Governments cannot divorce social security from public health responses to coronavirus, says the COVID-19 Action Taskforce Social Security group
The wide variety of public health responses to the COVID-19 pandemic in different countries has been well documented. Nations have gone into lockdown earlier, later or not at all. Restrictions have been relaxed at different speeds, with varying levels of monitoring and controls to prevent further outbreaks. People in Seoul, Stockholm and São Paulo have all had very different messages and experiences.
Drastic public health responses across the globe have been coupled with emergency social security responses. Social security systems were already under pressure from ageing populations, with government finances still reeling from the 2007-08 financial crisis and controversy around bulging informal economies. The long-term financial consequences of the pandemic are an important area for actuaries to understand and then influence. Throughout the pandemic there has been a lot of debate around trade-offs between health and economic outcomes, with preventative social security programmes such as the UK’s furlough scheme or the US’s increased unemployment benefit acting as safety nets for their respective economies.
As these programmes wind down and new economic realities become apparent, the relationship between the public health, the economy and longer-term social security packages will become incredibly important. For example, will stricter short-term health approaches, such as the Zero-Covid strategy seen in New Zealand, result in lower long-term impacts on social security budgets and national pensions arrangements?
What are the questions for actuaries to address in this area?
As one of the IFoA’s COVID-19 Action Taskforce (ICAT) groups, we are monitoring developments in social security programmes and identifying the actuarial implications.
- How will wealth and demographic changes affect the demand for and affordability of social security arrangements, and over what timeframes?
- What levers do governments have to reshape existing arrangements, particularly given the difficulty in altering national pensions benefits?
- Do the effects of the pandemic on various stakeholders make basic income approaches, eg universal basic income, more or less attractive than before?
- How prepared can governments realistically be for future pandemics?
How have governments responded to the pandemic so far?
To date, social security responses to the pandemic across the globe have varied in approach and magnitude. Of course, not every country starts from the same point.
France and Italy envisage an extensive role for the state, whereas others limit the role of social security to safety net protection with the onus on private provision. Sweden underwent radical reform in the 1990s, with a complex national pension system that combines PAYG, defined contribution and insurance elements, while other countries maintain more traditional arrangements. Ecuador is struggling to finance reform as it relies on US dollar public debt and cannot print its own money. Many countries have a significant informal economy, broadly where workers are not taxed nor monitored by any form of government; measurement of this is very difficult.
Some approaches, including perhaps surprisingly that in the US, have been highly progressive. Will those countries that were more proactive in lockdown or committed more short-term resources to testing find that they require less expensive long-term adjustments to social security provisions?
Structural changes to unemployment will be particularly important as higher rates among younger workers will impact both benefit costs and projected pay-as-you-go contribution receipts.
Are there criteria by which we can assess social security initiatives?
The pandemic is global but social security responses are inherently local. It is natural, therefore, to seek comparisons. Can we assess or even grade different governments’ responses to the virus?
The International Labour Organisation offer a standards framework with recommendations for effective systems, and the International Social Security Association issues extensive best practice guidelines. However, we need to recognise that much discussion in this area is necessarily subjective. In particular, social security systems will have been developed over time with quite varied aims and expectations, and against a backdrop of diverse economic and demographic challenges.
The size and ambition of social security programmes will vary enormously even before we come to issues of affordability and the age profile of populations. Some countries will emphasise direct government support, whereas others focus on embedding provisions within employment terms or on the availability of micro-loans from the banking sector.
With this in mind, it may be more appropriate to evaluate social security initiatives by the quality of their implementation against previously stated aims. Do the benefits and the way in which they are financed match the brief? Here we can think of three areas for enquiry, whether initiatives are:
- Adequate: to what extent are the benefits effective as a safety net or source of income replacement?
- Equitable: are different groups or cohorts treated fairly, both as contributors and beneficiaries?
- Sustainable: do financing arrangements hold up over different timeframes, with changing demographics and some resilience to future shocks?
One of the challenges of the pandemic is that it may put pressure on social security design where governments place more emphasis on short-term adequacy of benefits and less on equitable or sustainable finances.
Designing social security arrangements that balance all three is likely to be a complex task, but one to which actuaries should be well suited. Criteria such as these should also aid discussion in what is likely to emerge as an important topic: governments’ readiness for future pandemics.
What is distinctly actuarial here?
Perhaps the hardest question for many of us is: what is the unique perspective of actuaries in this field? Much ink will continue to be spilt on social security from political, economic, sociological and public policy perspectives. We believe that the nature of the challenges means governments also need to hear an actuarial response.
A notable aspect of nearly all social security provision is that some intergenerational transfers of wealth are inevitably embedded. That might be from the employed population to retirees in pay-as-you-go pension systems or from older to younger age groups at times of rising youth unemployment.
There is a link here to implementation of the UN’s Sustainable Development Goals, which include healthcare and social security elements. The profession is also a signatory to the Green Finance Education Charter, pledged to improve members’ knowledge and understanding of climate-related risks and green finance as part of the delivery of those UN Goals. In providing for long-term pension security, there is also support for the UN’s Principles for Responsible Investment.
Other factors, including house price inflation, graduate indebtedness and long-term care costs, may well have an impact. A thorough examination of whether systems are equal and sustainable will need an appreciation of all these intergenerational aspects.
We believe actuaries have a role in bringing greater transparency to these wealth transfers as questions are
rightly asked about the future of social security provision in light of the pandemic. As structural changes in social security systems emerge, both domestically and internationally, we will continue to explore these issues with blog posts via the profession’s Pandemics Hub.
Chris Sutton is a lecturer and part of the ICAT Social Security group
Alan Newton is an actuarial consultant and part of the ICAT Social Security group