1. Social protection costing and financing Inter-ministerial social protection training Lou Tessier, ILO 19 December 2014 ILO - December 20141

2. Outline Social protection costing and financing 1 Why and when costing social protection benefits? 2 How to evaluate the cost of social protection benefits? 3 Financing mechanisms 4 Mobilizing fiscal space ILO - December 20142

3. Why and when costing social protection benefits? ILO - December 20143

4. Why do we cost and project social protection benefits? It allows a discussion on concrete design feature of schemes. It helps setting priorities. It is a basis for advocacy. ILO - December 20144

5. Why costing social protection benefits? The cost is usually one of the argument used against the introduction of large-scale social protection programmes.  This often builds on the prejudice that social protection is costly.  Providing some elements of costing provides evidence and re-orient the discussion on concrete elements such as the potential impact of the programmes, the sequencing, etc. Rights-based social protection programmes are a long term cost for a country.  It is important to project the cost over time in order to ensure that the proper budget is available to cover the cost of social protection benefit.  It ensures the predictability of benefits for beneficiaries. ILO - December 20145

6. When costing social protection benefits? The cost of social protection benefits can be evaluated at various stages, with various levels of precision: Rapid cost evaluation Provides general cost estimate; Informs the decision-making process, helps decision makers setting priorities and sequencing the introduction of new schemes; Serves as an advocacy tool. Feasibility study Includes a more detailed costing based on a detailed evaluation of each implementation cost. Yearly budget and five years plans Includes a more precise cost evaluation, based on the current budget of the programme (empirical evidence). Decision-making Implementation Roll out and monitoring ILO - December 20146

7. How to evaluate the cost of social protection benefits? ILO - December 20147

8. Cost evaluation depends on the type of social protection scheme Is the scheme contributory or non-contributory? Contributory scheme  The cost is evaluated and projected through an actuarial model.  This is a statistical model taking into account the long term evolution of the population (birth, death,…), the macroeconomic framework (economic situation, unemployment, etc.) and the capacity to contribute of the covered population.  At the feasibility stage, it is necessary to gather data on the capacity to contribute of the population (who can contribute? How much?). Non-contributory scheme  The cost can be evaluated and projected through a simplified model.  It is not necessary to estimate the contributory capacity of the covered population, which simplifies the model (no need to have a match between collected contributions and delivered benefits). The benefit design is also usually simpler (not a percentage of the beneficiary income).  It is still necessary to project the cost over time, and additionally to the model, it is necessary to conduct a fiscal space analysis, as those schemes are not self-financed. ILO - December 20148

9. Cost estimate of non-contributory benefits: Rapid Assessment Protocol Several simplified tools are available to estimate the cost of non- contributory social protection benefits. ILO/UNICEF simplified costing tool ILO Rapid Assessment Protocol ILO Rapid Assessment Protocol Plus Etc. Many of those tools are available in open source to be used by social protection stakeholders: http://www.social- protection.org/gimi/gess/ShowTheme.action?th.themeId=4085 ILO - December 20149

10. Labour market (EAP) Demographic data (POP) Macroeconomic data (ECO) General government operations (GGO) Costing of benefits Summary and results 1. Input data 2. Estimated cost of benefits in absolute terms, as % of GDP, and as % of government expenditure 3. Projected cost of combined benefit packages Structure of RAP ILO - December 201410

11. Additional cost to achieve a SPF Cambodia; 0.4 – 2.4% GDP by 2020Indonesia; 0.7 to 2.4% GDP by 2020 Thailand; 0.5 – 1.2% GDP by 2020Viet Nam; 2% to 6% GDP by 2020 ILO - December 201411

12. 1. Inventory of schemes (November 2013) 2. Draft Assessment Matrix 3.Dialogue # 1 on assessment matrix (March 2014) 4. Translation of policy recommendations into practical scenarios 5. Dialogue # 2 on proposed scenarios (May-June 2014) 6. Data collection for the RAP protocol and costing of the scenarios (June- August 2014) 7. Dialogue # 3 on costing (August - September 2014) 9. Endorsement by the government and inclusion of some recommendations in the national strategy (Oct. 2014-Feb. 2015) 8. Finalization of Costing, Fiscal space, Writing ABND report (Sept. – Oct. 2014) Step 1 Step 3 The process in Myanmar Steps of the ABND in Myanmar ILO - December 201412

