ILO | Social Protection Platform

Baseline

The world has surpassed an important milestone: for the first time, more than half the world’s population (52.4 per cent) is covered by at least one social protection benefit, representing an increase of 9.6 percentage points since 2015 (see figures 3.1 and 3.2). Yet, the remaining 47.6 per cent – as many as 3.8 billion people – are left unprotected, without access to any social protection.
In 2023, countries allocated 12.9 per cent of their GDP on average to social protection (excluding healthcare), alongside 6.5 per cent to healthcare, resulting in a total social protection expenditure of 19.3 per cent of GDP. However, there are significant disparities across national income groups, which hide underinvestment in many developing countries.
The financing gap to ensure a social protection floor for all – including access to at least a basic level of income security (SDG target 1.3) and access to essential healthcare (SDG target 3.8) – persists in most low- and middle-income countries. For low- and middle-income countries, the financing gap equals 3.3 per cent of GDP annually (in 2024), with 2 per cent of GDP required for essential healthcare and 1.3 per cent for the five key social protection cash benefits.

Source: World Social Protection Report 2020-22: Social protection at the crossroads - in pursuit of a better future International Labour Office - Geneva: ILO, 2021

Standards and Guiding Principles

Key resources

Financing gap for universal social protection: Global, regional and national estimates and strategies for creating fiscal space

A global call to action to accelerate the achievement of universal social protection (SDG target 1.3) to reduce poverty and inequality

Financing gap for universal social protection

Approach and Technical Support

There is no one-size-fits-all approach for extending fiscal space for social protection. The key principles of Recommendation No. 202 provide a useful basis for defining financing approaches and mechanisms: universality of protection based on broad risk-pooling; solidarity in financing to achieve an optimal balance between the responsibilities and interests among those who finance and benefit from social security schemes; overall and primary responsibility of the State for social protection; social inclusion, including of workers in the informal economy; respect for the rights and dignity of people covered by the social security guarantees; the right to adequate and predictable benefits; and the progressive realization of universal coverage, including by setting targets and time frames. The key sources of financing are domestic regular sources such as progressive taxes and social security contributions, given that the commitments of social protection systems and floors are long-term rather than one-off.

Taxation is one of the key channels for mobilizing the resources to establish universal social protection systems, including floors with a view to provide adequate protection for all persons in need across the life cycle. Countries have a wide range of options to raise tax revenue. The most common in low- and middle-income countries are the rather regressive consumption/sales and value-added taxes (VAT), while the less frequently used are progressive taxation such as on income, wealth and corporate profits –including taxes on the financial sector– as well as property and inheritance taxes.

International competition to attract foreign direct investment has led many governments to reduce the respective tax rates and to otherwise increase tax concessions to corporations. However, there is no consensus on the advantages of granting such concessions in the matter of direct taxes, since the diversion of international investment or the attraction of such flows is determined by many factors, including the availability and quality of infrastructure, an educated and productive workforce, and the quality of institutions. Therefore, countries should examine the cost and benefits of such tax concessions as they may constitute an unnecessary loss of revenue, which could be used to ensure universal social protection coverage.

Social security contributions play a critical role in financing social protection. Social security contributions are linked to legal entitlements and should be considered a deferred wage and a social and economic investment. According to Convention No. 102, social security contributions shall be collected in a manner which avoids hardship to persons of small means and takes into account the economic situation of the Member and of the classes of persons protected. Furthermore, the total of the insurance contributions borne by the employees protected shall not exceed 50 per cent of the total of the financial resources allocated to the protection of employees and their families including children. Evidence has shown that there are no significant employment or formalization gains in reducing contribution rates that have remained stable throughout the twenty-first century. The sole clear outcome that is achieved through a reduction of social security contributions is a wider financing gap for social protection (Calligaro and Cetrangolo 2023).

Regular and high-quality financial forecasts of the social insurance system are an essential step for extending the fiscal space for social protection through contributory revenues and close the financing gap. Actuarial valuations are at the core of these and are indispensable to assess the sustainability of social security programmes, but are also required to assess system adequacy, financing and funding considerations. Actuarial valuations and financial forecasts are based on a range of assumptions including life expectancy, labour market participation, scheme coverage, real wage increases and economic growth, and are inherently complex. Findings of actuarial valuations also have an impact on investment decisions, benefit calculations and communication.

Sovereign debt should not be viewed as a permanent source of government finance for closing the financing gap, however, managing it effectively can free up resources to increase fiscal space for social protection. Effective sovereign debt management provides important options to expand fiscal space for socio-economic investments with positive impacts on women, children and other population groups. Debt service-related development distress is apparent in many countries. For instance, in Latin America and the Caribbean, the rise of interest payments between 2012 and 2021 curtailed spending on key public services and contributed to a decline in public investment (ECLAC 2023). If a portion of government debt could be renegotiated with lower interest rates, this could free a sizable share of financial resources to devote to these three key areas.

