europe. The main argument used by the Countries where the World Bank has Government in promoting the introduc- promoted this model of reform are not tion of the new pension schemes was the normally confronted with the same pop- fi nancial imbalance confronting the state ulation-ageing rate as OECD countries. pension system.The fi rst law introducing Some of the problems in the functioning a second pillar scheme was passed by par- of PAYG systems worldwide are the result liament in December 2000. In the years of poor management or political infl uence. since there has been a series of legislation In Central European countries in the early to implement the three pillar structure. 1990s, state pension systems were used to The present situation is that there is a absorb redundant workers from former legal framework for establishing the sec- state enterprises. Pension systems became ond and third pillars, with the intention unemployment mechanisms, encourag- of their taking effect in 2008. The main ing early retirement, which engendered characteristics of the private pension a powerful imbalance and a worsening schemes are: of the dependency ratio. For instance, in Romania over an eight-year period the de- Compulsory; defi ned contribution; pri- pendency ratio fell from 3.8 to 0.8. vately administered; There was a hope that funded systems The second pillar, 6 per cent contribu- would ensure a replacement ratio at least tion is deducted and redirected from as high as the one assured by the old sys- the contributions to the state pension tem, if not higher, for an equal level of con- system; tribution. But this turned out to be unrealistic. In Hungary and Poland the funds set Compulsory for employees up to age up at the end of the 1990s have registered a 35 years, and optional up to 45 years; negative return rate. This proves that risks Administration fees – 3.5 per cent of associated with investing in the fi nancial the contribution value and 0.1 per cent market cannot be avoided and they are from total assets each month; going to represent a permanent threat to the real value of pensions. Pension companies to be regulated by In order to avoid this risk, the Hungarian the Surveillance Commission; pension funds have invested a signifi cant Government guarantees: for actual part of their assets in government bonds. contributions minus administration In other words, the “experts” have created fees (and excluding interest earned). a model where there is little difference

97 between the classical PAYG system and Romanian trade unions are preparing a the privately managed investment system. strong campaign in support of amend- Romanian trade unions have also criti- ments to the proposed system, to protect cized the so-called “Chilean model”, devel- workers’ interests. oped in the early 1980s, which was the fi rst The main demands of trade unions funded private pension system. Research are: has shown that the administration costs of The law should promote the real goal these funds increased to over 20 per cent of the reforms – better pensions for fu- of contributions. Comparing this fi gure ture pensioners; with the administrative costs recorded by classical PAYG systems in Central Europe, There should be separate state and pri- a difference of around 15-18 per cent ex- vate systems for making pension con- ists. This leads unions to the conclusion tributions (private contributions are that the companies managing these funds currently deducted from state pension are more focused on their own profi ts than contributions); in producing good pensions for workers. Occupational pension schemes to be allowed in the system; The role for a future union campaign There should be some level of regulation of the benefi ts formula, otherwise A major criticism voiced by trade unions workers have no capacity to predict has been the lack of transparency in the their retirement income; Government’s development of the re- State guarantees to be based on mini- forms. Despite the commentary in some mum investment returns rather than World Bank papers that the social partners solely contributions. were consulted during the development of the new legal framework, this was not the This campaign will be a diffi cult one for case. The lack of transparency is borne out trade unions because of the complexity of by the high degree of public confusion and the issues and because of the lower level of ignorance about the new system, an ex- technical expertise available to trade un- perience shared in Croatia, Hungary and ions compared to government. Romania. This lack of transparency has led to worker insecurity about participating in the new funds. Note The new private pillar system of pensions will start to operate in 2007 for 1 The National Authority for Employment con- third pillar and 2008 for the second pillar. tributes on behalf of unemployed workers.

98 Pension reform and trade unions in Slovakia

Slovak unions faced the questions most unions faced in post-communist States: how to preserve social tripartism, how to preserve the social protections inherent in socialist era pension systems and how to balance all this with pension system sustainability.

Mária Svorenˇová Trade Unions Confederation of the Slovak Republic

A brief history of the pension system ment, disability or the death of a bread- and the role of trade unions winner. As nearly all individuals had a duty to work the pension scheme there- The roots of the Slovak pension insurance fore provided benefi ts for everyone. scheme can be found in the Czechoslovak The value of pensions refl ected wages pension system, which had a shared trad- earned prior to retirement, and with low ition with western European countries. wage differentiation in the socialist econ- After the Second World War, during the omy there was little differentiation in communist period, the pension system was benefi t levels. For many years pensions signifi cantly altered. The statutory pen- were rarely indexed, with the result that at sion system before 1989 was, in principle, the beginning of the 1990s pensioners rep- very generous, especially towards certain resented a signifi cant proportion of people groups in the population. This generosity living below the subsistence minimum. was refl ected especially in the eligibility conditions rather than in the level of the benefi ts. All citizens were covered by the The role of trade unions during pension system preferential treatment was the transition process of the 1990s given to certain groups of manual workers who worked in hazardous conditions, From the beginning of the national tran- the armed forces and high-level politicians sition process following the collapse of and Communist Party leaders. the socialist state, trade unions played an The statutory pension system in Slo- important role in reforming the social se- vakia inherited from the former Czecho- curity system. A newly created Trade Un- slovakia covered the majority of employ- ions Confederation of the Slovak Republic ees and provided old-age, disability and (KOZ SR) became a powerful group rep- survivor benefi ts. Every person reaching resenting workers and citizens, and pro- pensionable age (60 years for men and moting their interests under free market 53-57 for women) was entitled to an old- economy conditions. The environment age pension equal to 50 per cent of his/ in which the new, post-socialist era trade her previous wage, but subject to certain unions operated changed fundamentally upper limits. This pension policy was de- during the process of comprehensive pol- veloped during the socialist era and it as- itical, economic and social transformation sumed the existence of full employment. that took place in Slovakia.1 The prime objective of the pension system The most important forum for nego- was to replace income lost due to retire- tiations about government legislation

