Social Security: A Means of Savings Mobilization for Economic Development
  • 1 0000000404811396 Monetary Fund

SOCIAL SECURITY PROGRAMS financed primarily by payroll taxes have been adopted by a large number of developing countries and are being considered by others. They not only serve a desirable social objective but also in many countries provide an important source of funds to finance economic development. This paper consists of two parts: the first attempts to measure the extent to which savings are in fact mobilized by social security and related taxes; the second surveys the investment policies of social security funds and assesses their impact on economic development.


SOCIAL SECURITY PROGRAMS financed primarily by payroll taxes have been adopted by a large number of developing countries and are being considered by others. They not only serve a desirable social objective but also in many countries provide an important source of funds to finance economic development. This paper consists of two parts: the first attempts to measure the extent to which savings are in fact mobilized by social security and related taxes; the second surveys the investment policies of social security funds and assesses their impact on economic development.

SOCIAL SECURITY PROGRAMS financed primarily by payroll taxes have been adopted by a large number of developing countries and are being considered by others. They not only serve a desirable social objective but also in many countries provide an important source of funds to finance economic development. This paper consists of two parts: the first attempts to measure the extent to which savings are in fact mobilized by social security and related taxes; the second surveys the investment policies of social security funds and assesses their impact on economic development.

I. Social Security and Savings Mobilization

Scope of the social security sector

The scope of the social security sector used in this paper conforms to that used by the Statistical Institute of the European Economic Community and by the EEC Commission.1 It covers national provident funds, national health programs, compulsory insurance, family allowances, and special programs for public employees.2

This broad coverage is justified since consolidated statistics reflect the absorption of surpluses of the funded programs to support other social security programs and therefore give a better measure of actual performance than that obtained from statistics confined to the funded programs. Certain programs included in the ILO definition of social security are not covered in this paper because they have special characteristics (mainly financing only through the general budget and not through social security taxation) which call for separate treatment.

Funded programs are combined in different proportions with other social security programs. Occasionally, surpluses of long-term risk programs are used to finance the deficits of short-term risk programs. In some countries (e.g., Congo (Brazzaville), Mali, and Upper Volta), surpluses of pension schemes are used to finance the deficits of the family allowances programs; in other countries they are channeled to meet the deficits of the programs for government employees (e.g., Argentina and Uruguay) or the deficits of the sickness programs (e.g., Costa Rica).

The available data often cover the combined operation of short-term and long-term risk programs, which in many countries are conducted by the same institution (e.g., the combined pension and short-term risk programs in a number of countries with pension programs for nongovernment employees).3 Published reports do not always detail the operations of the different programs. Because of these interrelationships and the unavailability of separate data, it would be unrealistic and impracticable to limit the analysis to long-term risk programs.

National provident funds comprise compulsory savings from certain categories of employees and contributions from their employers. Generally, contributors receive benefits at retirement, invalidity, or death, consisting of the accumulated savings plus interest thereon, mostly payable in one lump sum. Sometimes benefits are also payable in the case of emigration, maternity, sickness, and unemployment.

National health programs covering all residents are included for reasons of comparability, because they correspond to the social insurance programs for sickness in other countries.4 However, it has been practically impossible to exclude from the expenditures of the national health programs those that in other countries are defined as public expenditures for health and are excluded from the social security concept used in this paper.

Social insurance programs provide for the collection of contributions and the payment of benefits under prescribed conditions, based on the pooling of risks and resources and the equalization of losses. The strict insurance approach would require that every member contribute only for his own risk; for example, those in groups with a higher incidence of illness would pay higher premiums. Usually, however, contributions are not varied with risk, so that there is a redistribution of income from contributors with a low incidence of risk to those with a high incidence.

Social insurance may embrace all programs for long-term risks of old age, death, invalidity, or permanent disability, as well as short-term risks of sickness, maternity, temporary disability, and unemployment. Long-term risks may be insured on the basis of either full-funding or pay-as-you-go financing, whereas short-term risks are usually financed by a pay-as-you-go system. Under the full-funding system, a sum of money is set aside which, with interest and other earnings, will cover payment of the benefits; under the pay-as-you-go system, each year’s benefits are met out of current funds, except that provision may be made for a contingency reserve. Special programs for public employees are included for reasons of comparability; in several countries these programs are managed together with those for private employees.

While programs for sickness, maternity, work injury, and family allowances financed on a pay-as-you-go basis5 sometimes produce a surplus as a contingency reserve against unforeseen events, a significant degree of saving mobilization is achieved only by funded programs.

Relation of social security savings to gross domestic investment

One measure of the mobilization of resources by the social security sector is the relation of social security savings to aggregate national savings; another is their relation to gross national product (GNP). Since estimates of national savings are available for only a few countries, the savings of the social security sector are compared with gross domestic investment (GDI). No adjustments have been made for the international flow of capital in arriving at an approximation of domestic savings.

In determining the increase in social security reserves, only the net increase in the consolidated social security sector is considered. The net increase is measured by the difference between annual current receipts to finance the programs covered (premiums, government payments, and returns on investment) and the annual current expenditures (benefit payments and operating expenses). Surpluses and deficits of different programs are consolidated so that only the net increase in the reserves is shown. Although such increases in reserves are treated as “gross savings,” they may be used in part for current or future consumption.

The comparison related to the social security gross savings is not limited to the cash increase in the reserves, but covers also the accrued but unpaid liabilities to the system. The accrued increase in the reserves includes the government payments for contributions, interest, and subsidies made with securities, as well as the known overdue payments for contributions by the government and by the employers.

Table 1 presents the relation of social security gross savings to GDI for a recent 2-year or 3-year period, and Table 2 for the latest available year. Use of a 2-year or 3-year period reduces the effect of exceptional situations on a particular budget; on the other hand, the comparison on an annual basis presents the operations in the latest available year, and for a group of countries for which information for more than a year is not available.

Social security gross savings

Tables 1 and 2 measure the gross savings of the consolidated social security sector before adjustment for government subsidies. By such consolidation the surpluses of some programs—generally the pension or provident fund schemes—offset the deficits of other programs. This offsetting occurs in several countries where a social security institution manages the combined operations of different programs. In other countries the deficits of some programs are not directly financed by the surpluses of the pension programs, but through borrowing or transfers from the government budget.

The comparison of the social security gross savings with GDI in the last 2 or 3 years covers 23 developing countries (Table 1). This table, as well as a number of succeeding tables, excludes many developing countries because of lack of financial statistics. Some of these countries6 have social security systems which include pension programs designed to accumulate reserves. Other countries do not have these plans7 or have introduced pension programs or provident funds very recently8 so that the accumulation of reserves, if any, can be considered to be negligible.

Table 1.

Social Security Reserves (Gross Savings): Increase in Relation to Gross Domestic Investment, 23 Developing Countries, Recent 2-Year or 3-Year Average

article image
Sources: See country notes in the Appendix (p. 362).

Besides the cash gross savings, accrued gross savings include either the Government payments for contributions, interest, and subsidies made with securities, or the known overdue payments for contributions by the Government and the employers.

Countries where no pension scheme or provident fund for employees of the private sector was in force.

Only private and local government investments.

Per cent of savings and net capital inflow.

In 1962 and 1963 there was a cash deficit, but for these years no GDI estimate is available.

Includes funds mobilized by some property and life insurance programs for Government employees.

In 11 countries of Table 1, net cash accumulation of reserves represents 2.5 per cent or less of GDI, including a deficit of 0.1 per cent in the Dominican Republic. Benefit payments absorbed practically all the social security sector’s receipts, leaving either no surplus or a small surplus in Venezuela, Mauritania, Argentina, Nicaragua, Guatemala, Burma, Colombia, El Salvador, Paraguay, and Uruguay. Although no recent GDI estimates are available for a comparison, Nigeria is also in this category. The low level of resources mobilized by the social security sector in this group of countries can be explained on different grounds. In some countries (e.g., Burma, Colombia, El Salvador, Guatemala, and Venezuela), no pension program or provident fund was in force for nongovernment employees.9 In Paraguay the pension program has not mobilized appreciable resources because the Government and employers did not pay their assessments. In Nicaragua the small surplus of the social security sector probably is attributable to the narrow coverage of the program.

Some other countries (e.g., Uruguay and Argentina) have well-developed long-term risk programs which could provide substantial resources for investment if benefit expenditures were contained and the returns on investments were maintained in real terms. Inflation, however, has brought about substantial deterioration in the real value of the assets held by the social security institutions, as well as in the investment income as a source of revenue. Benefit expenditures were large because the expansion of the coverage provided benefits to groups of persons with a relatively short service and because the amount of the benefits was liberal; on the other hand, the real value of the assets and the returns was eroded by the inflationary process, which was also largely responsible for the substantial shortfall of government and employers’ contributions. Uruguay is a striking example of this situation: without coverage for sickness, the Uruguayan social security sector has receipts equal to about 13 per cent of GNP—one of the highest ratios in the world—owing to contributions ranging from 38.5 per cent to 44.5 per cent of wages and salaries. The social security taxes generate revenues almost equal to the Central Government’s other tax revenues, but they are almost wholly absorbed by benefits. In fact, the social security sector had a cash deficit of about 3 per cent of GDI in 1962 and in 1964, against a surplus of about 7.4 per cent in 1961 and 3.4 per cent in 1963.

It would be arbitrary to say when the contribution of social security surplus to the mobilization of resources becomes important. The social security sectors in the other 12 countries in Table 1 produced surpluses ranging from 3.3 to 20.3 per cent of GDI. The highest 6 consisted of Turkey (with a surplus of 7.3 per cent of GDI), the Philippines (9.0 per cent), Malaysia (10.0 per cent), Ecuador (10.5 per cent), Chile (13.1 per cent), and the United Arab Republic (20.3 per cent).

The social security situation in Brazil deteriorated after 1960, mainly because of the growing proportion of inactive members, the increasing amount of unpaid contributions by the Government and the employers, and the effect of inflation on earnings from capital such as housing. Although a small surplus (Cr$5.3 billion) was still recorded in 1961, the deficits amounted to Cr$5.8 billion in 1962 and to Cr$15.3 billion in 1963. Therefore, Brazil would move to a lower position in Table 1 if information on the GDI for 1962 and 1963 were available.

