By Stephen Kidd
History tells us that inclusive, lifecycle national social security systems play a key role in enabling nations to tackle poverty and inequality, promote human development, build the social contract, generate social cohesion and stimulate economic growth. Indeed, the world’s most successful economies have, over many decades, built comprehensive social security systems that protect citizens across their lifecycle, from childhood to old age. Yet, Egypt is a long way from establishing a similar modern social security system, focusing instead on one that is more characteristic of 19th century England.
Levels of investment in social security across the world
As Figure (1) indicates, the average level of investment in social security across high-income countries is 12% of the GDP, with priority given to old age pensions, disability benefits and child benefits, while significant support is also offered to the unemployed and survivors (such as widow[er]s). In most high-income countries, the core social security schemes offer universal coverage complemented by small programmes for those living in poverty. They are usually financed through a mix of contributions from workers’ and employers’ incomes to social insurance combined with general taxation.
Figure 1: Levels of investment in social security in high-income countries (2014)
Source: Kidd et al (2019).
Increasing numbers of low- and middle-income countries have also recognised the imperative to invest in social security to achieve sustainable economic growth and cohesive societies. Figure (2) shows the level of investment in tax-financed schemes across a range of countries: a country as poor as Nepal is able to invest around 1.5% of the GDP in schemes for older people, people with disabilities, children, and widows while some countries in Africa are investing between 1.6% and 4.5% of the GDP (Lesotho, Mauritius, Namibia and South Africa). Yet, Egypt is investing only 0.5% of the GDP in tax-financed cash-based social security transfers despite having an economy that, in GDP per capita terms, is almost five times richer than Nepal’s.
Figure 2: Levels of investment in tax-financed social security systems across a range of low and middle- income countries
Source: Research undertaken by Development Pathways based on most recent data available for all countries.
Egypt’s move from universal subsidies to poor relief
Until recently, Egypt offered its citizens universal social protection based mainly on subsidies; for example, in 2012/2013, the cost of food and fuel subsidies reached 8.7% of the GDP (Auktor & Loewe, 2019), however, it was a form of universal social protection that did not offer equal benefits to all. In the case of fuel subsidies, the main beneficiaries were the wealthy, with only 3% of petrol subsidies reaching the poorest quintile of the population. In addition, the social insurance system offered old age pensions and other benefits to those working in the formal economy, who also tended to be among the wealthier members of society, at a cost of around 3.4% of the GDP (Egypt Today, 2018).
In recent years, these subsidies have largely been withdrawn – for example, petrol and diesel prices rose by 186% to 387% between 2010 and 2017 – and replaced by a system of poor relief, or cash handouts targeted at the poorest members of society (Auktor & Loewe, 2019). The main compensation scheme introduced – under the advice of the World Bank – was the Takaful and Karama programs, which is a classic example of poor relief based on England’s 19th century model of social security, known as the Poor Law.[i] This 19th century model provided conditional transfers – in the form of being obliged to reside and work in a workhouse – to those who were expected to work while older people and people with disabilities were given unconditional transfers.
In Egypt, conditional transfers, in the form of the Takaful program, are given to working-age families who are obliged to send their children to school or face sanctions, while unconditional transfers are offered to older people and people living with disabilities in the form of Karama. In 2018, the total budget of Karama and Takaful was a mere 0.24% of the GDP and reached just 10% of households (Tammam, 2018). It was complemented by the Social Solidarity Pension, another poor relief scheme for older people and people with disabilities living in poverty, costing around 0.3% of the GDP.
Gaps in social security coverage and the missing middle
The focus on social insurance for those in the formal economy and poor relief for the poorest has meant that there are significant coverage gaps in the national social security system. For example, only 37.5% of over-60s access a pension (ILO, 2017), the majority of disabled Egyptians are excluded from disability benefits, and only around 10% of children can access a child benefit.
The group who, by design, are excluded from the national social security system are those on middle incomes–the so-called ‘missing middle’, who often work in the informal economy. Despite paying taxes – even if they are indirect taxes – they do not receive social security in return (unless they are mistakenly included in poor relief as a result of poor targeting). Yet, their incomes are still low: 53% of Egypt’s population live on less than US$5 in purchasing power parity (PPP) terms per day while 90% live on less than US$10 PPP per day, which many would argue should be regarded as the international poverty line (The World Bank, 2019). Without doubt, they would benefit from access to social security.
