Understanding social security trends: an expenditure decomposition approach with application to Australia and Hong Kong

ABSTRACT

The social security system is a central feature of the social protection system in all countries. It provides support (generally in cash) for vulnerable groups and thus plays an important role in poverty alleviation and in income redistribution generally. In Western countries, social security expenditure accounts for a large proportion of total government social spending and continues to grow despite sustained efforts to control its growth through a variety of measures. Although social security systems are still maturing in most Asian countries, spending is growing rapidly there too, but with little apparent effect on poverty rates, raising concerns about financial sustainability and policy effectiveness. The expenditure decomposition framework was developed at the OECD in the 1970s and decomposes the growth in total expenditure into changes in three factors: external (demographic) pressures; the benefit coverage ratio; and benefit generosity (or payment adequacy). It can be used to better understand the relative importance of these factors in explaining past spending growth, to make future expenditure projections and to focus on what kinds of policy reforms are needed to keep future spending growth within prescribed limits. This paper applies the expenditure decomposition framework to examine past changes in spending on age and disability pensions in Australia, and in assistance for older people in Hong Kong. The findings illustrate the strengths and weaknesses of the approach and highlight some of the similarities and differences within and between the two countries.

KEYWORDS:

• Expenditure growth
• demographic factor
• coverage ratio
• benefit generosity

Acknowledgements

The author acknowledges the statistical support provided by Kenia Parsons but accepts full responsibility for any errors of fact or interpretation. He acknowledges the assistance provided by Maria Lau and other staff from the statistics section of the Hong Kong Social Welfare Department, but accepts full responsibility for how the data provided have been used and interpreted in this analysis.

Disclosure statement

No potential conflict of interest was reported by the author.

Additional information

Notes on contributors

Peter Saunders

Peter Saunders was the Director of the Social Policy Research Centre (SPRC) at the University of New South Wales (UNSW) from February 1987 until July 2007, and now holds a Research Chair in Social Policy within the Centre. His research interests include poverty and income distribution, household needs and living standards, social exclusion, social security reform, comparative social policy and ageing and social protection in China. His recent books include The Ends and Means of Welfare. Coping with Economic and Social Change in Australia (Cambridge University Press, 2002), The Poverty Wars, Reconnecting Research with Reality (UNSW Press, 2005) and Down and Out: Poverty and Exclusion in Australia (Policy Press, 2011). He was elected a Fellow of the Academy of the Social Sciences in Australia in 1995, and has worked as a consultant for the Australian Institute of Health and Welfare, the OECD, the IMF, the Asian Development Bank, the International Social Security Association, and the Royal Commission on Social Policy in New Zealand. He is currently the President of the Foundation for International Studies on Social Security (FISS) and was the first elected President of the Australian Social Policy Association between 2009 and 2013. In 2015, he was appointed a member of the Advisory Board of the World Bank Commission on Global Poverty.