Table 2 presents the social security gross savings and their relation to GDI in 30 countries for a single year, including countries omitted from Table 1 because of lack of information for more than a year. These countries are Mali, Republic of China, Honduras, Nigeria, and Dahomey, all of which probably would have ranked in the lower half of Table 1; Congo (Brazzaville) and Costa Rica are also added. In the Republic of China, the old-age program is very limited both in coverage and in the size of premiums. In Honduras, no pension program was in force except for government employees. In Mali, Nigeria, and Congo (Brazzaville) the pension program started only in 1962; moreover, the surplus in Mali is partly used to finance the family allowances programs. In early 1965 the Nigerian National Provident Fund was raising resources at a rate of over £400,000 a month, against about £258,000 a month in 1963. In Costa Rica, much of the surplus of the pension programs for employees in industry and commerce is offset by the deficit in the Government employees’ pension program. Most of the other countries included in Table 2 reported a higher percentage in the latest available year.

The social security sector of many Latin American countries would have produced a greater surplus if it had received in cash all the revenues due. In Argentina, Brazil, Colombia, Costa Rica, Ecuador, and Uruguay, large amounts of obligations—either by the Government for transfers and contributions or by private employers for contributions—remained unpaid or were paid in part by the Government with securities. Similar shortfalls probably exist also in other countries, but were not reported by the social security institutions.

Government shortfalls are generally explained by the difficult budgetary situation and, sometimes, by the belief that subsidies to social security institutions are not necessary expenditures. Employers’ delinquency is often produced by the difficulties in financing working capital in a period of rapid inflation: high premiums coupled with a low interest rate on overdue payments give a strong incentive to delayed payment. Sometimes the government implicitly permits this delinquency as a means of overcoming the financial difficulties of the enterprises.

If we consider accrued surplus (including these claims), instead of cash surplus, in the last available 2 or 3 years, the ratio of surplus to GDI would increase considerably: from 0.2 per cent to 4.6 per cent in Argentina; from 0.3 per cent to 0.8 per cent in Nicaragua; from 2.5 per cent to 11.7 per cent in Uruguay; and from 3.6 per cent to 9.7 per cent in Brazil (Table 1). Considering only the last available year, the percentage would increase from—0.4 per cent to 0.5 per cent in Mali, and from 4.5 per cent to 6.7 per cent of GDI in Costa Rica (Table 2).

Except for Ceylon, Malaysia, and India, which have provident funds,10 all the countries in the upper half of these tables have pension programs organized in accordance with the social insurance approach. In a few countries these programs were established in fairly recent years so that the conditions that must be satisfied to qualify for retirement benefits—generally the attainment of a specified minimum age and the completion of a minimum period of contribution or insured employment—were not yet fulfilled for a large group of beneficiaries. Malaysia started a provident fund in 1951, India in 1952, and Ceylon in 1959. Chile started its pension funds in 1952, the Philippines in 1954, and the United Arab Republic in 1955.

The pension programs of Turkey and Israel (founded in 1957 and 1953) were also in an early stage of development. The pension programs of Panama and Mexico, however, were started over 20 years previously (in 1941 and 1942), but the expanding coverage, together with the strict qualifying conditions, still permits considerable surpluses to develop.

Table 2.

Social Security Reserves (Gross Savings): Increase in Relation to Gross Domestic Investment and Domestic Savings, 30 Developing Countries, Latest Available Year

(Amount in millions of national currency)

article image
article image
Sources: See country notes in the Appendix (p. 362).

Besides the cash surpluses, accrued surpluses include either the Government payments for contributions, interest, and subsidies made with securities or the known overdue payments for contributions by the Government and the employers.

Based on cash surplus or deficit (—).

Countries where no pension program or provident fund for employees of the private sectors was in force.

Private and local government investments only.

Latest available surplus for 1964 is L 0.9 million, but there is no estimate for GDI for that year.

There were surpluses of ¢ 1.8 million in 1963 and ¢ 2.4 million in 1964, but no estimates of GDI or public investments are available for these two years.

1959 GDI.

Public sector savings.

The Uruguayan social security sector had deficits of UR$95.3 million in 1962 and UR$ 176.7 million in 1964, but no GDI estimate for 1964 is available.

Including savings provided by private provident funds, surpluses represent 12 per cent of GDI and 30 per cent of domestic savings.

Including private provident funds, surpluses amounted to Rs 1,126 million, or 10.2 per cent of domestic savings. In 1962/63, they were Rs 1,667 million, or 10.7 per cent of domestic savings.

1960 is the last year for which an estimate of GDI is available. In 1961, accrued surpluses were Cr$56.7 billion, in 1962 Cr$58.1 billion, and in 1963 Cr$105.4 billion, but only in 1961 was there a cash surplus (Cr$5.3 billion); in the next two years, there was a cash deficit, amounting to Cr$5.8 billion in 1962 and Cr$15.3 billion in 1963.

In 1963 the surplus was B 7.9 million and in 1964 B 9.4 million, but no estimates of GDI are available for these years.

The 1964/65 budget estimates a surplus of LE 107.5 million.

Provident funds established in Malaysia, India, and Ceylon have been very successful in mobilizing resources (Table 3). In these countries, all public provident funds exclude employees covered by equivalent private programs. The Indian public provident funds cover employees of firms with 20 or more workers after 12 months’ employment with the same employer and public employees (defense, railways, post and telegraphs, and central and state government). During 1954-62 these public and private funds provided a net increase in reserves of about Rs 10.6 billion, and the annual rate of mobilization almost doubled. Mobilization through private funds has been diminishing, while the public funds have been rapidly increasing in importance.

Table 3.

Resources Mobilized by Provident Funds: India, Malaysia, and Ceylon, 1954-63

(In millions of national currency)

article image
Sources: See country notes in the Appendix (p. 362).

In Malaysia, the Employees’ Provident Fund (EPF) covers all employees except public employees and employees covered by equivalent private plans. This rapidly growing fund has been the most important domestic source of development financing in the public sector. During the First Five-Year Development Plan, 1957-61, the Fund provided M$394 million of a total public investment of M$ 1,007 million.11 Under the Second Development Plan, 1961-65, M$700 million was expected from this source. Including private programs, the Malaysian provident funds in the 9 years 1955-63 mobilized M$912 million.

In Ceylon, the Employees’ Provident Fund covers both private and public employees (public employees receive also special pensions), except for private employees in the shipping industry, banking, and plantations, covered by private provident funds. In the first 4 years of operation it mobilized about Rs 284 million—roughly 8 per cent of GDI.

Social security net savings

To arrive at the net savings of the social security sector, it is necessary to deduct from the gross savings (net increase in social security reserves) the amount of government subsidies financed by borrowing rather than taxation. A further allowance would also be appropriate for the reduction in private savings attributable to the benefits and to social security taxes or other taxes to finance government subsidies, but this adjustment cannot be readily quantified (see below, pp. 341-42). The procedure followed here is to deduct from the gross savings mobilized by social security the subsidies paid by the government when in the same year government borrowing (after foreign financing) is larger than the amount of the subsidy. This treatment is based on the assumption that subsidies to the social security sector are marginal (i.e., the last expenditures made). Thus, if government borrowing exceeds the subsidy, the subsidy is considered not financed by taxation and is deducted from social security gross savings. When the subsidy exceeds government borrowing, only the amount of government borrowing is deducted. No deduction is made when the government registers a surplus. Net savings can be considered mobilized by social security taxation and, for the part corresponding to the amount of the subsidy, by general taxation. To the extent that the subsidy is financed by taxation which curtails private consumption expenditures, it can be supported as a means of increasing public savings.

According to the rationale of the treatment of the subsidy seen above, two questions need to be considered: (1) what constitutes a government “subsidy” to the social security sector? and (2) why, among the government payments made to the social security sector (contributions as employer, interest on public debt held, and subsidies), are only subsidies considered marginal expenditures? Subsidies are defined as cash payments from the general fund to support benefit payments and operating costs of programs financed by contributors. Therefore, the payments made out of the general fund in Ceylon and Malaysia to finance the national health programs, which are entirely supported by the Government, are not considered subsidies. In the light of this exclusion, it seems correct also to exclude the payments of the Chilean Government to meet the deficit of the National Health Service covering most of the population, even though the Chilean scheme is supported by a minor amount of contributions. Government payments other than subsidies (contributions made to social security by the Government as employer, and interest) are not considered marginal expenditures because, unlike subsidies, these payments appear to be generally regarded as necessary expenditures. Moreover, subsidies are transfer expenditures which, it may be argued, do not have the same moral obligation for the government when the coverage of programs is limited to a minor part of the population.

Generally, the subsidy benefits those who have the highest wage levels and who are better off than most of those who are not covered by social security.12 However, a subsidy can be defended when it is necessary to make the social security scheme acceptable to the community. The promise of a subsidy can be used to persuade persons to accept the program, who would not otherwise save through a pension or provident fund. The same result may be obtained by fiscal benefits which are another form of subsidy, such as an income tax deduction. For a group of 31 countries, Table 4 shows for recent years social security gross savings, subsidy payments made by the government, and social security net savings and their relation to GDI.

When only social security net savings are considered, the resources mobilized through the social security system in a large group of countries disappear or are reduced considerably. For example, in Colombia (1963) a surplus of 1 per cent of GDI (Table 2) is reduced to a deficit of 2.3 per cent (Table 4), and in Ecuador (1963) the surplus is reduced from 10.9 per cent to 9.8 per cent. In none of the highest 8 countries of Table 2, except for Ecuador and Panama, was a government subsidy financed by borrowing received by the social security sector. In Ecuador, however, the subsidy was almost negligible; therefore, it can be held that these 7 countries have been able to mobilize considerable resources through their social security programs.

Relation to GNP

The relative importance of an increase in social security gross and net savings can also be measured by its percentage of GNP. This comparison is interesting also because it gives a measure of the importance of social security surpluses in such countries as Algeria, the Malagasy Republic, Libya, Ghana, and Upper Volta, for which data on GDI are unavailable. Algeria has sickness, old-age, and family-allowances programs. The Malagasy Republic has a social security sector limited to a family-allowances program; Libya has a pension program covering industrial and commercial sectors. Upper Volta has family allowances, and since October 1960 a pension scheme covering nongovernment employees.

Table 4.

Social Security Savings: Amount of Gross and Net Savings, and Relation of Net Savings to Gross Domestic Investment, 31 Developing Countries, Recent Year

(Amount in millions of national currency)

article image
Sources: See country notes in the Appendix (p. 362).

Gross savings equal cash increase in social security reserves.

Cash payments made out of the general fund to support benefit payments and operating cdsts of programs financed by contributors.

Net savings equal the balance of gross savings and the Government subsidy only where Government borrowing after foreign financing exceeded the Government subsidy.

