Financing social protection to reduce income inequality: Ways forward

What type of tax policy is needed to guarantee the universality of social protection? Good practices and possible ways forward

D6
Lab debate
Wednesday, June 19, 2019
13:00 to 14:15

Social protection has great potential to reduce income inequality. The way social protection policy implementation is financed could contribute to a solidarity-based society in which the strongest shoulders carry the biggest burden. There are mainly two domestic sources from which to finance social protection – contributions through labour and general taxes. It is important to better understand these funding mechanisms and their potential impact on the redistribution of wealth within a society. It is key to avoid the belief that solidarity is organised amongst the poor. It is also key to guarantee the universality of social protection to ensure no one is left behind and to include gender-sensitivity in the design and financing of social protection schemes.

Key points

  • Social protection is an investment to generate sustained economic gains; this understanding changes the way we think about social protection

  • Social protection should not target “the poor” or “the vulnerable”; for maximum political legitimacy it should aim to be universal over people’s life-cycles

  • Creating universal coverage is less a matter of resources than of political will

Synopsis

Whether the potential of social protection to reduce income inequality is realised depends crucially on the way its implementation is financed. Two basic domestic sources of finance should be distinguished: contributions based on labour; and general taxes. For example, the share of social protection systems covered by value-added tax is far higher than in Europe, which relies more on direct contributions. The exact mix will shape the effectiveness and legitimacy of social protection programmes. But the general acceptance of social redistribution schemes also depends on their coverage and on the way social protection is conceptualised. As long as these are designed or presented as “programmes for the poor”, they will meet with far less general acceptance than when coverage is universal; that is, citizens from all social and income backgrounds have, in principle, access to it (such as pensions or child support). Social protection for everyone throughout the life-cycle, rather than simply for “the poor” or “the vulnerable” as distinct social groups, is an investment in future economic growth that is sustainable, and in an inclusive society that works for all. It is crucial in building up a broad constituency for social and economic justice. The poorest segments of the population are those holding the least political power, which means that less is invested in social protection and that social protection schemes tend to be of lower quality. Building viable systems, however, is also a question of rights, and of governments’ commitments under Sustainable Development ls Target 1.3. Some 55% of human beings worldwide have no access whatsoever to any form of social protection, contributory or non-contributory. For older persons, this share rises to close to 70 %; for children, it is close to 40 %; and for people with severe disabilities, around 30 %. In Africa, less than 20 % of the population is covered by any kind of social protection, while in Europe it is more than 80 %. Building a system that reaches virtually every household during its life-cycle is possible by spending less than 2 % of GDP. Universal coverage, which is central to the system’s democratic legitimacy, can be created by phasing in specific schemes such as pensions or child benefits gradually. Various developing countries have taken this approach, which has proven to be viable. Recent research based on 125 countries established that 80 % of these countries could close their social protection gaps by devoting less than 5 % of their GDP to it. This suggests the policy choice of building viable universal coverage is less a problem of finding resources than of mobilising political will.

Insight

Research has established the relatively low cost (below 5 % of GDP) of creating viable social protection systems.

Organised by

Speakers

Moderator
Hilde Van Regenmortel
Thematic Officer - Active Citizens for Social Justice
Oxfam
Stephen Kidd
Senior Social Policy Specialist
Development Pathways
Evelyn Astor
Policy Advisor
International Trade Union Confederation
Alexander Pick
Economist
OECD Development Centre