SOCIAL SECURITY PROGRAMS financed primarily by payroll taxes have been adopted by a large number of developing countries and are being considered by others. They not only serve a desirable social objective but also in many countries provide an important source of funds to finance economic development. This paper consists of two parts: the first attempts to measure the extent to which savings are in fact mobilized by social security and related taxes; the second surveys the investment policies of social security funds and assesses their impact on economic development.
Funded programs are combined in different proportions with other social security programs. Occasionally, surpluses of long-term risk programs are used to finance the deficits of short-term risk programs. In some countries (e.g., Congo (Brazzaville), Mali, and Upper Volta), surpluses of pension schemes are used to finance the deficits of the family allowances programs; in other countries they are channeled to meet the deficits of the programs for government employees (e.g., Argentina and Uruguay) or the deficits of the sickness programs (e.g., Costa Rica).

The available data often cover the combined operation of short-term and long-term risk programs, which in many countries are conducted by the same institution (e.g., the combined pension and short-term risk programs in a number of countries with pension programs for nongovernment employees).3 Published reports do not always detail the operations of the different programs. Because of these interrelationships and the unavailability of separate data, it would be unrealistic and impracticable to limit the analysis to long-term risk programs.

National provident funds comprise compulsory savings from certain categories of employees and contributions from their employers. Generally, contributors receive benefits at retirement, invalidity, or death, consisting of the accumulated savings plus interest thereon, mostly payable in one lump sum. Sometimes benefits are also payable in the case of emigration, maternity, sickness, and unemployment.

National health programs covering all residents are included for reasons of comparability, because they correspond to the social insurance programs for sickness in other countries.4 However, it has been practically impossible to exclude from the expenditures of the national health programs those that in other countries are defined as public expenditures for health and are excluded from the social security concept used in this paper.

Social insurance programs provide for the collection of contributions and the payment of benefits under prescribed conditions, based on the pooling of risks and resources and the equalization of losses. The strict insurance approach would require that every member contribute only for his own risk; for example, those in groups with a higher incidence of illness would pay higher premiums. Usually, however, contributions are not varied with risk, so that there is a redistribution of income from contributors with a low incidence of risk to those with a high incidence.

Social insurance may embrace all programs for long-term risks of old age, death, invalidity, or permanent disability, as well as short-term risks of sickness, maternity, temporary disability, and unemployment. Long-term risks may be insured on the basis of either full-funding or pay-as-you-go financing, whereas short-term risks are usually financed by a pay-as-you-go system. Under the full-funding system, a sum of money is set aside which, with interest and other earnings, will cover payment of the benefits; under the pay-as-you-go system, each year’s benefits are met out of current funds, except that provision may be made for a contingency reserve. Special programs for public employees are included for reasons of comparability; in several countries these programs are managed together with those for private employees.

While programs for sickness, maternity, work injury, and family allowances financed on a pay-as-you-go basis5 sometimes produce a surplus as a contingency reserve against unforeseen events, a significant degree of saving mobilization is achieved only by funded programs.

Relation of social security savings to gross domestic investment
One measure of the mobilization of resources by the social security sector is the relation of social security savings to aggregate national savings; another is their relation to gross national product (GNP). Since estimates of national savings are available for only a few countries, the savings of the social security sector are compared with gross domestic investment (GDI). No adjustments have been made for the international flow of capital in arriving at an approximation of domestic savings.

In determining the increase in social security reserves, only the net increase in the consolidated social security sector is considered. The net increase is measured by the difference between annual current receipts to finance the programs covered (premiums, government payments, and returns on investment) and the annual current expenditures (benefit payments and operating expenses). Surpluses and deficits of different programs are consolidated so that only the net increase in the reserves is shown. Although such increases in reserves are treated as “gross savings,” they may be used in part for current or future consumption.

The comparison related to the social security gross savings is not limited to the cash increase in the reserves, but covers also the accrued but unpaid liabilities to the system. The accrued increase in the reserves includes the government payments for contributions, interest, and subsidies made with securities, as well as the known overdue payments for contributions by the government and by the employers.