99 and policy on living standards and social compulsory employer contributions, and security was (and is) the Council of Eco- an employee may voluntarily contribute to nomic and Social Agreement of the Slo- his/her account. Very signifi cant was the vak Republic (the Council), established role of the KOZ SR in promoting a better in 1990. The Council is an independent, system of pensions indexation, as the link tripartite body comprised of the KOZ SR, between infl ation and the growth of pen- the Federation of Employers’ Unions and sions had not been clearly specifi ed in the Associations of the Slovak Republic, and legislation. the Government of Slovakia. The Coun- cil allows the parties to initiate and reach agreement on government policy and le- The process of pension reform gislation. Until 1997 General Agreements in Slovakia were concluded annually between the social partners represented on the Council: During the 1990s there were several at- “They provided guidance for lower-level tempts to pass pension reform legislation, collective bargaining on wages, health based on substantively new ideas and and safety, and other conditions at work, principles. The fi rst reforms in the social as well as containing pointers as regards sphere were made in 1990 when Slovakia policies towards employment and unem- was still part of the Czechoslovak Repub- ployment, and measures to reform the so- lic. During the ten years following the es- cial security system.” 2 tablishment of Slovakia in 1993, successive Every policy proposal or draft bill re- governments had all declared their inten- lated to pensions is the subject of nego- tion to implement radical reform meas- tiations at the Council. The outcomes of ures to the pension system, but none were these negotiations and any council agree- successful. ment are passed to both the government and the parliament, having the nature of Since the mid 1990s, the accession countries recommendations. The respective policy have made signifi cant adjustment to such fea- agendas formulated by each of the social tures of their public social insurance schemes partners are tabled in parliament as part as retirement age, benefi t formulas, the treat- of the underlying rationale of the bill or ment of special categories of workers, and the policy initiative. collection of pension contributions. Most of In the early 1990s the KOZ SR suc- these are the result of political compromise, cessfully opposed the Government’s at- with governments having proposed larger in- tempt to increase the retirement age and creases initially, to be reduced through a proc- to abolish the more advantageous benefi ts ess of negotiation with trade unions and, in given to employees engaged in dangerous some cases, with employers.3 working conditions. In 1992, the Federal Czech and Slovak Parliament abolished all In contrast with other accession countries, preferential treatment for different work the situation in Slovakia had not been categories within the pension scheme. the same: However the KOZ SR reached agreement with the newly established Slovak On three occasions – always during an election Government and the employer represen- period – the Slovak Government has tried to tatives to reintroduce all these preferen- implement complex pension insurance reform. tial benefi ts into the Social Security Act, In 1996 the “Social Security Transformation where they remained until 2000. Partially Programme of Slovakia” was adopted. This these preferential benefi ts were replaced highlighted the need for contribution-based by supplementary insurance of workers social insurance benefi ts. The programme also engaged in dangerous working condi- stressed the principle of “pay-as-you-go” fi - tions. This supplementary old-age and nancing, autonomy and unifi cation of the com- disability insurance is paid for through pulsory social insurance system (including

100 old-age insurance, invalidity insurance and need for a substantial reform of the pen- survivor insurance). The method of benefi t sion scheme was widely recognized not calculation and the scope of social benefi ts re- only by technical experts and politicians, mained almost the same, however.4 but also by the general public. A signifi cant motivation for transform- The necessity to transform pension ing the pension system was the argument schemes, and the solutions available to about the ageing of the population and the address major problems facing pensions resulting dependency ratio. However, as schemes in Central and Eastern European fi gure 1 shows, the population structure of Countries (CEEC), characterized Krzysz- Slovakia has a high proportion of people in tof Hagemejer’s keynote address to the the younger age brackets of working ages Sub-regional Trade Union Seminar in Za- (which is a higher proportion compared to greb, October 2000: the EU 15 average) and this relativity will remain for several decades. The expected In the upcoming decades, pension scheme fi - elderly dependency ratio in Slovakia will nancing will have to cope with growing ten- only increase from 16.5 per cent in 2000 to sions resulting from the demographic ageing 29.6 in 2030, while in Western European process. There are only three solutions avail- countries it would be from 23.6 per cent able to cope with the unfavourably changing to 41.6 per cent respectively.7 proportion between the numbers of employed persons and pensioners: increasing the retire- Transformation of the pension system into ment age, lowering pension benefi ts, or in- a pension insurance scheme commenced in creasing contributions. Contributions are al- 1999 when the government prepared its “Draft ready high and it is hard to imagine that a po- Concept of Social Insurance Reform” for pub- litical consensus could be reached to increase lic discussion. A survey (with 14,796 respond- them. Benefi ts, on the other hand, are low by ents) carried out by the Research Institute of international standards in most of the coun- Labour, Social Affairs and Family appeared to tries, and should be rather improved. What is confi rm Slovak citizens’ willingness to partici- left then is to encourage people to work longer pate more actively in providing for their old and retire later.5 age and to receive benefi ts based on contributions. However, a survey published in Labour During the 1990s the KOZ SR was the and Social Policy (No. 1-2/2000) found that citi- main non-governmental actor actively zens were not willing to renounce the exist- pressuring government to develop and ing system: two-thirds of respondents were implement pension reform. Even though against raising the retirement age.8 the pension scheme in Slovakia has not been sustainable and despite there hav- Another strong impulse for pension re- ing been major reforms in all neighbour- form was the result of the autumn elec- ing countries, no Slovak government has tion in 2002, when a coalition of solely been able to implement major reform. In right wing parties won power. Immedi- 2001, among 14 selected CEEC countries ately after the creation of a new govern- only Slovakia and Ukraine had not legis- ment all poverty alleviation benefi ts were lated reform of the statutory pay-as-you- drastically reduced and a new, more indi- go (PAYG) pension scheme.6 vidualistic policy of pension reform was It became clear also that pension adopted. This strong change in social schemes developed during the social- policy resulted in the new government ist era could not cope with the economic issuing in spring 2003 a paper “Concept and demographic conditions of the post- of Pension Security Reform in the Slovak transformation society: the evolution of Republic” (the “Concept”). This paper a market economy, high levels of unem- was discussed at the Council of Economic ployment and an expected decline in the and Social Partnership (the primary tri- youth dependency ratio (see fi gure 1). The partite body for national discussions