1960 GDI is the latest available. In 1963, social security had a gross dissaving of Cr$15.3 billion and a net dissaving (social security gross dissaving plus Government subsidy) of Cr$58.3 billion.

Table 5 shows these percentages in 35 developing countries for which there are data for recent years. In the 9 highest countries, the ratio exceeded 0.9 per cent. The United Arab Republic had the highest percentage—4.2 per cent of GNP both for gross and net savings in 1963/64. At the other extreme, 3 countries, including Brazil,13 had negative percentages for social security gross and net savings, 2 others had negative percentages only for net social security savings, and 5 more had little or no increase in their social security reserves.

Relation to GDI and to GNP in selected developed countries

In developed countries, social security gross savings appear to be relatively more important than in developing countries (Table 6). In 1960 the social security sectors (except for France) mobilized resources ranging generally at or above the median for developing countries. Social security gross savings ranged between 0.04 per cent of GNP for France and 1.7 per cent for Italy. Besides Italy, only Japan registered above 1 per cent of GNP.

Except in the United States and, to a lesser extent, Japan, these surpluses generally were made possible by large transfers (subsidies) from the central and local governments. Taking into consideration the government subsidies (as defined above) financed by borrowing rather than taxation (on the assumption that such subsidy payments are marginal expenditures), social security net savings were negative in France, Belgium, and Austria. For all other countries included in Table 6, the percentages for net savings were considerably lower than those for gross savings.

Do social security surpluses represent savings mobilization?

Long-term insurance programs or provident funds in several developing countries make available substantial resources for development, especially for a period of years following the establishment of a plan. Receipts exceed expenditures because of the funding principle, deferred benefits, and broadened coverage or expansion with the growth of the economy. The length of the period of accumulation can be extended and the savings potential can be enhanced if the benefits are controlled and the retirement age is not too early. The choice of retirement age and related conditions for the receipt of old-age benefits is a very important decision in determining the cost of the program, as the experience of several Latin American countries shows.14

Table 5.

Social Security Gross and Net Savings: Relation to Gross National Product, 35 Developing Countries, Recent Year

article image
Sources: See country notes in the Appendix (p. 362).

Per cent of national income.

Per cent of gross domestic product (GDP) at factor cost.

Table 6.

Social Security Gross and Net Savings, and Their Relation to Gross National Product and Gross Domestic Investment, 10 Developed Countries, 1960

(Amount in billions of national currency)

article image
Sources: See country notes in the Appendix (p. 362).

Social security net savings equal the balance of gross savings and the government subsidy only where government borrowing after foreign financing exceeded the government subsidy (France, Spain, and Austria); for the countries where for the subsidy was the greater, the amount of the government’s borrowing (including use of cash balances) was deducted.

Per cent of private and local government investments.

Per cent of private investments only.

There remains to be answered the question of whether or not social security reserves represent new savings mobilization.15 Would aggregate savings be the same, or less, in the absence of the social security system? That is, would the individuals, the businesses, and the government have saved the same amount in other forms? No definitive answer to this question can be given without an empirical investigation of the behavior of households. A negative conclusion for the United States has recently been reached through an elaborate questionnaire, but because of different institutional conditions its extension to developing countries seems hazardous.

Results from a questionnaire survey of 11,000 households in the United States indicated that public and private pension systems tend to enlarge the flow of personal savings, although there is some offsetting reduction in savings of other sectors. On the whole, pension coverage does not lead households to reduce their savings in other forms and may even stimulate the motivation to save.16 Only for certain groups, especially those with high employee-contribution rates and full vesting, is there evidence of some substitution of pension saving for saving in other forms, but this substitution tends to be offset by those whose reaction is to increase other saving. The net addition to aggregate personal savings in the United States appears to equal the full amount of employees’ and employers’ contributions. Part of these savings (perhaps 10-20 per cent) is probably offset by a reduction in business and government savings. The total net addition to the national savings attributable to the U.S. pension programs therefore can be considerable.

Under certain conditions, the extension of the above conclusions to a developing country seems permissible despite differences in economic and social conditions, and the limited discretion that low-income households have in changing their spending-savings patterns. Indeed, some characteristics of a developing country would appear to favor an increase in the total rate of saving based on pension programs and provident funds.

Although detailed information about savings is not available for most less developed countries, scattered data show that—with few exceptions—personal savings of the household sector are small or even negative (Table 7).17 Saving in the form of insurance, pension, and provident funds is in its infancy in a large group of developing countries. But where appreciable social security saving has been mobilized (e.g., in the 8 countries where social security saving represented over 1 per cent of GNP), it seems correct to infer that social security saving has increased the existing level of household saving.18 It is likely that poor workmen would not have saved without the compulsory scheme which they accept for the reasons explained below (pp. 344-46). And it is likely that some people who saved before will react to the pension or provident funds, increasing their aspirations regarding retirement income and their effort to add to their saving.

Table 7.

Savings of the Household Sector:1 Relation to Gross National Product, 12 Developing Countries, 1961-63 Average

article image
Sources: All countries except India, United Nations, Yearbook of National Accounts Statistics, 1965; India, Reserve Bank of India Bulletin, Vol. XIX (1965), pp. 314-33.

Including private nonprofit institutions.

National income.

1960-62 average.

Moreover, coverage under a pension or provident fund program does not leave the participant with the same “wealth effect” as he gets, for example, from the ownership of government bonds or other negotiable property. Since the right to the pension cannot be sold in the market, it is not a substitute for other forms of investment which give liquidity for security as well as prospect for future gains. Therefore, the contributors to a social security fund may still have an unsatisfied need of saving for liquidity.

On the other hand, some factors can operate to offset social security savings. There are thrifty persons who already save; when required to pay the social security premiums, they may prefer to cut down their savings rather than to reduce their consumption because saving which previously competed with “superfluous” consumption now encroaches on “necessities.”19 Business saving can be reduced by the employers’ social security taxes if profits are reduced by the increase in labor costs. Profits will be reduced unless the taxes can be shifted by raising selling prices or reducing labor costs—at least in the short run. Moreover, the contributions paid by the employers and the employees may result in a loss of income tax revenue which offsets a part of the social security surpluses. This happens when social security contributions are deductible in determining taxable income and their incidence is on profits.20

Similarly, savings mobilized in state-trading countries cannot be considered wholly as new savings because the contributions paid by government enterprises in a situation of price stability represent simply a change in the allocation of gross profits. This is the case of the United Arab Republic, where Government enterprises and the Government are estimated to account for about one half of the financing of the social security system.21

Taking into consideration the points just summarized, it is difficult to believe that surpluses of pension funds or provident funds represent wholly a net addition to aggregate saving. But it seems reasonable to think that a significant part of the savings represented by such surpluses would not have been realized without such programs. Pension and provident funds thus appear to be an efficient compulsory means of increasing the rate of savings from current income.

Social security taxation compared with alternative means of savings mobilization

Pension programs or provident funds are not the only method of enlarging savings for development. Rationing, other forms of compulsory savings, and higher taxation could also serve this purpose. Rationing requires a rigorous control of private spending, a control which can be achieved only with difficulty and at a high cost; other forms of compulsory savings seem to have a comparative advantage over higher taxes on incentive grounds. Also, an increase in taxes is often difficult to implement because of political opposition; on these grounds, social security taxes have important merits which make them preferable to these alternatives.

Since social security contributions represent a compulsory transfer of resources from the private sector to a public institution without any guarantee to individual contributors of receiving benefits equal to the amount of the premiums paid, the payments are properly classified as taxes.22 On the other hand, there is a presumption that individual contributors will receive benefits as members of the group covered by the program so that it seems correct to consider the social security contributions a special tax.23 The expectation of benefits is an important characteristic even though the amount received is not necessarily bound to the amount of the premiums paid. Actuarial factors are often overwhelmed by social justice considerations. Premiums and benefits are not related to individual risks but they are generally standardized; subsistence minimums are guaranteed. Often, particularly in developed countries, a part of the contributions of one sector of the economy, such as manufacturing, is used to finance benefits in other sectors, for example, agriculture.

An important advantage of social security taxation as a means of financing new investment is that it usually encounters less political resistance than other taxes do. Employers consider more favorably a tax which is not progressive on the income of the enterprise; and they hope to shift the tax forward or backward, or to avoid it by increasing the capital-output ratio. Employees are often victims of a sort of financial illusion; they do not wholly perceive the tax element of social security contributions because they regard the payments as an insurance premium which is capitalized for the future. This illusion sometimes is encouraged by governments; often the initial conditions required to ensure the right to benefits are very strict, but after a few years they are relaxed and sometimes repealed. There is of course no guarantee that every participant will ultimately receive the same real amount paid in; rather he may receive a lesser value, either because of depreciation due to inflation or because of deficiencies of the program. The acceptability of social security programs may also be enhanced by the promise of a subsidy from general taxation. The favorable public attitude toward compulsory contributions to a provident fund is evidenced by a public opinion poll, conducted by the Nigerian Provident Fund, in which about 90 per cent of the contributors were “happy” with the program.24

Another advantage of social security taxation is its high “income elasticity of yield due to the rapid expansion of the tax base at early stages of development. Also, social security taxes are rather easily collected because they are usually withheld at the source and in large part by large industrial enterprises and government offices.

From a strictly financial viewpoint, the obligation to pay future benefits to participants is a disadvantage of social security taxation compared with ordinary taxation. The benefit payments, however, serve socially desirable purposes and bring about a redistribution of income in favor of those needing assistance. If the social security reserves are invested well, the yield (additional national product) will enhance the government’s ability to provide the benefits.

The impact of inflation on social security programs calls for comment. When contributions are a fixed proportion of payroll, and cash benefits (such as pensions) are fixed, the amount of contributions increases at a faster rate than the benefits under inflationary conditions, and social security surpluses grow. When this happens, the increase in savings due to inflation helps to check the inflationary process. But this effect results from a default on the government’s implicit promise to provide benefits commensurate with the contributions, raising an ethical question; in time it may cause people to regard social security taxes in the same way as other taxes. For this reason, social security taxation can be recommended only under conditions of reasonable monetary stability unless the government provides for an adjustment of benefits to take account of inflation.

For example, in Chile before 1963, inflation apparently generated a large part of the surplus of the pension funds for Government employees, representing perhaps one third of the surplus of the social security sector. Although various methods of adjusting pensions for inflation were in effect in other institutions, the pensioners of the National Institution of Public Employees and Journalists were not covered by these adjustments and were seriously affected by the loss of real value of their income.25 In December 1963, the Chilean Government instituted a general system for the annual increase of pensions in relation to the cost of living, covering public employees.

