See the upside

A properly designed system is a development imperative.
ALEX VAN DEN HEEVER clears up common misunderstandings.

In many circles the term ‘social security’ has been associated with inflexibility, the absence of choice, threats to private enterprise, paternalism, the mommy state or, even worse, that such systems generate systemic risks for economies particularly within the context of globalisation.
Others see social security as essential to the maintenance of a healthy and thriving society where high-performance economies must depend on highly capable people. Social security systems are seen as essential to the development and maintenance of human capabilities. In this way they contribute directly to economic development and growth.

The more effectively social security and social services contribute to human capabilities, the more the potential of an economy is enhanced. For this reason, certain highperforming countries place education and social security at the top of their industrial policy strategies.

Even the second-order effects of social security systems are seen as important. It’s noted, for instance by the International Labour Organisation, that those countries with good social security systems recovered far faster after the 2008 financial crash than those without them. This has a lot to do with their ability to act as counter-cyclical economic demand stabilisers. Within the SA context, notions such as the ‘welfare state’ are sometimes contrasted with the ‘developmental state’, implicitly suggesting that social security reform is antagonistic to developmental agendas. References to the term ‘state’ create the impression of a holistic strategic direction for government. Framed in this way a ‘handout’ state is disingenuously contrasted with a ‘worker’ state.

In reality, these alternative perspectives raise important questions about the role and design of social
security systems. They retain their hold on the minds of many because they contain elements of the truth. Internationally, many social security arrangements (particularly dealing with unemployment, pensions, and health) are seen as slow to adapt to a fast-changing world, cold to the served population, and inflexible in the face of particular crises. Some of this inflexibility relates to design where heavily centralised and bureaucratic structures are generally unresponsive. Other aspects involve the politics of social security where certain social contracts are so entrenched in the designs that any moves to adapt to changing conditions are seen as challenges to the social order and can attract a severe social backlash. On the other hand, governments and business leaders are often tempted to chase short-term objectives with long-term implications for human development. There is
consequently a trust issue, and changes to social contracts are not taken lightly by affected constituencies. These concerns are legitimate. But in a world where social structures, the nature of
the workplace and the labour market are never static, there is a genuine need to design more flexible, adaptable, and responsive social security systems. To achieve this requires that the parameters of any ‘social contract’ are prospectively negotiated with all social partners to allow for appropriate flexibility.

In SA it is false economy to minimise social security or to retain the current architecture. It is in fact more likely that SA’s developmental agenda will be harmed by retaining failing and outmoded social security arrangements, irrespective of whether they operate within the public or private spheres.

Getting to someplace new will require many years of disciplined work to implement a revitalised strategic framework. The real trick will be learning to design high-capability departments and organisations able to adapt to changing social and technological conditions. Negotiating the parameters with society, to allow for appropriate flexibility, will also reduce the risks associated

Indirect benefits

Van der Heever . . . development advantages

Social security interventions usefully involve a number
of second-order effects (the first-order effects involving
direct protection of households). These can be beneficial
to the country as a whole.

For instance, households that remain protected
despite facing some form of crisis are able to recover
without any reduction in their existing and future
capacity to participate fruitfully in society. This is a
first-order effect, with the second order effect found in
the long-term inter-generational impacts resulting from
children avoiding periods of poverty or instability in their
education or families.

Well-designed social security systems can also provide
an automatic stabilisation mechanism during times of
economic crisis. This is achieved by reducing shocks on
the demand-side of the economy. Arrangements that
achieve this effect include:

• Tax-funded social assistance;
• Publicly offered defined-benefit pension funds;
• Unemployment insurance.

By way of contrast, systems that transfer a lot of risk onto households -- such as defined-contribution
pension arrangements where benefits are determined by investment returns -- reinforce demand shocks in a downturn, potentially extending and deepening its impact.

The reserving of pension funds, particularly where full funding (the 100% reserving of liabilities) is involved, can also contribute to development of strong capital markets. This consequence was seen as highly desirable in pension fund reforms initiated in Latin America from the early 1980s. Development of these capital markets helped to foster increased private domestic investment.
Social security systems can also provide an important social buffer, protecting economies undergoing structural change due to globalisation. If designed correctly, income support can be provided together with programmes providing new skills to achieve a transition from declining to new industries.

Countries such as South Korea and Taiwan achieved dramatic industrial restructuring in a socially inclusive manner. By avoiding widespread hardship during periods of transition and avoiding winner-loser strategies, these dynamic economies were grown through continuous investment in human capacities. It was understood that allowing some groups to lose for extended periods of transition is harmful to long-term development prospects.

Prof van den Heever is newly appointed to the Old Mutual-sponsored Chair of Social Security Systems Administration & Management Studies at Wits University. These are edited excerpts from his inaugural lecture.