101 Figure 1. Population structure in Slovakia, 1990 and 2002 (thousands)

80-84 Women Men

70-74

60-64

50-54

40-44

30-34

20-24

10-14

0-4

25 20 151051005 15 20 25

1990 2002 Source: SO SR.

on policy and governance), where the The act of parliament that created the KOZ SR strongly opposed many parts of new scheme was passed by only a slim the Government’s proposals. The views of majority and the President of Slovakia sent trade unions were not supported by either the act back to parliament for further de- the employer groups or the conservative bate, after which it was again passed nar- government. The Government then pro- rowly. The act gave all workers already in- ceeded to endorse the concept, and it was sured the choice to join the private savings subsequently enacted into law by parlia- scheme and required that all new entrants ment. The fi rst piece of legislation, on so- to the work force must participate in it. For cial insurance, established a new public, each member, 9 of the 24 per cent rate of PAYG pension scheme, under which pen- pension contribution would be diverted to sion benefi ts would be much more closely an individual savings account managed aligned to each individual worker’s previ- by a private savings fund. This diversion ous earnings and contributions. of contributions would create an enor- The second new law, on old-age pen- mous hole in the fi nancing of the public sion savings, established a mandatory, pension scheme, around 30 per cent of its privately managed, defi ned contribution income over the next several decades. To second pillar pension scheme with indi- help balance this loss, the Government set vidual pension accounts, to be fi nanced by aside 65 billion Slovakian koruna (SKK) diverting a portion of the existing contri- from the total sale price of the privatized bution rate from the fi rst pillar. Both new state gas enterprise and has reserved this systems largely destroyed the solidarity to underwrite the transformation of the and cross-subsidization of the previous pension scheme. It also established a new scheme. Reserve Solidarity Fund in the Slovakian

102 Insurance Agency (SIA) which would re- Multi-pillar reform will lead to a state ceive 4.75 per cent of all pension contribu- fi scal defi cit – under the EU stability tions to create a fund for underwriting the pact a 3 per cent defi cit limit should be public as well as private pension scheme. met; The Slovakian fi nancial market is not suffi ciently developed and as a result The deficit issue pension funds have problems investing assets; The estimated impact on the fi nancial stability of the public pension insurance The defi cit in the public, PAYG pillar will scheme has not been published. However, create pressure to index pensions inad- the following reasons demonstrate that it equately, and the younger generation of will be signifi cantly. workers will also suffer because taxation revenue will need to be diverted The fi nancial stability of the fi rst pillar to meet the defi cit in the PAYG scheme; of old-age pension insurance is undermined by the redirection of 9 per cent The second pillar scheme will not solve of the contributions rate into the second the expected problems of demographic pillar of private savings and by splitting change; and disability insurance with the diversion A minimum level of pension benefi t of another 6 per cent. The fi rst pillar is required to provide a decent stand- old-age pension insurance is presently ard of living for the elderly who have fi nanced by a contribution rate of only worked for their entire adult life. 9 per cent instead of the 28 per cent rate used to fi nance old-age and disability Figure 2 shows the projected growth of pensions before the reforms; the defi cit in the public fi rst pillar pen- The defi cit in the PAYG pillar will grow; sion system.

Figure 2. Revenue and expenditure of the social insurance agency on old-age pensions, Slovakia, 2004-2010 (thousands of SKK) 140

120 Revenues Expenditures

100

0 Budget Proposal Expected Proposal Forecast Forecast Forecast Forecast 2004 for 2005 budget for 2006 for 2007 for 2008 for 2009 for 2010 2005

103 With the redirection of a large share The least popular reform introduced of contributions into the second pillar pri- by the new Social Insurance Act was the vate pension system, the defi cit of the fi rst increase of the retirement age. From 2004 pillar PAYG pension system will continue the retirement age will gradually increase to deepen. In 2010 the Social Insurance to age 62 for both males and females, from Agency will collect only about 50 per cent the former ages of between 53 and 57 for of the funds necessary to fi nance existing women (depending on the number of chil- pensions. The Act states that the Reserve dren raised) and age 60 for men. Fund of Solidarity has to cover the defi cit, The most substantial change has been but it is already depleted after the last two to the benefi t levels in the public old-age years’ defi cit. Another option is to under- pension scheme. Instead of the previous write the defi cit from the state budget, but requirement of a minimum of 25 years of it is not clear whether there will be a suffi - insurance contributions/employment, it cient budget surplus to cover this shortfall. is now suffi cient to have a minimum of There is the further option of borrowing 10 years (assuming the person has also the funds to meet the shortfall, but this reached pensionable age). would create a fi nancial liability for future The monthly benefi t is calculated on generations (both those currently working the basis of: and those still to enter the workforce). 1. For each year of contributions during the period since 1984, a “personal The framework of the pension system earnings point” is calculated, being the and of pension benefits ratio of that employee’s gross annual income to the average annual wage across the workforce in that year, up to Pension reform was introduced to improve a maximum ratio of 3 (i.e. three times the pay-as-you-go pension insurance sys- the average wage). Over the working tem and to introduce a system of pension life since 1984 an average is taken of savings. This is the fi rst mixed pension all of an employee’s annual “personal insurance system in Slovakia. earnings points”, which is called the The new PAYG scheme came into ef- “average personal earnings point”. fect on 1 January 2004 and introduced the following substantial changes to the pen- 2. The “average personal earnings point” sion scheme: is multiplied by the number of years of employment (i.e. years of insurance A different calculation of old-age pen- contributions) and by the “current sion benefi t; pension value”. The “current pension The reintroduction of early retirement, value” is set by legislation every year but with a restriction in the benefi t and in 2006 it is about 1.2 per cent of the level; monthly average wage (SKK214.68). The entitlement to receive an old-age This old-age pension calculation formula pension while still earning income and is signifi cantly austere towards low in- without income testing; come contributors. A worker with 40 years Equality of entitlements for widows of contributions who earned the min- and widowers; imum wage would receive only 50 per cent of their average pre-retirement in- The abolition of a statutory minimum come, whereas such a worker would have pension level which, under the previ- received 120.2 per cent of pre-retirement ous scheme, was set at 110 per cent of income under the old scheme. the subsistence minimum; Very popular among contributors Increase of the retirement age to 62 for was the retention of the early retirement both genders. pension, although it is subject to new