Adjustments of pensions for the increase in the cost of living have been made in some other countries (e.g., Argentina, Brazil, and Uruguay). Full adjustment of benefits for increases in the cost of living (indexing) would not preclude savings mobilization, but would eliminate inflation gains and leave intact accumulations due to demographic factors and expanding coverage.

A country which wishes to use social security as a means of saving mobilization should give priority to the funded programs. Other programs are likely to narrow the scope for mobilizing savings. Moreover, in the long run, the cost of pension programs or provident funds will increase substantially. As the experience of developed countries shows, the length of time a country has maintained a social security program is the most important single determinant of the cost of the system.26 In the future, therefore, the programs established today to mobilize additional resources for development can put a heavy burden on the country’s economy if the stream of benefit payments cannot be financed by contributions and returns on investment of the funds. The experience of several Latin American countries shows that the choice of the retirement age and related conditions for the receipts of benefits is a very important decision in determining the cost of the program.

Under certain conditions it is possible to extend the period of accumulation for a long period of years. In developing countries, a high rate of population increase, rising industrialization, and increased coverage of the program make it possible to provide a net increase in savings for an extended period.

II. Investment of Social Security Funds

In a number of developing countries, social security taxation has been successful in reducing consumption and increasing savings. But the contribution of the social security reserves to development depends largely on how they are used. The remainder of this paper discusses investment criteria, surveys the size of social security assets in relationship to GNP, analyzes the composition of these assets, and appraises the investment policies that have been followed.

Investment criteria

Since the social security agencies are public institutions, the resources mobilized by them should be invested according to criteria established for the optimum economic and social development of the country. These criteria should guide every investment decision.27 The funds mobilized through social security should be channeled into the pool available to the government, and tapped for investment in different projects according to national priorities in such a way that they will expand productivity and taxable capacity. This policy is required by the necessity of coordinating decisions on investment with the decisions on the extent of the social security sector, the size of contributions and benefits, and the level of mobilized resources. In this way a broad view can be taken of the country’s economic development without its being subject to a possibly more parochial view of the social security institutions.

Admittedly, broader development objectives may conflict at times with strictly social security objectives. The parochialism of social security institutions may take either of two opposite forms—excessive emphasis on a high rate of return, or preoccupation with immediate welfare consideration to the exclusion of financial considerations.

Control of the reserves, therefore, should remain at the center of political decision in order to ensure management consistent with the best public interest of the country. The social security agencies should not be left free to operate on a commercial basis, seeking the highest attainable monetary yield, or to operate according to their own interpretation of “welfare.” Rather, the investment decisions should be made on the basis of their productivity, taking into account conditions such as external benefits or market imperfections and the effects on the balance of payments, which are not necessarily considered by private investors. Use of the funds to finance investment in the private sector should not be avoided, however, if such use appears advisable on productivity grounds. Moreover, investment decisions should be made in the light not only of over-all development policy but also of economic trends; for example, in an inflationary situation marked by speculative movements, the investment of social security funds in buildings or in land could be incompatible with a stabilization program.

A rule limiting the use of the social security funds which are channeled to the public sector to the financing of the capital or development budget will not necessarily achieve the best allocation. The capital budget may include items that contribute little to productivity, such as elaborate government buildings or investments in inefficient industries, while many kinds of current expenditures (notably those for education) may increase future productivity. On the other hand, in a particular country there may be practical advantage in a rule restricting the use of social security funds to the financing of investment as conventionally defined, because it may help avoid their dissipation in financing current expenditures without regard to contribution to production, productivity, and taxable capacity.

If the government uses the funds directly or indirectly, it should guarantee a fair rate of return; if there is a capital market, the interest rate on the government obligations should approximate that of other marketable government obligations of similar terms in order to protect the beneficiaries.

Moreover, the government should assume the risk of capital loss on any project it deems necessary for social or economic purposes. For this purpose, it should issue bonds directly or indirectly with its guarantee, and not require the social security institutions to invest directly in the projects. It might invest through economic development banks like those introduced in the Philippines and in Turkey or through state housing agencies like that established in Chile.

One of the more important arguments supporting the full-funding principle against the assessment system is that the establishment of reserves involves a guarantee of the solvency of the program. The investment of the reserves in public debt is a real guarantee, however, only when there are prospects for reasonable monetary stability or when the government undertakes to adjust the nominal value of the securities to make up for any great increase in the price level.

Funding, moreover, does not have the same significance if reserves represent a considerable portion of the national wealth, and interest payments a significant part of the national income, as it does if the program is small. When the amounts involved are large in relation to total income and wealth, the real guarantee for the beneficiaries of the social security program is not provided by the investment policy of the funds alone, but by the general economic policy of the country.28

Accumulated assets and their relation to GNP

Table 8 shows the level of the assets of the social security sector in 27 developing countries and the relation of the assets to GNP. The assets include claims on the government consolidated in bonds and other receivables. Some of the assets shown include investments financed by the social security institutions out of borrowing rather than the accumulation of surpluses. Data for many countries were incomplete and unsatisfactory, and it was necessary to estimate the size and composition of assets. For a few countries, assets were estimated on the basis of the surpluses of the consolidated social security sector, neglecting, therefore, the interagency debt and the capital gains or losses. The data should be viewed as indications of magnitude rather than as precise measurements. The assets ranged from less than 0.5 per cent of GNP in Burma, Honduras, Nigeria, and Mauritania to 20.6 per cent in Ecuador. The percentage was also fairly high in Chile, the United Arab Republic, Malaysia, Uruguay, and Panama.

Table 8 excludes some developing countries because their social security assets are negligible (the Republic of China, Colombia, Ghana, the Malagasy Republic, Tanzania, and Upper Volta), or because the assets data are not available (Congo (Brazzaville) and Dahomey).

Accounts due from the government and employers (receivables) are considerable in many Latin American countries (e.g., Argentina, Brazil, Costa Rica, Ecuador, Nicaragua, Paraguay, Panama, and Uruguay). See Table 9. Considerable claims also exist in Colombia and Mexico, for which precise information is not available.29 Claims on the government which have been consolidated in the public debt in some countries (Brazil and Argentina) are excluded from the table.

Composition of assets

Legislative provisions govern investments of the reserves of the social security agencies in many countries, whether to assure government access to this financing or to limit the government’s use of it. In a number of countries the reserves are invested in certain types of securities only up to prescribed percentages; in others the surpluses may be invested in certain securities only with government approval. Government authorities of some countries determine certain types of investment.30 Some institutions, however, have substantial autonomy in investment policies.

Table 8.

Social Security Assets: Amount and Relation to Gross National Product, 27 Developing Countries, Recent Year

(Amount in millions of national currency)

article image
Sources: See country notes in the Appendix (p. 362).

Estimate based on annual excess of receipts over expenditures.

In March 1965, total assets were £ 10 million.

Per cent of gross domestic product.

Including private provident funds in 1963 (£973 million), the assets were over 16 per cent of GNP.

¢368.8 million in 1965.

Private and public provident funds; in 1960, the last available year, public provident funds represented less than one half of the total.

National income.

Excludes receivables; includes M$N 9.1 million of interagency loans.

Includes Ur$158 million of interagency loans.

Table 9.

Social Security Assets: Claims on the Government and Other Employers, and Their Relation to Other Assets and Gross National Product, 8 Developing Countries, Recent Year

(Amount in millions of national currency)

article image
Sources: See country notes in the Appendix (p. 362).

Excludes claims consolidated in public debt, amounting to Cr$294.3 billion in Brazil, and M$N 69.8 billion in Argentina.

Arrears of employers were estimated at M$N 45 billion in 1964.


Increase in claims on the Government during 1962-65.



Table 10 shows data on physical and financial assets of the social security sector in a number of developing countries. (In Table 10, assets exclude unfunded claims on the government and unpaid accounts of private employers but include special bonds issued by the government to fulfill its obligations, as in Brazil, Argentina, and Ecuador.) The social security sectors in several countries do not appear to have any investment in physical assets such as land, apartment and hospital buildings, houses, and medical facilities. In over one third of the 26 countries covered by Table 10, the funds are all invested in financial assets. On the other hand, in no country are the funds all invested in physical assets; however, in several countries (e.g., Mexico, Honduras, Paraguay, Guatemala, and Costa Rica), one half or more is so invested. In the remaining countries of the group shown in Table 10, physical assets ranged from 1.6 per cent of total assets for Brazil to 37 per cent for Chile.

Table 10.

Social Security Assets: Composition, 26 Developing Countries, Recent Year1

(Amount in millions of national currency)

article image
Sources: See country notes in the Appendix (p. 362).

For some countries, more recent years are used in this table than in Tables 8 and 11, which require data on GNP and composition of financial assets not available in more recent years.

Excludes unfunded claims on the Government and other employers.

Assets are mostly financial.

Assets are over 80 per cent financial.

Assets are about 50 per cent physical and 50 per cent financial.

Main institution only; excludes claims on the Government and employers.

Little information is available on the composition of the physical assets of the social security sector. Hospitals and other medical facilities, as well as hotels, apartment buildings, and houses, are built with funds provided by the social security sector. The construction of hospitals has been one of the more common forms of investment in several Latin American countries, as in Chile, Costa Rica, Mexico, Paraguay, El Salvador, Nicaragua, Ecuador, and Guatemala. In Costa Rica, in the 4 years 1962-65, total investment of ¢ 50 million for hospitals represented a large part of the available resources; in Paraguay, the main institution, the Social Welfare Institute (IPS), is in process of constructing the central hospital at a total estimated cost of £ 1 billion, of which about one half will be financed by a German loan. In El Salvador, total expenditures for construction of hospitals amounted to about ¢0.8 million annually in 1963 and 1964, and larger investments are planned for the following years. In Ecuador, total investments for hospitals and buildings amounted to S/113 million in 1962 and to S/102 million in 1963.

Table 11.

Financial Assets of the Social Security Sector: Composition and Relation to total Assets, 18 Developing Countries, Recent Year

(Amount in millions of national currency)

article image
article image
Sources: See country notes in the Appendix (p. 362).

Excludes unfunded claims on employers and on the Government.

Includes unfunded claims.

Excludes cash and deposits for which data are not available.

Since 1961 a large part of the available resources has been transferred every year to the National Housing Administration (CORVI) to finance low-income and middle-income housing.

Estimated accumulated savings of the private and public provident funds. During 1954-59, accumulated savings of public provident funds amounted to about 42 per cent of the total.

