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Protecting All: Risk Sharing for a Diverse and Diversifying World of Work – World Bank – September 2019

7 February, 2020

Global drivers of labor market disruption, such as technological advances, economic integration and social, demographic and climate change, have resulted in greater diversity and fluidity of work. Due to the new nature of the increasingly diverse and diversified labor market, with non-standard forms of work (numerous forms of self-employment, part-time and permanent employment, “gig economy” jobs with digital platforms, flexible work arrangements and multiple concurrent part-time commitments), “risk-sharing policies” more in line with this new reality are required.

The term “risk-sharing policies” is used in reference to the set of institutions, regulations, and interventions that societies implement to help households manage upheavals (or shocks) in their livelihoods. These policies include rules and formal structures that regulate market interactions (protection of workers and other labor market institutions) and instruments that help people diversify risks (social assistance and Social Security) and save and take out insurance in an affordable and effective manner (mandatory individual savings with incentives, and other financial instruments), and to recover from losses from livelihood shocks (active re-employment measures).

This book offers a package of protections, job benefits and services that are most relevant to the world of work. Five key messages for policymakers:

  1. The basis of the risk-sharing policy is poverty prevention and subsidized protection against catastrophic, tax-financed losses.
  2. With robust protection available to everyone, no matter how they work, government mandates may be less distortive.
  3. Instead of protecting workers from change, governments can protect them for change, supporting transitions and re-employment.
  4. Given the enormous resource and capacity constraints in most countries, a progressive universalization of risk-sharing coverage will be more fiscally viable and sustainable.
  5. Digital technology can be leveraged to mobilize tax resources for greater coverage, providing protection more effectively, efficiently and equitably.

The objectives of this book are:

  • Examine the relevance and effects of prevailing risk-sharing policies in low- and middle-income countries.
  • Consider how global disruption drivers shape and diversify the ways people work, and in light of this diversity, propose more relevant alternative risk-sharing policies.
  • Map a reasonable path of transition, from the current policy approach to an alternative approach, that substantially extends protection to a larger portion of working people and their families.

This book proposes a comprehensive package of protection policies with a guaranteed minimum support mechanism, funded with general taxes at its core, and additional layers of mandatory insurance, proper default design (“Nudges”) and fully voluntary insurance. Each segment of the proposed package is composed in accordance with the nature of the shocks (the size of the losses, the probability of occurrence and the extent of market failures to provide them with coverage).

The most important feature of the most internal core of the packet is that it covers losses which, if exposed, impose an unacceptable social cost. It is important to highlight this point, because this coverage is too important to be left to the will of individuals or the alleged compliance of employers. In the remaining three segments of the social protection package, responsibility for funding and provision gradually shifts from purely public resources and direct government provision, to home or individual funding and market provision. Altogether, the package represents a coherent set of changes that expand protection and increase people’s ability to manage risk and uncertainty. This comprehensive, consistent and concerted approach to risk-sharing is characterized as “insurance assistance.

How each segment of the proposed package is financed is important for the efficiency and effectiveness of shared risk. A key principle shaping the package is that poverty prevention and redistribution objectives should be carried out transparently with instruments financed from general taxes, while legal contributions must be carried out to finance consumption leveling instruments with fair actuarial parameters. Traditionally, contributory social insurance systems have mixed different forms of redistribution, either directly, through the financing of deficits (or the accumulation of contingent liabilities involving future subsidies) or through redistribution among different groups of taxpayers. By consolidating poverty prevention and redistribution objectives at the core of the package and fully funding them with overall revenue, governments can increase coherence between the publicly and individually funded layers of the package and reduce perverse incentives.

Here is a brief description of each segment of the package:

Segment 1: This is the internal core, which represents the minimum guaranteed support to avoid poverty and mitigate the most catastrophic losses, for which there are no effective market insurance instruments. 

Because most people who work do not have insurance coverage or are under-insured, the most vital element of the proposed package is a risk grouping mechanism, financed by public funds or general taxes. The policy objective of the guaranteed basic minimum is to prevent poverty and manage catastrophic losses which, even if they do not result in poverty, can jeopardize household investment in human capital. Although definitions of catastrophic loss vary, a widely applied definition is a loss that eliminates 30% or more of the household’s disposable income. To serve as the core of a comprehensive insurance assistance package, the guaranteed minimum would ideally be available to all in need, would be set at appropriate benefit levels, would incentivize work, respond to changing circumstances and be fiscally sustainable. While these features are widely accepted attributes of an ideal safety net, experience in all countries shows how difficult they are to achieve and that there are tensions between them.  However, some important lessons arise from the global experience:

  • Meet the objectives of the guaranteed minimum and avoid excluding households through rigid rationing. Programs should operate as rights, with budgets being accommodated and open eligibility processes.
  • All residents who need it must be eligible to receive the guaranteed minimum. Specific social groups, such as poor workers, should not be excluded by design.
  • To increase fiscal sustainability, the guaranteed minimum must have a benefit structure that is gradually reduced as income or wealth increases to avoid abrupt discontinuities or “eligibility cliffs” that discourage work.
  • Eligibility thresholds should be set high enough to avoid substantially different treatment of households with low levels of welfare. This feature would also help maintain protection for families who frequently enter and emerge from poverty and would reduce the risk of exclusion errors.

A second element of the proposed minimum guaranteed protections is universal access to contingent coverage of catastrophic losses through public subsidies. Many social protection systems currently lack protection against catastrophic losses for those without a history of contributions to traditional social insurance plans. A guaranteed minimum package, as conceptualized in Figure 1, should help address this lack of coverage, but will require public subsidies. The combination of poverty-preventing benefit and publicly funded contingent risk coverage can achieve progressive protection for all. This approach can already be observed in the way that a growing number of countries structure health insurance, approaching the goal of universal health coverage through the government subsidy that sets actuarially fair premiums for people who cannot afford them.

Segment 2: This is the mandatory segment of the package (including the individual accounts pillar managed by the AFPs), which safeguards the fiscal sustainability of the core, or Segment 1, from moral hazard, and protects people from their own improvisation or myopia and market failures in providing affordable and reliable insurance.

Human constraints combine with market failures to create a strong justification for the state to enforce additional savings and insurance efforts. Mandatory contributions from people who work (and their employers) have two main purposes. First, mandatory and actuarially fair arrangements reduce the likelihood of moral hazard, which arises naturally because the government provides the minimum guaranteed core of protection.

Segment 3: Incentives for voluntary savings, with adequate design of privately financed defaults (“Nudges”). An example of this layer is the automatic enrollment mechanism in the United Kingdom.

Segment 4: Pure Voluntary Saving, privately funded.

Beyond the minimum and mandatory guaranteed segments of the policy package, there is the possibility of strengthening purely voluntary savings and insurance with the appropriate design of defaults, for greater consumption smoothing (segments 3 and 4, as already mentioned). Successful examples of driven or purely voluntary savings and insurance programs are based on knowledge of behavioral economics, using simple commitment devices or behavioral nudges, such as default enrollment within the company registration and tax systems. Such approaches have proven promising in developed and developing countries (e.g. New Zealand’s Kiwi Saver retirement savings scheme and the commitment devices on telephone payment platforms in Kenya, which have increased savings).

To download this book, please click on the following link.

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