Chapter

Appendix 2. Social Protection

Author(s):
Sage De Clerck, and Tobias Wickens
Published Date:
March 2015
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This appendix describes the various organizational structures used to provide social protection and the associated government finance statistics compiled for the general government or public sectors.

Introduction

A2.1 Social protection is the systematic intervention intended to relieve households and individuals of the burden of a defined set of social risks.1Social risks are defined as events or circumstances that may adversely affect the welfare of households either by imposing additional demands on their resources or by reducing their income. Needs may occur due to sickness, unemployment, retirement, housing, education, or family circumstances. Many governments devote considerable economic resources to protect citizens and their employees against these risks.

A2.2 This appendix describes the nature of social protection, the boundary between social protection and private insurance, and the criteria used in the classification of social protection arrangements. A typology of social protection arrangements is presented. The typology has the purpose of identifying the type and sector attribution of social protection arrangements, in order to assist the compiler in the recording of flow and stock positions. Examples of the recording of specific flows related to various types of social protection arrangements are presented in tabular form.2

The Nature of Social Protection

A2.3 Households benefit from social protection in different ways:

  • Households could receive benefits when they meet certain eligibility criteria that originated from a social risk without making any contributions. These benefits are classified as an expense that leads to a redistribution of income through transfers.

  • Households could make contributions and receive benefits as transfers receivable in the event of the occurrence of the specified social risks. Neither the contributions nor the benefits constitute an exchange as no direct exchange of economic value occurs. The payment of the social contribution entitles the contributor to some contingent future benefits. The finances of these arrangements function similarly to nonlife insurance schemes (see paragraph A4.70). Such social protection arrangements are essentially a process of redistribution across a wide section of the population, with many individuals contributing resources so that those in need may benefit.3 These social benefits are classified as an expense.

  • Households (including employees, self-employed, and unemployed) could make contributions (actual and imputed) to a scheme to accumulate assets. They can withdraw from these accumulated assets in the event of the occurrence of the specified social risk. Examples are employment-related pensions and other retirement benefits, compulsory saving schemes, and other types of annuities. The finances of these arrangements function similarly to life insurance schemes (see paragraph A4.69). There is relatively little redistribution among the various households holding similar policies, and members of households are able to predict with a reasonable degree of certainty what they will receive and when. Therefore, contributions and payments of these benefits are transactions in financial assets and liabilities.

A2.4 Depending on the nature of the social protection arrangement, the unit that administers the arrangement could earn revenue (social contributions) and/or incur expense (social benefits) related to the social protection arrangement. Socialcontributions[GFS] (12) are actual or imputed revenue receivable by social insurance schemes to make provision for social insurance benefits payable (see paragraphs 5.94–5.100). As an expense, socialbenefits [GFS] (27) are current transfers receivable by households intended to provide for the needs that arise from social risks (see paragraphs 6.96–6.106). Alternatively, the unit that administers the arrangement could be involved in transactions in financial assets and liabilities, classified as insurance, pensions, and standardized guarantee schemes (see paragraphs 7.178–7.202).

A2.5 The social risks covered by social protection vary from country to country and from scheme to scheme. Generally, social protection may be divided into two classes—namely:

  • Pensions and other retirement benefits

  • All other social benefits, collectively described as nonpension social benefits.

A2.6 Pensions and other retirement benefits are payable when individuals cease employment upon retirement. Pensions may also be payable to other individuals—for example, a bereaved spouse or other dependents, or to someone suffering from a permanent disability. As indicated in Figure A2.1, pensions and other retirement benefits are provided to individuals via social assistance, social security, employment-related pension schemes, or private insurance.

Figure A2.1Boundary between Social Protection and Private Insurance

1 Including defined-contribution schemes, treated similar to life insurance.

A2.7 Nonpension social benefits include payments made to individuals when they are temporarily unemployed, suffering from a medical condition, or suffering from an event that prevents them from working for a period. The following list of typical non-pension social benefits illustrates their general nature:

  • The beneficiaries, or their dependents, require medical, dental, and other treatments, or hospital, convalescent, or long-term care as a result of sickness, injuries, maternity needs, chronic invalidity, old age, etc. These social benefits are provided in kind in the form of treatment or care provided free or at prices that are not economically significant, or by reimbursing expense incurred by households or individuals.

  • The beneficiaries have to support dependents of various kinds: spouses, children, elderly relatives, physically or mentally disabled persons, etc. These social benefits are usually payable in cash in the form of regular dependents’ or family allowances.

  • The beneficiaries suffer a reduction in income as a result of not being able to work full-time. These social benefits are usually payable regularly in cash for the duration of the condition or for a maximum period. In some instances, a lump sum may be provided additionally or instead of the regular payment. People may be prevented from working for various reasons, including involuntary unemployment, temporary layoffs, short-time working, sickness, accidental injury, the birth of a child, etc.

  • The beneficiaries suffer a reduction in income because of the death of the main income earner. These social benefits are usually payable in cash, often in the form of regular allowances or, in some instances, a lump sum.

  • The beneficiaries are provided with housing either free or at prices that are not economically significant, or by reimbursing some of the expense they incur.

  • The beneficiaries are provided with allowances to cover education expenses incurred on behalf of themselves or their dependents; education services may occasionally be provided in kind (i.e., education services provided free or at prices that are not economically significant4 to those subject to social risks).

A2.8 Social benefits can be provided in cash or in kind. If provided in kind, the goods or services could be produced by the unit providing the benefits, they could be purchased by the unit providing the benefits from a market producer before distributing them to the household, or the households could purchase the goods and services and be reimbursed. Some benefits are provided indirectly, such as through tax allowances, exemptions, and deductions; benefits provided in this manner are not considered social benefits in GFS. However, if social benefits are made available via the tax system in the form of payable tax credits, these payable tax credits should be recorded on a gross basis and recorded as a social benefit payable by government (see paragraphs 5.29–5.32).

A2.9 In GFS, a social benefit expense is always a transfer payment because the benefits are provided without the recipients being required to provide something of equivalent value in return. Allowances provided as compensation of employees or loans provided by employers to employees are not social benefits. Transfers are defined and explained in more detail in paragraph 3.10.

