Bosnia and Herzegovina: Selected Issues and Statistical Appendix

This Selected Issues and Statistical Appendix paper on Bosnia and Herzegovina provides background information for the 1999 Article IV Consultation with Bosnia and Herzegovina. The economy has been dominated by a small number of large state-owned enterprises. A central policy was settled during the preparation of the privatization framework under which the competence to privatize was assigned to the entities. Major tax policy reforms will be needed over the medium term to address the deficiencies of the present tax system, and to lay the foundation for long-term economic growth, driven mainly by private sector development.

Abstract

This Selected Issues and Statistical Appendix paper on Bosnia and Herzegovina provides background information for the 1999 Article IV Consultation with Bosnia and Herzegovina. The economy has been dominated by a small number of large state-owned enterprises. A central policy was settled during the preparation of the privatization framework under which the competence to privatize was assigned to the entities. Major tax policy reforms will be needed over the medium term to address the deficiencies of the present tax system, and to lay the foundation for long-term economic growth, driven mainly by private sector development.

VIII. Social Insurance and Social Assistance Programs 1

A. Introduction

123. The social protection programs provided in both Entities fall into three broad categories: (i) social insurance schemes, including pension and disability insurance, health insurance, and unemployment insurance; (ii) exceptional benefits, such as post-war provisions for military invalids and families of soldiers killed in the war; and (iii) social assistance to cover the basic needs of those outside the provisions of other programs. The overall structure of social protection programs is largely a legacy of the pre-war system and—like the earlier system—depends on continuous high levels of employment for sustainability.2 Within this system, social insurance programs funded from wage contributions on a pay-as-you-go basis are expected to provide for pension and disability benefits, health care, and short-term coverage for frictional unemployment. Social assistance for those outside this net remains severely constrained.

124. The demands placed by a post-conflict economy have overwhelmed these programs. Social insurance programs are faced with the problem of providing benefits for pensioners and the disabled who qualified under pre-war provisions. At the same time, the contribution base is considerably smaller than envisaged as a result of high post-conflict levels of unemployment, a higher concentration of elderly and disabled—a problem that is expected to intensify with the return of more ex-refugees—and a considerable gray economy. Exceptional benefits for military invalids and the families of soldiers killed in the war are financed from Entity budgets, with some supplemental resources from lower levels of government. In general, benefits paid are considerably smaller than legal entitlements. In the Federation, most other social assistance provisions are left to the cantons and municipalities, and the more centralized RS government also delegates a share of these responsibilities to municipal governments.

125. The rest of this chapter provides a description of the basic features of the social insurance and social assistance programs in BiH, and points out the fundamental weaknesses of these programs. In general, the chapter points to an over-allocation of resources to military invalids and civilian war victims, at the expense of the most vulnerable. A reallocation of resources to ensure adequate social safety net provisions and potentially to offset the impact of high levels of unemployment on social insurance programs will be needed in both Entities. 3

B. Social Insurance Funds

126. Public social insurance funds in the Federation and Republika Srpska cover (i) pension and disability benefits; (ii) health care; and (iii) unemployment benefits.4 Within the Federation, separate contribution rates for areas previously under the Bosniac– and HVO military control were unified under new legislation adopted in July 1998. Currently, the combined contributions for social insurance amount to 45 percent of gross wages, including 24 percent for pension and disability insurance, 18 percent for health insurance, and 3 percent for unemployment insurance. The total contribution rate is 44 percent in the Republika Srpska, including 22 percent for pension and disability insurance, 18 percent for health insurance, 1 percent for unemployment insurance, and 3 percent for the children’s fund (Box 11). Within the Federation, contributions in the Bosniac– and Croat-majority areas were unified at lower rates—particularly for employer contributions—in 1998; somewhat lower rates were also adopted by Republika Srpska in 1998. In both cases, the reduction in rates was accompanied by intensified efforts to collect amounts owed and to improve compliance. Despite some improvement in collections, however, the substantial gray market and high unemployment continue to constrain the contribution base.

Pension and disability insurance funds

127. In the pre-war period, pension and disability insurance benefits were provided through a single social fund seated in Sarajevo with eight regional offices. During the war, separate funds split off to serve Republika Srpska and Herceg-Bosna (Mostar) and, in the post-war period, the three separate funds took over payment of benefit entitlements to pensioners now residing in their respective territories, including refugees and displaced persons. All three pension insurance plans envisaged the implementation of entitlement schemes similar to those employed under the original system. During the immediate post-conflict period, however, only the Sarajevo fund had sufficient records to implement an entitlement system based on historical earnings. As an interim measure, the Mostar-based fund introduced flat rate pensions until such time as appropriate records regarding work history and pension contributions could be obtained, and the RS pension fund shifted to education levels as a proxy for historical wage rates and linked the base to the legal minimum wage.