104 conditions. A person becomes eligible for the SIA has been through many changes an early retirement pension if they have but its tripartite way of governance still been insured for at least 10 years and if the survives. pension payment (as calculated at the day The SIA collects all contributions to- of applying for it) is higher than 1.2 times wards the insurance schemes (including the offi cial subsistence minimum income. pension, disability, sickness, occupational Pension benefi ts are indexed annually injury and unemployment insurance) and on 1 July, based on the growth of consumer pays benefi ts from all those schemes. Since prices and average wages. the 2004 reforms, the SIA also provides The statutory public pension system personal accounts for fi rst pillar pension in Slovakia is composed of two types of contributors. For private pension funds schemes. The general pension insurance (second pillar), the SIA also collects con- scheme covers the majority of employees. tributions and produces a list of concluded For professional military members and agreements between insured persons and members of the special state services a private pension funds. different pension systems exist. The two main governing bodies of the In the second private savings pillar, Social Insurance Agency are its super- 9 per cent of old-age pension contribu- visory board and its board of directors. tions are accumulated in personal ac- The supervisory board has 15 members, counts within pension fund management of which two are nominated by trade un- companies (PFMCs), but the collection of ions, three by community associations contributions to PFMCs is done by the So- which represent the interests of pension cial Insurance Agency. Eligibility to a pen- benefi ciaries, fi ve by employer groups, and sion from this second pillar accrues after four by the Government. The president is 10 years of savings through the purchase the Minister of Labour, Social Affairs and of an annuity. Family. A supplementary, third pillar pension The Board of Directors consists of fi ve insurance scheme was established in Slo- members. The President of the Board and vakia in 1996. During the 2003-4 pension two Vice-Presidents are nominated by the reforms the legislative framework was Ministry of Labour, Social Affairs and changed, requiring all insurers providing Family (MLSAF), one member is nomi- voluntary old-age insurance to restructure nated by the trade unions and commu- themselves to conform to the new regula- nity groups, and the fi fth member by the tions. Contributions are paid on a volun- employer groups. tary basis and the rate of an employer’s contribution can be set by collective agreements. Also eligibility to benefi ts from this Pension reform in Slovakia third pillar has been strengthened. and trade union involvement

The KOZ SR played an important role in The social insurance agency shaping the pension scheme in Slovakia. and tripartite governance It realized very early after the transition process began that reform to the pension The most important changes to the pen- system was inevitable and necessary. The sion scheme which existed in the former KOZ SR took an active part in developing Slovak Federal State within Czechoslova- pension reform during 1990s and in the kia occurred in Slovakia in 1993 and 1994. early years 2000s. In 1993 the KOZ SR pre- It was the separation of the ﬁ nancing of pared its own proposal for social secur- pensions from the state budget and the ity reform which was, in many respects, creation of a new organisational structure accepted by the Ministry of Labour and for pension administration – the Social In- Social Affairs. The KOZ SR was also active surance Agency (SIA). Since its creation in responding to each government reform

105 proposal and used the tripartite forums agenda. Signifi cantly, there was also strong of social dialogue to promote workers’ in- public support for substantial changes to terests in social security protection. These the statutory pension scheme, particularly tripartite forums were not the sole forum to reduce the level of income redistribu- for debate, as meetings were also held of tion inherent in the previous public pen- technical experts associated with each of sion system. the social partners to discuss pension re- The Government funded a large pub- form documents and legislation. licity campaign on pension reform, pre- KOZ SR helped the MLSAF to organize senting only the positive aspects of its opinion-polls, and to distribute and collect proposals. It was the simplistic positives questionnaires. KOZ SR valued consensus that the public heard and listened to, and building and on many occasions was suc- the government was thereby successful in cessful in reaching agreements with the gaining the public’s trust for its pension social partners on cornerstone issues. One reforms. of the key tripartite agreements in the de- For KOZ SR the results of pension re- velopment of social security reform was form were mixed. KOZ SR was able to on the framework of the pension scheme infl uence positively some aspects of the created by legislation in 2001. reform process, but it was not possible However, as mentioned earlier, a Min- to prevent the overall thrust away from ister of Labour, Social Affairs and Family a solidaristic system of pensions. During from the hard right was appointed after the process of reform, the KOZ SR played the 2002 election, and refused to cooper- a key role in having the following amend- ate with trade unions. This new Minister ments included: created a special commission for pension After the elections in 2002, the fi rst reform and invited employer groups, re- Government proposal was to abolish searchers and academics, policy institutes the PAYG pension scheme and replace and NGOs to participate, but excluded it with a private savings scheme. How- the KOZ SR and any other union repre- ever, there was no proposal as to how sentation. In contrast with previous gov- to fi nance the entitlements of current ernments, the conservative government benefi ts. After strong opposition from elected in 2002 did not seek any level KOZ and also from some experts and of consultation with unions. However, left wing politicians, this proposal was KOZ SR continued to develop alternative abandoned. There had also been a pro- policy proposals and raise its objections to posal to increase the retirement age to the government’s reform agenda. 65 years. The Trade Unions Confederation was the main if not the only opponent of most Other changes accepted by the MLSAF aspects of the proposed reforms. The un- and later by the government were ions were especially opposed to the pro- mostly minor or their complexity made portion (40 per cent) of contributions to them diffi cult to explain to the public. be redirected to the second savings pillar. For example, a transition period was Such a large deduction from the contribu- introduced during which the calculations towards the public scheme under- tion formula was moderated to lessen mines the fi nancial sustainability of the the gap between the highest and the pay-as-you-go pillar of the pension sys- lowest pension benefi ts and to reduce tem, which was already in debt before the the gap between benefi ts, especially proposed reforms took effect. low income pensions, under the exist- However, KOZ SR could not win the ing and new schemes. After one year battle to put a more social face on the new of operation this transition period was pension scheme. The KOZ SR did not re- increased from 3 to 10 years, in part to ceive the same level of media coverage protect low income pensioners, but also as the Government did in promoting its to protect the state budget because the

