Expanding Social Security

SSA benefits include retirement, disability and survivor benefits. The program also provides health care coverage.

The old age category of ESSPROS accounts for about three-quarters of total social protection expenditure. Its share grew throughout the period 2007 to 2014.

Otto von Bismarck is credited with inventing social insurance–benefits for workers in the formal sector financed by dedicated taxes on wages. This model can reduce poverty while decoupling redistribution from payroll taxes.

The Bismarckian model

Otto von Bismarck, Germany’s chancellor in the late 19th century, is credited with inventing social insurance, a centralized funding platform for healthcare and pensions that requires people to pay into a pool based on their earnings. The model is used in many countries, including Germany and parts of Latin America. It differs from the Beveridge model, which focuses on universal healthcare coverage.

While this model is not suited to developing economies, it does have some advantages. In the rich world, it reduces earnings differentials and provides stability over the life course. It also provides a strong incentive to work hard.

In addition, the Bismarck model can decouple from payroll taxes and reduce the size of required contributions. This could be particularly useful in countries that already have significant redistribution in the form of mandatory payments and high contribution rates that are viewed as pure taxes on labor.

In addition, it can be adapted to lower-income countries by replacing employer contributions with an indexed, progressive income tax and adding healthcare benefits. This would allow low-income households to pay less and still receive the same level of protection. It could also reduce the cost of healthcare by providing access to private sector providers and enabling better coverage for chronic conditions. In addition, it can inspire better attention to health promotion and disease prevention healthcare services.

The expansion options

There are a variety of ways to expand social protection toward a guaranteed social minimum. At one end of the spectrum is a means-tested guarantee that distributes cash to households, with benefits declining as income rises, and at the other end is an unconditional basic income that provides a monthly payment regardless of individual circumstances or employment status. Both approaches would likely be supplemented by universal child allowances and a social pension.

Another option is to move away from wage-based taxes, which are prone to labor market distortions and have unintended distributional effects. In some emerging economies, decoupling labor taxes from social insurance contributions may be feasible, but it will require political courage to impose new taxes or increase existing ones. In these cases, disentangling redistribution from savings could reduce incentives to replace workers with robots.

Finally, a number of options exist to provide more affordable healthcare through an expansion of Medicaid and/or Medicare. A Medicare-for-all model could be implemented through a public option that covers everyone who does not purchase private insurance, with premiums financed by the government and provided through a pooled trust funded with employer and individual contributions and managed by non-profits or cooperatives. This approach has the advantage of avoiding significant costs for those already covered by private insurance and reducing administrative complexity.

Universal basic income

A few cities around the world are experimenting with guaranteed basic income programs as a means to combat generational poverty and racial inequality. The program works by giving citizens a monthly cash payment to spend as they choose. The money isn’t tied to employment or any other activity, which removes the disincentive to work that critics of traditional social programs say discourage workers from finding jobs.

Proponents of UBI argue that it has many benefits, including reducing poverty and increasing financial stability; promoting population health by decreasing stress-related behavior and boosting engagement in activities like education, caregiving, and entrepreneurship; reducing the number of people who feel trapped in “poverty traps” caused by changes to their life or work circumstances, such as losing their job during a pandemic; and simplifying government administration by eliminating the need for bureaucracy to adjust payments to account for factors like inflation.

Some experts also suggest that UBI can be paired with initiatives to address structural racism and reduce the racial wealth divide. Others note that it may not be enough assistance for certain groups, such as people with lower incomes or those with disabilities, and recommend combining UBI with other forms of ביטוח לאומי

One of the biggest arguments against UBI is that it would cost more than current welfare programs. But proponents of the policy insist that it’s possible to pay for UBI with a small tax on capital and other forms of wealth, as well as by reducing corporate tax breaks and raising taxes on the wealthy.

Disentangling redistribution from savings

The current financing model of social insurance combines risk-sharing functions with redistribution. To varying degrees, the contributions that workers must make to their individual accounts are perceived as taxes on labor. A progressive universalism that expands coverage in line with the available fiscal space can disentangle redistribution from savings, while providing more protection against work disruptions. This shift would also reduce the size of mandated contributions and their pure-tax element.

Technology is helping to bolster the credibility of personal identification systems that are the first step in the delivery of social protection. For example, linking 34 social program databases by unique identification numbers in Argentina revealed inclusion errors that resulted in US$143 million in savings over an eight-year period. It can also improve the coordination of different programs, reducing administrative costs and increasing the efficiency of the system.

Surveys indicate that many people are concerned about rising inequality. They want governments to take action to address it. However, a policy focus on addressing inequality of opportunity should not detract from achieving macroeconomic stability and sustainable growth in advanced economies. In addition, state-level interventions aimed at raising household savings rates may be more effective in boosting incomes than redistributive tax and spending policies. This would be especially true in countries where market mechanisms to smooth income over time are weak.