A2.10 Social benefits do not include transfers payable in response to events or circumstances that are not normally covered by social insurance schemes. Therefore, transfers made in response to unusual events, such as natural disasters or destruction during wars, should be recorded as transfers not elsewhere classified (282) in GFS (see paragraphs 6.122–6.126).

Boundary between Social Protection and Private Insurance

A2.11 Social benefits are provided by general government employers to their employees and their dependents, or other units, such as trade unions and nonprofit institutions serving households. Social benefits are always provided in collective arrangements. Consequently, individual insurance policies taken out on the private initiative of individuals or households solely in their own interest are excluded from social protection arrangements. When individuals take out insurance policies in their own names, on their own initiative, and independently of their employers or government, the claims receivable are not treated as social benefits, even if the policies are taken out against the same kinds of social risks as those listed in paragraphs A2.6–A2.7—these private initiatives are treated as private insurance.

A2.12 Individual saving arrangements that maintain the integrity of the participants’ contributions and are restricted to protecting against social risks are private insurance schemes. Under such arrangements, the contributions of the participants and/or their employers are kept in a separate account and may be withdrawn under specified circumstances, such as retirement, unemployment, invalidity, and death.

A2.13 Social protection arrangements (covering social assistance and social insurance) must be organized collectively for groups of workers or be available by law to all workers or designated categories of workers, possibly including unemployed persons as well as employed. Social insurance includes private social insurance schemes arranged for selected groups of workers employed by a single employer, and social security schemes (see paragraph 2.101).5

A2.14 Many social insurance schemes (covering social security schemes and employment-related insurance schemes) are organized collectively for groups of workers so that those participating do not have to take out individual insurance policies in their own names. In such cases, there is no difficulty about distinguishing social insurance from private insurance taken out on an individual basis. However, some social insurance schemes may permit, or even require, participants to take out policies in their own names. In order for an individual policy to be treated as part of a social insurance scheme, the eventualities or circumstances against which the participants are insured must be of the kind listed in paragraphs A2.5–A2.7, and, in addition, one or more of the following conditions must be satisfied:

  • Participation in the scheme is obligatory either by law for a specified category of persons, whether employed or unemployed, or under the terms and conditions of employment of an employee, or group of employees.

  • The scheme is a collective one operated for the benefit of a designated group of persons, whether employees or unemployed, participation being restricted to members of that group.

  • An employer makes a contribution (actual or imputed) to the scheme on behalf of an employee, regardless of whether the employee also makes a contribution.

A2.15 The premiums payable, and claims receivable, under individual policies taken out under a social insurance scheme are recorded as social contributions and social benefits. Most individual policies that qualify as social insurance schemes are likely to be for pension provision, but it is possible that they may cover other eventualities—for example, to provide income if the policyholder is unable to work for a prolonged period because of ill health.

A2.16 Participation in insurance schemes, public or private, may be voluntary for the workers concerned, but it is more common for it to be obligatory. For example, participation in schemes organized by individual employers may be required by the terms and conditions of employment collectively agreed between employers and their employees. Participation in nationwide social security schemes organized by government units may be compulsory by law for the entire labor force, except perhaps for persons who are already covered by private schemes. Making a distinction in underlying source data between compulsory and voluntary social contributions is required when the total fiscal burden is calculated (see Table 4A.1). In contrast, social assistance is provided without any insurance involved (see paragraph A2.25).

Classification Criteria for Social Protection Arrangements

A2.17 As indicated in Figure A2.2, the following criteria are used in macroeconomic statistics to classify social protection arrangements:

Figure A2.2Typology of Social Protection

  • Contributory versus noncontributory—Contributory schemes require actual or imputed social contributions by the protected persons or by other parties on their behalf to obtain entitlement to the benefits. Noncontributory arrangements do not require the payment of contributions, but other eligibility requirements may apply.

  • Compulsory versus voluntary—Compulsory schemes may be established by law and/or regulation or by agreement between employer and employees. In some cases, a scheme may be mixed, where some people are required to participate and others are allowed a choice. Participation in voluntary schemes is at free will.

  • Cover the whole (or large segments of the) population or just government employees—Social protection is provided collectively to the general population (or a large segment of the general population), although possibly limited by eligibility criteria, while employment-related schemes provide benefits as part of the conditions of employment.6

  • Provide pension and other retirement benefits, or other types of social benefits—Social protection arrangements distinguish between those that provide pensions and other retirement benefits, and those that provide other types of nonpension benefits, such as medical, unemployment, disability, etc. This distinction determines the transactions recorded for the arrangement; for example, employment-related pension schemes are considered to give rise to liabilities in the form of pension entitlements recorded under the debt instrument insurance, pension, and standardized guarantee schemes.

  • Autonomous versus nonautonomous—A social protection scheme is autonomous when a separate institutional unit exists7 that is directly held responsible, and accountable, for the decisions and actions the unit takes. Where a separate institutional unit does not exist, the arrangement would be considered nonautonomous and be classified with the unit that controls it.

  • Defined-contribution versus defined-benefit schemes—A defined-contribution scheme is one where the benefits are determined by the actual contributions made to the scheme, and the investment income and holding gains and losses earned on these and previous contributions. Under a defined-benefit scheme, the ultimate benefit is calculated by means of a formula embodied in the terms of the social insurance scheme. These benefits are usually determined in terms of the undertakings made by the employer or operator of the scheme.

  • Funded versus unfunded schemes—A social insurance scheme is funded if contributions are held in a segregated fund (reserve), from which future benefits will be payable. If a segregated fund is sufficient to finance the present value of the future benefits payable, the scheme is fully funded. If the segregated fund is insufficient to finance the net present value of the future benefits payable, it is underfunded. If the reserve is more than sufficient to finance the net present value of the future benefits payable, it is overfunded. For an unfunded scheme, contributions are not held in a segregated fund (reserve). By definition, unfunded schemes have no separate pool of reserves and cannot be a separate institutional unit.

