Principles and functions of pensions and insurance - Social policy

Pensions and Insurance Principles and Functions

The most important principles of organizing national pension systems:

- the maximum possible coverage by the pension system (a set of pension institutions) of the population;

- the joint distribution of the pension burden between the subjects of the pension system - employers and employees;

- providing income in the form of substituting a significant part of the earnings lost as a result of voluntary or involuntary retirement, all insured in cases of old age or disability;

- coverage of social protection against poverty of those categories of citizens who do not have the required insurance experience, as well as in case of loss of a bread-winner;

- the indexation of pensions, taking into account a combination of inflation factors, wage growth in the country and a general improvement in the quality of life.

In order to adequately fulfill both basic functions of pension provision-to prevent poverty among pensioners, to meet their basic needs, to replace lost income, and to maintain the standard of living, pension systems must meet certain criteria, based on principles such as social protection of the population , and the principles of financial opportunity. They should be based on the balance of interests of the insured and insured, the payers of insurance (earmarked) contributions, on the one hand, and the recipients of pensions and benefits on the other, and ensure a certain level of wage replacement in the event of an insured event, while guaranteeing a minimum level of income for all participants of the system. Thus, pension systems are designed to ensure economic acceptability, individual equity and social efficiency.

Economic acceptability and efficiency imply an optimal and fair distribution of burden between payers of insurance premiums (or social target tax) and recipients of pensions, between different groups of policyholders.

Individual justice implies the equivalence (or at least a clear dependence) of the amount of the insured person's participation in financing the pension system and the rights to receive a pension.

To achieve social efficiency , the systems should not only provide minimum guarantees to any participant in the system, but also provide an adequate standard of living for all pensioners, including through intrasocial redistribution .

Achieving economic efficiency is set as the goal of pension reforms in many countries, often at the expense of social2. Achieving economic efficiency implies establishing such a level of redistribution between the active population - payers of insurance premiums or targeted taxes, and retirees, which would not be burdensome for the working population and employers, but would also provide sufficient funds to cover current and future obligations to pay pensions.

In other words, the size of the insurance tariff or the tax rate should be set at a level sufficient to cover the financial obligations of the pension system, but not be excessive, hampering economic growth, increasing labor productivity and reducing the competitiveness of the national economy. The need to achieve individual justice fundamentally differentiates the system of pension social insurance from social assistance systems.

Equivalence of obligations is the main principle that ensures the insurance nature of pension systems of the working population, an effective motivational mechanism that encourages employees to participate in financing of pension systems. It should be noted here that the legitimacy of using the term equivalence within the framework of nationwide pension insurance systems is rather conditional. In fact, only accumulation systems based on the use of individual accounts and conditional savings systems can provide a direct equivalence of the contribution to the financing of the system of the right to receive a pension. In all other cases, it seems more correct to talk about the desire for an increasing connection between the volume of contributions and the size of pensions.

The movement of pension systems based on the principles of social insurance, towards "greater equivalence" (or closer dependence) is one of the main measures undertaken by governments in carrying out parametric or systemic pension reforms. The implementation of the principle of individual equity by achieving a close linkage of the individual contribution of the insured to the financing of the pension system and the volume of pension rights makes it possible to realize the function of compensating for lost income, i.е. to guarantee the size of pensions at a level commensurate with the size of the salary of a particular employee, received by him before the occurrence of an insurance event.

Any pension system must meet these seemingly mutually exclusive principles. Determination of optimal parameters that allow to combine all three criteria that suit all social partners allows to maintain an effective and socially acceptable pension system. At the same time, it is of no fundamental importance whether these tasks are achieved within the framework of one pension program or through the implementation of several separate pension programs.

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