Future-proofing social protection

NEW DELHI: Since their inception in late-nineteenth-century Europe, social protection programs have been financed primarily through payroll contributions by workers and employers. These schemes maintain people’s standard of living when old age, illness, child-rearing, or unemployment affect their capacity to earn an income.

The recent confluence of global crises – from the COVID-19 pandemic and the skyrocketing cost of living to the climate emergency and wars in Europe, the Middle East, and Africa – has highlighted the catastrophic risks of inadequate social protection. To address these vulnerabilities and curb rampant inequality, governments must work to bring everyone under the umbrella of comprehensive social protection systems.

But just when such systems are needed more than ever, global trends that could erode their very foundation are emerging. The move from productive to financialised capitalism, the rise of digital technologies, automation, and artificial intelligence, together with demographic change, will alter how social protection is funded, who can access it, and under what terms. Ensuring its long-term resilience requires innovative solutions.

Historically, labour was essential for production and the creation of wealth. But today, the most valuable companies increasingly leverage finance and technology more than human work. At the same time, wages have stagnated and no longer grow in line with productivity. Because social-insurance contributions depend on wages, labour-intensive firms now shoulder a larger financing burden, which lets some of the most profitable companies and those contributing less to employment creation off the hook.

Moreover, demographic shifts such as aging populations and declining birth rates increase the contributions required from workers and their employers, raising affordability constraints for employers seeking to expand their workforce. And with the rise of outsourcing and complex, far-flung value chains, combined with persistently high levels of informal and self-employment, firms benefit from the efforts of workers whom they do not directly employ, and thus contribute less to financing social insurance.

According to international labour standards on social security, workers should not pay more than half of social insurance’s total cost, with the remainder borne by employers. As the balance of power and profit shifts away from labour and toward capital, this core principle is under threat.

To address these challenges, countries could raise additional revenue by increasing taxes on corporate profits. Global efforts to establish a minimum corporate tax and harmonize rates are already underway. But this is unlikely to be sufficient. Social protection programs compete with government outlays for health care, education, sanitation, and other priorities, and financing them requires long-term planning, which is at odds with short-term political spending cycles.

Moreover, flat-rate, tax-funded benefits alone can hardly curb downward social mobility or prevent the impoverishment of the middle class during crises. Nor are they sufficient to sustain aggregate demand and serve as a macroeconomic stabilizer during economic downturns. Both objectives of social protection are arguably as important as poverty reduction.

In addition to expanding tax financing to ensure a universal minimum of protection, it may be time to rethink the composition and structure of contributions to social insurance systems. Instead of being determined solely by wages (and thus labour stock), employers’ contributions to these systems could be determined partly by their capital intensity. This could be calculated as a portion of a firm’s profits, sales, or investment in labour-replacing technologies – for example, a levy on robotisation, automation, or artificial intelligence could be earmarked for social insurance.

Such an approach would create a complementary source of financing, one more concentrated in sectors where employment is low or in decline. These additional funds could help mitigate the mounting economic pressures on working people and small businesses. They could be used to subsidize participation in social insurance for those who cannot afford it – particularly the self-employed and informal workers, as well as those in micro- and small enterprises. Increasing the contributions of capital-intensive firms would also be a step toward levelling the playing field between them and more labour-intensive companies.

It would not be the first time that policymakers have devised innovative mechanisms to fund social-insurance programs through levies on capital. In Portugal, contractors pay social contributions for the self-employed workers whose services they benefit from. Workers in India’s and Indonesia’s construction sectors, regardless of their contractual status, are insured for workplace-related injury, illness, and death through a charge paid by the main contractor based on the project’s total value. Several countries are ensuring social-insurance coverage for platform work through levies on the digital platforms’ turnover or digital transactions. In Brazil, the national unemployment-insurance system is financed by taxes paid on a firm’s total revenue, rather than the size of its payroll.

Social protection has long adapted to the changing nature of work and economic activity. The changes we are starting to see in labour markets require a commensurate rethinking of how social-insurance systems are funded. Only by adapting can social protection realize its core principles – solidarity, collective financing by capital and labour, redistribution, and risk sharing – for years to come.

The views expressed here are those of the authors and do not necessarily reflect the positions of their respective organisations.

Florian Juergens-Grant is Global Social Protection Adviser at Women in Informal Employment: Globalizing and Organizing. Luca Pellerano is Senior Social Protection Specialist at the International Labour Organization’s Regional Office for the Arab States.