Facilitating contribution collection and financing mechanisms
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One of the key obstacles to social security coverage for those in the informal economy is the payment of contributions in the case of contributory schemes, namely social insurance. For many workers and employers in the informal economy, one or more of the following main challenges constitute effective obstacles to social security coverage: low incomes and limited contributory capacity, volatile incomes and the lack of an employer.
This module stresses specific challenges related to contribution collection and financing mechanisms and explores some policy options to overcome these barriers, based on international experience and guided by ILO social security standards.
- How can contributions be determined in a way that is be better adapted to the needs of workers in the informal economy, to take account of their often low and volatile incomes?
- How can the payment of be facilitated for both workers and employers, as well as the social security administration?
- How can differentiated income categories facilitate the establishment and calculation of contributions? How can they be established?
- How can the subsidization of contributions for some categories of workers from government funds facilitate the extension of coverage?
- Low incomes and limited contributory capacity: Many workers and employers in the informal economy generate low incomes, live in poverty or are vulnerable to fall into poverty, and have limited contributory capacity.
- Volatile incomes: Many workers in the informal economy have volatile incomes, associated with forms of employment with high job insecurity (such as casual work), seasonality, unforeseen shocks, high level of mobility in terms of status/sector of employment and/or self-employment.
- Double contribution challenge: Many workers in the informal economy, particularly those working on their own account, cannot count on the support of an employer for the payment of contributions. In many cases the self-employed may not be in a position to pay the full amount of contributions, which in these cases cannot be shared between workers and employers.
- Multiple employers: Many workers in the informal economy have multiple employers which makes it difficult to identify the respective obligations of each employer. It may also be the case that the social insurance administration may not be able to handle multiple employers.
Adapting the way contributions are determined and paid
- Adapting the frequency of contribution payments to the situations of workers and employers, for instance, considering annual instead of monthly income, or allowing for greater flexibility regarding the scheduling of contribution payments
- Using broad contribution categories to determine earned income
- Using alternative reference values (other than earnings) for the determination of contributions, such as global contributions to facilitate the coverage of specific groups of workers
Facilitating the payment of contributions
- Implementing simplified mechanisms for the payment of social insurance contributions, such as monotax mechanisms
- Expanding access points for the payment of contributions through physical access points, online and mobile phone services
- Collective insurance agreements through workers’ organization or cooperatives
- Allow for contribution payment to be delayed or interrupted, or for temporary suspension of membership
- Providing individual support in preparing declarations
- Ensure continuous contributions through government support
Subsidizing contributions for low-income workers
- Subsidizing social insurance contributions for specific groups of workers with limited contributory capacities, while maintaining incentives for formalization (do not subsidize informality)
- Subsidizing health insurance coverage through the establishment of an integrated health care financing system that combines contributions and taxes to grant universal access to health protection for the population
- Tax incentives for employers to register their workers, such as for domestic workers
- Careful assessment of financing needs and options for the extension of coverage
- Low and volatile incomes constitute important barriers to the extension of coverage to workers in the informal economy. Policies to extend social security coverage will need to address these challenges through (a) adapting the way in which contributions are determined; (b) facilitating contribution payment mechanisms and/or (c) combining non-contributory and contributory financing mechanisms.
- Adapting the way how contributions are determined can facilitate coverage of workers in the informal economy, including through redefining reference incomes for the calculation of contributions, using contributory categories to determine earned income, using simplified contribution and tax payment (monotax) mechanisms, or considering alternative reference incomes other than earnings.
- Facilitating the payment of contributions can further support the extension of coverage, including through the expansion of access points for the payment of contributions, the provision of individual support for the declaration of contributions, unified social insurance contributions, or adapting the timing of contribution collection schedules.
- For workers with limited contributory capacities, it may be necessary to combine contributory and non-contributory financing mechanisms to ensure universal coverage and financial sustainability.
- ILO World Social Protection Report 2017-19: Universal Social Protection to Achieve the Sustainable Development Goals
- ILO Publication on Financing Social Protection
- ILO report: Fiscal Space for Social Protection and the SDGs
- ISSA Guidelines on Actuarial Work for Social Security
- ISSA Guide on Administrative Solutions for Coverage Extension
- ISSA Guidelines: Contribution Collection and Compliance