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Adequacy of Social Security System in Transition: The Czech Case 1. Paper to the NISPAcee Conference, Budapest, April 13-15, PDF

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Adequacy of Social Security System in Transition: The Czech Case 1 Tomáš Sirovátka Paper to the NISPAcee Conference, Budapest, April 13-15, 2000 Faculty of Social Studies, Masaryk University, Brno, Czech
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Adequacy of Social Security System in Transition: The Czech Case 1 Tomáš Sirovátka Paper to the NISPAcee Conference, Budapest, April 13-15, 2000 Faculty of Social Studies, Masaryk University, Brno, Czech Republic Gorkeho 7, 60200, tel , fax , Abstract The aim of the paper is to analyze adequacy and effectiveness of the new emerging system of social security in the Czech Republic. Adequacy is defined in objective terms as responsiveness of social security arrangements to the new risks and needs (namely to the risk of poverty). In subjective terms it is defined in terms of evaluations and attitudes of the citizens related to the various social security arrangements. The paper brings evidence about the adequacy of social security in objective and subjective perspectives and about the link between the both. It also attempts to explain the preliminary finding that in spite of acceptable effectiveness of the Czech social security system in terms of elimination of poverty the link between objective and subjective adequacy of the provisions has weakened and legitimacy of the system is low. The analysis is based on the two main sources of data: first, on Micro-censuses from years 1988, 1992 and 1996 and on Family Budget Surveys from years Second, on representative surveys Legitimacy of Social Security and Social Impacts of Social Security which have been carried in 1998 and Introduction: dilemmas and goals of social security reform The traditional dilemma between efficiency and social justice or equality as well as between economic and social goals overloads the functional capacity of new democracies. The dilemma is much more difficult to deal with than a similar dilemma faced by Western European countries for at least two reasons. First, the new market systems are weak in economic terms. GDP per capita measured in purchasing power parity is much lower compared to the EU countries. 2 Moreover, during the first years of transition these countries experienced a significant fall in GDP and real wages, rising inflation and unemployment. Cuts in welfare spending, liberalization of prices and elimination of subsidies of certain goods and services (mainly housing and energy) have impacted on the falling standard of living. Even though the dynamics of GDP and real wages recovered for the most part within several years, the above mentioned phenomena negatively impact on the standard of living in the long run. On top of that, the new risks emerging from marketization of the economy require new solutions and welfare spending. However, welfare spending prohibits hegemony of the market as well as economic incentives. Briefly, the demands for social justice arise during transformation (Offe, 1996) but demands for economic efficiency become the priority. Second, market transformation requires a political support of citizens and stabilization of the new democratic systems. Even though the support for ongoing market changes is high, other expectations of the population are based on comparisons to the communist past on one hand (when people were provided with a high degree of security) and comparisons to the Western world on the other hand (where the standard of living is much higher) (cf. Offe, 1996). The new political elite has to take into consideration the impacts of market changes on the standard of living and new uncertainties experienced by the citizens. Social cohesion and unrest need to be 1 This work was supported by the Czech Grant Agency, grant No. 403/98/1085, Research Support Scheme of the OSI/HESP, grant No.: 109/1997 and project No of the Institute for Human Sciences in Vienna (program Social Costs of Transformation in Central and Eastern Europe - SOCO ). 2 According to data from the Economic Commission for Europe, the GDP per capita was 44%, 35% and 30% of the EU average in the Czech Republic, Hungary and Poland in 1995, respectively (see Kramer, 1997). prevented throughout the whole process of market transition. The social policy in countries going through the transformation thus develops under a constant strong economic and political pressure of high demands and limited opportunities due to, inter alia, the current slowdown in economic growth. Moreover, in the long run, social policy costs are becoming a part of the economic infrastructure as investment into human resources is important to ensure future prosperity. In the short run, however, investment into modernizing and restructuring production facilities and economic sectors has to be accumulated. Negative social impacts of the economic reforms gradually grow side by side with increasing social inequalities. At