128. Pensions paid by all three funds have risen from exceedingly low levels available in the immediate post-conflict period. Within the Federation, average benefits during 1996 of KM 60 per month were less than half their pre-war levels—although substantially higher than the KM 4–5 a month paid during mid-1994. By mid-1999, average benefits had risen to KM 202 per month, equal to about 54 percent of the prevailing average net wage. The rebound in average benefits also has been substantial in Republika Srpska: in early 1996 benefits averaged KM 14 per month, rising to KM 70 per month during 1998 (Box 12). Despite these increases, most pensions in both Entities remain generally quite low in terms of the implied standard of living.

Bosnia and Herzegovina: Social Insurance Contribution Rates in the Federation and Republika Srpska, 1997 and 1999

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Sources: Law on Contributions for the Federation and Republika Srpska.

Contribution rates throughout the Federation were unified in June 1998, and entitlements for pension and disability benefits were unified under new legislation adopted in July 1998.

Contribution rates for military personnel and mine workers in the Federation are set at 9 percent of net wages for pension and invalid insurance, and 3 percent for health insurance.

In 1996, contribution rates in Republika Srpska were reduced from 23 percent and 28 percent for pension and health insurance, respectively, both of which were evenly split between the employee and employer.

Bosnia and Herzegovina: Pension and Disability Benefits Paid during 1996–98

Sources: Statistical Bulletins for the Federation and Republika Srpska and information provided by the Public Fund for pension and Invalid Insurance. Sarajevo and the Public Fund for Pension and Invalid Intunane-Republika Srpska.

Calculations for the Federation Sarajevo fund are based on the previous version of Law an Pension and Invalid Insurance; calculations for the Mostar Fond reflect separate legislation that provided for more limited coverage on a flat rate basis consistent with available resources. Obligations of the Moster Fund the new Federation Law on Pension and Invalid Insurance were not applied until mid-1999.

Values for Republika Srpska for 1996-98 are converted from Yugoslav dinars at the average market exchange rates.

Average pensions paid in the Federation cover only 10 payments for 1998. Payments for January-June 1999 cover amounts owed on entitlements far October-December 1998, and January 1999,

Legally-mandated average pension rates for the Sarajevo Fund were set at 82 percent of the average wage from the preceding month until new legislation was implemented in mid-1998. Values for the RS are indicative, and are based on the pension entitlement of someone with a secondary education and 35 years of contributions. Amounts owed for 1996 and covered in 1997 included provisions of materials, rent and utilities.

This reflects only the average gap during the year between pensions due and pensions paid, and an estimated average number of beneficiaries.

For PIO-Sarajevo the average is calculated with a one-month lag, reflecting the link between pension entitlements and average wages for the preceding month. However, because wages were often paid at less frequency than monthly, the average wage for a particular month is likely to he overstated.

Until mid-1998, the lowest statutory pension for the region covered by PIO-Sarajevo war 20 percent of the average wage from the previous month

For the Federation, the maximum pension was reduced in April 1998 to 2 times the average monthly net wage for the preceding December, compared with 3.5 times the average net wage under earlier legislation. For the RS, the maximum pension is set at approximately 380 percent of the lowest labor price for those with the highest education levels (4.5 times the maximum entitlement of 85 percent of the lowest labor price).

129. The Federation Law on Pension and Disability Insurance adopted in July 1998 significantly modified entitlements and eligibility criteria, with the aim of bringing future obligations into line with anticipated resource flows. Provisions for early retirement were reduced for a transition period, and then eliminated.5 The retirement age increases in steps to age 65 by 2003 from 60 in 1998, and pension benefits reflect a longer wage history. More importantly, pension and disability benefit increases are to be linked to available resources—a step intended to eliminate automatic indexation to increases in the average nominal wage. Minimum and average pension levels are now linked to average pension levels for the previous year, instead of prevailing average wages. The differential between minimum and maximum benefit entitlements has been narrowed: the maximum pension has been reduced from 350 percent of the prevailing average wage to 200 percent, while minimum pensions have increased from 20 percent of the average wage for the previous year to 60 percent of the average pension for the previous year. Provisions for other forms of assistance, including additional monetary compensation for those requiring assistance, have been dropped, and these benefits were eliminated as of January 1999—six months after the enactment of new legislation (Box 12).