106 majority of low income workers would 3 Fultz, Elaine. 2003. Recent Trends in Pension Re- be eligible to state social assistance form and Implementation in the EU Accession Countries, benefi ts. (Note though that the value of paper presented at the Informal Meeting of Minis- ters at the International Labour Conference, Geneva, social assistance benefi ts is about one pp. 4, 5. half of the subsistence minimum, due 4 Bednarik, Rastislav. 2004. Pension reform fi - to austerity measures made at the end nally a reality, EIRO (European Industrial Relation of 2002 and early 2003). Observatory on-line). Early retirement pensions for workers 5 Social Protection and the Informal Sector in Central and Eastern Europe, Seminar Report, Za- dismissed one year before reaching greb, 2000, ILO-CEET – Budapest, p. 10. retirement age would not be reduced 6 Fultz. Elaine and Markus Ruck. 2001. Pension (normally, there is a reduction of 0.5 per Reform in Central and Eastern Europe: An Update on the cent of pension benefi t for each month Restructuring of National Pension Schemes in Selected before reaching retirement age). Countries, ILO-CEET Report No. 25, p. 11. 7 In the second pillar scheme, unisex Svorenˇová, M. and A. Petrášová. 2005. Social Protection Expenditure and Performance Review of the tables for calculating pension benefi ts Slovak Republic. Budapest: ILO-CEET, pp. 367-368. were introduced. 8 Bednarik, Rastislav. 2004. Pension reform fi - Better supervision of private funds was nally a reality, EIRO (European Industrial Relation promoted. Observatory on-line).

But, as discussed earlier in this article, References the majority of the population supported the pension reforms, having the mistaken Bednarik, Rastislav. 2004. Pension reform ﬁ nally a re- expectation that pensions for everybody ality, EIRO (European Industrial Relations Ob- would be higher. Despite being able to servatory on-line). win the changes listed above, it was very Fultz, Elaine. 2003. Recent Trends in Pension Reform difﬁ cult for KOZ SR to oppose the main and Implementation in the EU Accession Countries, A paper presented at the Informal Meeting of thrust of the Government’s reforms. The Ministers at the International Labour Confer- performance of the new pension system ence, Geneva, since its inception has demonstrated that — and Markus Ruck. 2001. Pension Reform in Central many of the trade unions’ objections were and Eastern Europe: An Update on the Restructuring valid and correct. of National Pension Schemes in Selected Countries, ILO-CEET Report No. 25. ILO-CEET. 2000. Social Protection and the Informal Sec- Notes tor in Central and Eastern Europe, Seminar Report, Zagreb. 1 For more about the pension scheme in the Slo- Svorenˇová, Maria. 2000. The Development of Trade vak Republic between 1989 and 2004 see Svorenˇová, Unions in Slovakia during the Last Decade. In: M. and A. Petrášová (2005), pp. 121-185; 308-328. South East Europe Review for Labour and Social 2 Svorenˇová, Maria. 2000. The Development of Affairs. Vol. 3. No. 2/2000. Baden-Baden: Hans- Trade Unions in Slovakia during the Last Decade. Bockler Foundation. In: South East Europe Review for Labour and Social Af- — and A. Petrášová. 2005. Social Protection Expendi- fairs. Vol. 3. No. 2/2000. Baden-Baden: Hans-Bockler ture and Performance Review of Slovakia. Budapest: Foundation, p. 135. ILO-CEET.

107

Trade union role in the Slovenian pension system

Social values rank highly within Slovene society, despite an increasing neo-liberal influence in politics. Social dialogue and tripartism also have good public support as they are seen as being fundamental to a Slovene style of democracy. Pension reform was seen as a litmus test of preserving this culture.

Metka Roksandi´c Association of Free Trade Unions of Slovenia (ZSSS)

1. Introduction 2. Brief history of the Slovenian pension system and the role The Slovenian pension reforms of 1999 of trade unions represented a major victory for trade unions. The two fundamental elements that 2.1. History of the pension system unions succeeded in retaining were the maintenance of intergenerational solidar- The Slovenian pension system ﬁ nds its ity in the funding of pensions and the roots in the nineteenth century social in- preservation of mandatory insurance as a surance systems of the Austro-Hungarian basic and general insurance for all. monarchy and in the compulsory workers’ The pension system is one of the most social insurance in Yugoslavia from 1937 important pillars of the Slovenian social onwards. After the Second World War, security system with its income protec- state social insurance became a universal tion for old age. Its fundamental status right for all in Yugoslavia. As a new State, is recognized by the inclusion in the Slovenia has maintained that pension sys- Constitution of a right to social secur- tem and, since 1982, it has been adminis- ity. Slovenes place a high value on good tered autonomously from Government. social policy and rights, especially social The new Constitution in 1991 created security, and so Slovenian trade unions a constitutional right to universal social have always been deeply involved in the protection and, as a result, in 1992 an pension system, including in the manage- integrated aged and invalidity pension ment of schemes. And as recent Slovenian scheme was adopted. In 1996 minor re- history shows, the role of unions has at forms were enacted: the pay-as-you-go times been critical to maintaining a sound system was retained but supplementary, pension system. voluntary (third pillar) pension insurance was introduced, along with an amended system of valorization. After 1992 several Note: This paper presents a trade union per- other minor amendments were made. spective of the pension system in Slovenia: its roots and development in a newly established State, and the role of trade unions in shaping the pension debate. By “pension system” I am referring to the whole system of pensions and invalidity insurance. However, I will focus here on the aged pension system in particular.

