Transition Economies Need to Reform Social Safety Nets

The former centrally planned countries undergoing economic transition have experienced a sharp decline in output, income and employment in recent years. This has resulted in severe hardships for many households, particularly the elderly, young children, and the unemployed.

In this adverse climate, transition countries now face the challenge of securing adequate resources for social protection. But the ability of governments to help identify the poor or administer targeted social protection programmes is undermined by severe financial and administrative constraints.

Unemployment and Underemployment. The collapse of output has drastically reduced labor demand, increasing open unemployment in some countries and underemployment in others. While registered unemployment throughout the region is low, total employment has declined. In Russia, for example, total official employment dropped to about 6.7 million by 1995, from 7.4 million in 1991.

The absence of normal labor market adjustment mechanisms in transitional economies further complicates the employment situation, For example, despite diminishing work opportunities in the formal sector, large numbers of employees choose to stick with their traditional employers in order to hold onto company-provided housing, education, and health benefits; an additional incentive to stay put is the inadequacy of unemployment compensation.

Financial Constraints. Prior to the onset of the reforms the governments of centrally planned economies controlled virtually all prices and wages; guaranteed employment for all, at least in principle; and provided universal public pensions, child allowances, and other benefits for sickness, maternity, and childbirth. But since the early 1990s, outlays for social protection in transition countries have come under increased financial pressure since revenue from payroll taxes - traditional source of funding for such programmes - began to fall.

Besides, the low statutory retirement ages for men and women have further reduced the number of working-age individuals.

On top of that the authorities have so far been unable to improve the distorted benefits structure. They still provide generous services with loose eligibility requirements, running from housing benefits to subsidized vacations. Paradoxically, welfare benefits are distributed among all instead of being given to the most needy.

Since the above trends have affected both the revenue base of social protection programs and the ability of these countries to target social benefits, international experts believe that to find a solution of the social protection problem the transition economies will have to:

• reform eligibility and benefits standards governing the distribution of social benefits;

• raise statutory retirement ages;

• require individuals to vacate their last job on reaching retirement age;

• establish a more equitable distribution of social adjustment burdens across different population groups;

• broaden the tax base to include presently untaxed elements of labour compensation;

• increase the efficiency of expenditures in government programmes, including outlays for social protection, and prioritize them;

• work out effective targeting mechanisms for the provision of benefits.

Words you may need:

Англійський	Російський	Український
targeted program	целевая программа	цільова програма
to stay put	оставаться на месте, не менять место работы	залишатися на місці; (тут) не змінювати місце роботи
onset	начало	початок
child allowance	пособие на ребенка	допомога на дитину
maternity	материнство	материнство
payroll taxes	налог на заработную плату	податок на заробітню платню
statutory	установленный законом	встановлений законом
eligibility	применимость, попадание(под льготы)	застосовність (пільг), попадання (під пільги)
retirement age	пенсионный возраст, возраст выхода на пенсию	пенсійний вік, вік виходу на пенсію
vacate	освобождаться	звільнюватись

Ex. 17. Look through the article and find the answer to the following question: What can help improve the lives of people in transition economies?