Implication
of social security system on the employee cost in a country
By
Amlan Ray; Dean, IIPM- Kolkata,
AQ-6, Sector V, Salt Lake, Kolkata- 700091
E-mail: amlan.ray@iipm.edu
Implication of social security
system on the employee cost in a country
Abstract
Employee
cost can some time be lethal for the profitability of a Corporation. We have
witnessed positive reaction of stock market with announcement of retrenchment
plan by an organization. Employee retirement benefit can also be a long term
constraint for a big organization. At the same time, Deloitte report says in
Belgium, the personal medical expenses are reimbursed by the government up to
70-75%; still Belgium has one of the highest employee cost in Europe. In our
study, we have made an attempt to compare the social security structure in a
country and its effect on employee cost. We have chosen 5 countries, USA,
Sweden, Japan, Switzerland and India and analyzed the social security system in
respective countries. We have studied the correlation between employee cost and
social security benefit. Our finding shows that there is no strong correlation
between the employee cost in a country and the social security provided to the
employees. Even, if we do not make a sweeping conclusion, we may arrive at an
understanding that due to the immense benefit of social security system on
employee performance, it is imperative to have a strong social security system to
achieve better corporate performance.
Key words:
social security, employee cost, pension, health care
Introduction
Social
security is an important feature of modern society which ensures that emergency
and post work life need of an employee is secured. The fund for social security
is mostly financed by the beneficiary during his employment. It also gets
contribution from the organizations which employ people. State funding as well
often come into the picture.
Social
security has dramatically reduced old age poverty. It gives the middle class
immunity against inflation and upheavals of the market. It is seen that the poverty amongst old age
are 10 percent against the general poverty level of 12 percent in the United
States of America.
Social
security system varies from country to country. In some countries, there is a
backup system from the Government. In
many countries, the solvency of the security fund is pay as you go. It is
entirely on the individual’s contribution in the fund. In many places, the
employers are heavily obligated to fund the system.
In
our study, we have analyzed the social security funds in depth in five
countries. We have also studied the correlation between the employee cost and
the social security contribution.
2. Literature Review
2.1 Impact of pension schemes on
the performance of Companies
McFarland,
Park and Warshawsky studied whether freezing or closing a defined benefit (DB)
pension plan increases the company’s market value. In their study there was
little evidence that freezing or closing a DB plan increased company’s value.
The study consists of 82 publicly traded US companies that announced freezing
or closing DB during the period of 2003-07.
The
main reason for closing DB plan was cost and volatility reduction. General
assumption is that DB plan freezes/ closes reduce the growth of pension
liabilities allowing more fund to the company. The study paper says “The
decision to freeze/ close a DB plan is perhaps by itself a negative signal of
the company’s prospects.” The study further says “Any positive financial impact
of the plan freeze/ close may be outweighed by negative effects on employee
morale, productivity, attraction, retention and optimal retirement patterns.”
2.2 Social Security and labor
productivity
ILO
report says “Social security helps create a more positive attitude not just to
structural and technological change, but also to the challenges of
globalization and to its potential benefits
in
terms of greater efficiency and higher productivity. “
It
has been found that the economies which are more open i.e. the economies with
high trade: GDP ratio provide high levels of social security. The countries
which are more exposed to the external risks from foreign trade demand a higher
degree of social protection. Thus we may conclude that globalization and social
security go hand in hand.
Social
security is an important factor in maintaining effective business confidence.
Social security benefit acts as a buffer during recession. It helps the
production from falling below a certain level and keep companies in business.
Different
types of social security benefits help in increasing labor productivity. We
understand following from ILO report:
i)
Health
Care system
It
helps to ensure that working people in an organization are in good health and
those who are sick are cured. It reduces the absenteeism due to sickness. Poor
health is one of the major factors for lower labor productivity. If we compare
the productivity of a labor in Punjab with that of a labor in West Bengal, the
labor in Punjab is much more productive. This is due to the better health of
the worker. In many underdeveloped countries, we see workers do not have access
to modern health care. It leads to abysmally poor productivity of the labor
force. Better health care ensures that
laborers are able to cope up with the demand of physical activity in the work.
Better immunization and family health care system ensures supply of future work
force.
Cash
sickness benefit ensures recovery of the workers faster as they do not have the
compulsion of working when they are ill. It also contributes in maintenance of
productivity of the other workers as the infection is not spread.
Maternity
benefit is a must for the health of a working mother and also important for the
reproduction of a healthy future workforce.