130. Legislation that would merge the two pension funds operating in the territory of the Federation was submitted to the Federation Parliament in August 1999. A key requirement is that all outstanding claims (unpaid contributions from enterprises and the military, as well as unpaid pensions) be cleared prior to the establishment of a new Federation-wide pension fund. To address the accumulation of arrears, legislation adopted by the Federation in October 1998 under which unpaid pension obligations accumulated during April 1992 – June 30, 1998 are to be settled within the privatization process. Vouchers equivalent to KM 734 million are to be issued—KM 577 million for the Sarajevo fund and KM 177 million for the Mostar fund based on average salaries and regulations in force at the time.

131. Even with further revisions to benefit entitlements, the continued high rate of unemployment and high dependency rate are likely to pose additional problems in achieving an alignment between commitments and resources. Box 13 and Table 14 provide a summary of issues relevant for the short-term viability and medium-term sustainability of the Federation pension funds.

Table 14.

Medium-Term Sustainability of the Federation Pension Funds, 1999-2033

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Sources: World Bank and Fund staff estimates.

Working age: 18–61 (in 1999), 18–62 (in 2000). 18–63 (in 2001). 18–64 (in 2002/03). and 18-65 (in 2004).

Up to 2004, this amounts to 24 percent of the gross wage. After that, it is reduced in steps to 16 percent in 2016

132. Reforms to the Republika Srpska Fund for Pension and Invalid Insurance have proceeded more slowly, compared with the Federation. As an interim measure, the pension base was linked to the minimum wage, and education levels are used to approximate the distribution of benefit entitlements. Owing to the absence of records on employment history, the level of benefits is jointly determined by an individual’s education level and retirement age, with entitlements ranging between 45 percent and 380 percent of the minimum wage.6 Changes similar to those implemented in the Federation to increase retirement age, reduce the gap between minimum and maximum pensions, and lengthen the contribution period, have not yet been introduced (Box 14).

Financial Sustainability of the Federation Pension Funds1

The staff has conducted a simple simulation exercise on the medium-term sustainability of the consolidated Federation Pension Fund (Table 14). The major findings and conclusions from this study are summarized below.

  • The Pension Fund is not—and will not be for the next 4 years—self—financing, reflecting the post—war demographic structure characterized by very high proportions of young and old population relative to the working-age population. In addition, the expected return of a large number of old—age refugees is putting further pressure on the expenditures of the Pension Fund in the next few years. Continued real sector growth, increased labor force participation, reduced unemployment rates, however, will help reduce the size of the deficit.

  • From 2004 to 2018, the net balance of the Pension Fund is projected to turn into a surplus (on average 2 percent of GDP), owing to a further reduction in the unemployment rate, an increase in the ratio of working-age population to non-working-age population (i.e., the old-age dependency ratio), and an improvement in contribution compliance. This will permit a reduction in the pension contribution rate from the current 24 percent to 22 percent in 2005, and a gradual further reduction to about 16 percent in 2016.

  • Aside from the assumptions regarding demographic changes and continued economic growth, several key structural reforms are necessary to achieve the Pension Fund’s medium-term financial sustainability. These include, inter alia, an increase in retirement age from the current levels to 65 in 2002, a tightening of the eligibility criteria for disability and death benefits during the next 3–4 years, an introduction of nationally defined individual accounts, and reform of the pension contribution collection mechanism to ensure better compliance.

  • The projection results are very sensitive to key assumptions and should be used with extreme caution. In particular, if the number of returned refugees over the next two years is larger-than-expected, unemployment falls by less-than-expected, and the above mentioned structural reforms are not fully implemented, the Pension Fund’s financial position will not be sustainable during the entire projection period. For example, an average unemployment rate of about 40 percent during the next 10 years will give rise to an average deficit of 2 percent during 2004-2018 and of 4 percent during the whole period.

  • Over the period 2013–18, when the Pension Fund’s financial position becomes sufficiently strong to absorb the transition costs, a switch from the current pay-as-you-go system to a partially funded system should be considered.

1 The simulation exercise consolidates the two pension funds operating in the Federation in anticipation of their pending unification

133. While the pension funds operating in the Federation are independent of the Entity budget, the Public Expenditure Law for Republika Srpska requires the Entity government to cover any shortfall between benefits provided by the extrabudgetary funds and the level of entitlements. At the same time, government is prohibited from taking on obligations that cannot be met, and the government liability to the pension fund—and on the part of the pension fund for payments lower than entitlements—is limited by commitments of the RS government in the annual budget execution laws. During 1997 and 1998, the RS government contributed an estimated KM 39 million and KM 32 million, respectively. The growth in benefits in the RS during the period 1997–99 has been held down by the link between entitlements and minimum wages. At its inception, this was viewed as a temporary measure, and proposals have been put forward to restore the link to average wage rates, owing in part to the fact that average wages have increased considerably more rapidly than minimum wages.