Excludes the assets of private provident funds. Footnotes continued on page 355.

The composition shows the situation for only the main institution—Social Welfare Institute (IPS), whose total assets in 1962 amounted to £ 1,716 million (i.e., they exceeded the total assets of the consolidated social security sector). In fact, the consolidation excludes the inter-agency loans. Total assets of IPS include £ 311 million of loans to the Pension Fund for Government employees and £ 47 million of claims.

Includes also other securities and shares of corporations.

LT 202 million, or 6.6 per cent of total assets in 1960. In the following years, considerable investments were made in stocks and bonds of public corporations.

The composition covers only the Pension and Insurance Authority (total assets, LE 208.4 million).

Investment through the Treasury.

Includes Ur$151 million of interagency loans.

Public debt accounts for over 50 per cent of total assets in 9 of the 18 developing countries shown in Table 11. Social security agencies in 6 countries (Burma, Ceylon, India, Israel, Malaysia, and Nigeria) placed all their assets in public debt. These include 4 countries with provident funds, whose assets are generally wholly invested in government debt. Only in a few countries (Chile, Ecuador, El Salvador, and the Philippines) did public debt held by the social security sector represent less than 20 per cent of the total assets. In Chile, public debt absorbed less than 1 per cent. Several countries (Mexico, Nicaragua, and Guatemala) are excluded from the analysis for lack of data.31

In several countries, the social security sector holds a large part of the total internal public debt (Table 12).32 In a group of 15 countries for which recent date are available, the public debt held by the social security agencies ranged from 1 per cent of the total in Chile to 60 per cent in Malaysia; in 5 countries (Ecuador, Argentina, Panama, Uruguay, and Malaysia), the social security agencies held over 30 per cent of the internal public debt. Probably in some countries (not covered in Table 12) in the early stage of development, public debt held by the social security sector is the only internal public debt outstanding.

Table 12.

Per Cent of Total Internal Public Debt Held by the Social Security Sector, 15 Developing Countries, Recent Year

article image
Sources: See country notes in the Appendix (p. 362).


Investment made through the Treasury is considered public debt.

Excluding floating debt, 52.7 per cent.

In developed countries, public debt is generally the principal type of investment of social security institutions. The U.S. Government securities represent about 44 per cent of the total of the reserves of pension programs administered by state and local governments, and virtually 100 per cent of the reserves of the Federal Government’s old-age and unemployment insurance programs.33 (The private pension funds invest most of their reserves in corporate securities.) Loans to state and local authorities in 1962 formed a large part of the total resources of pension insurance institutions in Finland, Germany, Italy, the Netherlands, Sweden, and Switzerland (Table 13).

Table 13.

Principal Types of Investments of Pension Funds, 7 Developed Countries, 1962

(In per cent of total resources)

article image
Source: Liebing, op. cit., Table 3.

Includes loans to industrial undertakings.

Includes loans.

Basic pension fund.

Financial assets of the social security sector also include items such as mortgages, housing loans, personal loans, stocks and bonds, and cash deposits. While direct investments by the social security sector in real estate (hospital and apartment buildings, hotels, housing, and land) are made in many Latin American countries (e.g., Chile, Brazil, Ecuador, Mexico, and Panama) and in some other countries (e.g., Turkey and the Philippines), such investments are also made indirectly in several countries through mortgages, housing loans, and personal loans. Therefore, an evaluation of the resources devoted to real estate must take into account not only the physical assets held by the social security agencies but also related financial investments.

Mortgages in considerable amounts are held in Chile and the Philippines; in the former they represent about 16.8 per cent of all investments and in the latter 22.5 per cent. Housing loans are important in Ecuador (over 50 per cent of total assets), Panama (15.2 per cent), and the Philippines (9.7 per cent). In Chile, since 1961, a large part of the available surpluses of the social security is transferred to the National Housing Administration (CORVI) to finance low-income and middle-income housing for contributors to the social security system.

Personal loans are granted by the social security institutions in Argentina, Chile, Mexico, Uruguay, and the Philippines.

Funds are not frequently used to purchase corporation stocks and bonds. In only a few countries (e.g., the Philippines, Ecuador, Paraguay, Panama, Chile, the United Arab Republic, and Turkey) were investments made in corporation stocks and bonds. In the Philippines, about 15 per cent of the total assets were invested in private stocks and bonds in 1961. Since 1962, the sizable resources mobilized by the social security sector have been channeled mostly into private investments in industry through the Development Bank of the Philippines, a long-term financing institution owned by the Government. In Ecuador, corporation stock held by the social security sector amounted to 9.0 per cent of total assets in 1963. It represented investments in hotels and in cement and sugar plants. In Paraguay, little recent information is available on the stock investments of the social security sector; in 1962, stocks held by the main social security institution amounted to 5.6 per cent of the assets of this institution. In Panama the social security sector held public corporation stocks and bonds representing 8.4 per cent of total assets in 1964. Corporation bonds in the United Arab Republic accounted for LE 25.7 million, or 12.3 per cent of the assets of the main institution (the Pensions and Insurance Authority) in 1963.

Other financial assets include extensive industrial and commercial loans in Panama, the Philippines, Turkey, and the United Arab Republic, and unspecified loans in Brazil and Chile. Interagency loans are included in Argentina and Uruguay. Investments in public corporations made by the social security institutions in Turkey and in the United Arab Republic in recent years are of considerable importance. In Turkey, more than one fourth of the total investments of the state economic enterprises is financed through the social security system. Since 1964 the financing has been channeled through a State Development Bank, which issues its own securities and transfers them to the social security agencies. In the United Arab Republic the Treasury invests a part of the available surpluses directly in Government enterprises. The amount of those investments cannot be estimated because the Government enterprises are included in the public sector and the social security surpluses are used to finance the investments of the public sector as a whole; in 1963/64 the surpluses financed almost one fourth of these investments.

Cash and deposits are not always separately disclosed. When reported, they generally amount to 4-9 per cent of total assets. In a few countries the proportion was much higher (e.g., Libya, 80 per cent; El Salvador, 48.6 per cent in 1959 although the amounts were small; Turkey, 27.6 per cent; and the Philippines, 14.3 per cent).

The impact of the use of surpluses

This final section considers the impact of the use of social security surpluses for (1) investment by the government and (2) direct investment by the social security institutions.

The data above show that the greater part of the social security reserves has been channeled directly to the government in exchange for its obligations. It is difficult to evaluate the economic productivity of the resources invested in public debt, since it is nearly impossible to trace the flow of funds; it is possible, however, to examine from a theoretical and practical point of view the impact of the alternative ways of channeling the funds to the government.

Investments in public debt by social security agencies often receive an inadequate rate of return and lack marketability. Moreover, this kind of investment, like other fixed claims, is subject to the risk of depreciation in real value because of inflation. But perhaps the main problem concerns the government’s use of the resources drawn from the social security agencies.

If the money borrowed by the government from the social security institutions is used productively to finance investments in enterprises or in economic and social infrastructure—such as roads, harbors, storage facilities for agricultural products, water supply, school and health facilities, and housing—future productivity will be increased and greater resources will be available to meet social security obligations in the future. On the other hand, if the money is employed to finance government expenditures which do not increase future productivity, future national income available to meet social security obligations and for other purposes will probably be diminished to some extent by the operation of the social security system since personal and corporate savings are likely to be somewhat reduced by the payment of the social security contributions.

The direct monetary return on investments does not necessarily coincide with their social product. Investment in state or private enterprises, which may be made directly or through a development bank acting as an intermediary, can generate not only an increase of future national product but also a monetary return. On the other hand, investment in infrastructure, hospitals, schools, and the like may enlarge the national income and wealth and the potential tax base but produce a direct monetary return only to the minor extent that fees are charged for some of the services provided. While investment in housing can produce adequate returns, rents or mortgage terms for public low-income housing are usually so favorable to occupants that investment returns are small. If nonremunerative investments are made, the government will have to resort to new or increased taxation to pay an adequate return on the social security funds. The need for additional taxation to service the debt will also arise, of course, if the debt is subscribed by lenders other than the social security sector.

Investments in hospitals and other medical facilities, schools, and housing, should not be excluded if they rank higher than other alternatives in a scale of priorities established on the basis of social and economic benefits. These investments can have a high social value for purposes of income redistribution. Moreover, these investments, particularly in hospitals and in school facilities, can increase the productivity of the economy; sometimes they can take advantage of foreign assistance by providing local matching funds without which the aid may not be available.

In certain circumstances, the use of the social security surpluses for stabilization34 can have a highly favorable impact on production. For example, in Argentina, a part of the surpluses in 1963 was held as time deposits with the Central Bank to be sterilized instead of being lent to the government sector. If such sterilization increases the future growth of the economy and arrests an inflationary process, no better alternative could be found for the use of the surpluses, in the interest both of the national economy and the future pensioners. In fact, there is better assurance that the real value of their pensions will not be eroded.

It is much easier to analyze the use of the surpluses directly invested by the social security agencies because of the analogies it presents with investments made by the government.

Use of the funds by the social security agencies for personal consumption loans is subject to the same criticism raised against government channeling of the funds into consumption expenditures. Nothing is added to the stock of assets of the country—only a redistribution of consumption is made within the group of contributors. In the future the debtors of the funds will have to reduce their level of consumption to repay their obligations. Quite often, however, the interest on the loans is below the market rate so that, in effect, the users of the funds are subsidized by the other contributors. This situation cannot be approved on grounds of equity or efficiency.

Social security institutions frequently grant housing loans and mortgages to the contributors, under the rationalization that the contributors are, after all, the owners of the funds. But this reasoning does not seem acceptable on grounds of equity. A large-scale program for low-cost residential housing should be open to everyone, under specified conditions—not only to those participating in the social security program. Such investments generally benefit those who already enjoy an advantageous position as wage or salary earners, and may preclude meeting pressing needs of the poorer population for low-cost housing and other services. Often, insured workers who have the use of the funds are subsidized by the remainder of the contributors when special advantageous conditions are granted and inflation is in course. The inflation risk is a strong argument against personal loans to participants. In some of the Latin American countries, where personal loans are important, a large part of the real benefits of social security has gone to the minority of participants who were lucky or influential enough to obtain personal loans or housing loans. With inflation, this kind of loan, unlike other fixed claims, results in a redistribution among participants rather than a redistribution between sectors of the economy.