Work
injury schemes are also equally important in prevention of the work related
accidents and sickness. It also facilitates rehabilitation of workers who are
injured during work.
ii)
Pension
system
Pension
system ensures weeding out of the workers who are having fallen productivity
due to old age. It ensures new jobs for younger work force.
iii)
Unemployment
benefit
Unemployment
benefit provides the workers with that space he needs to find a suitable work
during the transition period. It enables the person to use his talent and
potential properly. If there is any associated employment and training
services, it helps the worker further.
iv)
Child
benefits
Child
benefit and other associated cash benefits help to ensure that the children are
not deprived of nutrition are other requirement of childhood. In case of poor countries it can be a tool to
prevent child labor and can ensure better attendance in schools. If the
children receive proper education they can be more productive while joining the
workforce.
In
case of unemployment insurance, workers remain more open to the technological
changes and other structural changes.
The
major criticism about socials security system is that the increased percentage
of retirees in any economy and increased longevity raise question about
sustainability of social security system. President Bush commented about
America’s social security system that in 50s, 16 workers were contributing
towards the retirement benefit of one person; today 3.3 workers are sharing the
same. Spriggs and Price (2011) in their paper argue against this. They have
shown that increased productivity of the workers will keep the system running.
They have mentioned correctly that the productivity of the earlier workers with
type writer and telephones cannot be compared with today’s productivity with
Blackburry and Internet. Further while there is increase in the old age
population, children’s share in the population is declining. So, the total
population to working population ratio will not face that major alteration.
Pension fund in different countries
Australian
centre for Financial Studies ranked Netherland at the top and United States of
America at the tenth place as per their respective pension policies.
“The Netherlands’ retirement income system
comprises a flat-rate public pension and a quasi-mandatory earnings-related
occupational pension linked to industrial agreements. Most employees belong to
these occupational schemes which are industry-wide defined benefit plans with
the earnings measure based on lifetime average earnings.”
The
authors suggest following measures for improving pension system in a country:
·
Raising the minimum pension for low-income pensioners;
·
Adjusting the level of mandatory contributions to increase the
net replacement for median income earners;
·
Improving the vesting of benefits for all plan members and
maintaining the real value of retained benefits through to retirement;
·
Reducing pre-retirement leakage by further limiting the access
to funds before retirement;
·
Introducing a requirement that part of the retirement benefit
must be taken as an income stream.
Employee Social Security in
different countries
USA
There
is no intervention from the Government in wage negotiation is USA. Most
employees are covered by the Fair Labor Standards Act of 1938 which regulates
minimum wage and overtime.
Pension
There
are company paid pension plan in USA in addition to the social security
benefits. Companies also require insuring certain types of pension benefit
plans with the Government. For those who are not covered by labor contract,
generally companies provide retirement saving account. Employers and employees
contribute to this fund which provides supplementary pension income to the
employees during old age.
Social Insurance
Old
age, survivors and disability insurance (OASDI) is imposed on the first USD
106,800 of each employee’s wages at the combined rate of 12.4 %. The
contribution of employee and employers are equal.
Separate
Medicare Health contributions are charged to both employee and employer @ 1.45
%. Medicare pays for medical coverage during old age. Self employed persons
require paying both employee and employer contribution. Federal unemployment insurance rate is 6 % on
the first USD 7,000.
Sweden
Labor
law is applied very strictly in Sweden. It has strongly supplemented the system
of collective bargaining.
Wages and benefits
There
is no minimum wage law in Sweden. Voluntary fringe benefits are usually
negotiated collectively. It includes subsidized canteen meal, work wear,
occupational health and medical services, recreational facilities, company cars
and mobile phones. Most of the fringe benefits are taxed.
Pensions
The
statutory state pension is split into two categories: an old age pension, which
is defined benefit plan and the other one, is a premium based plan in which
individual can choose in which funds the pension is to be invested.
The
Swedish pension system is often like a pyramid. At the bottom, National Basic
pension and insurance which is funded by the state. At the middle, we get to
see Occupational based pension and insurance which is provided by the employer.
In addition to these two at the top is Private Pension and Insurance chosen by
any individual.
Old age pension system in Sweden
Social Insurance
The
employer social security contribution is 31.42 % of salary and taxable
benefits. The employee contributions amount to 7 % capped at SEK 30,800 for
2012.
Japan
The
labor standards law regulates the working condition in Japan.
Wages and benefits
The
salary structure of Japan is mostly based on seniority. Pay remains closely
linked to the age of the employee and the number of years of service.
Fringe
benefits and other non basic wage components represent roughly one third of the
total per capita wage. Fringe benefits provided by Japanese companies are much
wider compared to other countries. Some fringe benefits are applicable as per
law including pension contribution, national health insurance, worker’s
compensation and unemployment insurance. Companies also often offer family
allowances, subsidized medical and dental treatment, subsidized meals, holiday
and excursion, housing and recreation.
Pension
Japan
has a national pension programme. Employer’s contribution is 14 % and
employees’ contribution 13 % of annual pay into this pension fund.