As with other poor relief schemes in middle-income countries, the design and implementation of the Takaful and Karama programs is of poor quality, in particular in terms of its selection of recipients. It uses a proxy means test (PMT) and Social Registry to identify recipients. The PMT estimates household income by measuring household assets and characteristics. Yet, across the world, it has been proven to be highly inaccurate. For instance, the average exclusion error of PMT schemes targeted at the poorest 10% of the population is around 70% (Kidd & Athias, 2019; Kidd, Gelders, & Athias, 2017). Indeed, a recent study of Takaful has shown that 80% of the poorest quintile of Egypt’s population are unable to access the scheme (Breisinger et al., 2018). A further challenge with PMTs is that they often generate social conflict, which may well add fuel to the fire in Egypt (Kidd, Gelders, & Athias, 2017).
Role of the IMF and World Bank in promoting poor relief
The push to build a 19th Century style poor relief system in Egypt has derived, in part, from the World Bank and International Monetary Fund (IMF), both of which have a track record of promoting similar programs around the world (Kidd, 2018). For example, the IMF (2018) recommended a greater reliance in Egypt on ‘targeted cash transfer programs’ and they have found willing allies within the government. The main driver of poor relief is usually to reduce costs and, therefore, taxes on the wealthy. However, a further key incentive for the World Bank has been the opportunity to deliver a large loan to Egypt, which is, of course, intrinsic to its business model. In recent years, the World Bank has increasingly been providing low- and middle-income countries with loans for social security, with priority given to promoting poor relief alongside conditions and sanctions or by obliging recipients to engage in public works (Kidd, 2018).
Building a modern social security system in Egypt
Egypt could, however, have taken a different path and used its savings from subsidies to build a more modern social security system. As Figure 1 illustrated, the social security systems found in high-income countries are based on addressing risks that everyone may experience across the lifecycle, usually by offering schemes to all citizens as a basic human right. Growing numbers of low- and middle-income countries are building similar inclusive systems, usually beginning by offering universal old age pension coverage while subsequently establishing other schemes, in particular child and disability benefits. While these inclusive schemes are more expensive than poor relief, they are also more popular, especially among those on middle and high incomes, since they receive something in return for their taxes.[ii]
It is not too late for Egypt to change direction. The question to be answered is: does Egypt want to continue focusing on a 19th century poor relief model or does it want to build a more modern, inclusive, lifecycle system that offers social security as a basic right to all citizens (complemented, of course, by some limited provision of poor relief)? Egypt could start by offering a child benefit to all children under 5 years of age to ensure that they receive a good start in life (gradually increasing the age of eligibility over time)[iii], a disability benefit to all children and adults with a severe disability up to 64 years of age and an old age pension to everyone aged 65 years and above. These schemes would cover a high proportion of the population including, also, households living in poverty, young people (in particular those with children), widows, and the unemployed. More importantly, they would mark the beginning of an inclusive system that would eventually offer income security to everyone in the population.
If benefit levels were the equivalent of what are regarded as reasonable values internationally, the overall cost of this package would be 1.8% of the GDP. If these schemes replaced the Karama and Takaful programs and the Social Solidarity Pension – which currently cost 0.5% of the GDP – an additional 1.3% of the GDP would be required, which could easily have been afforded by the savings in subsidies. Alternatively, the system could be introduced slowly over a number of years, funded by a small part of the additional taxation that will be derived from economic growth. It could be further expanded over time, in particular by increasing the age of eligibility of the child benefit and introducing unemployment benefits.
So, which way will Egypt go? Almost all successful and sustainable economies have invested significantly in inclusive, lifecycle national social security systems. Indeed, a key reason for the increase in social cohesion in Europe following World War II was the growth in investment in social security and a rejection of poor relief as the basis of national systems. Therefore, will Egypt take the decision to invest in a form of inclusive social security to help build a more socially just and cohesive society? Or will it continue to follow a 19th century model of social security which, ultimately, is doomed to failure?
[i] For more information on the Poor Law and the workhouse, see: http://www.workhouses.org.uk/poorlaws/newpoorlaw.shtml[ii] See Kidd (2015) for a more in-depth explanation.[iii] While it is often feared that child benefits may encourage higher fertility, the evidence from around the world suggests that this is not the case.
This blog was originally published by Alternative Policy Solutions, a non-partisan, public policy research project at the American University in Cairo. See: https://aps.aucegypt.edu/en/articles/83/what-type-of-social-security-system-is-appropriate-for-egypt-not-the-current-19th-century-model
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