In early 2009, the ISSA undertook an initial survey of its member institutions to collect information and data on how social security schemes have been affected by, and are responding to, the global financial and economic crisis. The preliminary results, issued in April 2009, encompass the responses of 47 social security institutions from all the world’s regions.

The impact of the crisis on benefits financing and demand

The last recent months have borne witness to negative economic growth in many parts of the world, with dramatic losses in market values in the financial and property sectors. At the individual level, the crisis has led to a sharp increase in unemployment rates: there were over 6 million more unemployed persons in the OECD area in January compared with the year before. The ILO forecasts that global unemployment could increase to a range of 210 million to 239 million in 2009, an increase of between 29 million to 59 million since 2007 (1).

According to the ISSA survey, social security revenue has reduced significantly as a result of the crisis: the majority of respondents confirmed a loss of revenues, mainly due to a decline in contributions and investment income, a fall in government subsidies and cross subsidies between schemes, and through rising non-compliance. Social security reserves have also diminished.

Major social security funds associated with public social security programmes have experienced a negative investment performance and estimate overall combined losses of USD 225 billion for 2008. For some social security funds, the loss represents as much as five years of investment income and around 25 per cent of the net asset value of the fund. According to the new OECD Private Pensions Outlook , workers are rightly worried about the fall in the value of the private pension savings. The OECD estimates that the loss in private pension assets in the year to December 2008 has increased to USD 5.4 trillion, up from USD 5 trillion until October 2008. The average pension fund had a negative rate of return of 23 per cent over the year (2).

Figure 1 gives a picture of the investment performance of a range of public social security funds and sovereign wealth funds in 2008.

Compounding the fall in revenue and reserves, social security expenditure is growing considerably due to increased demand for benefits for unemployment, housing and social assistance. There are also indications that health-care costs are increasing as an additional effect of the crisis.

As a result, many social security programmes may incur financing problems in the short- and medium-term. For instance, improving benefits or lightening the burden of social contributions for businesses could lead to serious financial imbalances among social security programmes and institutions. Measures such as additional benefits or freezing scheduled increases in contribution rates, or even reducing current rates, may increase individual disposable income or help enterprise cash flows in the short term, but they can also reduce social security’s income.

Lessons learned

The current crisis is complex. It is not only financial and economic but has an important social component as well. For this reason, social security must be acknowledged as an important part of the response for addressing and moving out of the crisis. In this vein, a number of social security institutions have already adopted dynamic and often innovative measures to face current challenges.

The ISSA is convinced that Dynamic Social Security – innovative policies and processes geared to better ensure accessible and sustainable social protection systems that contribute to better realizing socially inclusive and economically productive societies – provides social security institutions with effective strategies to counter the negative impacts of the current crisis.

Social security programmes play an important role in absorbing social and economic shocks, by replacing lost income, reducing poverty, and better guaranteeing social cohesion by providing adequate protection to the most vulnerable, those most affected by the economic crisis. When assessing the extent of the current turmoil, especially when placed in the broader context of globalization and population ageing, it is evident that social security is more necessary than ever and should be seen as a core element of public policies aimed at proactively supporting economic recovery and employment while reducing the negative social impacts of the economic downturn.

It is important to highlight the need for a strong public pillar and then, and only then, to find the right balance between the public and private provision of social security. There is also a need to create an appropriate balance between defined-benefit and defined-contribution schemes in order to better manage risks, ensure adequate benefits, and maintain solidarity within social security systems.

To enhance the efficiency of such provisions, the ISSA is calling for coordinated policy measures in the financial, economic and social sectors. Due to the fact that social security helps cushion the social and economic impacts of adverse risk events and also has a high capacity for improving socio-economic stability, governments have a responsibility to help guarantee the financial sustainability of schemes and ensure benefit levels. In this, special attention should be given to supporting old-age pension schemes.

Without doubt, an international crisis needs international organizations to address its consequences. But to be effective, a coordinated response is required from all international agencies, including from the ISSA. In this regard, the survey results presented here represent a first contribution by the ISSA. It is to be expected that future results will further confirm that social security administrations are indispensable actors in alleviating the human impacts of the crisis and in supporting economic recovery.

(1) ILO Global Employment Trends - Update , May 2009. http://www.ilo.org/public/english/employment/strat/global.htm
(2) OECD Private Pensions Outlook 2008 . http://www.oecd.org/daf/pensions/outlook