While domestic resource mobilization must remain the cornerstone of national social protection systems, in the case of low-income countries, the financing gap of 52.3 per cent of their GDP is such that international solidarity is absolutely necessary. However, to close such a gap, the current ODA directed to low-income countries would need to be more than tripled and fully allocated to social protection.

Many low-income countries are among the most vulnerable to climate change (IPCC 2023). Social protection is increasingly recognized as a key adaptation strategy, as it is a way to strengthen coping and adaptive capacities, reduce vulnerability and increase resilience (Costella et al. 2023; Sengupta and Costella 2023). In these countries, leveraging international climate financing, including loss and damage funding arrangements, can help reinforce and adapt their social protection systems to ensure that they are better prepared to tackle the impacts of the climate crisis. In addition, social protection is also a central enabling factor for more inclusive and equitable climate action, thus facilitating a just transition.

Achieved in particular by increasing compliance and good governance of social protection systems and the government budget. Social pressure to increase the transparency and accountability of social protection institutions improves provision, trust, and thus compliance.

Engaging in order to increase investments in social protection and enhance policy coherence through the evidence-based assessment of national social protection priorities and the formulation of options for sustainable financing.

Partnerships

The purpose of the ILO SOCPRO partnership with the IMF Strategy, Policy and Review Department is to respond to a specific demand from the International Labour Conference’s recurrent discussion on social protection (June 2021), when constituents asked the Office to engage with the IFIs on social protection, mentioning specifically the IMF. As a result, in 2022, the ILO and the IMF initiated their partnership on financing social protection, which led to collaborative efforts in Iraq, Mozambique, Togo, and Uzbekistan. Collaboration deepened the dialogue with the constituents and authorities and provided more coherent policy advice to governments. A new phase of the ILO-IMF Engagement on Financing Social Protection is ongoing for 2023-2025, joint work will be carried out in 9 countries: Cambodia, Comoros, Eswatini, Lebanon, Morocco, Mozambique, Paraguay, Senegal, Thailand.

Latest ILO Projects and Programmes

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Key Results

Funding gaps

US$ 250,000

On-line tool on financing social protection

Impact: The ILO Universal Social Protection Department is currently exploring external funding resources to develop an online tool on financing social protection to be incorporated in the existing ILO Social Protection Platform. The database will offer an interactive user experience, offering country-level data and proposing solutions to close the financing gap within each country, such as taxes, social security contributions, combat of illicit financial flows, management and restructuring of sovereign debt and foreign aid. Special attention will be given to identifying fiscal space options that could be generated through resources collected via climate change mitigation strategies such as carbon pricing or fuel subsidy eliminations.

US$ 250,000

Second edition of the handbook on fiscal space for social protection

Impact: The ILO Universal Social Protection Department is currently working on an update of the Fiscal Space for Social Protection. A Handbook for Assessing Financing Options. It is often argued that universal social protection systems, including floors, are not affordable and that there is insufficient budget to cover all children, women and men. Through the presentation of a wealth of case studies, the handbook will demonstrate that there are alternatives even in the poorest countries. Internal ILO resources could only partially cover the ambitious extent of such research, therefore ILO-SOCPRO is currently looking for external funds to finalize such research.

US$ 200,000

Development of the ILO Poverty and Inequality tool

Impact: Given the rising interest from constituents in estimating the impact of social protection systems on poverty and income inequality, ILO-SOCPRO has opted to construct a tool based on the methodology presented in the working paper "Combating Inequalities: What Role for Universal Social Protection?". This tool aims to provide scenarios concerning the impact of various social protection benefits and their financing (e.g., taxes used to finance to such benefits) on poverty and income inequality. This initiative will enable governments to evaluate the net benefits of expanding coverage and adequacy of social protection benefits in terms of poverty reduction and income inequality. The development of the tool will be facilitated by the expertise of the ILO Universal Protection Department in crafting such instruments, and it will be hosted on the ILO/QPSS platform, a quantitative platform on social security already hosting other tools.

US$ 150,000

Interagency Social Protection Assessment (ISPA) tool on financing social protection at the country-level

Impact: The ILO has developed the ISPA tool on social protection financing. The aim of the tool is to provide a costing methodology for social protection floors and to present a feasibility analysis in five core dimensions (legal; political; institutional or administrative; social; and economic or technical). The tool is complementary with the financing gaps estimates, which are considered the first step to prompt national dialogues regarding how to find the required fiscal space for social protection. The ILO would like to include at least two countries in the pilot and the financial requirement for each country ranges between US$70,000 and US$150,000, depending on the scope of the work and on the availability of input data.

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