Typology of Social Protection Arrangements

A2.18 The classification of social protection is based on the type of social protection arrangement governing the payment of the benefits. Social protection can be organized as social assistance or social insurance schemes, with the latter organized as social security schemes or employment-related social insurance schemes. The units involved in the organization and operation of social protection can be general government units, public corporations, nonprofit institutions serving households, or private corporations.

A2.19 Using the various aspects of the classification criteria for social protection, as described earlier, Figure A2.2 provides a typology designed to assist compilers in identifying and classifying various social protection arrangements. Identifying the type of unit involved in social protection arrangements is an important step in determining the recording of flows and stock positions, which differs depending on the type of arrangement.

A2.20 The first level in the typology of social protection is based on whether payments of contributions are required to obtain entitlement to benefits. Where no contributions are required, social protection is provided as a social assistance arrangement (see paragraphs A2.25–A2.29). The requirement to make payments of social contributions by the protected persons or by other parties on their behalf to obtain entitlement to the benefits indicates the existence of a social insurance scheme (see paragraphs A2.30–A2.31). However, noncontributory employment-related social protection schemes provided by employers for the benefit of their employees are treated as if they were contributory schemes because contributions are imputed. The amounts necessary to obtain coverage against the specified social risks are imputed as social contributions, and another transaction imputes the employees’ payment of the same amounts to the employer as social contributions (see paragraph A2.40).

A2.21 The next level in the typology of social protection is determined by whether the social insurance is arranged as a defined-contribution or defined-benefit scheme. Defined-contribution schemes will constitute either a compulsory savings arrangement or an employment-related pension scheme, and, as described in paragraph A2.12, these arrangements are treated similarly to life insurance. Paragraphs A2.55–A2.59 describe the treatment of defined-contribution schemes.

A2.22 Within social insurance, the types of beneficiaries covered by the scheme determine the next level in the typology. When the beneficiaries are the general population, or a large segment of the general population, the scheme would be a social security scheme, as discussed in paragraphs A2.33–A2.39. If individuals or households are eligible to receive social benefits as a group of employees, it is an employment-related social insurance scheme, as discussed in paragraph A2.40.

A2.23 The typology of employment-related social insurance schemes further distinguishes based on the types of benefits provided by the scheme: Employment-related pension schemes provide pension and other retirement benefits and are discussed in paragraphs A2.41–A2.59; employment-related nonpension social insurance schemes provide nonpension benefits and are discussed in paragraphs A2.64–A2.66. These benefits may be provided in cash or in kind, similar to the benefits as described in paragraph A2.27.

A2.24 Employment-related pension and other retirement benefit schemes can further be distinguished by whether they are funded or unfunded (see paragraph A2.17). While unfunded schemes are always considered nonautonomous, for funded schemes a further distinction is made between those that are nonautonomous (see paragraph A2.44) or autonomous (see paragraph A2.47).

Social Assistance

A2.25 Social assistance provides social protection benefits to all persons who are in need without any formal requirement to participate as evidenced by the payment of contributions. The eligibility to receive social benefits is not conditional on the payment of contributions by the protected persons or by other parties on their behalf. There may, however, be specific eligibility criteria, such as a “means test,” where the expression indicates a maximum qualifying level of income or assets. The benefits payable by such an arrangement are social assistance benefits. Socialassistancebenefits (272) are transfers payable in cash or in kind to households to meet the same needs as social insurance benefits but are not made under a social insurance scheme (see paragraph A2.30).

A2.26 All social assistance is organized and operated by government units and NPISHs. The benefits are payable to households, out of the unit’s general resources, according to the specified criteria. Eligibility is purely related to the criteria stipulated in the social protection arrangement.

A2.27 Social assistance benefits may be provided in cash or in kind. The classification of this expense is further discussed in paragraphs 6.101–6.102, and Table A2.1 illustrates the recording of flows related to social assistance. Social assistance benefits in kind are recorded when:

Table A2.1Illustrative Recording of Flows Related to Social Assistance
DescriptionDebitCredit
1.1 Government provides benefits payable to qualifying persons who have met the eligibility criteria of a social assistance arrangement
Assistance to households in cash2721Social assistance benefits in cash3212/3318Currency and deposits / Other accounts payable1
1.2 Government provides goods purchased from market producers to persons who have met the eligibility criteria of a social assistance arrangement
Government acquires the goods31224Inventories (goods for resale)23212/3318Currency and deposits / Other accounts payable1
Government provides goods2722Social assistance benefits in kind31224Inventories (goods for resale)2
1.3 Government reimburses market providers or households for goods and services acquired from market entities in accordance with the conditions of a social assistance arrangement
Government reimburses providers or households2722Social assistance benefits in kind3212/3318Currency and deposits / Other accounts payable1
1.4 Government produces and provides goods or services to the population in accordance with the condition of a social assistance arrangement
The operational costs incurred in the production of the goods and services are recorded as relevant21, 22, 23Compensation of employees, use of goods and services, and consumption of fixed capital3212/3318Currency and deposits / Other accounts payable1
  • Government provides directly to the households goods and services purchased from market producers.

  • Market entities provide goods and services directly to households, with the government providing reimbursement either directly to the provider or to the household for expenses incurred. Although households are reimbursed in cash for eligible purchases of goods and services, the transaction should be recorded as social assistance benefits in kind.8

A2.28 A distinction should be made between social assistance benefits and certain other expense categories incurred by government—notably:

  • When a government unit produces the goods and services provided to households as social assistance benefits, they are not recorded as social benefits but rather by type of expense incurred in producing these goods and services: compensation of employees (21), use of goods and services (22), and consumption of fixed capital (23).9

  • If a government unit reimburses corporations for the cost of goods and services provided to targeted social assistance beneficiaries, the transfers are recorded as social assistance benefits in kind. These transfers to corporations should be distinguished from subsidies (25), which are transfers to enterprises intended to reduce prices or increase the provision of goods and services for the general population.

  • Social assistance benefits do not include transfers payable in response to events or circumstances that are not normally covered by social insurance schemes (see paragraph A2.10).