109 2.2. Preparations for major reforms solidarity, a compulsory second pillar, a standard retirement age of 65 years for At the request of the Slovenian Govern- men and women (with no associated qual- ment, in 1995 and 1996 research into the ifying period of contributions), signifi cant pension system was conducted by spe- reductions in the benefi t levels of acquired cial missions of the International Mon- pensions, and a short transitional period etary Fund and the World Bank. In 1996, for equalizing retirement ages. in accordance with the European Union The proposed reforms were unaccept- (EU) PHARE1 programme, the Govern- able to trade unions. The Association of ment started developing proposals to re- Free Trade Unions of Slovenia (ZSSS) reform the pension system. This led to the solved to oppose the general direction set release in late 1997 of a White Paper on out in the White Paper. The main issues pension reform. This paper was preceded for the ZSSS were: by an intensive government public edu- the retention of intergenerational soli- cation campaign the necessity for pension darity as the cornerstone of the pension reform. system; There were several factors infl uencing pension reform at this time. Slovenia had the second pillar scheme should be vol- begun the process of preparations for ac- untary, not compulsory; cession to the EU, with the related pres- maintaining the combination of age sures of economic modernization which and years of service as conditions focused attention on the pension system. for eligibility for a retirement benefi t; These pressures infl uenced the Govern- and ment’s decision in 1996 to decrease employers’ contributions from 15.5 per cent a longer transitional period before the to 8.85 per cent of gross earnings, the ar- retirement ages for women and men gument being that it would increase the were equalized. competitiveness of the Slovenian economy. It was a decisive moment. The au- At the beginning of 1998 the ZSSS and tonomous state pension then ceased being other trade unions mobilized protest: funded entirely by contributions from the weekly demonstrations against the White active population and became state co-fi - Paper reforms in front of the Govern- nanced: the Government undertook co-fi - ment’s headquarters; the collection of sig- nancing to compensate for the reduction natures in support of a referendum; and, in employer contributions. To meet the at the time, the largest workers’ demon- cost of co-fi nancing the Government in- stration ever held in Slovenia. These ini- troduced a payroll tax to be paid by em- taitives won unions and their campaign ployers. This tax was politically more ac- extensive media coverage and built up sig- ceptable than the previous level of pension nifi cant public support. contributions. The ZSSS also prepared information material for the public, showing the impact on workers, particularly women, of 2.3. The trade union perspective the proposed reforms: the effect on re- on the proposed pension reform tirement ages, benefi ts, eligibility, etc. This education campaign was achieved The 1997 White Paper instigated tremen- through the distribution of material via dous trade union activity on pensions. It affi liate unions, at workplaces and at dem- was clear that the Government’s agenda onstrations, and the use of the media. was to dismantle the existing pension system: the picture from the White Paper was not white but black. It proposed a three- pillar system with no intergenerational

110 2.4. The response of Government full pension entitlements under the fi rst pillar for 40 working years (38 for Despite the union campaign, and des- women) at a minimum age of 58; pite the fact that the Economic and Social different retirement ages and years of Council of Slovenia (the national tripartite service for women and men – women advisory body) and the National Coun- to retire at age 63-61 and men at 65-63, cil2 (the upper chamber of Parliament with the exact retirement age depend- with powers of review and supervision ing on the number of years of contribu- of legislation passed by the National As- tions, and specifi c benefi cial conditions sembly) both demanded a social consen- applicable to women for work before sus before any parliamentary procedure age 18; and should occur, in July 1998 the Govern- ment tabled a draft law in parliament. a longer transitional period for increas- However, the draft law did not include ing the retirement age for women to 58 the proposed compulsory second pillar years (to be implemented by 2014). and retained the existing pay-as-you-go system. One important factor which in- To reach an agreement with Government, fl uenced Government in not pursuing this trade unions had to concede on some is- second pillar system was the unknown sues: higher eligibility age; longer periods level of management costs of such a pri- of work before qualifying for a pension; the vatized scheme. pension benefi t is calculated based on the After intensive public debate and many average of the worker’s best 18 consecutive academic papers on the subject, in 1999 the years of salary instead of the previous level time was ripe for talking and negotiating. of 10 years (see section 3.2); and the pen- It was also the fi rst year for negotiations sion benefi t will be reduced on a phased-in for Slovenia’s EU accession. basis from 85 per cent to 72.5 per cent of In April 1999, after the draft law’s fi rst the pension base. The accord on pension reading in the National Assembly, the reform was seen as a win-win both for gov- Minister of Labour initiated talks with ernment and unions, but some fi nancial ex- unions on pension reform. After hard but perts claimed that pension reform did not short negotiations with trade unions, con- go far enough and foresaw problems of fi - sensus was reached by the end of April nancial sustainability in the near future. 1999 and the Government signed an agree- Pension reform was a turning point in ment with all four representative trade Slovenian social dialogue, as it was the fi rst union confederations. The Economic and signifi cant experience in the new State of Social Council of Slovenia also endorsed the social partners reaching consensus on the agreement, which Parliament then en- social protection issues. It demonstrated acted into law. that social dialogue is an effective mechanism in developing social and labour policy at the national level. And, impor- 2.5. Trade union outcomes tantly, it shows that trade unions have the capacity to participate effectively in social The result of the trade union campaign dialogue at the national level. was the following: compulsory pension insurance (the 3. Overview of the legal and pay-as-you-go system) remained the institutional framework of pensions cornerstone of the pension system – the second pillar; The new Pension and Invalidity Insurance voluntary second pillar contributions Act was adopted in December 1999 with based on agreements reached through effect from 1 January 2000. The structure of collective bargaining; the pension system is shown in fi gure 1.