Social security institutions often prefer direct investment in real estate, particularly in the form of apartments and other urban buildings, to financial investments, such as bonds, mortgages, and loans. This preference may involve a conflict between social security objectives and general development objectives. Real estate investments, though less subject to the erosion of value by inflation, are fairly easy to manage and are fairly safe. On the other hand, investment in housing may make a relatively small contribution to economic development. In any case, investment in luxury apartments and speculative land is objectionable because it does not contribute as much to the attainment of increased production and higher standards of living as investment in low-cost housing does.

In several Latin American countries the real value of the financial assets of the social security sector has declined substantially over the years because of the long-continued inflation. In Argentina, for instance, the real value of assets owned by the social security sector, consisting mostly of public debt, declined by over 90 per cent in the period 1950-61; in the same period, large erosions of the real value of the reserves occurred also in Brazil and Uruguay, where most of the assets are government bonds, and in Chile, where an appreciable part of the reserves are personal loans and mortgages.

For government bonds, this erosion represents a redistribution from the group of participants to the community at large.35 In any case, shrinkage in value explains why social security institutions are reluctant to invest their reserves in financial assets in the face of an inflationary situation in which they are unprotected. In only one country (Israel) were government securities held by the social security agencies protected against inflation by an index clause. In this way the Government can guarantee the pensions against a decline in value, for example, by providing payment of pensions adjusted for changes in the cost of living or wage level. This poses a financial problem for the social security system if assets are invested in fixed claims such as government bonds.36

In several countries direct investments are made also in public and private enterprises. This form of investment is highly advisable for the best exploitation of the country’s resources, since it increases future production. Moreover, private and public utility enterprises (e.g., electric power, telephones, water supply, and transport) are likely to meet in a high degree the test of continuity and stability in earnings that social security institutions often require,37 provided there is no threat of inflation. But many serious institutional problems arise in finding suitable enterprises and in investing in private corporations, without involving the social security institution in the control or management of the business.


Country Notes

Unless otherwise indicated, the figures for gross national product (GNP) and gross domestic investment (GDI) used in the paper are from the International Monetary Fund, International Financial Statistics, and those on the internal public debt from the United Nations, Statistical Yearbook, 1964. For Latin American countries, see International Bank for Reconstruction and Development (IBRD), Financial Aspects of Social Security in Latin America, Washington, 1962 (mimeographed); Pan American Union, New Orientations in the Field of Social Security, 1963-1964 (Washington, 1964); and Conferencia Interamericana de Seguridad Social, Séptima Réunion, Memoria de Labores (Mexico City, 1964). For African countries, see D.S. Gerig, “Social Security in the New African Countries,” op. cit. (fn. 2, p. 325). For the structure of social security programs throughout the world, see also footnote 2.

For the operations of the social security systems in several countries up to 1960, the source is International Labor Office (ILO), The Cost of Social Security, 1949-1957 (Geneva, 1961), and The Cost of Social Security, 1958-1960 (Geneva, 1964).

In the preparation of Tables 4, 5, and 6, government surplus or borrowing is that computed by International Financial Statistics, in the “Government Finance” section and when this was not available, in the line “Claims on Government” included in the “Monetary Survey” section. Also used were nonconfidential data obtained in the course of Fund missions to these countries, from government budgets, and from similar sources. For individual countries, additional sources, if any, are listed below:

Argentina: Until 1961, Ministerio de Trabajo y Seguridad Social, Comisión Asesora Permanente de Seguridad Social, Análisis Económico Financiero de las Cajas Nacionales de Previsión Social, Periodo: 1950-1961, Series Estadísticas, 1963.

Brazil: Brazilian Institute of Geography and Statistics; Moacyr Velloso Cardoso de Oliveira. “Social Security in Brazil,” International Labour Review, Vol. 84 (1961), pp. 376-93; and E. Fischlawitz, Problemas Cruciais de Previdencia Social Brasileira em 1964 (Rio de Janeiro, 1964).

Burma: ILO, Report to the Government of the Union of Burma on the Further Development of Social Security (Geneva, 1964).

Ceylon: Department of Census and Statistics, Statistical Abstract of Ceylon, 1963; Robert J. Myers, Social Security in Ceylon, prepared under the auspices of the U.S. Agency for International Development, Ceylon, 1962; and on the social security assets, Central Bank of Ceylon, Annual Report, 1964.

Chile: E. Miranda Salass, “La Seguridad Social en Chile,” Seguridad Social (Mexico City) July-August 1962; Chile, Balance Consolidado del Sector Público de Chile, 1960-1962 (Santiago, 1964); and L. Santibañez and E. Miranda, Investment of the Chilean Social Security Surpluses, Universidad de Chile, 1965. The social security assets for the year 1962 have been estimated by adding the surpluses of 9 main agencies in 1961 and 1962 to the 1960 assets of 32 agencies; for these assets, Directión de Estadística y Censos, Finanzas, Bancos y Cajas Sociales, 1963.

Colombia: LOS Seguros Sociales en Colombia, Revista Iberoamericana de Seguridad Social (Madrid, 1961).

Congo (Brazzaville): Caisse Nationale de Prévoyance Sociale; for GNP and GDI, Plan Intérimaire de Développement Economique et Social, 1964-1968 (Brazzaville, 1964); ILO, Rapport sur le Cycle d’Etudes de Sécurité Sociale pour les Pays d’Afrique d’Expression Française (Geneva, 1963).

Costa Rica: Caja Costarricense de Seguro Social, Departamento Actuarial y Estadístico, Anuario Estadístico, 1963 (San José, 1964); and, Ministerio de Economía y Hacienda, Memoria Anual, 1962 and 1963.

Dahomey: Banque Centrale des Etats de l’Afrique de l’Ouest, Notes d’Information et Statistiques, Paris, January 1965; Caisse de Compensation des Prestations Familiales et Accidents du Travail, Bilan Général, 1962; and ILO, Rapport au Gouvernement de la République du Dahomey sur l’Assurance Pension (Geneva, 1964).

Dominican Republic: Conferencia Interamericana de Seguridad Social, Séptima Reunión, Memoria de Labores (Mexico City, 1964).

Ecuador: Instituto Nacional de Previsión, Boletín de lnformaciones y Estudios Sociales y Económicos, 1963 and 1964; and Banco Central del Ecuador, Memoria, 1963.

El Salvador: IBRD and IDA, Financial Aspects of Social Security in Latin America, Washington, 1962 (mimeographed); and Social Security Institute budgets for 1963 and 1964.

Ghana: Social Security Act, 1965.

Guatemala: Institute Guatemalteco de Seguridad Social (IGSS), Informe Anual de Labores, 1963-64.

Honduras: Institute of Social Security, Anuario Estadístico 1963 (Tegucigalpa, 1964).

India: D.R. Khatkhate and K.L. Deshpande, “Estimates of Saving and Investment in the Indian Economy, 1950-51 to 1962-63,” Reserve Bank of India Bulletin, Vol. XIX (1965), pp. 314-33; Ministry of Labour and Employment, Report 1963-64, Vol. 1; Indian Labour Journal, December 1963, March and May 1964; and Provident Fund Commissioner, ‘The Working of Employees’ Provident Fund Scheme,” Annual Report. The assets of the provident funds were estimated on the basis of the annual surpluses since 1950/51.

Israel: Statistical Abstract of Israel and Israel, Government Yearbook.

Libya: ILO, Report to the Government of Libya on the National Social Insurance Institution and the Investment of Its Funds (Geneva, 1964); and “Social Security and I.L.O. Technical Co-operation in Libya,” International Labour Review, Vol. 91 (1965), pp. 292-320.

Malaysia: Figures on the States of Malaya, Bank Negara Tanah Melayu [Central Bank of Malaya], Annual Report and Statement of Accounts, 1962-64; Monthly Statistical Bulletin of the States of Malaya, August 1964; Monthly Digest of Statistics (Singapore), Vol. III, 1964; and ILO, Report to the Government of the Federation of Malaya on Social Security (Geneva, 1960).

Mali: Institut National de Prévoyance Sociale, Rapport Moral et Financier, 1962.

Mauritania: ILO, Rapport du Gouvernement de Mauritanie sur la Législation et l’Administration des Régimes de Prévoyance Sociale (Geneva, 1964); ILO, Rapport sur le Cycle d’Etudes de Sécurité Sociale pour les Pays d’Afrique d’Expression Française (Geneva, 1963); and for GNP and GDI, Ministère de la Planification, “Etudes Economiques Ouest Africaines,” Comptes Economiques, No. 6, 1963.

Mexico: Social Security Institutions (ISSTE and IMSS); Conferencia Interamericana de Seguridad Social, Séptima Reunión, Memoria de Labores (Mexico City, 1964), 2 vols.; División General de Estadística, Anuario 1962-63; Banco de México, Informe Anual, 1962 and 1963; Secretaría de Hacienda y Crédito Público, Presupuesto General de Egresos de la Federación, 1963; and IBRD and IDA, Financial Aspects of Social Security in Latin America, Washington, 1962 (mimeographed). The assets of the sector in 1963 were estimated by adding to their amount in 1958 the surpluses realized in the period 1959-63.

Nicaragua: Robert J. Myers, Informe Actuarial sobre el Sistema de Seguro Social de Nicaragua (unpublished), Pan American Union, Washington, 1965. The source for GNP in 1963 is Organization of American States (OAS) and Inter-American Development Bank (IDB), Sistemas Tributarios de América Latina: Nicaragua, Pan American Union (Washington, 1966) [also in English]. Figures for GDI are estimates.

Nigeria: Nigeria Trade Journal, October-December, 1964; Central Bank of Nigeria, Economic and Financial Review, No. 1, 1964; and Report of Accounts of National Provident Fund, 1963. Figures for GNP and GDI are estimates.

Panama: Caja de Seguro Social, Monthly Report, December 31, 1963 and December 31, 1964; and Joint Tax Program OAS/IDB, Fiscal Survey of Panama (Baltimore, 1964).

Paraguay: Instituto de Previsión Social, Memoria, 1962. The value of the assets in 1964 was estimated by adding the surpluses of the sector in 1963 and in 1964 to the 1962 assets.

Philippines: Government Service Insurance System, Accomplishment Report for 1962-64; The Philippines Economy Bulletin, November-December 1963; Robert J. Myers, Social Security in the Philippines, U.S. Department of Health, Education, and Welfare (unpublished), Manila, 1962; Vene Pe Benito, “Social Security in the Philippines,” Bulletin of the International Social Security Association, Vol. XVI (1963), pp. 404-406; for gross savings, The Statistical Reporter, Vol. XVIII, April-June, 1964; and for the government securities held by the social security sector and the loans granted to the Central Bank of the Philippines, Statistical Bulletin, June 1964.