A2.29 Typically, social assistance benefits will be recorded on an accrual basis as an expense when all eligibility criteria have been met and the benefits become payable. Although some benefits, such as disability or maternity payments, may be payable over several reporting periods, no liability for the future payments of social assistance benefits should be recorded on the balance sheet of government. Other accounts payable will be recognized only in cases where a benefit accrued but remained unpaid at the end of a reporting period.10 However, to increase transparency and allow an analysis of the sustainability of social assistance policies, an estimate of the present value of social assistance benefits that have already been earned, according to the existing laws and regulations, but are payable in the future, could be calculated in a manner similar to the liabilities of an employment-related insurance scheme.

Social Insurance Schemes

A2.30 Social insurance schemes provide social protection and require formal participation by the beneficiaries, evidenced by the payment of contributions (actual or imputed). These schemes are organized in such a way that a third party, usually an employer or the government, encourages or obliges individuals to participate in a scheme that provides benefits for a number of identified circumstances, including pensions in retirement. Social insurance schemes have much in common with direct insurance (see paragraph A4.68) and may be run by insurance corporations. The payment of contributions (corresponding to premiums in the case of direct insurance) and benefits (corresponding to claims in the case of direct insurance) is recorded according to the nature of the scheme. Participation is usually linked to employment, and contributions are payable either by the participants, an employer, or both. Therefore, a social insurance scheme is an insurance scheme for which the following two conditions are satisfied:

  • The benefits receivable are conditional on participation in the scheme and constitute social benefits.

  • At least one of the following three conditions is met:

    • Participation in the scheme is obligatory either by law or under the terms and conditions of employment of an employee, or group of employees.

    • The scheme is a collective one operated for the benefit of a designated group of workers, whether employed or unemployed, participation being restricted to members of that group.

    • An employer makes a contribution (actual or imputed) to the scheme on behalf of an employee, regardless of whether the employee also makes a contribution.

A2.31 A social insurance contribution is the amount payable to a social insurance scheme in order for a designated beneficiary to be entitled to receive the social benefits covered by the scheme. A social insurance benefit is a social benefit payable because the beneficiary participates in a social insurance scheme and the identified circumstances have occurred.

A2.32 As indicated in paragraph A2.22, the types of beneficiaries covered by the social insurance scheme determine the next level in the typology of this scheme (see Figure A2.2). The individuals or households eligible to receive social insurance benefits are either a group of employees, the general population, or a large segment of the general population. Social security schemes are social insurance schemes that cover the community as a whole, or large sections of the community, and are imposed and controlled by government units. In contrast, as indicated in paragraph A2.40, social insurance schemes in which employers provide social insurance benefits only to their employees, former employees, or their beneficiaries are referred to as other employment-related social insurance schemes. Where the same scheme covers the general population and government employees, the scheme is treated as a social security scheme. However, if the conditions for participation and benefits payable, as determined by the employment contract, differ from those of the social security scheme for nongovernment employee participants, an employment-related scheme exists and the flows and stock positions of the two schemes should be distinguished within the social security fund (see paragraph 2.102).

Social security schemes

A2.33 Social security schemes are social insurance schemes covering the community as a whole, or large sections of the community, and are imposed and controlled by government units. These schemes cover a wide variety of programs, providing benefits in cash or in kind for old age, invalidity or death, survivors, sickness and maternity, work injury, unemployment, family allowance, health care, etc. There is not necessarily a direct link between the amount of the contribution payable by an individual and the benefits receivable.

A2.34 Social security schemes that are organized separately from the other activities of government units, hold their assets and liabilities separately from the latter, and engage in financial transactions on their own account qualify as institutional units. These institutional units are described as social security funds. A social security fund is a particular kind of government unit that is devoted to the operation of one or more social security schemes. These special types of government units are identified separately in a subsector to allow for the alternative methods of constructing subsectors of the general government sector (see paragraph 2.78). The existence of a social security fund depends on its organization as a separate institutional unit, not on other characteristics of the scheme, such as types of benefits provided or sources of finance.

A2.35 Not all social security schemes are operated by social security funds. Where a separate social security fund does not exist, the transactions of the social security scheme would be reported as an integral part of the transactions of the government unit that controls operations of the social security scheme. Social security schemes can therefore be operated by government units that are not social security funds. Consequently, statistics for the social security funds subsector may not include all social security schemes. If a social security scheme is not a separate institutional unit, however, there may be separate accounts to manage the scheme’s finances, which would permit compiling supplementary statistics on social security activities with broader coverage than that of the social security subsector.

A2.36 By definition, social security schemes are contributory—participants in the scheme are required to make regular contributions to be eligible to receive benefits for themselves or their dependents. The primary receipts of social security schemes are social security contributions. As shown in Table 5.1 in Chapter 5, social security contributions are classified according to their source, which may be employers or households. Participation in social security schemes can be compulsory or voluntary. Further breakdown in the classification of these social contributions would allow a distinction between contributions receivable in cash and in kind, and between compulsory and voluntary contributions. In addition to social contributions, social security schemes may receive grants from general government resources and may earn property income from the investment of their assets.

A2.37Social security benefits [GFS] (271) payable are current transfers and are classified as one of the social benefits categories. These can further be classified as being payable in cash or in kind (see Table 6.1). Social security benefits in kind can be provided to beneficiaries in the same ways as social assistance benefits in kind (see paragraphs A2.27–A2.28). Table A2.2 illustrates the recording of some of the flows related to social security schemes.

