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AS
regards the contribution of public authorities to social security schemes, it may either take the same form as the employer's or the insured person's contribution, or it may be fixed in other ways, for example, as a proportion of the total contributions paid by employers and insured persons; as an amount equal to the expenditure on certain benefits or on administration; as an amount equal to the
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difference, if positive, between expenditure and income from other sources; more generally, as a flat subsidy either out of the state budget or in the form of earmarked taxes.
Criteria for the choice of financial system
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The arrangement by which the receipts of a social security scheme are made available to meet the expenditure of the scheme so as to guarantee its solvency be made in a variety of ways, each giving rise to a different manner of pooling resources, which may involve not only a redistribution of income between members of given generation but also a subsidy from one generation to another. Secondly, different financial systems would lead to different patterns of accumulation of reserve funds, that is to say, the degree of funding would vary from one financial system to another. It should be remarked, however, that the question of Choice cf financial system does not arise with provident funds based as they are on the concept of individual saving.
An important distinction to be made in this respect is between the so-called short-term benefits, e.g. sickness benefit, maternity benefit, temporary incapacity benefit payable in respect of employment injury and the long-term benefits, i.e. pensions. In the case of short-term benefits, the annual expenditure on benefits may be expected to attain a relatively constant level in a comparatively short time after the scheme starts operating, unless fundamental changes are made such as widening of the scope of application of the scheme or altering the benefit provisions. In contrast, the annual expenditure on pensions may, in general, be expected to grow continuously for a comparatively long period of time, not only because of the progressive increase in the number of surviving pensioners, but also because of the increase in the average rate of pension commensurate with an increase in the average length of qualifying service. The exceptions to the above trend arise with nev pension schemes incorporating generous transitional provisions in respect of older persons and with "mature" pension schemes tending to attain "stable" situation after having operated for long periods of time without undergoing any fundamental modifications.
a
The choice of financial system will also be influenced by the scope of coverage of the scheme. In a private scheme or a scheme with limited coverage, such as an occupational scheme, one important consideration is that the scheme must, at any moment, be able to face a liquidation or a contraction of the industry which is covered. Pension schemes of limited coverage, therefore, usually adopt financial systems leading to the accumulation of substantial reserve funds, or, in other words, have a "high degree of funding". In the case of a social security pension scheme, which is
underwritten by a government, however, funding does not have the same significance, unless there is doubt regarding the country's finances; in that case,
however, even the existence of a fund would not provide an adequate guarantee if it were invested, as is usually the case, in the government's own securities.
For a national scheme covering large sectors of the economy, the choice of financial system should be guided by considerations related to the national economy and public finance. A social security pension scheme with a high degree of funding can be a powerful means of increasing national savings which can be used for capital investment leading to economic development. However, it has to be ensured that the corresponding investments satisfy certain basic principles which regulate all investments of social security funds - see paragraph 31 et seq. It must also be recognised that saving through the medium of social security is only a means to an end and not the end in itself, and the savings realised would contribute to economic development only to the extent that they are suitably invested in developmental projects. In fact, the creation of huge social security funds can give rise complicated problems with regard to their administration and investment especially in countries where a capital market has not yet developed.
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A related consideration, particularly with regard to pension schemes, is that the cost of living or the general level of wages increases, it often becomes necessary to adjust the rates of benefits to compensate at least for the resulting loss
of purchasing power. It can be demonstrated that the greater the degree of
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