the same time, direct social expenses and voters expectation and demands for social protection are rising. Poor economic conditions produced by the economic sub-system combined with new social risks imposed on the citizens and a requirement of political legitimacy imposed on the state seem to be the main determining factors of the welfare state formation. Offe's notion of the self-limiting welfare state as a form of crisis management (Offe, 1984) thus seems to be increasingly adequate to characterize the strategy of social security in the transition countries where functions of the welfare state are significantly overloaded. The success of the social reform and its impact on other social sub-systems will depend on adequacy of the new accepted solutions. 3 Despite the vagueness of goals the Czech social policy in the 1990s no matter which government set them, these goals have been determined by given economic possibilities and pragmatic political considerations. Thus there are permanently important but rather hidden objectives that can be traced in the social policy development so far: 1. legitimacy (the objective of social acceptability of the reform ). This objective led to a limited pressure on the labour market and unemployment until 1997 and involved compromises and temporary or out-of-concept solutions in social issues (for example, the result of the coalition discussion on child allowance entitlements), and 2. non-increasing, or restricted social expenditure. 4 Yet it can be said that in consistency with both objectives, as well as in concord with recommendations by foreign experts and institutions, the Czech social policy has followed the elimination of real and potential negative aspects of the economic transition as its prime intention. Setting up an efficient social safety net is considered the main requirement and precondition for meeting other goals of the social security system (Barr, 1994; Kramer, 1997 and others). The intention can be described as the intention to eliminate the risk of potential poverty. The intention has been influencing the social policy measures in the 1990s and it also corresponds with the current general trend of targeting in social policy. Other goals of social policy, for example savings in social expenditure, educating citizens towards more individual responsibility and public support for transition legitimacy - are coordinated with the above fundamental goal and the means are chosen with respect to this set of priorities. 5 The new social policy accepted income inequalities, and understands them as functional dynamic aspect of the economy and society and therefore declares not only targeting - i.e. poverty elimination - but also heavy restrictions in general egalitarian ambitions. The requirement of economic efficiency of the employed means in the Czech social policy in its transition was crucial. At the same time, social and political effectiveness (legitimacy) of these means was also understood and stressed, including the support of transition changes and legitimacy of the new system. Therefore, the need to eliminate the social transition risks was also emphasized. Attention should be thus paid to social policy 3 Coming from the above discussion we understand that the notion of adequacy should reflect both objective aspect - effectiveness and efficiency (i.e. achievement of the main goals at acceptable costs) and subjective aspect (legitimacy of the goals and of the policies implemented) - and that these two aspects are closely interrelated. 4 This goal was evident from the discrepancy between the revenues and the amount of transfers redistributed by the social insurance system (in the total revenues were about thousand million CZK higher than the total costs of transfers), while the real size of average social transfers with respect to wages was gradually decreasing (Hiršl 1997, Sirovátka 1998). 5 Citizens did not appear to expect anything else at the beginning of transition - they were ready to tighten the belts and willing to pay the social costs of transition. effectiveness, especially in terms of its above functions. If we focus on elementary functions and indicators of effectiveness of social policy measures, the policy s basic criterion of effectiveness can be defined in terms of poverty elimination. 6 This concept of effectiveness has been crucial in the Czech social reform, too. In a similar fashion, it is possible to assess effectiveness of social policy in terms of eliminating inequalities. However, the definition of the goal of eliminating inequality remains subject to discussion, particularly in transition economies. 7 In the following analysis we are concerned with the question of the social policy effectiveness in terms of poverty elimination. Our argument is built on the above suggested hypothesis that the transition of the Czech social policy has been directed so far towards the small welfare state (that is close to the residual type), especially in the period between 1992 and 1997, as indicated in many analyses (see Veèerník, 1998: ; Potùèek, 1999). We also use the hypothesis of targeting, selectiveness and progressively redistributive effects of social policy (as indicated in many analyses of targeting of the social security system see mainly Dlouhý, 1997; Veèerník, 1997; Sirovátka, 1998). Furthermore we question the effectiveness of such a system and the significance of the selected characteristics for the system s legitimacy. 