Table A2.2Illustrative Recording of Flows Related to Social Security Schemes
DescriptionDebitCredit
2.1 The government social security scheme receives contributions from various contributors
Social security contributions receivable from employees, self-employed, and unemployed3212 / 3218Currency and deposits / Other accounts receivable11211 / 1213Social security contributions: Employee contributions/self-employed, and unemployed
Social security contributions receivable from employers3212 / 3218Currency and deposits / Other accounts receivable11212Social security contributions: Employer contributions
2.2 The government as employer makes contributions to social security schemes on behalf of its employees
Government contributions as employer become payable2121Actual employers’ social contributions3212/3318Currency and deposits / Other accounts payable1
2.3 The government social security scheme provides social security benefits to the eligible beneficiaries in accordance with the conditions of the scheme
Social security scheme benefits become payable2711Social security benefits in cash3212/3318Currency and deposits / Other accounts payable1
2.4 The government social security scheme provides goods purchased from market producers to qualifying beneficiaries
Social security scheme acquires the goods31224Inventories (goods for resale)23212/3318Currency and deposits / Other accounts payable1
Social security scheme provides goods to households2712Social security benefits in kind31224Inventories (goods for resale)2
2.5 The government social security scheme reimburses market providers or households for goods and services provided by market entities to eligible beneficiaries in accordance with the conditions of the scheme
Social security scheme reimburses providers or households2712Social security benefits in kind3212/3318Currency and deposits / Other accounts payable1
2.6 The government social security scheme produces and provides goods or services to the population in accordance with the conditions of the scheme
No social security benefits are recorded in GFS—the operational costs incurred in the production of the goods and services are recorded as relevant21, 22, 23Compensation of employees, use of goods and services, and consumption of fixed capital3212/3318Currency and deposits / Other accounts payable1
Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

A2.38 Social security schemes are characterized by a degree of contingent reciprocity. Social security contributions secure entitlements to benefits that are contingent on the event underlying the social risk occurring. Nonetheless, the amount and timing of receipts of benefits by beneficiaries (if any) are subject to various eligibility criteria without necessarily a direct relationship between the amount of the contribution payable by an individual and the benefits receivable. Therefore, the link between benefits and contributions is not considered sufficiently strong to give rise to a financial claim on the part of contributors. The potential individual claims of contributors (and therefore the corresponding government obligations) are regarded as contingent. Also, because social security benefits can be changed at will by the government or legislature as part of its overall economic policy, there is uncertainty about the eventual payment or level of payment of these social benefits.11 As a result, in GFS, no liabilities are associated with the potential future claims on social security schemes. An expense is recorded only when payment of the benefits is due.

A2.39 However, a high expectation exists that social security benefits earned according to the existing laws will be payable in the future. Therefore, an estimate equal to the net implicit obligations for future social security benefits should be presented as a memorandum item to the Balance Sheet, and details of it presented as a supplementary statement, the Summary Statement of Explicit Contingent Liabilities and Net Implicit Obligations for Future Social Security Benefits (see paragraphs 4.47 and 7.261).

Other employment-related social insurance schemes

A2.40 Other employment-related social insurance schemes derive from an employer-employee relationship in the provision of pension entitlement and other social benefit to employees as part of the conditions of employment. By definition, these schemes are contributory and, for government or public sector units, protect only their own employees and dependents. The provision of social insurance benefits by government to its own employees is considered to be part of an actual or implicit contract between the government, as employer, and the employees, to compensate them for the provision of their labor services. Therefore, employment-related social insurance schemes give rise to requited expense transactions for government when the social contributions became payable. To accurately reflect the accrued costs of employment, the actual and imputed social insurance contributions should be recorded as employers’ social contributions (212) in the expense category for compensation of employees (21) (see Table 6.1).

Employment-related pensions and other retirement benefit schemes

A2.41 Employment-related social insurance schemes that provide pensions and other retirement benefits can be organized as a funded or unfunded social insurance scheme. Table A2.3 illustrates the recording of some of the flows of employment-related pensions.

Table A2.3Illustrative Recording of Flows Related to Employment-Related Pension Schemes
DescriptionDebitCredit
3.1 The government makes pension contributions on behalf of its employees to an autonomous pension fund maintained by an insurance company (i.e., it is part of the private financial corporation sector)
Government pays social contributions as component of compensation of employees2121Actual employers’ social contributions3212/3318Currency and deposits / Other accounts payable1
3.2 The government makes pension contributions on behalf of its employees to an autonomous pension fund set up by government as a separate institutional unit (i.e., it is part of the public financial corporation sector)
Government pays social contributions as component of compensation of employees2121Actual employers’ social contributions3212/3318Currency and deposits / Other accounts payable1
3.3 The government operates a funded nonautonomous pension fund for its employees (i.e., a separate reserve is maintained in the government account but it is not an institutional unit)
Government pays social contributions as component of compensation of employees2121Actual employers’ social contributions3212/3318Currency and deposits / Other accounts payable1
Receipts of social contributions by the pension fund account giving rise to a liability3212 / 3218Currency and deposits / Other accounts receivable13316Insurance, pension, and standardized guarantee schemes
Government, as owner of the pension fund account, receives property income on the investments of the pension fund3212 / 3218Currency and deposits / Other accounts receivable11411 / 1412Interest Dividends
Government attributes the property income to the policy holders22813Property expense for investment income disbursements3316Insurance, pension, and standardized guarantee schemes
Government provides pension benefit payments to eligible beneficiaries3316Insurance, pension, and standardized guarantee schemes3212/3318Currency and deposits / Other accounts payable1
3.4 Government operates an unfunded nonautonomous pension fund for its employees (i.e., there are no actual contributions and no separate reserve is maintained in the government account)
Government provides pension benefit payments to eligible beneficiaries: cash basis of recording2731Employment-related social benefits in cash3212Currency and deposits
Imputed social contributions as component of compensation of employees: accrual basis of recording2122Imputed employers’ social contributions3316Insurance, pension, and standardized guarantee schemes
Government provides pension benefit payments to eligible beneficiaries: accrual basis of recording3316Insurance, pension, and standardized guarantee schemes3212 / 3318Currency and deposits / Other accounts payable1
Government recognizes the increase in liability for benefit entitlements due to time passing2813Property expense for investment income disbursements3316Insurance, pension, and standardized guarantee schemes
3.5 All defined-benefit schemes can also be subject to other economic flows
Pension liabilities increase due to unilateral changes in conditions of the scheme5Other changes in the volume of assets and liabilities5316Insurance, pension, and standardized guarantee schemes
Pension liabilities increase due to changes in interest rates used to calculate the present value of the liability4Holding gains/losses4316Insurance, pension, and standardized guarantee schemes

A2.42 There are three types of employment-related pension schemes:

  • A nonautonomous pension scheme that is therefore regarded as an integral part of the employer

  • A separate institutional unit that operates a pension scheme that is therefore regarded as an autonomous pension fund

  • A scheme managed by an insurance enterprise on behalf of the employer regarded as a financial corporation.