Health Insurance

134. In the Federation, implementation of basic or obligatory health insurance is delegated to the cantonal governments, without direct financial support from the Federation government. Benefits are financed from wage and salary contributions automatically withheld by the payments bureaus, supplementary resources from cantonal and municipal budgets, and co-payments from beneficiaries. Benefit entitlements under the Law on Health Insurance include health care, compensation for lost wages and traveling costs related to securing health care; in some cases, the law provides for financial assistance for newborns and death benefits. Guaranteed benefits without co-payment are limited to children under the age of 15 and elderly over the age of 65. The role of the Federation Ministry for Health is presently largely limited to that of establishing norms and standards for obligatory health insurance.

135. Until recently, health care in Republika Srpska was relatively decentralized, with most insurance contributions and fee-based revenues automatically allocated to eight local branches of the health insurance fund, which in turn were responsible for financing all levels of health care. Substantial differences in the level of care and the need for a single accounting system resulted in a greater centralization of the health insurance fund in 1998, with most resources flowing directly to the central fund for reallocation to the respective branches. Basic benefits include health care, and salary compensation for temporary disability, at a rate equivalent to at least 70 percent of net salary, and not more than 90 percent of net salary.7

Pension end Disability Benefits in the Federation and Republikia Srpska, 1999

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136. Republika Srpska adopted new legislation in mid-1999 that provides the basis for health care. The Law on Health Protection establishes basic standards for the health care sector. The Law on Health Insurance is intended to establish the basics for universal insurance for basic health care, as well as the schedule of fees and charges for beneficiary co-payments. The Health Insurance Fund is permitted to provide extended health insurance and outlines arrangements for individuals with private insurance. Under the new laws, basic (obligatory) health care is to be financed by the Health Insurance Fund from automatic contributions from wages, allocations from the budget of Republika Srpska, and co– payments. Health care costs incurred by refugees, military invalids and surviving families, and demobilized soldiers are to be financed from the budget of Republika Srpska.

137. The health funds in both Entities face significant financing problems, and have incurred arrears to various health institutions.8 First, as in the case of pension funds, the contribution base is limited by high unemployment, a substantial gray economy, and a tendency to underreport the actual wage rate paid to workers. At the same time, war and the demographic shifts have increased the number of invalids, elderly, and indigent. Second, required contributions from local governments (cantons or municipalities) and transfers from the Entity budget were not always made on time or in full, placing additional strains on the health insurance funds.

Unemployment Insurance

138. Unemployment insurance funds in the Federation and the RS provide some basic unemployment benefits, financed from salary-based contributions. Contribution rates are the smallest of all the contribution-based funds, and are patterned after their counterparts in the former Socialist Republic of Yugoslavia. Benefits include financial support for relatively limited periods of time (typically less than six months), and health and pension insurance contributions (Federation), determined by the individual’s previous employment history9 (Boxes 1516).

Federation of Bosnia and Herzegovina: Unemployment Benefits, 1998

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Sources: Statistical Bulletins issued by the Institute for Employment (Sarajevo), the Federation Statistics Agency; and staff estimates.

Employment covers only registered employment: no adjustment is made to capture gray market activity.

Data on the number of unemployed reflect only those individuals registered with the Employment Institute.

Republika Srpska: Unemployment Benefits, 1997–99 1/

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Sources: Data provided by the Republika Srpska Employment Institute and the Republika Srpska Statistics Agency.

Data for 1999 cover only January-June 1999.

Includes only those individuals registered with the Employment Institute and does not reflect total unemployment.

No disaggregation regarding the type of benefit provided was included.

Value of nonadministrative expenditures divided by total number of recipients.

139. The number of registered unemployed is quite small, compared with actual levels of unemployment in both Entities. This reflects, in part, the fact that registered unemployment is largely confined to individuals registered with the employment institute for the purpose of receiving benefits or for assistance in seeking employment. The benefits are available for only limited periods, and once the period of monetary benefits has been exhausted, the motivation for registering with the employment institutes declines sharply. Registered unemployment and employment combined account for 20–35 percent of the working age population in most cantons: only for Sarajevo do the two combined amount to 50 percent of the working age population.

140. The number of benefit recipients of the unemployment insurance funds amount to a scant 2–5 percent of registered unemployment. The limited benefit entitlements have, however, contributed to the absence of arrears for these funds.