2. Social spending and the level of social security transfers During the 1990s, total spending on social policy tended to stagnate in relation to GDP, with retirement spending slightly increasing 8 and new expenditures being necessary for the systems of social assistance and employment policy. The total social security spending (including health care) and social transfers equal approximately 20 21% and 13% of GDP, respectively. New expenditures were counterbalanced by a reduction in the level of benefits relative to wages and thus also to tax payments and social insurance contributions (see Table 1). Social policy was subject to budgetary cuts which made themselves felt especially in 1997 when the government adopted restrictive measures due to an unexpected economic stagnation. 9 Table 1 Social benefits as a percentage of average wage Net Aver. Wage (CZK) Min. wage compared to GAW SM of individual compared to NAW SM of 4- member household compared to NAW Min. pension - individual compared to NAW Average pension (as % of actually paid NAW) Unemployment benefit actually paid for 6 months (as % of NAW) Sickness benefit- 1 month computed from NAW Child benefit for 2 children (2 adults aver. wages) ,691 N/A N/A N/A N/A , , , , , , , Notes : NAW = net average wage, GW = gross average wage and SM = subsistence minimum Sources: RILSA Bulletin No. 11, 1998, calculations and net average wage figures provided by the Ministry of Labor and Social Affairs of the Czech Republic 6 While there is a disagreement about the responsibility of government with regards to overall inequality, its responsibility in relation to poverty has been accepted for generations and is not seriously contested today. (Ringen, 1987:141). 7 The argument concerns the extent of inequalities that is desirable and functional in a society. 8 Due to early retirement and a decrease in the amount of payments resulting from employers failure to pay and lower economic activity (including unemployment). 9 In the first place, mandatory social benefits indexation was associated with a 10% increase in the cost of living (instead of a former increase of 5%). Entitlement to a child allowance was limited to families with income lower than 2.2 times the subsistence minimum per household member. 3. Generosity versus strictness - and effectiveness of social security The economic transition in the Czech Republic seriously affected income of households and their standard of living, especially in the initial period from 1990 till At that time, rising inflation caused a decrease in real wages by 30%. As far as the elderly, i.e. pensioners, are concerned, the negative effect of transition was the largest in 1993 when their real income was 22% lower than in However, the fall in real income of economically active households was not compensated by social incomes. On the contrary, real social incomes decreased, too. Even though the decrease was not as sharp in households with minimum income 10 as in average households, the lowest-income households suffered the largest decline in real total income due to the sharp decrease in real earned income (see Tables 2 and 3). Since 1993, the general trend changed as wages and total income of the bottom strata increased. However, the increase in income was only minor in households with minimum income that had suffered the largest decrease in real income previously. The decline in real income of the elderly whose main source of income are social security transfers was compensated for slightly more. Table 2 Real net disposable income (1989 = 100) Real gross wages Pensioners (only social transfer incomes) Employees (total incomes) Households with children and N/A minimum income (total income) Ratio of minimum to average income Source: Czech Statistical Bureau, Family Accounts Statistics; adjusted The generosity of social transfers measured by the real volume of social transfers accruing to an average household declined from 1991 till 1994 in households of employees by 25% and has remained at this level. In minimum-income households, real transfers declined by 10% from 1991 till 1993 with no compensation for the sharp fall in earned income and thus the decrease in total income of minimum-income households was the largest and permanent. In these households, the real volume of social transfers did not exceed its original level before 1996, i.e. after the targeted income-tested system of welfare payments was introduced. The generosity of social redistribution measured as the volume of social transfers in relation to net disposable income per member of an average household decreased in average households of employees and slightly less in minimum-income households with children. However, in the first case the