A2.43 The manner in which the employment-related pension scheme is organized determines the recording of the associated transactions. Insurance enterprises and autonomous pension funds are units of the financial corporations sector, while nonautonomous pension funds and unfunded employment-related social insurance schemes are units of the general government sector.

Nonautonomous employment-related pension schemes

A2.44 Nonautonomous social insurance schemes are operated by the employer, and these schemes are usually unfunded schemes because they are organized by the employer without assigning specific accounts or otherwise creating special reserves for the payment of benefits. Instead, the benefits are payable from the employer’s general resources.

A2.45 A nonautonomous pension fund for public sector employees does not meet the criteria to be considered an institutional unit, and is therefore deemed to be included in the unit that operates the scheme. This is also the case when the employer has established segregated reserves, but the organization and operations of the scheme do not meet the criteria to be an institutional unit (see paragraph 2.22). The economic flows and stock positions of nonautonomous employment-related pension funds are integrated with those of the controlling employer. All of the assets, liabilities, transactions, and other economic events of the pension fund are combined with the corresponding items of the employer operating the scheme, which may be a general government unit or a public corporation. The treatment of the assets, liabilities, transactions, and other economic events related to the nonautonomous pension fund is similar to that of an autonomous pension fund. However, in this case, the contributions payable as a component of compensation of employees, the receipt of the contributions by the pension scheme, and the associated liabilities are recorded by the same level of government. These flows are not eliminated in consolidation because households are regarded as, respectively, the recipient and payer. These flows should be rerouted as described in paragraph 3.28.

A2.46 In accordance with the accrual basis of recording, the amount that would be required to cover the accrual of the social benefits must be imputed. This will also ensure that the full cost of employment is accounted for by recording the imputed social contributions, with a counterpart entry that creates the associated liability for these pension benefits. This imputation recognizes the economic flows during the period in which the underlying economic event takes place. It also improves transparency because it records the cost of providing the social benefits to its employees and flags the risks associated with the future demands on resources. When these pension benefits are paid, the payment is recorded as a reduction in liabilities.12

Autonomous employment-related pension schemes

A2.47 To be regarded as autonomous, the entity responsible for the employment-related pension scheme must have the characteristics of an institutional unit (see paragraph 2.22). These institutional units are considered to provide financial services (i.e., insurance/ pensions) to the household sector, and are therefore classified in the financial corporations sector. They are classified as either private or public financial corporations, depending on whether they are controlled by the private or public sectors (see Box 2.2).

A2.48 An employer may contract with a third party to administer the pension funds for its employees. The employment-related pension scheme is then managed through an insurance enterprise or an autonomous pension fund. The employer’s primary responsibility with respect to the scheme is to pay the social contributions on behalf of its employees. The government unit records the payment as part of compensation of employees, under actual social contributions (see Table 6.1 and paragraph 6.21). No other transactions are recorded by the government unit as employer, as it has no direct liability for future provision of social benefits.

A2.49 However, in cases where the employer continues to determine the terms of the pension schemes and retains the responsibility for any deficit in funding, as well as the right to retain any excess funding, the employer is described as the pension manager and the unit working under the direction of the pension manager is described as the pension administrator. If the agreement between the employer and the third party is such that the employer passes the risks and responsibilities for any deficit in funding to the third party in return for the right of the third party to retain any excess, the third party becomes the pension manager as well as the administrator.

A2.50 When the pension manager is a unit different from the administrator, and the responsibility for any deficit, or claims on any excess, rests with the pension manager, the claim of the pension fund on the pension manager should be shown under the liability, claims of pension funds on pension managers (63064). By contrast, if the pension fund makes more investment income from the pension entitlements it holds than necessary to cover the increase in entitlements, the difference is payable to the pension manager of the scheme. The pension manager records this claim on the pension administrator as a financial asset, claims of pension funds on pension managers (62064).13

A2.51 If government controls the financial corporation that manages the employment-related pension scheme for government employees, the corporation will be part of the public financial sector, and the relevant flows and stock positions would be recorded when compiling GFS for the public sector. The receipt of social contributions by this insurance enterprise or pension fund gives rise to a liability, classified in the financial instrument insurance, pensions, and standardized guarantee schemes (6306), and more specifically in pension entitlements (63063). The liability originates from the obligation to pay future pension benefits—any subsequent payment of the benefits will be recorded as a reduction in this liability. Although the social contributions are payable directly by the employer to the financial corporation, they are recorded in GFS as if payable by the employer to households as compensation of employees: households in turn pay the contributions to the financial corporation. Because of this rerouting, these transactions should not be eliminated in consolidation of the public sector (see paragraph 3.28).

A2.52 For the financial corporation, revenue from the investment of the financial reserves should be classified as the relevant category of property income. However, since these resources are considered to give rise to an asset of the policyholders, such income should be attributed to policyholders. An expense is recorded, classified as property expense for investment income disbursements (2813), with a counterpart entry that increases the liability to reflect the policyholders’ increase in claims for pension entitlements.

A2.53 Autonomous employment-related pension schemes can be organized as a defined-benefit pension scheme or a defined-contribution pension scheme.

Defined-benefit pension schemes

A2.54 A defined-benefit pension scheme is one where the benefits payable to an employee on retirement are determined by the use of a formula, either alone or as a minimum amount payable. The level of benefits promised to participating employees is determined by a formula embodied in the terms of the social insurance scheme. These terms are usually based on factors such as the participants’ length of service and salary.14 The calculation of imputed contributions and net present value of future benefits requires advanced actuarial techniques, beyond the responsibility of GFS compilers. The present value of future benefit entitlements increases each period because there is one fewer period over which it is discounted. This increase should be a transaction in property expense for investment income disbursements (2813) (see paragraph 6.113). Furthermore, a holding gain should be recorded with respect to the liability in order to reflect any change in the value of the liability because of a change in the interest rate used to discount the future benefits. A change in the liability resulting from a change in the benefit structure should always be treated as an other volume change, because it does not constitute a transaction but represents a unilateral change brought about by the employer.