C. Benefits for Military Invalids and Families of Soldiers Killed in the War

141. The Federation and Republika Srpska governments are responsible for financing social benefits for military invalids and surviving families of those killed in the war. The number of beneficiaries is considerable for both Entities. There are an estimated 46,000 disabled war veterans in the Federation, and an additional 38,000 in Republika Srpska. Benefits for the families of soldiers killed in the war account for an additional 90,000 beneficiaries in the Federation and 50,000 in Republika Srpska (Box 17).

142. During 1997–98, outlays for military invalids in the Federation have accounted for 10–12 percent of consolidated Federation revenues (including cantons and municipalities). Most of the burden is met from the Federation budget, with some supplemental support from local governments. Taken as a share of the Federation budget, outlays for military invalids increased from 28 percent of own revenues in 1997 to a projected 32 percent for 1999, exerting a disproportionately large impact on Federation fiscal priorities.10

143. During 1998, average benefits for military invalids and surviving families in the Federation amounted to KM 167 per month, about 83 percent of average pensions paid during 1998.11 Had existing entitlements been met, the bill to the Federation budget would have been on the order of KM 800 million, in contrast to the total budget allocation of KM209 million. The Draft Law on the Rights of Soldiers and Their Families placed before the Federation parliament in July 1998 was intended to constrain entitlements to amounts that can be afforded within the budget. The draft law has been under discussion for a considerable period and, despite some significant revisions to entitlements and obligations that were made, the new legislation would imply costs that would continue to exceed available resources (Box 18).

Federation and Republika Srpska: Pension and Benefits Payments, 1998

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Sources: Statistical Bulletins published by the Federation and Republika Srpska Statistical Institutes and the Employment Service of BiH-Sarajevo; data provided by the Public Fund for Pension and Invalid Insurance-Sarajevo Agency for Pension Insurance-Republika Srpska; Professor Mikerevice, Centralized Data Collection and Efficiency of Pension and Health Insurance in Republika Srpska, 1999.

Federation of Bosnia and Herzegovina: Benefits for Military Invalids, Surviving Families and Demobilized Soldiers Under the Draft Law on the Rights of Soldiers and their Families

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Source: Federation Draft Law on Rights of Soldiers and Men Fanuliet, 1995

Available for seventy disabled military invalids requiring care and assistance.

144. The draft Law on the Rights of Soldiers and their Families in the Federation, which is before parliament, maintains disability and pension entitlements that are considerably more generous than those available from the Pension and Invalid Insurance Funds, and entitlements are independent of any means testing. Disability payments are indexed to the average Federation wage—without reference to past earnings—while disability pensions are linked to the average wage for military personnel of comparable rank.12 Benefits for families and children of soldiers killed in the war are also higher than provisions under the Law on Pension and Invalid Insurance. For those eligible for benefits under the Law on Pension and Invalid Insurance, the Federation government liability is at least equal to the supplementary payments to bring total benefits into line with the higher entitlement levels for military invalids. Additional benefits—including allocations to cover the cost of caregivers for the severely disabled, which were eliminated from the Law on Pension and Invalid Insurance—are retained for military invalids.

145. For Republika Srpska, outlays for military invalids accounted for about 11 percent of total revenue in 1998. This notwithstanding, average benefits have remained small, averaging KM 36 per month during 1998, well below average pensions of KM 56 per month. The lower level of benefits reflects two features of entitlements contained in the Law on the Rights of Soldiers, Military Invalids, and Families of Soldiers (1996). First, existing entitlements—as with benefits under social insurance for pensioners and invalids—have been linked to the lowest labor price, not to average wages or prevailing military wages. Second, the law contains provisions that allow the RS government to determine which entitlements are to be given priority in the event that resources fall short of entitlements.

146. As with the Federation, overall entitlements are considerably more generous than other social safety net provisions. The law provides for allowances to boost soldiers’ income (after demobilization), effectively providing a guaranteed wage rate; permanent monthly allowances for unemployed soldiers, as well as pension entitlements and supplements, and allowances for care and aid; and benefits for the families of military invalids and soldiers killed in the war (Box 19). The lower average level of benefits paid reflect not only the link to a lower minimum wage, but also the fact that soldiers’ allowances and provisions for permanent support were suspended owing to the lack of resources.

Republika Srpska: Benefits for Military Invalids, Surviving Families and De-Mobilized Soldiers Under the Draft Law on the Rights of Soldiers, Military Invalids, and Families of Killed Soldiers

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Source: RS Draft Low on die Rights of Soldiers, Military Invalids and Families of Killed Soldiers.

