Photo: Collin Key

Why the need for reform?

Securing financial sustainability

The financial difficulties of the social security system in Turkey stemmed from a range of factors. Revenue had been constrained by the high level of informal employment in the country, the under-declaration of earnings used to calculate contributions, a low level of contribution collection, and a decrease in the level of contribution payments. Expenditure had risen primarily because of a trend towards early retirement, the longer duration of pension payments due to increased life expectancy, over-generous insurance payments causing a financial imbalance, and a loose link between the level of contributions made and actual pensions paid.

The impact of early retirement on the financial health of the system was one of the most important issues addressed by the reform. As much as 60 per cent of individuals who retired were below the statutory retirement age of 60 (for men) and 58 (for women). Life expectancy at birth, however, is 73.6 years according to the OECD and although this is nearly six years below the OECD average, Turkey registered one of the greatest gains in life expectancy of any country between 1960 and 2008, implying a growing risk to the financial sustainability of the system. Other issues impacting on the system were the high replacement rate, a weak relation between earnings and pension benefits, and the method of adjusting pensions annually.

Ensuring uniform social security norms

One of the most important purposes of social security is to limit social inequality. To do this, the State has the responsibility to build a social security system with equal rights and obligations for all individuals. This obligation is enshrined in Article 60 of the Turkish Constitution: “Everyone has the right to social security. The state shall take the necessary measures and establish the organization for the provision of social security.”

However, pension entitlements, conditions of eligibility to health-care services and the provision of those services were defined differently by distinct laws for each category of worker: Those employed under a service contract; the self-employed; civil servants; farmers; and agricultural workers. These different schemes were managed by separate institutions.

Complex legislation, heavy bureaucracy, insufficient IT infrastructure and personnel issues prevented the social security institutions from functioning effectively, making the system difficult to coordinate and to ensure the uniformity of norms. This, in turn, caused a number of problems for beneficiaries, such as delays in receiving notice of their pension entitlement – especially for those who had years of service in different types of employment – and in obtaining health reports or accessing health-care services.

Anticipating demographic changes

Turkey currently has a relatively young population, but census data released in early 2010 show that the over-65 age group increased by nearly 3.9 per cent in 2009. In the same year, the growth rate of those under the age of 29 reduced from 0.52 percent to 0.32 per cent. Projections show that the ratio of the population over age 65 to the population aged between 0 and 64 will rise from 7 per cent to 14 per cent in just 27 years. These factors, coupled with the reduction in the total fertility rate to 2.12 births per woman in 2009 – down from just over 6 in 1960 – mean Turkey will face relatively rapid population ageing compared to the major industrialized countries, and a deteriorating total dependency ratio, which will have important implications for social security schemes.

The main reforms implemented

Starting in 2006, the Turkish authorities introduced important new social security legislation (1): The Social Security Institution Law and the Social Security and General Health Insurance Law . The reforms undertaken were aimed at tackling the financial deficit, creating a sustainable and sound social security system for future generations, as well as guaranteeing high-quality, standardized services for all citizens. The laws focused on three main areas:

- The provision of norms and equality for all with respect to insurance rights and obligations;
- The establishment of universal health insurance to offer equal and fair service to all citizens;
- The introduction of more effective protection against poverty through an accessible and financially-sustainable social security system, managed through a sound institutional structure.

Studies to prepare the legislation had started in 2002 with the Government’s “Emergency Action Plan”, and experts from all stakeholder groups were invited to participate. Throughout the reform process, suggestions, criticisms and contributions from social partners, public institutions, non-governmental organizations and the media were taken into account and reflected in the legislation.

Parametric changes to the pension system

The fundamental parameters of the pension system, including the retirement age, the number of days of contributions required to qualify for a pension, the replacement rate, and the valorization coefficient – used for updating the income of previous periods – were all reformed.

A major change introduced by the 2006 legislation was the gradual increase in the retirement age starting in 2036 to reach age 65 for both men and women by 2048. The number of days of contributions required to qualify for a pension was also increased from 7,000 to 9,000 for the self-employed and civil servants and to 7,200 for other employees.