Defined-contribution pension schemes

A2.55 A defined-contribution pension scheme is one where the benefits payable to an employee on retirement are defined exclusively in terms of the level of the funds built up from the contributions made over the employee’s working life and the increases in value that result from the investment of these funds by the manager of the scheme. The risk of the scheme to provide an adequate retirement income is thus borne by the employee, and the benefits that will be payable depend on the assets of the fund.15 For a defined-contribution pension scheme, a pension fund is always deemed to exist.

A2.56 Contributions to a defined-contribution pension scheme are invested on behalf of the employees as future beneficiaries. The investment income on the cumulated assets of the pension fund is recorded as revenue for the fund, classified according to the nature of the respective property income revenue (usually including interest (1411), dividends (1412), or rent (1415)). The investment income is also recorded as being distributed to the beneficiaries (classified as property expense for investment income disbursements (2813)), who are deemed to reinvest the income in the pension fund as contributions. Therefore, the investment income payable on defined-contribution entitlements is equal to the investment income on the financial investments plus any net operating surplus earned by renting land or buildings owned by the fund.

A2.57 The value of the pension entitlement liability of a defined-contribution pension scheme is the market value of the financial assets held by the pension fund on behalf of the future beneficiaries. Any changes in the market value of these investments of the pension fund would include holding gains and losses. These holding gains and losses should be recorded as changes in the value of the relevant assets of the institutional unit administering the pension fund. In addition, these holding gains or losses should also be attributed to the policyholders. Therefore, a matching entry for the holding gain or losses in the liability of the pension fund toward households should be recorded.

A2.58 For a defined-contribution pension scheme, the risks and costs associated with the scheme are borne by the beneficiaries. There are no imputed contributions for defined-contribution pension schemes, unless the employer operates the scheme directly. In that case, the value of the costs of operating the scheme is treated as an imputed contribution payable to the employee as part of compensation of employees. This amount is recorded by the employer as the sale of a financial service to the employees, classified as imputed sales of goods and services (1424) (see paragraph 5.140). When the fund is operated by a unit other than the employer, the operating costs are financed from investment income retained by the fund to meet its costs and generate a profit. Therefore, in keeping with the recording of insurance, the investment income generated is treated as being attributed in full to the beneficiaries in the household sector who use part of the income to purchase a financial service from the fund, and reinvest the remainder with the fund.

A2.59 As indicated in paragraphs A2.3 and A2.21, defined-contribution schemes are similar to life insurance schemes.16 However, a scheme that may be defined in terms similar to a defined-contribution scheme, but with a guaranteed minimum benefit specified, or other hybrid schemes, should be treated as defined-benefit pension schemes in macroeconomic statistics.

Government assumption of employment-related pension obligations of other institutional units

A2.60 On occasion, large one-off transactions (lump-sum transactions) may occur between a government and another institutional unit, often a public corporation, linked to pension reforms or to privatization of the public corporations. The goal may be to make the corporation competitive, or financially more attractive, by removing existing pension liabilities from its balance sheet. This goal is achieved by government assuming the liability in exchange for an asset or assets from the other institutional unit. When the value of the asset(s) receivable is the same as the value of the liability assumed, the transaction is recorded as a transaction in financial assets and liabilities for both units involved.

A2.61 However, if the value of the asset(s) receivable by government is less than the value of the liability assumed, an expense in the form of a capital transfer from government to the corporation is recorded for the difference. The assumer (government) records an increase in liabilities for pension entitlements, an increase in the relevant financial and/or nonfinancial assets, and an expense in the form of capital transfer to the corporation (see paragraph 6.91). The corporation records a decrease in liabilities for pension entitlements, a decrease in financial and/or nonfinancial assets, and revenue in the form of a capital transfer from government.

A2.62 If the value of the asset(s) receivable is more than the value of the liability incurred, a capital transfer receivable from the corporation to the government is recorded for the difference (see paragraph 5.148). The corporation records a decrease in liabilities for pension entitlements, a decrease in financial and/or nonfinancial assets, and an expense in the form of a capital transfer to government.

A2.63 Even if the arrangement transforms the pension liability, so that it is to be administered as part of a social security fund, the initial assumption of the pension obligation should be recorded as in the foregoing paragraphs. The pension obligations absorbed by the social security fund continue to be classified as pension entitlement liabilities. These obligations are gradually extinguished as the benefits are paid out.

Employment-related nonpension social insurance schemes

A2.64 Employment-related nonpension social insurance schemes can be operated by the government or by autonomous nongovernment entities. In either case, the actual or imputed employers’ contributions are included as an expense in the compensation of employees, under social contributions. For funded schemes, the actual contributions made to the scheme are classified under actual employers’ social contributions. For unfunded schemes, the amount that would be required to purchase equivalent social benefits must be imputed by the employer, and should be classified under imputed employers’ social contributions. Where a scheme is operated by the government, a simultaneous transaction equal to the actual or imputed social contributions is recorded as revenue from the household sector back to government, and classified under other social contributions by employees. The social benefits provided by the government are classified as an expense under employment-related social benefits. Table A2.4 illustrates the recording of some of these flows of employment-related nonpension social insurance schemes.