Benefits included in existing legislation, but not designated as a priority for payment

147. Despite the compression of actual benefits, new legislation adopted in October 1999 would substantially increase entitlements from existing levels. First, the base for most benefits would shift from the minimum wage to the average wage—which would at least triple most benefit entitlements. This change was prompted by the more rapid increase in average wages, and political issues associated with the linkage of military benefits to the lowest labor price. The new law—like the previous version—contains provisions allowing the RS Minister of Finance to determine which entitlements will be met under circumstances when resources are inadequate to meet entitlements. Unfortunately, the new legislation is likely to contribute to a far wider gap between entitlements and benefits actually provided—the reverse of what is needed for credibility and transparency.

148. Neither Entity has been able to provide the full range of legally mandated benefits, and new legislation in both cases provides for entitlements that would exacerbate existing strains on the Entity budgets. It will be important that benefits become appropriately targeted, with a greater emphasis on temporary, rather than permanent, support. The combination of complete indexation—and links to the average prevailing military wage in the case of the Federation—should also be reconsidered, as the gap in benefit levels compared with those available to other groups will become an increasing source of pressure on all levels of government.

D. Social Assistance Programs

149. In the Federation, all responsibilities for assisting the most vulnerable other than for military invalids and surviving families—devolve to the cantons, with some guidance from Federation regulations. In July 1999, the Federation adopted the Law on the Basics of Social Care, Protection of Civilian War Victims, and Protection of Families with Children. In general, the law covers basic social safety net responsibilities, which remain assigned to cantons and lower levels of government. The law adds one new element, however, which is a direct link between benefits for civilian war victims and entitlements provided to military victims and their families—with financial responsibility assigned to the cantons and municipalities. With regard to social safety net provisions, the level of entitlements is left to the determination of cantons and municipalities. There are, however, no provisions for resource sharing to offset differences in cantonal revenue bases or to ensure broadly equitable benefits across cantons (Box 20).

150. The Federation’s social care provisions are broadly targeted toward (i) children without adequate parental care; (ii) elderly without access to family support; (iii) people with special disabilities (vision, hearing, mental); (iv) those incapable of work or without alternative resources; and (v) persons in special circumstances, including forced migration. Under the law, these individuals are entitled to cash and material assistance; housing in a social institution or with another family; and social services and/or home care. The level of material or cash support consistent with subsistence living is left to the determination of the individual cantons; cantons are also free to determine which resources are taken into account in establishing eligibility for assistance or compensation.13 In general, costs for accommodation in a social institution or with another family are to be borne by the individual or their family according to rates determined by the social institution or the canton: for those granted permanent social support, the cost is borne by the canton or municipality.

Bosnia and Herzegovina: Indicators of Per Capita Fiscal Capacity Among Federation Cantons, 1998

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Source: Federation Ministry of Finance, Federation Statistical Agency, and Federation Employment Fund.

Because health insurance contributions and benefits are outside the budget of moat cantons, indicative expenditure data for each canton are not readily available.

Data apply only to beneficiaries covered by the Sarajevo-based Agency for Pension and Invalid Insurance (PIO), and therefore covers only a subset of Central Bosnia and Herceg-Novretna. The remainder of the Federation is covered by the Mostar-based Agency for Pension and Invalid Insurance (NO).

The number of pensioners includes old age pensioners, beneficiaries from disability insurance and pension’’, and beneficiaries of family pensions.

151. The law also elaborates the benefits to be provided by cantons and municipal governments to those designated as civilian war invalids. In broad terms, this extends the benefits available to military war invalids and surviving families to civilians (and their families) with moderate to severe disabilities incurred as a result of the war.14 Cantons are required to provide benefits equal to 70 percent of entitlements of military invalids for (i) personal disability coverage; (ii) care and assistance; and (iii) orthopedic supplements. Family benefits are set as a percentage of benefits granted to the completely disabled.15 Unlike provisions for social care and for families with children, no means testing is applied for benefits to civilian war victims.

152. In addition, the law outlines social support for the protection of families with children, when family income falls below the cantons’ definitions of subsistence. Specific benefit entitlements include children’s allowance, salary compensation while on maternity leave; pre– and post-natal care; meals for children in preschool and elementary school; tuition and scholarships for children. The conditions, methods, procedures, and financial support for these benefits are left to the determination of the cantons, as are any additional welfare benefits and the definitions of subsistence living.