Social Insurance
The
average limit of unemployment benefit is 90 to 300 days. An employee and
employer share the premium payments. All employers in Japan are required by law
to participate in unemployment and worker disaster insurance programme.
Switzerland
Swiss
labor law is not very stringent and allows freedom to the companies to
restructure their work force. Switzerland’s main employment laws are the swiss
code of obligations and the law on labor in industry, handicrafts and trade,
supplemented by additional rules.
Wages and benefits
There
is no national minimum wage. Depending on prevailing economic condition, salary
is negotiated between the employee and employer.
Pension and disability Insurance
Federal
old age and disability insurance is mandatory for all. The annual contribution
is 10.3 % of total employee remuneration. It is divided between the employee
and employer.
Employee
pension funds are compulsory under federal law for all employees. These funds
are about 17.4 % of the base salary. The employer has to pay at least half of
the contribution.
Accident Insurance
All
companies must have occupational accident insurance for their employees. This
is mandatory under federal law.
Other Benefits
Other
prevailing benefits are 4 to 5 weeks of holidays. Family allowances are again
compulsory. The contribution varies from place to place. Compulsory
unemployment fund has equal share of contributions from both employee and
employer at 1 % for each party with a ceiling at CHF 1, 26,000 gross salaries.
Health
insurance is compulsory for Swiss citizen but it is not the obligation for the
employer.
India
India’s
labor laws are complex and it is difficult to restructure work force or closing
an industrial establishment.
Wages and benefits
There
is a minimum wage level in India by law. There is the concept of time and piece
rates also in the factories. Statutory benefits such as Provident funds,
pensions and bonuses normally constitute 30-42 % of the basic pay.
Provident funds and Pensions
If
there are more than 20 employees in an establishment, there is requirement of
provident funds and pension contributions. Employer and employee both
contribute 10-12 % of wages. From the employer’s contribution an amount up to
Rs 6500 per annum (8.33 % of wages) goes towards the pension fund and rest
remains for provident fund.
Health and death benefit
The
Employee State Insurance Corporation provides health insurance for workers for
which employers contribute 4.75 % of an employee’s wages and employers
contribute 1.75 % on a monthly basis. There is compensation for accident and
diseases resulting in disability and death. The minimum compensation payable by
the employer is Rs 80000 for death and Rs 90000 for total disability. The
maximum is Rs 4, 57,000 for death and Rs 5, 48, 496 for total disability.
Other Benefits
Under
the Payment of Gratuity Act (1972) an employer requires to pay 15 days salary
for each year of completed services to an employee on completion of 5 years of
service. In excess of 6 month’s gratuity payment is made up to a maximum of Rs
3, 50,000.
Comparative
Social Security in Europe
Table
1
Country
|
Capped
or uncapped social security
contributions
|
As
of an income exceeding
|
Belgium
|
Uncapped
Employees:
13,07%
Employers:
approximately 35%
|
|
Ireland
|
Uncapped
Employees:
approximately 10% but certain
exemptions
apply
Employers:
approximately 10,75% and no
exemptions
apply
|
|
Spain
|
Capped
|
Employees:
6,35% up to a maximum
income
of 38.376,00 EUR
Employers:
approximately 29,7% up to a
maximum
income of 40.384,00 EUR
|
The
Netherlands
|
Capped
|
Employees:
31,15% up to a maximum
income
of 32.738,00 EUR and with a
maximum
exemption of 3.185,00 EUR
Employers:
approximately 19,43% up to a
maximum
income of 48.715,65 EUR with a
maximum
of 7.669,25 EUR
|
Sweden
|
Uncapped
employer contributions
(Approximately
34%)
|
7%
for the employees but only up to a
maximum
income of 42.774,00 EUR
|
France
|
Uncapped
Employees:
approximately 21,7%
Employers:
approximately: 42,10 %
|
|
Italy
|
Uncapped
Employees:
approximately 10-12%
Employers:
approximately 30 to 38%
|
|
Poland
|
Uncapped
Employees:
Health
insurance uncapped 2,45%;
Pension
and invalidity max. 9.890,29 PLN
Employers:
Pension
max. 9.211,49 PLN;
Invalidity:
max. 4.247,10 PLN;
Accident
insurance max. 1.803,60 PLN;
Labor
fund 2,45%; EGBF 0,1%.
|
|
The
United
Kingdom
|
Uncapped
Employees:
approximately 11% but certain
exemptions
apply
Employers:
approximately 12,8 and similar
exemptions
apply
|
|
Germany
|
Capped
Employees and employers together pay
(almost
50/50) approximately 39,55% up to
a
maximum income of 66.000,00 EUR for
pension
and unemployment and up to
45.000,00
EUR for sickness and invalidity).