111 Figure 1. Structure of the pension system adopted in 1999 in Slovenia

Pillar I Pillar II Pillar III System of compulsory in- Supplementary, volun- Supplementary, volun- surance paid by contribu- tary collective pension tary pension insurance to tions from workers and insurance, mainly aris- which an individual con- employers ing out of collective bar- tributes, independently gaining, with the pension of an employer Intergenerational soli- scheme being open to darity all employees of the employer, and the employer paying all or part of the contributions Compulsory employer- paid insurance for those working in hard conditions (miners, police, sol- diers, etc.)

• Right to pension: • Contributions receive tax exemptions – old-age benefits • Contributions are managed by public – invalidity and private insurers – survivor’s pension • Defined contributions – partial pension • Paid as a lifelong annuity • Supplementary state • Benefits defined by years of contribu- benefits for low pen- tions, etc. sion earners • Managed by autonomous public authority

The Pension and Disability Insurance pension, and this is paid from consoli- Institute of Slovenia (PDII) is a public body dated revenue. This latter pension is set administering the compulsory fi rst pillar at one-third of the pension base (see sec- insurance pension system. This system is tion 3.3). fi nanced by employer and employee contributions (two-thirds) and from the state budget (one-third). Contributions are: 3.1. Retirement conditions employers 8.85 per cent and employees 15.5 per cent of gross wages. This scheme Eligibility for a retirement pension is a covers (as at 2004) approximately 83 per product of a person’s age and years of pen- cent of the total labour force with pension sion contribution (“qualifying period”). entitlement for old age, disability, the need The fi nal structure of the pension scheme for permanent assistance and care and (following a transition period during death. which retirement ages will increase) will There is also a basic, safety-net means- be as shown in table 1. tested pension for people not otherwise In 2006 the eligibility for a full pen- entitled to the fi rst pillar insurance-based sion for full working years (40 for men

112 Table 1. Eligibility for retirement pension, men and women

Retirement age Qualifying period Entitlement

Men 58 40 years of work Full pensiona

Women 58 38 years of work Full pension a

Men 63 At least 20 years and up 35% of retirement pension base b to 40 years of pension- + qualifying period 1.5% for every year in excess of 15 years of pension-qualifying period, to a maximum of 72.5%.

Women 61 At least 20 years and up 38% of retirement pension base b to 40 years of pension- + qualifying period 1.5% for every year in excess of 15 years of pension-qualifying period, to a maximum of 72.5%.

Men 65 At least 15 years and up 35% + 1.5% of retirement base b for every to 40 years of pension- year of pension-qualifying period qualifying period

Women 63 At least 15 years and up 38% + 1.5% of retirement base b for every to 40 years of pension- year of pension-qualifying period qualifying period

Notes: a See section 3.2. b See section 3.3.

and 36 and 3 months for women) is at 3.2. Calculating the old-age pension age 58 for men and 55 and 4 months for women. With at least 20 years of pension- An old-age pension is calculated on previ- qualifying period, men can retire at age ous earnings. Currently it is the average of 61 and 6 months and women at age 60 and the best 16 consecutive years of salary (ris- 4 months. All age limits and qualifying ing to 18 years in 2008) since 1970. periods will increase during a transitional This average is then the base for pen- period from 2000 to 2014. sion calculations: men receive as a pension In some circumstances the retirement 35 per cent of this average for 15 years of age can be lowered but to not less than service; women 40 per cent for 15 years of 55 for women and 58 for men. This ap- service; and an additional 2 per cent for plies where a worker is entitled to a credit each year of contributions prior to 2000. for having raised a child, where a woman For work after 2000, 1.5 per cent is calcu- performed work before the age of 18, lated for each year of service. When all where the worker was engaged in an oc- years of service are performed after 2000 cupation designated as “hard work”, or the values in table 1 apply. Pensions are where there are special personal health indexed twice a year based on movements circumstances. in average wages. In practice the average years of service in qualifying for old-age pensions is currently 37 years for men and 32 years, 1 month for women. Between 1999 and 2005 these averages increased by 2 years, 3 months both for men and for women.

113 3.3. Maximum and agreement is not reached, unions will nor- minimum payments mally start a public education and media campaign to infl uence public opinion. Levels of pension entitlement are based The National Council, the Parliamen- on a national minimum pension standard, tary chamber of review, has four trade which was defi ned in 1996 at 64 per cent union representatives in the Council, nom- of monthly average wages and is valorized inated directly by unions, out of a total in the same way as pension entitlements. size of 40, as well as those from employer The minimum receivable pension is set at groups. The Council has the power to veto 35 per cent and the maximum receivable legislation approved by the National As- pension 400 per cent of the minimum pen- sembly which gives trade unions a second sion basis. level of infl uence over legislation: if vetoed For low-income pension recipients in the Council the legislation must return there is supplementary pension support. to the National Assembly, which must This is means-tested and can provide ad- again vote on the legislation. ditional income of between 15.471 Slov- There had also been the facility to or- enian tolars and 20.344 Slovenian tolars ganize referendums either before or after (64.55 and 84.89 euros) per month.3 a law was adopted by the National As- The minimum pension (assuming the sembly, with such referendums prevent- minimum 15 years of qualifying contribu- ing the law from being amended or im- tions) is currently 37.378 tolars per month plemented for two years.5 Trade unions (156 euros), and the highest paid-out pen- had successfully organized referendums sion is 403.303 tolars (1,683 euros). The in the past, such as in 2003 over the issue average old-age pension (including those of shop opening hours. The capacity of who receive supplementary pension sup- unions to mobilize public opinion against port) is 126.002 tolars (526 euros).4 a government initiative compels Govern- The national average for old-age pen- ment to give due weight to consultation sions in 2006 was 70.3 per cent of the aver- with unions. age national net wage. This ratio had been However, consultation does not always constantly falling: from 77.8 per cent in lead to consensus. In 2005 the Government 1992 to 75.8 per cent in 1999, and to 69.1 per proposed a new formula for indexing pen- cent in 2005. However, in 2006 there was a sions based on average wage increases. slight increase (70.3 per cent ) due to a new This amendment was the result of a pol- system of indexation introduced in 2005. itical compact with the pensioners’ party who formed part of the ruling coalition. Trade unions did not oppose these pro- 4. The influence of trade unions posals but employers and economic ex- on pension policies and governance perts believed the proposal would harm the fi nancial sustainability of the pension 4.1. Pension policies system. Trade unions were opposed to a proposal to change the governance of The shape of pension reform in 1999 dem- the PDII. Government sent the proposal onstrated the success of the trade unions’ to Parliament for adoption in spite of the campaign and their capacity to infl uence opposition both of employers and trade social policy. Since 1999 pension law has unions. been amended several times but the tri- In the latest reforms in 2006, the social partite Economic and Social Council has partners and Government did not reach on each occasion discussed the proposed agreement through the Economic and changes. Where consensus cannot be Social Council about the introduction of reached, a joint working group is set up supplementary individual insurance for to attempt to reach consensus. In gen- workers already insured under a collective eral, the social partners agree but, where pension programme. The employer repre-