153. As can be seen from Box 20, cantonal outlays for social assistance vary widely, as does the per capita revenue capacity. For the poorer cantons, the new mandatory levels of assistance for civilian war victims are linked to average wage rates in the Federation—affording little flexibility to areas with lower wages and standards of living. For other benefits, the determination of standards is left to the cantons, leaving no mechanism for ensuring that benefits are broadly equitable.

154. In the RS, the Law on Social Protection provides for social assistance to those who are unable to work and lack alternative means of support from family members; and those who, because of special circumstances, fall below minimum subsistence.16 Social protection provisions are similar to those applied by the Federation: (i) children without adequate parental care; (ii) adults unable to work and the elderly, without family support; (iii) invalids and the mentally disabled; and (iv) persons requiring assistance owing to special circumstances. As in the Federation, these individuals are entitled to material provisions, allowances for care and aid, accommodation in a social protection institution or with another family, and social work services. Here, however, the law defines subsistence living for all municipalities, based on prevailing average wages; subsistence benefits may be provided either in the form of financial support or as material support. Benefits for those capable of working are reduced by 20 percent, and limited to a maximum duration of six months. Allowances for aid and care are limited to 25 percent of subsistence allowances. Families of beneficiaries accommodated in social institutions or with other families are obliged to contribute to their support, with the extent of support determined by the center for social work.

155. Financial and material resources for material assistance, allowances for aid and care, accommodation, and social work services are the responsibility of lower levels of government; the RS budget is responsible for building, maintaining, and furnishing social protection institutions (including children’s homes, homes for the elderly), and resources to train the physically and mentally handicapped for employment.

E. Conclusions and Recommendations

156. The reform of social benefits will need to proceed on two tracks—one aimed at implementing urgently needed short-term reforms, and a second aimed at formulating and progressively implementing longer-term reforms consistent with a credible sustainable fiscal system and an equitable structure of benefits. Virtually all social benefit programs operating in BiH exhibit a marked gap between commitments and available resources. The structure of benefit entitlements, and the abnormally narrow resource base of a post-conflict economy, both account for this gap. In the absence of explicit adjustment rules, these programs rely on a range of ad hoc rationing mechanisms (delayed payments, in particular) to close the gap. In the near term, measures that provide a transparent and equitable means of bridging these gaps are needed. For the medium term, a realistic, sustainable system of social benefits will need to be based on clearly articulated priorities consistent with a changing resource base.

157. Social insurance programs are likely to continue to be the main providers of health care and old-age and disability benefits, and it will be essential to ensure that benefit entitlements are consistent with the long run sustainability of these programs. Entitlement changes needed for medium-term viability, however, are unlikely to resolve all of the short– term problems arising from an unusually narrow contribution base. In the short-run, it will be important to implement transparent mechanisms capable of delivering an equitable allocation of benefits. With regard to pension and invalid insurance, simple solutions applicable for the short term could include (i) adoption of a simple rule that reduce higher entitlement levels as needed to guarantee timely payments on a monthly basis to all beneficiaries; and (ii) the cancellation of extraordinary benefits mandated by separate government legislation—unless they can be met from budgetary resources. These steps would enhance the credibility of the programs—which is essential to improve compliance. Over the longer term, contribution levels and benefit entitlements will need to be jointly determined to ensure sustainability under most economic conditions.

158. It will be important to establish clear priorities: disparate activities such as pension payments and health service provisions—which rely on wage-based contributions—are linked both by their direct effect on citizen’s welfare and by their claim on the same limited pool of resources. In addition, disparities in regional resource bases will need to be taken into account. The marked disparities in cantonal revenue bases underscore the importance of establishing the broadest possible base for financing social insurance programs. The unification of the two Federation pension and invalid insurance funds within the Federation is overdue, and necessary for an efficient use of resources. For the same reasons, a purely cantonal organization for all health care protection and insurance is unlikely to support a sustainable, efficient health care system in either the short or medium term.

159. The need to close the gap between commitments and actual benefits paid to military invalids and surviving family members—which are financed directly from Entity budgets—is important for the credibility of both governments. Neither Entity has been able to cover entitlements, and the higher benefit standards contained in legislation recently adopted by the RS and under consideration by the Federation parliament will only further undermine government credibility and exacerbate the already marked imbalance, compared with benefits offered to other socially vulnerable groups.

160. In the short-term, these benefits commitments to military invalids and surviving family members need to be contained to levels consistent with timely, predictable payments to beneficiaries and the allocation of resources to other social needs. Short term measures would include: (i) aligning the level of disability benefits for military invalids and surviving family members with those provided for civilian work-related injuries or disabilities; (ii) replacing the link between disability pensions for military invalids and surviving family members to the prevailing military wage, and with a link to average pension benefits, even if adjusted by a scale factor. Links to prevailing military wages—which are well above average wages—create a fiscal burden that cannot be afforded, and add an unneeded source of uncertainty to budget planning.

