Financing and investment

Social security and the challenge of sustainability

Social security systems are facing new challenges that differ significantly from those experienced decades ago, and which involve major implications for their financing. There is a wide consensus on what is expected from social security systems - coverage extension and the provision of adequate benefits.

However, these objectives must be achieved while ensuring mid- and long-term financial sustainability of benefit programmes. This is a particular challenge in several areas of social security: in particular, for pensions due to the ageing of the population, and for medical care due to increased related costs. And, of course, these challenges must be considered in the light of globalization and an increasingly precarious labour market.

The ultimate objective of social security systems is to honour benefits when they are due. This means, first of all, being financially sustainable.

How is social security financed?

National social security schemes contribute to the social protection of the population through the redistribution of a significant part of the Gross Domestic Product (up to more than 30 per cent in some countries). This large amount of resources is comprised of:

  • social contributions made by employees, employers and governments
  • transfers from governments (i.e. earmarked taxes and profits, general revenues, and international loans)
  • other arrangements, such as micro-insurance, micro-credit and community-based protection schemes

Investing in the future

Studies undertaken by the International Social Security Association show that countries have recently begun to implement and strengthen reserve funds to ensure the long-term sustainability of their systems and provide a buffer for anticipated and unforeseen periods of difficulty. Some countries that had phased out their Pay-As-You-Go (PAYG) programmes are now considering either the implementation of social pensions financed by taxes or the strengthening of social insurance arrangements. And finally, some countries are extending coverage through the implementation of a basic set of benefits, also financed by taxes

Sound governance is key

Social security funds are growing significantly. The investment environment presents many opportunities and, at the same time, a complicated context dominated by complex financial instruments and financial market crises. This is a somewhat hostile environment for social security institutions in which certain risks may hamper the optimal investment of social security funds. Consequently, social security institutions must be alert and minimize associated risks by adopting sound governance structures. At the same time, they must ensure that existing sources of funds are sufficient to make social security systems financially sustainable.

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