|
|
The
Czech
Republic
|
Capped
|
Employees:
approximately 11% up to a
maximum
income of 69.563,64 EUR
Employers:
approximately 34% up to a
Maximum income of 69.561,76 EUR.
|
Source:
Deloitte
Table 2
County
|
Pay
|
Social Security
|
Mandatory Benefits
|
Voluntary Benefits
|
Total benefits as % of pay
|
Total costs
|
EU
|
||||||
France
|
33,106
|
12,194
|
2,483
|
662
|
46
|
48,445
|
Belgium
|
33,432
|
11,594
|
0
|
2,173
|
41
|
47,199
|
Sweden
|
31,941
|
10,483
|
1,118
|
0
|
36
|
43,543
|
Germany
|
31,492
|
6,865
|
0
|
1,575
|
27
|
39,932
|
Luxembourg
|
33,432
|
4,570
|
0
|
1,672
|
19
|
39,673
|
Denmark
|
36,322
|
109
|
1,694
|
545
|
6
|
38,670
|
Netherlands
|
30,327
|
3,657
|
0
|
2,426
|
20
|
36,411
|
Finland
|
28,402
|
2,508
|
4,938
|
284
|
27
|
36,132
|
UK
|
31,289
|
2,003
|
0
|
2,347
|
14
|
35,638
|
Austria
|
26,765
|
5,862
|
412
|
669
|
26
|
33,708
|
Italy
|
22,968
|
7,667
|
2,042
|
230
|
43
|
32,905
|
Ireland
|
26,522
|
3,183
|
0
|
1,989
|
20
|
31,694
|
Spain
|
19,307
|
6,101
|
0
|
965
|
37
|
26,374
|
Portugal
|
10,671
|
2,534
|
762
|
107
|
32
|
14,075
|
Greece
|
9,928
|
2,776
|
865
|
149
|
38
|
13,718
|
Japan
|
45,654
|
5,922
|
0
|
5,022
|
24
|
56,598
|
USA
|
40,601
|
3,106
|
528
|
3,248
|
17
|
47,483
|
India
|
1,654
|
365
|
0
|
0
|
22
|
2,019
|
China
|
1,231
|
535
|
0
|
62
|
49
|
1,827
|
Source:
Mercer Human Resource Consulting
We
find there is wide variation in salary amongst the European countries. In spite
of high
provision
of benefit in EU, EU employee cost is 35 percent lower than US and 60 percent
lower
than
Japan.
Now
when we calculate the Pearson’s correlation coefficient between Social Security
and Total employee cost, we find it = 0.587318. It shows there is a correlation
but it is not significantly strong.
Chart 1
Scatter Diagram between Total costs
vis-a vis Total Social security
Further
when we compute the percentage benefit and the total employee cost, we do not
find any correlation. It stands at -0.23437.
On
the basis of above, we can infer that there is no strong correlation between
the social security provided to the employees and total employee cost.
Chart 2
Scatter diagram between Total cost
vis- a – vis Benefits as a % pay
Conclusion
From
our study and review of existing literature it is evident that social security
benefit necessarily does not mean increased labor cost. At the same time social
security comes with a bouquet of benefit for the corporation at micro level and
business as a whole in the macro level. It helps in improving productivity in
the short run and in long run gives us supply of healthy and better educated
work force. It helps in reducing old age poverty. The social security system
ensures that people do not continue working with fallen productivity and makes
room for the new generation.
It
is a myth and not based on fact to believe that social security encourages
unemployment or increases absenteeism in the workforce. Social security has
long term impact on the country’s savings rate .It promotes compulsory savings
at all levels.
Administration
of the social security is important. The solvency of the fund needs to be
protected against unforeseen events and market risk. In spite of longevity of
the people, solvency of the social security system can be maintained with
increased productivity of the workforce.
We
may conclude that a pragmatic society will focus on better social security
system in the interest of its people and business.
Bibliography:
1.
( 2008)
Brown Jeffrey R; Guaranteed
Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation; Journal
of Economic Perspectives—Volume 22, Number 1—Winter 2008—Pages 177–198
2. ( 2011) Derthoo Patrick ,Wouters Els, Vanassche
Delphine ; Deloitte European salary survey –Salary costs
versus ‘net wages’ and ‘net spendable income’
3. (
2009) McFarland Brendan, Pang Gaobo, and
Warshawsky Mark ; Does Freezing
a Defined-Benefit Pension Plan Increase Company Value? Empirical Evidence; Financial
Analysts Journal Volume 65 Number 4©2009
CFA Institute
4. (2005)
Spriggs E Willim, Price Lee; ‘ Productivity Growth and Social Security’s
Future’ ; EPI Issue Brief #208 Economic Policy Institute May 11, 2005
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( 2011) http://www.advisorone.com/2011/11/07/top-10-countries-with-best-retirement-systems
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