Sri LankaStrengthening Social

Protection

Improving Social Insurance

Ravi Rannan-EliyaInstitute for Health Policy

http://www.ihp.lk

OutlineRisksSchemes for formal sectorSchemes for informal sector & othersProblemsRecommendationsIssues

RisksOld ageDisabilityDeathUnemploymentHealth

Old age - Formal sector Government workers

Civil Service Pension SchemeAutomaticDefined benefit, non-contributory

Private sector workersEPF/ETF & APPFs

MandatoryDefined contribution, contributoryIndividual accounts

Old age - Informal sectorFarmers’ pension schemeFishermens’ pension schemeSelf-employed pension scheme

VoluntaryDefined benefit, contributory

Disability/DeathFormal sector

Civil Service Pension SchemeDisability, survivor defined benefits

ETFDisability/survivor lump sum payments to Rs 150,000

Informal sectorFarmers/Fishermen’s/SE schemes

Disability/survivor defined benefits

NGO sectorMicro-insurance schemes

UnemploymentNo provisionUnder consideration since 2003

Proposals for unemployment insuranceContributory, Replacement rate of 50% of last wage for 12-25 months

Ad-hoc workfare schemes, e.g. post-tsunami

HealthNo health insurance, but tax-funded health system performs insurance role*

Covers medical costsDoes not directly cover income losses

*Historical note: Insurance approach was deliberate choice in 1935, 1948

Problems

Cross-cutting problemsLack of coordination

No national strategy, ad hoc responses Many agencies

Gaps in coverage in formal schemesNominal coverage - 53% of populationActual coverage - 28% of population

AdequacyWeak administrationFiscal sustainability

1. Formal sector pensionsAdequacy

Benefit values low in EPF/ETF, voluntary schemesLack of consumption smoothing in EPF/ETF

Fiscal sustainabilityCivil service pension

2% of budgetLack of funding

EPF/ETFOnly self-funded in theory - in practice funded by government through debt

Constraint to labor mobility

2. Unemployment insurance

Weak administrative capacityAdministration of benefit paymentsEligibility monitoring - potential for moonlighting

Incentive problemsRecipients may not look for work

3. Informal sector pensions

AdequacyLow benefit values - no inflation protection

Coverage<50% - not designed for actual income conditions

Fiscal sustainabilityAd-hoc changes to benefit levelsIncreasing government liability

Recommendations

1. Formal sector pensionsCivil Service Pension Scheme

Reduce replacement rate, increase earnings base, & index to inflationIntroduce contributions

EPF/ETFIncrease retirement agesOutsource fund management & expand role of private sectorImprove administrationConsider annuity options

2. Informal sector pensions

Shift from defined benefits to defined contributionsIntroduce annuitiesImprove administrationImprove fund managementIntroduce matching contributions to encourage voluntary contributorsProvide disability through group insurance

3. Unemployment insurance

Fix initial eligibility and coverage same as TEWABenefits to require non-employment in formal sector (can monitor)Replacement rate - ~50%, 6-12 monthsFinancing - Employer and workersAdministration - Piggyback ETFJob search - employment services for recipients

Alternative - Unified approach

National defined contribution pension scheme for all new workers

Individual accountsDefined contributions, benefits

AdvantagesEconomies of scale, group insuranceAdministrative efficiencyPromote coverage through voluntary incentives

Issues

RealismImportance of political pressures

Ad-hoc schemes not arbitrary decision of central planners, but response to political pressures

>Reforms must not ignore political constraints

Future pressuresExpansion in coverage as elderly increaseIncrease in benefit levelsNeed for indexationCompatibility for job mobility

FundingPosition on prefunding/contributions not balanced or supported by theory or evidenceFunded Schemes

IMF/WB/OECD: “In context of large fiscal deficit, contributory schemes will become PAYG”Contributory schemes not viable route to adequate benefits

Consensus pointsExisting informal sector schemes represent an implicit government liabilityNeed to improve level and quality of benefitsNeed to expand coverageNeed for unified social insurance system

Alternative - US/Asian solution

Unified national pension scheme as long-term goalPartly funded, life-time contributions, but with tax funded PAYG elements to bring in informal sector and non-workersDefined benefits so as to allow risk protection and achieving minimum income targets