CHAPTER
FIVE
5
FINANCING
SOCIAL SECURITY
SCHEMES
FINANCING SOCIAL SECURITY SCHEME
1
Objectives of the lecture:
After completing this lecture, the students should be
able to:
5.1
5.2
5.3
5.4
Describe the factors affecting cost
Determine sources of finance
Describe the financing methods
Analyze trends and issues
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FINANCING SOCIAL SECURITY SCHEME
INTRODUCTION
• PUBLIC ASSISTANCE
– Universal scheme
– For all
– taxation
• SOCIAL INSURANCE
– Specific group
– Financed out of contribution
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FINANCING SOCIAL SECURITY SCHEME
5.1 PERSPECTIVE
• SHORT-TERM
BENEFITS
–
–
–
–
–
–
Sickness cash benefits
Maternity cash benefits
Medical care
Temporary incapacity
Family benefits
Unemployment benefits
• LONG-TERM
BENEFITS
– Old-age
– Invalidity
– Survivors’ benefits
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FINANCING SOCIAL SECURITY SCHEME
5.2 FACTORS AFFECTING COST
• The cost in financing the social security
programs are derived from many factors.
Thus, these factors may affect the cost of
social security.
• Internal Factors
• External Factors
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FINANCING SOCIAL SECURITY SCHEME
FACTORS AFFECTING COST
• INTERNAL
FACTORS
– Financial condition of
the social security
organization
– Allocation of
government
– Number of cases &
applications
• EXTERNAL
FACTORS
– Economic conditions
– Cost of living
– Demographic
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FINANCING SOCIAL SECURITY SCHEME
Internal factors
• Financial condition
of the social
security
– The management of
fund
– How they generate the
fund / income
– Based from the
numbers of
contributors
• Allocation from the
government
– Socio-economic
sector
– Welfare programme
– Financial strength
– Government policy
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FINANCING SOCIAL SECURITY SCHEME
Internal factors
• Economic condition
–
–
–
–
Inflation
Recession
Fiscal policy
Economic stability
• Cost of living
– Linear relationship
– Consumptions / labour
market / consumer
price
– Medical cost
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FINANCING SOCIAL SECURITY SCHEME
Internal factors
• Demographic
– Quality of life (lifespan)
– Long range financing
– Pension scheme &
medical benefits
– Us : 1956 (77.5)
2003 (82.5)
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FINANCING SOCIAL SECURITY SCHEME
5.3 SOURCES OF FINANCE /
FINANCING METHODS
• There are five methods of financing the costs of
social security program
• Government fully funded
• Joint fund
• Private fund
• Trust fund
• Investment
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FINANCING SOCIAL SECURITY SCHEME
SOURCES OF FINANCE / FINANCING METHODS
• Tripartite financing
– Bismarck’s social
insurance
– Joint contributions by:
• Employer
• Employee
• Government subsidy
• Government fully
funded
– Government contributes
to program costs from
general funds
– Taken from public
money / budget
– All persons has the right
– Social assistance
programme
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FINANCING SOCIAL SECURITY SCHEME
SOURCES OF FINANCE / FINANCING METHODS
• Joint Fund
– Employees &
employers
– Through contributions
– Employers withholds
the contributions &
send to social security
organization
– Must fulfill qualifying
conditions
• Private fund
– Fully funded by the
employee
– Conventional
insurance
– Insuree will get full
benefits
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FINANCING SOCIAL SECURITY SCHEME
SOURCES OF FINANCE / FINANCING METHODS
• Trust funds
– Sources ire form
members’
contributions,
– government grant
– Donations
– Income
• Investment
– Unit trust
– Projects
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FINANCING SOCIAL SECURITY SCHEME
5.4 TRENDS AND ISSUES
5.4.1 Social Security Administration
•
Most of social security programmes are mandatory publicly
administered
•
The plan is legislated by law and compulsory for every
employer and employee
•
It is an obligation for employer to ensure that employees in
the organization are covered by the particular program in the
plan.
•
The plan is employer-employee funded
•
Government manages the plan with broad power over it.
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FINANCING SOCIAL SECURITY SCHEME
5.4.2 The advantages of the plan
•
Forced saving – helps to inculcate the saving habit in the population
•
The plan firmly establishes individuals (and family) responsibility for
the provision of social security
•
The pool of saving generated by the plan could help stimulate growth
by providing greater room to pursue appropriate macroeconomic
policies, and by providing long-term, predictable, and large flow of
funds for investment.
•
Defined contribution plans are by nature fully funded, and do not
involve use of the tax-transfer process in a major way
•
Centralized public administration of the plan results in large saving in
operating costs.
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TUTORIAL
•
•
•
•
Financial issue in SOCSO
Financial issue in EPF
Financial issue in insurance agencies
Financial issue in government
Look at the challenge of each sector
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FINANCING SOCIAL SECURITY SCHEME