decrease was evidenced throughout the entire period while in the second case the trend reversed in 1996 (see Table 3). Table 3 Generosity in allocation of social security transfers (a) real social transfers (1991 = 100) (b) share of social transfers in average net disposable income per capita in average household of an employee a) employees a) households with children and minimum income b) employees b) households with children and minimum income Source: Czech Statistical Bureau, Family Accounts Statistics; adjusted 10 According to the Czech Statistical Bureau, this involves households with income per capita lower than 1.3 times the minimum subsistence level of the household. The effects of restricted generosity of social transfers on an increase in poverty have not been very drastic during this period. Using the data from a Microcensus, we can measure the extent of potential poverty. 11 In spite of rising from 1989 till 1992, the increase did not represent a heavy burden for social policy as it was gradually eliminated due to a rise in real wages, low unemployment and targeted social security transfers (see Table 4). The issue of potential poverty tends to concern the elderly more frequently as they have only an insignificant earned income. As far as the economically active are concerned, the Microcensus in 1996 showed that approximately 15% of households and 15% of the population were threatened by poverty (the figure was as high as 19% for children). 12 Table 4 Need for and outcomes of social security transfers (Proportion of those in poverty prior to and after transfers, poverty line according to the legal subsistence minimum) Pre-transfer Poor Post-transfer Poor Households Members of Children Households Members of Children households households Sources: Microcensus of 1988, 1992 and 1996; adjusted The key aspect of restrictions in transfer generosity was strictness in allocation of social security transfers. Strictness in allocation was determined by the real value of the subsistence minimum (stated by the law) and the proportion of subsistence minimum in average net disposable income of households. In the period from 1991 till 1998, strictness in allocation of social security transfers increased as the real value of subsistence minimum for an individual and a family of four fell to 96% and 89% of the original values. Similarly, the proportion of subsistence minimum to average net disposable income per capita in an average household of a family of four decreased from 47% to 38% Targeting of social security transfers and some neglected consequences Targeting of social security, social transfers in particular, increased quite significantly from 1989 till 1992 more than in the period since 1992 which has been suggested by several analyses (Večerník: 1996, 1997a, 1997b, 1998, Sirovátka, 1998) that, however, did not emphasize this fact. Targeting increased during that period due to decreasing total income and through the introduction of new social security transfers such as the state compensatory premium (since 1992 used for the economically inactive only), unemployment benefits, early retirement payments, and social assistance benefits. It has already been pointed out that at the same time, generosity and redistribution of the social security transfers by the state decreased. On the other hand, the extent of redistribution by taxes and social insurance contributions increased as did the progressiveness of taxes and social insurance contributions. In spite of targeted transfers, the lowest income brackets were worse off due to low generosity of transfers in this period (this contradicts Rawls principle of social justice). 14 The trend of deserves more attention as during that period the total tax burden increased in the highest income brackets as did the volume of transfers accruing to this segment. On the contrary, the volume of transfers accruing to the middle income segments decreased in comparison to other segments. Therefore, the share of the middle income segments in net disposable income decreased while the share of the lowest income segment increased mainly as a result of the rising earned income and reduced tax burden. 11 It is the ratio of households and members of households under the poverty line prior to social transfers. (The hypothetical method does not take into account any changes in behavior of the subjects, mainly in the working activity that would happen in a similar case). 12 Measured prior to social transfers. 13 Calculations based on data from ČSÚ, Family Accounts Statistics. 14 Večerník (1999:43) confirms that the real incomes per capita of the lowest decile of the Czech population decreased to 82% from 1988 till In comparison to other income brackets, it is the highest decrease (the average is 95%). From 1989 till 1992, both the total tax burden and social security transfers went up in proportion to net disposable income 15 but from 1992 till 1996 the share of transfers in income of households went down while the share of taxes and social insurance contributio
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