13. Macroeconomic data (ECO) General government operations (GGO) Costing of benefits Summary and results 1. Input data 2. Estimated cost of benefits in absolute terms, as % of GDP, and as % of government expenditure 3. Projected cost of combined benefit packages Structure of RAP – Myanmar Demographic data (POP) Additional demographic data (POP2) ILO - December 201413

14. POP POP2 ECO GGO (SQ) Health BS 2 BS 4 BS 5 3. Summary of benefit costs SUM 1. Input worksheets 2. Benefit worksheets to estimate the cost of scenarios Structure of RAP Children Active Age Old Age ILO - December 201414

15. Input data for the RAP in Myanmar POP Source of population data for Myanmar: UN DESA population projections, 2014, low hypothesis. ILO - December 201415

16. Input data for the RAP in Myanmar POP2 Regional population – Total population for each region: Ministry of Labour, Employment and Social Security, 2010. – Rural population (as % of total population) : World Bank Staff estimates based on United Nations, World Urbanization Prospects, 2012 Informal economy population – Total population minus civil servants and private sector workers registered to the Social Security Board. Fertility – Fertility rate: WB and WHO, 2012. ILO - December 201416

17. ILO - December 201417

18. Input data for the RAP in Myanmar ECO GDP: IMF projections, 2014. Poverty: IHLCS, 2010. Inflation: IMF, 2014. ILO - December 201418

19. Input data for the RAP in Myanmar GGO Government expenditure (status quo): IMF, 2014. ILO - December 201419

20. Using the RAP ILO - December 201420

21. ParameterWhat we haveWhat we need to know Benefit amountCurrent benefit level according to the programme design Future benefit level based on inflation, wage increase, etc. Target population Current number of people in the target group Future number of people in the target group based on general population growth, growth projections for specific groups Coverage of the target group Current coverage of potential beneficiaries Extension of beneficiary coverage depending on take-up rate Cost of extending benefits Current cost calculated using the parameters above Estimated future cost in absolute numbers, as % of GDP, as % of government expenditure based on GDP growth rate, forecasted government expenditure Using the RAP ILO - December 201421

22. Affordability of the proposed scenarios and their impact on the fiscal space can be assessed. Preliminary fiscal space analysis is conducted by comparing the cost of the scenarios with GDP and adding the cost to government expenditures - in the GGO(Benefits) worksheet. Fiscal space can be created by raising or introducing taxes, borrowing from international institutions or markets, cutting down on low-priority expenses, etc. Using the RAP ILO - December 201422

23. RAP can illustrate different policy options and provide a tangible basis to initiate and facilitate national dialogue. Long-term sustainability of the programme can be checked by comparing the cost of implementation with economic indicators like GDP and government expenditure. It is not a dynamic model. i.e. the potential positive impacts of the benefits on GPD (through strengthened consumption, graduation from poverty etc.) are not accounted for in the projections. Results are simplistic and indicative. Further detailed and actuarial studies are needed before designing a scheme Advantages and limitations of RAP ILO - December 201423

24. Old Age scenario 1: Universal social pension of 25,000 kyats per month for people 70 years old and over. 2015 Benefit cost = (25,000 x 12) x (1,760,000x20%) = 112,836 million kyats Admin cost = 20% x 112,836 million = 22, 567 million kyats Total cost = 135,403 million kyats Benefits Target group Take up rate Admin cost 25,000 Kyats/month 1,760,000 20% 2016 US$31.5/month 1,800,000 40% 20% Inflation: 6.85% Pop growth: 2.2% Additional take-up rate: 20% Admin cost same Benefit cost = (25,000x12) x (1,800,000 x 40%) = 245,781 million kyats Admin cost = 20% x 245,781 million = 49,156 million kyats Total cost = 294,937 million kyats Using the RAP in Myanmar ILO - December 201424

25. Old Age scenario 1: Universal social pension of 25,000 kyats per month for people 70 years old and over. RAP calculation Projection Total cost as % of GDP = 135,403/72,074,640 = 0.19% Total cost as % of govt. exp. = 135,403/20,742,620 = 0.65% Total cost of benefit GDP Government expenditure 135,403 million kyats 72,074,640 million kyats 20,742,620 million kyats 294,937 million kyats 82,740,180 million kyats 23,130,720 million kyats Total cost as % of GDP = 294,937 / 82,740,180 = 0.36% Total cost as % of govt. exp. = 294,937 / 23,130,720 = 1.28% Using the RAP in Myanmar 2016 2015 ILO - December 201425

