Authors from the Social Security workstream of the IFoA Covid-19 Action Taskforce, highlight two ways in which they believe that additional longer term COVID related imbalances are set to emerge in social security systems.
The ways in which Covid-19 infection, hospitalisation and death rates have varied by age, ethnicity and levels of deprivation are well documented. The virus is in no sense the “leveller” that some early commentators suggested, and the near-term healthcare and mortality differentials are set to continue.
Intergenerational transfers of wealth are embedded within social security provision. Unfunded, or pay-as-you-go, State pension arrangements involve a transfer from those in work to older citizens through income taxes or social security levies on employment income. In a stable demographic and economic structure, this might not matter so much because the generations currently working are then supported in their retirement by those who are then working. Unexpected changes to employment levels or opportunities for one generation may upset this balance.
This will almost certainly be the case for post-COVID-19 labour markets. Structural changes in these markets might precipitate the need for higher aggregate unemployment benefit payments to certain age groups creating an immediate intergenerational imbalance. However the reality that unemployment benefits themselves fall short of the income required for necessities, creates a second imbalance between the long term unemployed and those whose jobs survived the pandemic. At the same time there will be pressure for higher employment taxes levied on a lower income base to continue to support the same level of retirement benefits.
There is potential for societal changes related to COVID-19 to cause various intergenerational imbalances to grow in the future. Examples of this include:
· Challenges to the affordability of generous pension benefits or inflationary increases in the new fiscal landscape.
· Higher levels of youth unemployment as firms reappraise hiring plans and certain industries are forced to restructure.
· More instances of early retirement as some people exit the workforce through redundancy and choose not to return, or choose not to adapt to new ways of working.
There are challenging questions for policymakers here. In particular, is it reasonable to continue with pension increases for generations that are already sitting on substantial gains from property ownership at the same time as people in their twenties struggle with high youth unemployment, student debt and little prospect of owning a home. Of course, if all the changes described above were to occur simultaneously in the next few years then the generation in the middle could find themselves very squeezed as government demand for tax revenues grows at the same time as they are under pressure to support both older and younger relatives.
A challenge to political decision-making is that consideration of economic well-being is much more focused on the short than the long term. The impact of modifying benefits for those currently retired is felt immediately, as is the effect of any rises in taxation, whereas control of the future benefit promises feels more distant and less real, even though the financial impact might be equivalent when assessed with an actuarial mindset.
National versus local priorities
A second set of pending imbalances in the ways COVID-19 affects social security originates in the way in which the systems themselves are organised. Social security is nearly always run by central government as a national enterprise. However, we have witnessed how the economic impact of the virus can be inherently local. It is therefore quite likely in many countries that national social security systems become too blunt an instrument for effective protection. Where this occurs, large imbalances between different parts of a country’s population may result. Examples include:
· Regions with different tiers of restrictions leading to varying demands for furlough or unemployment benefits.
· Economic migrants as a growing proportion of the workforce in countries where these people may not be covered by social security or are more likely to be in the informal economy.
· Rural versus urban communities where benefits have historically been designed with one in mind.
· Countries within a Union, particularly where devolved administrations decide public health measures but not social security.
· States within a Federal system, in particular where healthcare operates State-by-State but social security is financed from the Federal budget.
What should actuaries do?
It is important that actuaries engage and offer advice. There are two areas where we are uniquely placed to support policymakers:
· Transparency. Intergenerational transfers are poorly understood, and any shifts can be difficult to present concisely. For social security initiatives to be sustainable, changes in intergenerational effects will need to be well understood.
· Longer-term perspectives. Social security is an area of policy where current resource allocation decisions have long term consequences and conversely where financial impacts many years away need to be understood today.
The pandemic will have long-lasting effects on the adequacy, design and financial sustainability of social security systems. Actuarial insights should prove valuable in the face of these challenges and imbalances.
The ICAT Social Security group consists of Tawanda Chituku, Laura Llewellyn Jones, Stephen Moncrief, Alan Newton, Peter Tompkins, Dave Williams and Chris Sutton.