161. Over the medium term, it will be important to establish two types of benefit entitlements for de-mobilized soldiers, military invalids, and surviving family members. Beneficiaries capable of working would be best served by retraining and rehabilitation programs: these same programs would also serve the needs of those experiencing long-term unemployment. Permanent support should be targeted more narrowly to those incapable of returning to work.

162. Social safety net provisions for the most vulnerable—those outside the social insurance net or eligible for only insufficient benefits—have received scant attention. For the near term, it will be essential for Entity and local governments to agree on basic common standards and define some mechanism to offset severe regional variations inconsistent with the implementation of common basic standards for social benefits and public services. For both Entities, it will be important to consider a reallocation of benefits—including from military invalids and surviving families—to provide subsistence services to the most vulnerable. A further issue to be faced by both Entities is the absence of social safety net provisions for the long-term unemployed. The existing employment insurance schemes—which mainly provide short-term assistance to the newly unemployed—could be usefully redirected toward this group, and toward the development of viable training and rehabilitation programs.

1

Prepared by Dawn Rehm, Jun Ma, and Jenny Ligthart.

2

The pre-war economic slowdown had already placed a severe strain on these programs.

3

Gupta, Sanjeev, Christian Schiller, and Henry Ma, 1999, “Privatization, Social Impact, and Social Safety Nets,” IMF Working Papers WP/99/68.

4

In Republika Srpska, an additional fund provides protection for children.

5

The age for early retirement for men (women) was increased from 55 (50) to 60 (55) with 35 (30) years of pension contributions, with a modest reduction in benefit entitlements. After 2005, this option is no longer available.

6

Benefit entitlements range between 130 percent and 450 percent of the pension base, depending on the level of education. The pension base ranges between 45 and 85 percent of the prevailing minimum wage, depending on years of contributions. The pension base is the minimum wage prevailing in the month benefits begin, adjusted for increases in the average wage.

7

Wage compensation for temporary disability is to be provided by the employer for disabilities of up to 120 days; longer periods of temporary disability are to be financed from the Health Insurance Fund.

8

For example, the Health Insurance Fund in the RS reported arrears of KM 5 million at end-1998.

9

For the Federation, unemployment benefits for periods greater than six months are available only to those who have been continuously employed for five years or more.

10

The continued existence of parallel institutions in the Federation is reflected in benefits for military invalids as well. Amounts included in the budget are divided on a 70–30 basis between the Bosniac– and Croat-majority areas. Extrabudgetary support to the Federation from Croatia—estimated at KM 164 million for 1999—is allocated by the Ministry of Defense between army units previously associated with the Republic of Herceg-Bosna (HVO), and the associated military invalids and surviving families.

11

Only 10 monthly pension payments were made in 1998.

12

Depending on the degree of impairment, disability benefits range from 20–160 percent of the average wage from the previous December. The gap between disability pensions granted under the Law on the Rights of Soldiers and their Families and entitlements provided under the Law on Pension and Invalid Insurance is likely to be considerably wider. Gross military wages are estimated to be at least double average wages in the Federation. Moreover, contributions for health and pension insurance account for only 11 percent of net salary, compared with 24 percent of gross wages for other individuals. Moreover, disability pensions under the Law on Pension and Invalid Insurance are linked to average pension levels from the previous year.

13

The law does prescribe, however, that the following sources of income are not to be taken into account: disability pay, monetary compensation received in return for care of another person; stipends for children; and scholarships.

14

The law covers civilian war victims with a disability of 60 percent or more; the law extends coverage, however, to those who qualified for support prior to the enactment of this law.

15

These percentages are as follows: 25 percent for one family member, increased by 50 percent for each additional family member; and 80 percent for children of civilian war victims without parents.

16

In Republika Srpska, maternity benefits and children’s allowances are covered by a separate social insurance fund supported by wage and salary contributions. The program covers salary compensation during maternity leave, maternity allowances for unemployed mothers, and a child allowance. The average number of beneficiaries in Republika Srpska declined from 104,000 in 1997 to about 88,715 during 1998 following amendments to the Law on Child Welfare aimed at improving the quality of benefits for those most in need. During the first six months of 1999, there were an estimated 70,000 beneficiaries. Average benefits per year are estimated to be KM 80–100 in each of the three years. By June 1999, the Fund was current in all benefit entitlements through April 1999.