Structuring social safety nets in the 21st century

The world may have largely moved on from the derision with which welfare recipients were treated in the past - in particular, the popular conservative trope of the ‘welfare queen’ - but the question remains: how should social safety nets be structured? In my home country Sri Lanka alone, half of the population is expected to fall below the poverty line by year’s end; although Sri Lanka is on the extreme end of the scale due to years of economic mismanagement, a recession is likely to affect many developed and developing nations globally due to the tumultuous economic and political conditions of our time. Reforming and developing social safety nets are therefore an increasingly prescient topic of discussion which may quite literally be a matter of life and death for many of the less fortunate worldwide.

A fair and functional society should, in the words of economist and LSE Director Minouche Shafik, ensure that “everyone was guaranteed a minimum, so nobody would be absolutely destitute. But also that, if you worked hard and tried hard, you could advance yourself regardless of which family you were born into.” To accomplish this, governments enact both pre-distribution (measures the state takes to prevent inequalities from occurring in the beginning - e.g. through free education, healthcare, and skills training) and redistribution policies (taxation, benefits, minimum wages, and some relatively controversial measures such as wage caps and UBIs). Social safety nets (SSNs) utilise elements of both in an effort to assist individuals in maintaining a minimum level of consumption. This article will focus on public SSNs rather than private ones - the latter of which includes informal transfers from members of a recipient’s community or family, assistance from NGOs, etc. - as the state has very limited control over these.

Before approaching the potential structures for SSNs, it’s important to note that many nations’ SSNs will require consolidation and reform to ensure efficiency and avoid the duplication of resources. For example, Sri Lanka’s social welfare system, as illustrated by the diagram below, is divided into three major sub-categories and different programs are run by organisations with limited communication. This has been shown to lead to duplication of resources, administrative inefficiencies, and higher costs for the taxpayer shown below.

Therefore, the state should endeavour to create a consolidated delivery mechanism and central database to ensure better coverage and efficiency. According to the OECD, such a move would promote cost-effectiveness and prevent program fragmentation as well. The state should also leverage technology to improve delivery outcomes - for example, transferring funds directly to recipients’ bank or mobile money accounts (the Kenyan government has had success using Safaricom’s M-PESA network to transfer funds) and allowing them to withdraw funds from ATMs or mobile money outlets, instead of requiring them to come to a physical government office which would waste their time and increase administrative costs for the state. This will also have the added benefit (particularly in developing economies) of reducing the unbanked percentage of the population. Although some criticise direct cash transfer programs (as opposed to subsidies or coupons) as potentially leading to misuse of funds, research has shown that misuse of funds is rare and cash recipients take advantage of the flexibility provided to invest in themselves, their businesses, their children, etc.

Critics of targeting, however, are likely to point out that targeting is unlikely to help in performing one of the most basic requirements of a ‘safety net’ - being there when it is needed. Qualifying for conditional cash transfers can often be a long and drawn-out process. For example, targeting for Mexico’s Oportunidades programme “takes place very infrequently – in some regions, every nine years – which means that, if a family falls into poverty between these targeting periods, they cannot access the programme” [11] according to Dr Stephen Kidd. Other problems highlighted by Kidd include targeting errors which lead to poor coverage - arguably the main thing that an SSN provider should not fail at. All of these flaws compound to a situation in which, according to the Human Rights Watch, there has only been, “limited success in protecting human rights.”

Kidd, and other economists of his ilk, have by contrast highlighted the benefits of universal social protection as part of a ‘lifecycle approach’ - i.e. the provision of social protection from the cradle to the grave. This type of SSN, which has now been endorsed by organisations including the World Bank and the ILO, includes adequate cash transfers for all who need it, and other types of support for the three main classifications of citizens - children; people of working age; and the elderly. Although the extent to which benefits are provided varies, most proposals include a ‘social protection floor’ (SPF) to ensure a minimum level of consumption and standard of living, and additional programs catered towards different demographics on top of this. This protection can be provided through social insurance, tax-funded social benefits, social assistance services, public works programs and other schemes guaranteeing basic income security, according to the ILO. Proponents of these programs argue that they are more effective at reducing poverty and inequality, ensuring that no one is left out, and preventing the build-up of resentment between members of communities and the state when some people are left out.

At the end of the day, however, social safety nets are clearly an issue that must be decided on a country-by-country basis. The strategy that works for Luxembourg, a developed country that can afford to spend $19,500 per capita annually on social protection, is not likely to work in Mexico, which can only spend $1,300. As aforementioned - particularly in nations with large fiscal deficits - governments must make difficult and pragmatic choices about where to spend their tax dollars. While developed nations can afford to build large and all-encompassing SSNs, developed nations should perhaps look towards lowering administrative costs and increasing the efficiency of delivery first. As they develop, and as per capita incomes and tax revenues rise, their governments should consider implementing an SPF and better targeting while working towards building an equitable and holistic solution.