The previous accrual rate was one of the highest among OECD countries and it decreased as the length of the working period increased, thereby encouraging early retirement and jeopardizing the sustainability of the system. The new law (2) revised the accrual rate to a standard 2 per cent for each year, providing more incentive for insured persons to stay longer in the system, helping to increase the system’s revenue and reduce its expenditure.

In addition to these main changes, other parameters were altered to standardize the different social security schemes. In particular, the scheme for the self-employed was abolished and their rights and obligations concerning both retirement and health insurance were aligned with those of employees and civil servants. At the same time, the calculation method and rate of contribution for the self-employed were redesigned to encourage compliance. The self-employed now have easier access to health insurance, can benefit from insurance against work accidents and occupational diseases and may also be entitled to additional benefits, such as nursing, support in the case of temporary incapacity and funeral grants.

As a result of these parametric changes, there has been some progress in improving the system’s financial situation. Table 1 shows that after the reform in 2006, the rate of increase in revenue has generally exceeded the rate of increase in expenditure, resulting in a recovery in the compensation rate (the ratio of revenue to expenditure) to 78 per cent in 2010. For 2011, the compensation ratio is expected to improve further.

Table 2 illustrates how the number of clients administered by the Social Security Institution (SSI) is increasing. According to these figures, active insured persons increased from 13.4 million to 17 million in the last 6 years, a rise of approximately 28 per cent. Passive insured persons and dependents increased by 2.2 million and 4 million respectively in the same period. The active/passive ratio, which currently stands at 1.90, has started to recover and will soon reach its pre-reform level.

Reorganization of the institutional structure

Prior to the reform, there were three different social security institutions: For employees, the self-employed and civil servants, each with their own branches, IT infrastructure, human resources policy and methods of implementation.

The policy-making process and financial management of social security were amalgamated into a single institution, the SSI, with the aim of ensuring the delivery of a fair, effective, easily accessible, actuarially and financially sustainable modern social security system, which is based on international social insurances principles. Since its inception, the SSI has aimed to be exemplary in the implementation of its projects.

One of the main objectives of organizational reform was to strengthen local access and bring services closer geographically to clients. The SSI, with approximately 26,000 employees, now has service networks all around the country. In addition to provincial directorates in 81 cities, more than 300 social security centres have been opened, operating as one-stop-shops so that citizens can access nearly all services without needing to travel to the provincial directorates or headquarters.

This countrywide structure has to be supported by sophisticated ICT systems and one of the core priorities of the newly-created SSI was to improve the capacity and technology of its IT infrastructure. A significant step was taken through the procurement of approximately 13,000 computers and 9,000 printers for the central and provincial offices. The SSI also designed advanced software, called MEDULA, to manage the health-insurance system, allowing data, such as patient identification, doctors’ records as well as payments made, to be monitored. In addition, access to health care was streamlined by abolishing the health certificate and using ID cards to allow the insured and retirees to access health-care institutions. Online transactions for both employees and the self-employed, such as registration and monthly declarations, have also been expanded.

The way forward

The reforms introduced through the Social Security Institution Law and the Social Security and General Health Insurance Law were by far the most comprehensive changes made to the social security system in the history of the Turkish Republic. The reforms affect not only the lives of Turkey’s 74 million inhabitants but also aim to ensure the sustainability of the system for future generations. Great strides towards this objective have been made, but social security is a living system and must continually evolve in line with socio-economic changes. The reform and its effects will continue to be monitored closely.

Notes

(1) The Social Security Institution Law No. 5502 (2006) and the General Health Insurance Law No. 5510 (2008).

(2) The General Health Insurance Law No. 5510 (2008).

Article contributed by the EU and Foreign Relations Department of the Social Security Institution of Turkey, an ISSA member organization. The Social Security Institution is willing to share its experience of this comprehensive reform process with the international social security family.