26. Using the RAP in Myanmar Assumptions for administrative costs: – Universal schemes: 20% – Means-tested schemes: additional 10%. – Additional certification (i.e. for disability): additional 10%. – Conditional: additional 10% Justification: – Average administrative costs in existing schemes are between 20 and 40 %; – Cumbersomeness of means-testing and certifications considering Myanmar’s lack of infrastructure / existing delivery channels at the moment. ILO - December 201426

27. Preliminary results of the RAP Myanmar Cost of benefit packages across SPF guarantees ILO - December 201427

28. Financing mechanisms ILO - December 201428

29. Main financing options to extend social protection Option 1: Extend existing contributory social insurance schemes. – Advantage => self-financed. – Limitation => difficult to extend to the informal economy, not possible to reach people who cannot afford to contribute. Option 2: Community-based contributory insurance mechanisms. – Advantage => community mobilization and appropriation. – Limitation => experience shows this can be a delivery mechanism but not a sustainable financing mechanism without State engagement and subsidy. Option 3: Tax financed non-contributory schemes. – Advantage => ability to cover the greatest number of people in the shortest amount of time. – Limitation => requires substantial political will to mobilize fiscal space. => Greatest potential for rapid extension of coverage.  Two sub-options – Option 3 a => general government budget. – Option 3 b => earmarked taxes. ILO - December 201429

30. THEY OPT FOR A COMBINATION of financing mechanisms because of : - Inherited historically grown organisational structures (path dependency) - fiscal policy principles, - societal values, - powerful group interests, - limited administrative capacity, What do most countries chose?

31. No one size fit all model Coverage for contributory and non-contributory pensions in selected countries

32. Contributory and non-contributory social transfers ContributorySubsidizedNon-contributory or largely subsidized BenefitBenefit proportional to the person’s wage. Benefit proportional to income or a fixed amount. Standard benefit. Source of funds Employers and workers contributions, sometimes also government. Mixed source of funds (partly people’s contributions, partly government budget or general taxes). General tax funded / earmarked tax funded. Target population Usually easy to put in place for formal salaried workers and their families. Usually used to cover independent workers / non-salaried workers and their families. Usually used to cover: -People who don’t have the capacity to contribute; -Contingencies that are more easily covered for all by government budget.

33. Combination of schemes Old age pensions in Brazil Contributory Partly subsidizedNon-contributory BenefitOld age pension: 70% of the average past salary. From 65 years old for urban workers and 60 for rural workers. Old age pension: legal minimum wage. From 65 years old for urban workers and 60 for rural workers. Old age pension: same as legal minimum wage. From 65 years old. Source of fund Contributions from employers and workers: 8 to 11% of monthly salary. Contributions from workers: 11% of minimum wage. Government subsidy from earmarked taxes. Earmarked tax funded. Target population Formal salaried workers and civil servants. Self-employed workers.Age 65, without remunerated work, and with family monthly earnings less than 25% of the legal monthly minimum wage for each person. 86.3% of the old age population receives a pension in Brazil, 50% from the contributory and subsidized schemes, 36.3% from the non-contributory scheme.

34. Combination of schemes Progressive universalization of pensions in Cape Verde https://www.youtube.com/watch?feature=player_embedded &v=cQML7YuCMqU https://www.youtube.com/watch?feature=player_embedded &v=cQML7YuCMqU Scheme Date created Target population Coverage rate (in 2009) BenefitFunding sourcesCost Instituto Nacional de Seguridad Social (INPS) 1957Civil servants and employees at enrolled private firms. 18.2%Proportion of past salary: 2% of the average annual salary when active per month. Mandatory. Contributory. Workers: 3% of salary. Employer: 7% of salary. 2.5% of GDP in 2010 Centro Nacional de Pensiones Sociales (CNPS) 2006Rest of the population (mainly in the informal economy). 37.5%65 USD / month.Earmarked taxes.

35. Combination of schemes Universal Health coverage in Thailand Scheme Date created Target population Coverage rate (in 2008) Benefit package Funding sources Cost Civil Servant Medical Benefit Scheme (CSMBS) 1963 Civil servants, retired civil servants, and their dependants. 16% Comprehensive package with little exclusion (some organ transplants, plastic surgery, infertility treatments). Near-identical packages and unity of service providers for the three schemes. Non- contributory. General taxes. Around 440 USD /capita / year (2011). Compulsory Social Security Scheme (SSS) 1990 Formal private sector employees. 7% Contributory. Payroll tax tripartite contributions. Roughly 69 USD / capita / year (2011). Universal Coverage Scheme (UCS) 2001 Rest of the population (mainly in the informal economy). 75% 30 bath contribution (with waver). Highly subsidized with earmarked taxes. Roughly 88 USD / capita / year (2011).

