Coordination of unemployment insurance and social assistance benefits: experience,

challenges, and improvement measures

Professor Romas LazutkaVilnius University

ISSA Technical Seminar on effective strategies and efficient protection against unemployment ; 12 – 13 May 2015 | Vilnius, Lithuania

Table of Contents

1. Characteristics of unemployment benefits in the EU context.

2. Vulnerability to poverty of recipients of unemployment benefits.

3. Social assistance benefits as compensation of the poor unemployment insurance system.

4. Unemployment insurance in the new Social model.

Characteristics of unemployment benefit

As in most countries, Lithuanian unemployment benefit is characterized by:

• The insurance period required for entitlement to benefit

• The amount of the benefit linked to the previous salary

• The limited duration of payment of benefit

There is no special social

assistance benefits for

the unemployed in

Lithuania.

There is a general

support for deprived people

Source: Unemployment Insurance in EU Member States, 2013

Replacement rates in Lithuania are one of the lowest

Source: Unemployment Insurance in EU Member States, 2013

Benefit replacement rate for those who earned more is extremely low

Source: Lazutka et al., Socialinis draudimas...,2013

weeks

Duration of unemloyment insurance benefits is the shortest in Lithuania

Source: Unemployment Insurance in EU Member States, 2013

Qualifying period is the longest in Lithuania

weeks Source: Unemployment Insurance in EU Member States, 2013

Unemployment benefit is almost the cheapest in Lithuania

Source: Unemployment Insurance in EU Member States, 2013

A very small proportion of the unemployed receives unemployment benefits

Vulnerability to poverty in the event of loss of job is very high

• Vulnerability to poverty is the capacity of the social security system to protect beneficiaries against the risks for which they are insured

• The indicator of vulnerability to poverty reflects the share of households that during a one-year period falls below the poverty risk threshold in the event of loss of job of one of their members

• The average vulnerability to poverty in case of unemployment is about 40 percent

• The level of vulnerability to poverty in households where only one person is insured against unemployment is about 60 percent

Vulnerability to poverty in the event of unemployment (the first year)

The poverty-risk level 40% above median

The poverty-risk level 60% above median

The poverty phase level 60% above median

The poverty-risk level 50% above median

The poverty-risk level 70% above median

Source: Lazutka et al., Socialinis draudimas...,2013

The high vulnerability to poverty in the event of unemployment causes:

1. Low unemployment benefit replacement rate, which is especially low for income exceeding the average income (the unemployment benefit replacement rate falls when income is increasing):– The unemployment benefit is slightly associated with the former

income as it consists of basic (fixed) and additional components– Benefit ceiling*

2. Low replacement rate is determined not only by restrictions on the amount of unemployment benefits, but also by very limited duration of payment.

* poverty rates among recipients of unemployment benefits are consistently declining by raising the ceiling to 50 percent, if raising more – the effect disappears

Source: Lazutka et al., Socialinis draudimas...,2013

Cash social assistance benefit is paid:

1) if the value of property does not exceed the average property value set for the residential area

2) and the monthly income is below the level of the Sate Supported Income (i.e. 101 EUR per family member per month)

Readiness for work and training is taken into account (refusal of job offer, training, or works supported by the Employment Fund may lead to the suspension of Social assistance benefit)

Amounts of the cash social assisstance benefit:

The monthly benefit level, is •100% of the difference between the actual income of a family or single resident and the State Supported Income of €101 per person per month for the first family member•80% for the second member •70% for the third and any additional family member

Case examples, monthly amounts for households with no other income, excluding family allowances:

Family type Euro

Single person 101

Single parent, 1 child 182

Single parent, 2 children 253

Couple without children 182

Couple with 1 child 253

Couple with 2 children 324

Couple with 3 children 395

The number of recipients of social assistance benefits grew during the crisis with unemployment rising

(on average per month, thousand) (*IQ of 2015)

The number of recipients of unemployment and social assistance benefits

The unemployment trap - indicator of financial incentives to work

(EUROSTAT definition)

The unemployment trap - or the implicit tax on retuning to work for unemployed persons - measures the part of the additional gross wage that is taxed away in the form of increased taxes and withdrawn benefits such as unemployment benefits, social assistance, housing benefits when a person returns to work from unemployment.

The 'trap' indicates that the change in disposable income is small and, conversely, the work-disincentive effect of tax and benefit systems is large.

Unemployment trap, 2013 The unemployment trap measures the percentage of gross earnings lost

to taxes and benefits when a person becomes employed

Unemployment trap

Suggestions for New social model with respect to unemployment insurance

The right to the unemployment insurance benefit with a minimum 12-month insurance period during the last 24 months (instead of 18 months during 36 months).

The unemployment insurance benefit is paid for nine months (currently: when the length of service is less than 25 years - for six months, from 25 to 30 years - for seven months, from 30 to 35 – for eight 8 months, if 35 and more – for nine months.

The unemployment insurance benefit is calculated as the sum of fixed and variable components.

1. The fixed component of the unemployment insurance benefit accounts for 30 percent of the minimum wage valid during the payment month (instead of 100 percent of the state supported income).

2. The variable component of the unemployment insurance benefit is calculated as follows:- 1-3 month - 50 percent - 4-6 month - 40 percent - 7-9 month - 30 percent of the average monthly insured income of the unemployed- Benefit ceiling - 75 percent of the average wage

Unemployment benefit amount (EUR)

* Ceiling

Wage I-III month I-III month VIII-IX I-III month

There is Proposed There is Proposed There is Proposed

300 221 240 150 210 0 180

700 302381 440 241 370 0 300

1000 302(501)

536 (590) 301 490 0 390

2000 302 (901)

536 (1090)

302(501)

536(890) 0 536

(690)

Findings

1. Benefits for the unemployed in Lithuania: low coverage, low amount and are paid for a short period of time.

2. The unemployed are highly vulnerable to poverty.3. The social assistance system bears the burden of

inadequate social insurance against unemployment. 4. Incentives to work for the unemployed are quite high (the

unemployment trap is small). 5. Due to week unemployment insurance the incentives to

work legally may be small (the illegally employed lose little).

6. Low unemployment insurance discourages the growth of wages.

7. Strengthening of unemployment insurance while preserving the incentives to work is offered in the New social model.

Thank you