Financing Social Protection

Mukul G Asher
Professorial Fellow, National University of Singapore
Director, Public Policy, Global Village Foundation
Email: sppasher@nus.edu.sg

Session 3, Asia Social Presentation Week, Asian Development Bank, Manila: August 1-5, 2016
DISCLAIMER: This presentation does not necessarily reflect the views of ADB or the Government concerned, and ADB and the
Government cannot be held liable for its contents.

Introduction

The fragile global macroeconomic environment, increased

potential for disruptive technologies, and subdued prospects
for medium-term growth, have accentuated the challenges of
financing social protection.
Governments have underestimated fiscal and financial risks,
including the contingent liabilities that they face. Once these
are recognized, governments fiscal space will be even
further reduced unless innovative and integrative
approaches are used to generate fiscal space.
This will require changes towards outcome orientation and
focus on citizen welfare with requisite governance, legal,
regulatory and administrative changes that they imply.
2

Introduction
On average, countries have
experienced a fiscal shock
(6% of GDP) once every 12
years in the past 25 years
(IMF 2016a).
Fiscal risks and contingent
liabilities are largely
underestimated

Source: IMF (2016a)

Introduction
Bova et al (2016) estimate for 1990-2014 the fiscal costs, and the
frequency of when contingent liabilities were realized between 19902014. Average fiscal cost is 6% of GDP

Funding versus Financing

Funding refers to the share of total economic resources available
or allocated (i.e. to pension expenditure in this instance).
Financing refers to the various instruments or mechanisms
through which resources are accessed or allocated. These
include for example social insurance contributions, mandatory
and voluntary savings, general budgetary revenue, family and
community support, and others.
To strengthen social protection, higher funding is needed as
elderly become a larger proportion of the population and
longevity increases. However, such funding will have to be
channelled through well designed and implemented financing
combinations.
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Example 1: Improving Social Protection Benefits

by Lowering Administrative Costs
Type and Level of

Percentage Decline in

Fees

Account Value Due to

Fees

Front-load fees (% of new contributions) of:

1 percent

1%

10 percent

10 %

20 percent

20 %

Annual management fees (% of account

balance) of:
0.1 percent

2.2 %

0.5 percent

10.5 %

1.0 percent

19.6 %

Diamond (2016)

Diamond (2016) presents the

Decline in Value of Accounts Due
to Fees After a 40-Year Work
Career (Table 1)
This assume real wage growth of
2.1 percent and a real annual return
on investments of 4 percent.
With a larger difference between the
rate of return and the wage growth
rate, the charge ratio with annual
management fees is slightly larger,
and conversely.

Example 1: Improving Social Protection Benefits

by Lowering Administrative Costs

Year
Administrative costs as a
share of assets
Administrative costs as a
share of gross
contributions
Administrative costs as a
share to gross income
Contributions as a share
of GDP
Net contributions as a
share of GDP
Assets as a share of GDP

EPF
SSS*
CPF
SSO*
(Malaysia) (Philippines) (Singapore) (Thailand)
2013
2014
2013
2014
1.99

0.08

0.49

2.05

7.42

0.88

4.73

3.00

22.21

2.39

12.48

5.17

0.67

7.16

1.19

2.11

0.08

2.72

0.60

58.44

2.51

71.29

11.47

0.18

* SSS (Philippines) and SSO (Thailand) are PAYG systems. Source: Asher and Bali (2015)

Example 2: Improving Social Protection Benefits by

Increasing Real Rate of Return
Average Real Rates of Return Credited to Members of Select Public Pension Funds (%)

4.5

Doubles in
26 years

4
3.5

4.09
3.3

2.8

Doubles in
51 years

3
2.5

1.42

2
1.5
1
0.5
0

EPF,
SSS,
CPF,
GPF
Malaysia
Philippines
Singapore
Thailand
(1999-2009) (1999-2009) (1987-2011) (1997-2013)

Doubles in
22 years

Doubles in
18 years

In Chile, between September

2002 and May 2014, the
average annual rate of return
credited to members ranged
between 4.14% for the most
conservative portfolio and
6.95% for the riskiest
portfolio (Sojo, 2014).
Obtaining higher returns has
become difficult in the nearzero yields on government
bonds.
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A Framework for Generating Fiscal Space

Enhancing Rate of Growth

and broadening its base
Use growth Drivers, including
knowledge generation,
application& diffusion more
competently, & technology
adaptation
Use Public Sector current and
capital expenditure to crowdin Private sector domestic
and foreign investment
Harnessing Demographic
Dividend

Improving Revenue performance

Reform Procurement Practices

including in manpower
Conventional Sources

Tax Reforms to broaden

base, Improve compliance,
reduce administrative
compliance costs, preserve
tax base and minimize taxbase shifting. Technology
enabled instruments, e.g.
new IT tool to check PAN
transactions history; renegotiating double taxation
treaties etc.

Improve overall Productivity

Trends
Improve Debt management
including managing
difference between
sustainable ,actual debt
levels

Complementary reforms in
such sectors as labour
markets, regulatory regimes
to facilitate growth

Constructed by Authors

Better Expenditure
Management to obtain value
for money

Cost recovery, User charges

Willingness to charge issues

Regulatory levies, Returns

on Investments

Non-Conventional Sources
Use government
assets(e-g-land mining
assets) more
productively using post
offices for telecom
towards is a good
example
Reform and use Capital
Markets, e-g for state
and municipal bonds,
monetizing housing,
gold & other such
assets
Better use of
Regulatory charges and
levies
Financial Transaction
Tax (FTT)
Remittances from
abroad

Improve Treasury Management

Reforming subsidies and tax

expenditure with emphasis on
efficiency societal outcome
rather than spending. Use
sunset clauses

Reform Public enterprises

obtain better utilization of
resources
Improve Policy coherence and
organizational Co-ordination to
make real resource saving in
transaction costs.
Lower Administrative and
Transactions costs

Better Align existing

expenditure allocation with
societys long-term priorities