Table A2.4Illustrative Recording of Flows Related to Employment-Related Nonpension Social Insurance Schemes
DescriptionDebitCredit
4.1 Social insurance contributions receivable from employers and employees
Social insurance contributions receivable from employees3212/3218Currency and deposits / Other accounts receivable11221Other social contributions: Employee contributions
Social insurance contributions receivable from employers3212/3218Currency and deposits / Other accounts receivable11222Other social contributions: Employer contributions
4.2 The government as employer makes contributions to social insurance schemes on behalf of its employees
Government contributions as employer becomes payable2121Actual employers’ social contributions3212 / 3318Currency and deposits / Other accounts payable1
4.3 Government as employer imputes contributions to the social insurance scheme where no or insufficient contributions to obtain entitlement to benefits were made
Imputed contributions2122Imputed employers’ social contributions1223Imputed contributions
4.4 Employer social insurance scheme provides benefits to government employees
Employer social insurance scheme pays benefits in cash2731Employment-related social benefits in cash3212 / 3318Currency and deposits / Other accounts payable1
4.5 Employer social insurance scheme provides goods purchased from market producers to employees in accordance with the conditions of the scheme
Employer social insurance scheme acquires the goods31224Inventories (goods for resale)23212 / 3318Currency and deposits / Other accounts payable1
Employer social insurance scheme provides goods to households2732Employment-related social benefits in kind31224Inventories (goods for resale)2
4.6 Employer social insurance scheme reimburses market providers or households for goods and services provided by market entities in accordance with the conditions of the scheme
Employer social insurance scheme reimburses providers or households2732Employment-related social benefits in kind3212 / 3318Currency and deposits / Other accounts payable1
4.7 Government produces and provides goods or services to their employees in accordance with an employer’s social insurance scheme
No employer social insurance benefits are recorded in GFS—the operational costs incurred in the production of the goods and services are recorded as relevant21, 22, 23Compensation of employees, use of goods and services, and consumption of fixed capital3212 / 3318Currency and deposits / Other accounts payable1
Note: The net implicit obligation for future social security benefits should be recorded as a memorandum item (see paragraph 7.261).

A2.65 Some employers provide nonpension social benefits directly to their employees, former employees, or dependents without involving an insurance enterprise or autonomous pension fund, and without creating a special fund or segregated reserve for the purpose. Employees may be considered as being protected against various specified social risks, even though no reserves are built up to provide for future entitlement to social security benefits. An expense for employers’ social contributions should therefore be imputed for such employees (see paragraph 6.22), equal in value to the amount of social contributions revenue needed to obtain the de facto entitlements to the accrued social benefits. These amounts take into account any actual contributions made by the employer or employee. The amounts depend not only on the levels of the benefits currently payable but also on the impact on future employer’s liabilities of demographic and actuarial factors, such as expected changes in the numbers, age distribution, and life expectancies of their present and previous employees. Therefore, the values that should be imputed for the contributions ought, in principle, to be based on the same kind of actuarial considerations that determine the levels of premiums charged by insurance enterprises.

A2.66 In practice, however, it may be difficult to estimate such imputed contributions. The government unit may make estimates itself, perhaps on the basis of the contributions payable into similar funded schemes, in order to calculate its likely liabilities in the future. Otherwise, the only practical alternative may be to use the unfunded nonpension benefits payable by government during the same reporting period as an estimate of the imputed remuneration that would be needed to cover the imputed contributions. This is a second best option as the value of the imputed contributions may diverge from the unfunded nonpension benefits actually paid in the same period, due to factors such as the changing composition and age structure of the government labor force.

The Classification of Functions of Government (COFOG) (see Annex to Chapter 6) has a category labeled social protection, but its scope differs from social protection described here, notably by excluding health care.

A discussion of the issues involved in the organization and treatment of social protection schemes can also be found in the European Commission, European System of Integrated Social Protection Statistics (ESSPROS) Manual 2008 (Luxembourg, 2008).

As described in paragraph 6.97, the category social benefits [GFS] differs from social benefits as defined in the 2008 SNA.

In this case, the social benefit will cover only the difference between the normal price of such services and the price payable.

Social insurance schemes are a subset of social protection arrangements, and social security schemes are a subset of social insurance schemes.

As indicated in paragraph A2.12, individual insurance or saving arrangements that maintain the integrity of the participant’s contributions are not considered social insurance.

The definition of an institutional unit and the criteria that an entity must fulfill to be an institutional unit are described in paragraph 2.22.

The economic substance of the transactions is recorded as if the government purchased the goods and distributed them to the beneficiaries. The intermediate step of acquisition and disposal of inventories of goods is netted out in the calculation of change in inventories.

This treatment differs from the treatment in the 2008 SNA. See Appendix 7, Box A7.1, for an explanation of the difference in the treatment of goods produced by government and transferred in kind.

For example, assume person A has met the eligibility criteria for unemployment payments in period t1, and is entitled to receive benefits for six periods. Because of administrative delays, no benefit payment was made in the first period—therefore, an other account payable at the end of that period, equal to the value of payment for one period only, should be recorded. Similarly, if another payment is not made in the second period, the account payable will increase with the value of benefits for another one month. The full amount of benefits to be receivable over the six periods should not be recognized as an upfront payable, but rather be accrued continuously over the period of eligibility.

The amounts of social security contributions receivable and benefits payable may be deliberately changed in order to achieve objectives of government policy. The change may have no direct connection with the functions of social security. For example, the contributions and benefits may be raised or lowered in order to influence the level of aggregate demand in the economy, or to ensure fiscal sustainability.

When using the cash basis of recording, the only flow recorded for these unfunded pension schemes is the employment-related social benefits expense, with a counterpart entry as a decrease in currency and deposits. The expense is recorded when cash payments are made.

Although this financial asset effectively represents a claim of the pension manager on the pension fund, the same line item title is used for both the asset and liability accounts.

There are four sources of changes in pension entitlements in a defined-benefit pension scheme: (i) the current service increase—it is the increase in entitlement associated with the wages and salaries earned in the current period; (ii) the past service increase—it is the increase in the value of the entitlement due to the fact that for all participants in the scheme, retirement (and death) is one year nearer; (iii) a decrease due to the payment of benefits to retirees of the scheme; and (iv) other factors—that is, factors that are related to other changes in the volume of assets.

Defined-contribution schemes are also referred to as money-purchase schemes.

The treatment of the flows and stock positions of these schemes is similar to the treatment of compulsory savings schemes.

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