Senegal: Ministère de la Fonction Publique et du Travail, Statistiques de la Sécurité Sociale, 1956-1961.

Tanzania: ILO, Report to the Government of Tanganyika on an Exploratory Social Security Survey with a View to Establishing a National Provident Fund (Geneva, 1963).

Turkey: Turkey, Monthly Bulletin of Statistics, October, 1964; and Robert J. Myers, Report on Social Security Systems in Turkey, U.S. Department of Health, Education, and Welfare (unpublished), Washington, 1961.

United arab republic: Robert J. Myers, Report on Social Security Systems in the United Arab Republic, U.S. Department of Health, Education, and Welfare (unpublished), Washington, 1961; and Jørgen R. Lotz, “Taxation in the United Arab Republic (Egypt),” Staff Papers, Vol. XIII (1966), pp. 121-53.

Upper Volta: Ministère du Travail et de la Fonction Publique, Statistique 1963.

Uruguay: Humberto Vieitz Novo, “Sistema de Previsión Social del Uruguay,” Revista de la Facultad de Ciencias Económicas y de Administratión de Montevideo, June 1963; ILO, Informe al Gobierno de la República Oriental del Uruguay sobre Seguridad Social (Geneva, 1964); Misión Fiscal de OEA-B1D-CEPAL, Contaduría General de la Nación (Washington, 1966); and for figures on internal public debt, Fortnightly Review, Bank of London and South America Limited, February 23, 1963 and February 20, 1965.

Venezuela: Instituto Venezolano de los Seguros Sociales, División de Estadística, Anuario Estadistico 1961; and Consolidated Balance Sheets, 1961 and 1962.

La sécurité sociale, moyen de mobilisation de l’épargne au profit du développement économique


La première partie de cette étude examine la mobilisation, dans certains pays, de l’épargne que représentent les cotisations de la sécurité sociale. La seconde partie passe en revue la politique d’investissement des organismes de sécurité sociale et l’incidence de cette politique sur le développement économique.

Les cotisations au titre de la sécurité sociale, plus avantageuses que les autres impôts sur le plan de la politique intérieure, des structures administratives et de l’élasticité par rapport aux revenus, peuvent four-nir un surcroît d’épargné contribuant à l’expansion économique des pays qui ont institué des programmes consolidés de caisses de retraite et de prévoyance. Les programmes non consolidés sont généralement moins favorables à la mobilisation de l’épargne. Les programmes de sécurité sociale trop ambitieux par rapport aux ressources disponibles peuvent réduire l’épargne.

Dans un certain nombre de pays en voie de développement (parmi les 30 qui ont été étudiés), les programmes de sécurité sociale ont réussi à mobiliser un volume considérable d’épargne. L’épargne nette a dépassé 4 pour cent de l’investissement intérieur brut dans 8 pays, où elle s’ést échelonnée entre 4,4 et 23,5 pour cent, et a representé de 0,4 à 4,2 pour cent du produit national brut (PNB). Dans d’autres pays, l’épargne a été faible; d’autres encore avaient institué des programmes de sécurité sociale qui semblaient entraîner une désépargne. Le champ duplication restreint des programmes consolidés, l’importance des prestations, le non-paiement des versements des employeurs (et notamment de l’état) et l’inflation expliquent que ces pays n’aient pas réussi une mobilisation plus importante de l’épargne.

Dans un certain nombre de pays, les secteurs qui cotisent à la sécurité sociale ont accumulé des avoirs considérables. Dans 13 pays (sur 27 pays étudiés), le rapport entre ces avoirs et le PNB s’ést échelonné entre 6,5 et 20,6 pour cent. Ces avoirs constituaient pour la plupart un élément de la dette publique, élément qui representait 100 pour cent du total de cette dette dans 6 pays et plus de 50 pour cent dans 3 autres.

Le rendement économique des ressources de la sécurité sociale placées en fonds d’état est difficile à évaluer. Dans d’autres investissements, les objectifs des organismes de sécurité sociale sont souvent entrés en conflit avec ceux du développement économique. Au-delà de certaines limites, l’affectation de fonds au logement peut compromettre le développement économique; l’affectation de fonds au crédit mobilier peut entraîner une redistribution injustifiée d’avoirs parmi les cotisants. Par contre, les investissements consacrés aux entreprises privées ou publiques peuvent accroître la production ultérieure et donner un bon rendement, surtout lorsqu’ils sont effectués par l’intermédiaire d’une société financiére de développement.

El seguro social y la movilización del ahorro para fines de desarrollo económico


La primera parte de este trabajo tiene por objeto evaluar la movilización del ahorro proveniente del seguro social en détérminados países. La segunda parte examina las políticas de inversión que siguen las instituciones de seguro social y la influencia que esas políticas ejercen sobre el desarrollo económico.

Las contribuciones al fondo de seguro social, que en relación con otros tipos de contribuciones presentan las ventajas de ser políticamente factibles, fáciles de administrar, y de un alto grado de elasticidad en función del ingreso, pueden ser fuente de nuevos ahorros para la expansión económica de los países en desarrollo que cuentan con programas de inversión para los fondos acumulados por concepto de jubilación y de previsión social. Los programas de fondos circulantes sin respaldo financiero de esa índole ofrecen probablemente menos posibilidades para la movilización del ahorro. Los programas de seguro social demasiado ambiciosos en relación con los recursos de que disponen, pueden contribuir a reducir el ahorro, al tener que hacer ingentes demandas sobre los activos con que cuentan los programas con la garantía de fondos acumulados, y sobre el presupuesto del gobierno.

Según este estudio, los programas de seguro social lograron en general movilizar con éxito el ahorro en varios de los 30 países en desarrollo que aquí se analizan. En ocho de ellos el ahorro neto representó más del 4 por ciento de la inversión interna bruta pues el monto del mismo osciló entre el 4,4 y el 23,5 por ciento, y entre el 0,4 y el 4,2 por ciento en relación con el producto nacional bruto (PNB). El ahorro de otros países fue insignificante y hubo algunos cuyos programas de seguro social registraron desahorros. Factores tales como la cobertura limitada de los programas con fondos de garantía acumulados, las considérables prestaciones que se pagaron, la falta de pago de los aportes patronales (e incluso del gobierno), y la inflación, contribuyeron a frustrar la movilización de un volumen importante de ahorros.

Las instituciones de seguro social de varios países acumularon activos considérables. En 13 de los 27 países que se analizan la relación entre esos activos y el PNB fue entre el 6,5 y el 20,6 por ciento. En su mayoría dichos activos estaban constituidos por títulos de la deuda pública, al grado que en seis países esas inversiónes representaron el 100 por ciento del total de sus inversiónes y en otros tres países, el 50 por ciento.

La productividad económica de los recursos de seguro social invertidos en la deuda pública es difícil de evaluar. En lo que respecta a otras inversiónes han surgido a menudo conflictos entre los objetivos de las instituciones de seguro social y los del desarrollo económico. Cuando se sobrepasan ciertos límites, las asignaciones de recursos para la constructión de viviendas pueden poner en peligro el desarrollo económico, y la asignación para préstamos personales puede acarrear una redistributión injustificable de bienes entre los contribuyentes; en cambio, las inversiónes en empresas privadas y púiblicas, además de servir para incrementar la futura producción rinden buenas utilidades, sobre todo cuando se colocan a través de un banco de fomento del capital.


Mr. Reviglio, a graduate of the University of Turin, was an economist in the Fund’s Department of Fiscal Affairs when this paper was prepared. Since then, he has returned to Italy to join the faculty of economics of Urbino University, Ancona. He is the author of La Teoria delta Curva di Domanda e gli Effetti delle Imposte (Milan, 1965) and has published several articles in Italian economic journals.


European Economic Community, Etude sur la physionomie actuelle de la sécurité sociale dans les pays de la C.E.E., and Financement de la sécurité sociale dans les pays de la C.E.E., Etudes, Série Polítique Sociale, No. 3 and No. 5 (Brussels, 1962); European Economic Community, Exposé sur l’évolution de la situation sociale dans la communaute en 1963 (Brussels, 1964). See also Sozial-statistik-Statistiques Sociales (Luxembourg), No. 3, 1961; No. 4, 1962; No. 1, 1963; and No. 2, 1964.


This definition is broader than that accepted in the United States, where for historical reasons, the field of operation of social security has been limited to the long-term risks (old age, invalidity, and death); and it is narrower than the concept formulated by the International Labor Office (ILO) in that it excludes public expenditures for health which supplement social insurance programs covering only a part of the population, public assistance, war victims and military disablement pensions, and other programs financed directly by the public budget and not by social security taxes.

For a summary of social security programs in all countries, see U.S. Department of Health, Education, and Welfare, Social Security Administration, Social Security Programs Throughout the World, 1964 (Washington, 1964). Other sources include supplemental reports of the U.S. Department of Health, Education, and Welfare; International Labour Review; Bulletin of the International Social Security Association; and Daniel S. Gerig, “Social Security in the New African Countries,” Social Security Bulletin, Vol. 29, January 1966, pp. 29-41.


Argentina, Brazil, the Republic of China, Congo (Brazzaville), Costa Rica, the Dominican Republic, Ecuador, Israel, Mali, Mexico, Nicaragua, Panama, Paraguay, the Philippines, and Upper Volta.


This inclusion does not affect the amount of savings mobilization shown in this paper, because expenditures for health programs are offset by payments from the general budget, leaving no balance.


Notable exceptions in developing countries are the national health programs of Malaysia and Ceylon, and the programs providing for curative medical care in Ghana and Tanzania. (Throughout this paper, data given for Malaysia cover only the States of Malaya.)


Iran, Iraq, Morocco, Peru, and Syria; Iraq had a provident fund beginning in 1956, but in 1965 the fund was transformed to a pension program.


Including (1) several French-speaking African countries (Cameroon, Chad, Niger, Senegal, and Togo) and Cambodia, in which the social security system is limited to work injury, maternity benefits, family allowances, and special programs for public employees; (2) Afghanistan, Haiti, Jordan, Kenya, Korea, Saudi Arabia, Sierra Leone, Somalia, the Sudan, Thailand, Uganda, and Zambia, in which the social security system is limited to work-injury programs and special systems for public employees; and (3) Ethiopia, in which only a public employees’ program is in force.


Including the Central African Republic, Gabon, Guinea, Ivory Coast, Burundi, the Democratic Republic of Congo, Rwanda, and Tanzania.


Mauritania introduced a pension program for employees in the private sector in 1965.