36. General taxes State Workers Employers SSO Social Security Office Ministry of Labour SSO Social Security Office Ministry of Labour Controller General Ministry of Finance Controller General Ministry of Finance Protected population CUTs Contracting unit for tertiary care CUTs Contracting unit for tertiary care CUSs Contracting unit for secondary care CUSs Contracting unit for secondary care CUPs Contracting unit for primary care CUPs Contracting unit for primary care Ministry of Public Health NHSO National Health Security Office NHSO National Health Security Office Financing sources Social Security institutions Service providers Contributions Referrals Register UCS beneficiaries Third party paying mechanism Supervises Referrals SSS scheme CSMBS scheme UCS scheme Capitation Fee for service Capitation

37. Mobilizing fiscal space for new social protection programmes ILO - December 201437

38. Mobilizing fiscal space for social protection Budget reallocation Introduction of new revenues: – Social contributions (for contributory schemes, or cross- subsidization). – Specific earmarked taxes (i.e. “sin taxes”, taxes on specific industries, taxes on natural resources, etc.). – Increase of existing tax sources (VAT, income tax, etc.). ILO - December 201438

39. Mobilizing fiscal space Renta dignidad in Bolivia Universal social pension for all elderly above 60 years old. 815,000 beneficiaries in 2012 (over 95% of the elderly 60 +). The amount of the Renta dignidad is 200 bolivares (approximately US$28.5) per month for people who do not receive a pension from the contributory pension scheme, and 150 bolivares a month (about US$21) for those who receive a pension under the compulsory social insurance scheme. Universal benefits are financed as follows: – 30 per cent of all resources received by the State in respect of the direct tax on hydrocarbons. – Dividends of public companies that were “capitalized” (partially sold by the state to transnational corporations), according to the proportion of shares owned by all citizens of Bolivia. Total tax revenue grew from about 15.3 per cent of GDP in 1990 to 28.5 per cent in 2008. ILO - December 201439

40. Mobilizing fiscal space Child and older persons grants in South Africa Over the past decades, South Africa introduced a number of new social protection programmes: – Grants for people 60 years of age or more, in the form of a state old-age pension (coverage was 2.4 million in 2008, i.e. about 70% of the eligible population). – Disability grants, which provide support for adults with disabilities. – Child support grants, which provide a subsidy for families with children under 14 years of age (coverage was 8.8 million children in 2008, i.e. 57.4 per cent of all children in that group). Those were financed thanks to: – The reduction of the public debt service. – Budget reallocation (with reduction in the share of Housing and Defense – Defense allocation was reduced by 10 percentage points over 20 years) to allocate half of government spending to the social sectors. ILO - December 201440

41. Mobilizing fiscal space UCS in Thailand The Universal Coverage Scheme provides health care to all the population not already covered by another scheme. It currently covers about 75% of the Thai population. It costed about 1% of GDP in 2008. In order to finance the scheme, the Government of Thailand: – Decelerated the growth of expenditure on defence and education. – Reduced debt service payments. – Earmarked “sin” taxes. … While GDP growth was decreasing (aftermath of the crisis). ILO - December 201441

42. Social protection spending in the ASEAN Where are we now? Social protection expenditure represent in average 3.09% of GDP in ASEAN countries ILO - December 201442

43. Preliminary fiscal space analysis in Myanmar ILO - December 201443

44. Preliminary fiscal space analysis for Myanmar ILO - December 201444

45. More resources www.social-protection.org Social protection assessment-based national dialogue in Myanmar http://www.social- protection.org/gimi/gess/ShowProject.action?id=2487 http://www.social- protection.org/gimi/gess/ShowProject.action?id=2487 Fiscal space and the extension of social protection: Lessons learnt from developing countries: http://www.social- protection.org/gimi/gess/RessourcePDF.action?ressource.r essourceId=34168 http://www.social- protection.org/gimi/gess/RessourcePDF.action?ressource.r essourceId=34168 ILO - December 201445

46. Thank you for your attention Lou Tessier, ILO tessier@ilo.org ILO - December 201446