114 sentatives warned against changes which sion policy and the views and opinions of did not fully take account of the possi- trade unions are welcomed by the media. bility of a decreasing number of insured The media has been an effective tool for persons. The social partners were not op- inﬂ uencing public opinion. posed to these changes but, based on the Social values continue to rank highly research and analysis available, were cau- in Slovene society, despite the increasing tious about the wisdom of the proposal. neo-liberal inﬂ uence in politics. Social dia- In the light of the social partners’ views, logue and tripartism has good public sup- Government proceeded only with those port as it is seen as being fundamental to changes to the law necessary for imple- a Slovene style of democracy. menting European directives.

5. Current issues 4.2. Pension scheme governance for the pension system

Despite the range of changes to the Slov- In November 2004 a new government enian pension system since 1992 the gov- was elected with an agenda of improv- ernance structure of the PDII had re- ing welfare rights in Slovenia. A frame- mained unchanged in practice: the em- work of reform was adopted a year later in ployer and worker representatives, along November 2005, comprised of 67 specifi c with pensioners, had continued jointly to measures. manage it. The establishment of this struc- Five of them concern the pension ture was the fi rst time that those contrib- system: uting the funds had the power to control Measure 61 Increasing incentives for the funds. remaining in active work However, in 2005 this bipartism was longer abolished. The Director-General of the PDII is now overseen by a council rather Measure 62 Extending compulsory in- than a management board. It is com- surance cover to those who prised of 27 members: ten appointed by work rarely and receive low government, six by trade unions, four by earnings employers, fi ve by pensioners, one by dis- Measure 63 Finding a suitable balance abled persons’ organizations and one by between the economic sus- PDII employees. Initially Government had tainability of the compul- proposed a structure of majority govern- sory pension insurance and ment control but, through consultation at the social impact of changes the Economic and Social Council, Gov- to the system ernment was persuaded to abandon this Measure 64 Systemic separation of proposal. Unions do not endorse the cur- collective and individual rent structure because it does not give due insurance representation to the funds’ contributors: employees and employers now hold one- Measure 65 Additional incentives for vol- third of seats in comparison to the previ- untary pension insurance. ous two-thirds. Trade unions have been adept at infl u- The Government also adopted in Decem- encing the policy debate on pensions in ber 2005 an agenda for negotiations on a So- Slovenia. Unions have a network of exter- cial Agreement for 2006-2009. However, for nal experts on which they rely for techni- trade unions the most important issue is the cal advice, but the ZSSS has its own inter- possible introduction of a fl at tax rate, which nal expertise which has allowed to take has hindered progress on other aspects of the leading role among unions on pension the Social Agreement for 2006-2009. Con- policy. There is high public interest in pen- sultation within the Economic and Social

115 Council is being undermined by the pace Notes and breadth of changes being introduced and by the Government’s strategy of tabling 1 The PHARE programme provides assistance for the economic and political transition of appli- documents just before meetings. cant countries in their preparations for joining the In respect of pension reforms, Measure European Union. 63 of the framework of reforms, above, has 2 The 40-member National Council is comprised been translated into government propos- of 22 elected representatives and 18 members nomi- als to again increase the eligibility periods, nated by a range of social partners, including four revalue the benefi t levels and accelerate the union representatives. transition period for higher pension ages 3 2005 fi gures. for women. At the time of writing there is 4 June 2006 fi gures. no concrete reform proposal. 5 This law was amended in December 2006, allowing referendums only after national legislation is enacted and deferring the date of effect of the referendum result until one year after the legislation 6. Conclusion was enacted. The pension system is one of the fundamental pillars of national social secur- References ity. As such, Slovenian trade unions see Government Offi ce for Growth, Framework of Eco- pensions as a core issue for workers. The nomic and Social Reforms for Increasing Welfare in public pension system, the level of contri- Slovenia, Ljubljana, August 2006. butions, the conditions of retirement and Prijatelj J., Pokojninsko in invalidsko zavarovanje 2000 the governance of the public pension fund, (Pension and invalidity insurance), Center Mar- among others, are of great signifi cance. keting Internationale, Ljubljana, January 2000. Reforms to public social insurance and the Stališcˇa Predsedstva ZSSS (Statements of the ZSSS pension system are matters for social dia- Presidency). logue: it is essential the Government seeks Verbicˇ M., Majcen B., van Nieuwkoop R., Sustain- agreement with the social partners and ability of the Slovenian pension system, Working paper No. 29, Institute for Economic research, strives for reforms which make social se- July 2005. curity sustainable. Agreement on pension Zapisniki Ekonomsko socialnega sveta (Minutes of reforms in 1999 was a great achievement. the Economic-Social Council). It showed that social dialogue should be ZPIZ, Letno porocˇilo 2005 (PDII, Annual Report the primary political tool for change and 2005), available at: www.zpiz.si. that social dialogue is a sign of an active, ZPIZ, Mesecˇni statisticˇni pregled, junij 2006 (PDII, participatory democracy. Monthly Statistics Overview, June 2006).

116