Ghana introduced a provident fund in 1965. The expected surplus (“£G 24 million a year) would place Ghana in the upper part of the table, with a rate of mobilization of around 8 per cent of GDI.


Bank Negara Tanah Melayu [Central Bank of Malaya], Annual Report and Statement of Accounts, 1964.


This criticism cannot be raised against the government transfers to a national health program when the coverage of the program is general and not restricted to certain classes of citizens.


In Tables 1 and 2, Brazil is shown with a considérable amount of resources mobilization. This can be explained by the détérioration of Brazil’s financial situation after 1961, leaving a social security deficit both in 1962 and in 1963.


For the pertinent experience gained by several countries, see Alvin M. David, “Problems of Retirement Age and Related Conditions for the Receipt of Old-Age Benefits,” Bulletin of the International Social Security Association, Year XVII, February-April 1965 (Report IX adopted by the Association at its XVth General Assembly, Washington, 1964); and T. Higuchi, “Old-Age Pensions and Retirement,” International Labour Review (Geneva), Vol. 90 (1964), pp. 333-51.


The term “savings mobilization” is intended to mean any increase in the total amount of domestic savings available for physical capital formation, or for improving the balance of payments (Bent Hansen, “Tax Policy and Mobilization of Savings,” in Government Finance and Economic Development, Alan T. Peacock and Gerald Hauser, eds., Organization for Economic Cooperation and Development, papers and proceedings of the Third Study Conference on problems of economic development, Athens, 1963 (Paris, 1965), pp. 143-55, especially p. 143).


Phillip Cagan, The Effect of Pension Plans on Aggregate Saving: Evidence from a Sample Survey, National Bureau of Economic Research, Occasional Paper 95 (New York, 1965). The conclusion that participation in pension plans does not inhibit or retard saving was also reached by George Katona, Private Pensions and Individual Saving, Survey Research Center, Institute for Social Research, University of Michigan, Monograph No. 40 (Ann Arbor, Michigan, 1965), p. 75. The conclusion that pension programs stimulate people to save was not ruled out in the previous literature. See George Garvy, “The Effect of Private Pension Plans on Personal Savings,” The Review of Economics and Statistics, Vol. XXXII (1950), pp. 223-26; and George Katona, “Attitudes Toward Savings and Borrowing,” in Consumer Instalment Credit, Part II, Vol. 1, Conference on Regulation, National Bureau of Research report to [U.S.] Board of Governors of the Federal Reserve System (Washington, 1957), pp. 450-69, and also his The Powerful Consumer: Psychological Studies of the American Economy (New York, Toronto, and London, 1960), pp. 98-99. Particularly for developing countries, see E.M. Bernstein, “Financing Economic Growth in Underdeveloped Economies,” in Savings in the Modern Economy, Walter W. Heller and others (Minneapolis, Minnesota, 1953), p. 299; and Hansen, op. cit.


Because of the large margin of error, these data should be accepted with caution. Besides the evidence shown in Table 7, see Simon Kuznets, “Quantitative Aspects of the Economic Growth of Nations: V. Capital Formation Proportions, International Comparisons for Recent Years,” Economic Development and Cultural Change (Chicago), Vol. VIII, Part II, July 1960, pp. 72 ff.; and William I. Abraham, “Saving Patterns in Latin America,” loc. cit., Vol. XII (1964), pp. 368-91, especially pp. 382 ff.


For a similar conclusion for ECAFE countries, see “Measures for Mobilizing Domestic Saving for Productive Investment,” Economic Bulletin for Asia and the Far East, United Nations, Vol. XIII, December 1962, pp. 1-26. Data on volume and pattern of saving of the household sector in India during 1950/51-1962/63 indicate that the growing contribution of provident funds to saving mobilization did not prevent an increase of other savings of the household sector. While saving through provident funds increased from 0.4 per cent of national income during this period to 1.0 per cent during 1959/60-1962/63, the ratio of household sector savings to national income increased from 3.4 per cent to 5.6 per cent, over the same time (D.R. Khatkhate and K.L. Deshpande, “Estimates of Savings and Investment in the Indian Economy, 1950-51 to 1962-63,” Reserve Bank of India Bulletin, Vol. XIX (1965), pp. 314-33, Table XIII).


F. Forte, Lezioni di Economia Finanziaria, Vol. I, Teoria Generate, Part II (Turin, 1967).


The incidence of payroll taxes on the employer, however, is not held likely in the prevailing literature. See, for instance, Earl R. Rolph and George F. Break, Public Finance (New York, 1961), p. 398; and Cesare Cosciani, Istituzioni di Scienza delle Finanze (Turin, 1961), p. 516.


Hansen, op. cit.


There is general agreement that premiums are taxes, but there is some controversy about their classification as direct or indirect taxes. The OECD definition (Stone) considers all premiums as direct taxes. Some experts, however, consider employer contributions as indirect taxes, “because they are costs of carrying on business like any other tax on the use of a factor of production; even if they are shifted to the employee, he will not recognize them nor view them as a direct payment out of his income” (Otto Eckstein assisted by Vito Tanzi, “Comparison of European and United States Tax Structures and Growth Implications” in The Role of Direct and Indirect Taxes in the Federal Revenue System, a Conference Report of the National Bureau of Economic Research and the Brookings Institution (Princeton, 1964), p. 222).


See E. d’Albergo, “Caratteri e Ripercussioni delle Nuove Assicurazioni Sociali,” Rivista Bancaria, September 1940, and Economia della Finanza Pubblica (Bologna, 1952), Vol. 1, p. 224. For an opposing view, see G. Parravicini, lntroduzione alia Finanza Pubblica (Florence, 1965), pp. 84 ff.


Commenting on the introduction of the compulsory provident fund in the Indian coal mining industry, A.N. Agarwala, in Insurance in India: A Study of Insurance Aspects of Social Security in India (Allahabad, 1960), p. 568, wrote:

“Although the Coal Mines Provident Fund Scheme was ushered in the midst of warnings from some prophets of gloom, its success has been satisfactory. The workers who initially considered the deduction of provident fund payments from their wages to be some sort of compulsory levy, have now come to realise that the provident fund would be the best friend of their old age.”


Comisión (Prat) de Estudios de Seguridad Social, Deterioro de las Pensiones, Informe No. 8, 1961/62, pp. 25 ff.


Conclusion reached from an analysis of data for 18 developed countries by Margaret S. Gordon, The Economics of Welfare Policies (New York and London, 1963), p. 16. See also Henry Aaron, “Social Security: International Comparisons,” in Studies in the Economics of Income Maintenance, Otto Eckstein, ed., The Brookings Institution (Washington, 1967), p. 44.


It is not the purpose of this paper to try to define these criteria, which depend on the strategy that the developing country should adopt in order to promote rapid economic development. Against the “general” view that investment in the “interests” of contributors is the canon for social security institutions, see Alan T. Peacock, The Economics of National Insurance (Edinburgh, London, and Glasgow, 1952), p. 47. He points out that it is hard to define what these interests are, and that when no adult persons at work are exempted from contributing, it becomes essential for a government presumably acting in the interests of all its citizens to see that investment policy of social insurance institutions in no way conflicts with general economic and social policy, a fact which is likely to affect both the distribution and type of investment undertaken with the funds available.


28 peacock, op. cit., p. 44; Mario Alberto Coppini, P. Medolaghi, Guiseppi Petrilli, and others, Capitalizzazione e Ripartizione (Rome, 1951); Sergio Steve, Lezioni di Scienza delle Finanze (Padova, 1965), p. 373; and Eveline M. Burns, Social Security and Public Policy (New York, Toronto, and London, 1956), p. 190.


In Mexico they amounted to Mex$322 million, or about 14 per cent of total assets, in 1958.


On the restrictions on investment policy of pension and insurance institutes, see Pan American Union, Department of Social Affairs, Sintesis de la Seguridad Social Americana (Washington, 1961); H.E. Liebing, “The Investment of Old-Age, Invalidity and Survivor’s Insurance Fund,” Bulletin of the International Social Security Association, Year XVIII, February-April, 1965, pp. 115-34, especially pp. 117 ff. (Report X adopted by the International Social Security Association at its XVth Assembly, Washington, 1964).


In Mexico (1958), total assets amounted to Mex$2.3 billion, of which Mex$1.3 billion represented financial assets (mostly short-term loans, mortgages, and Government bonds) and Mex$1.0 billion physical assets. During 1960-64, a total of Mex$3.3 billion was invested by the sector, mainly in physical assets (hospitals and purchases of real estate); financial investments (mainly loans to contributors) accounted for about one third of the total.

In Nicaragua, Government bonds are held by the social security agency, but no information is available on their amount. Personal loans to contributors and loans to the National Development Institute are also owned.

In Guatemala (1964), public debt, mortgages, and time deposits represented one third of the total assets.


The amount of public debt held by the social security sector, as shown in Tables 11 and 12, does not include claims on the government that are not consolidated in public debt.


In 1964, old-age and survivors insurance and disability insurance trust funds amounted to over $22 billion, unemployment trust funds to $7.3 billion, group pension funds (including government plans) to $125.9 billion. See Robert J. Myers and Francisco Bayo, “Hospital Insurance, Supplementary Medical Insurance, and Old-Age, Survivors, and Disability Insurance: Financing Basis under the 1965 Amendments,” Social Security Bulletin, Vol. 28, October 1965, Tables 2 and 3; and Statistical Bulletin, U.S. Securities and Exchange Commission, Vol. 24, June 1965, p. 33.


For an analysis of the part played by the reserves in a disinflation policy of a developed country, see Peacock, op. cit., Chapter VI. He considers the availability of the reserves for the government in a debt management policy aimed to support the market without credit expansión. See also Paul A. Samuelson, “Principles and Rules in Modern Fiscal Policy: A Neo-Classical Reformulation,” in The Collected Scientific Papers of Paul A. Samuelson, Vol. II (Cambridge, Massachusetts, and London, 1966), pp. 1271-90.


As Bernstein (op. cit., p. 286) points out, “in these days of large social security reserves, savings on behalf of labor represent an important part of the accumulated wealth that is expropriated to satisfy the excessive demand of one or more of the active sectors of the economy.”


Automatic (or quasi-automatic) adjustment of pensions to changes in the price index has been introduced in Belgium, Denmark, Finland, and Sweden, and to changes in the wage level in Chile, France, Germany, and the Netherlands. See A. Kayser “Adjustment of Old-Age Pensions to Fluctuations in Economic Conditions,” Bulletin of the International Social Security Association, March-April 1962.


Bernstein, op. cit., p. 301.