Providing social funds in support of the impoverished
Safety nets may be of three different types - social action programmes, emergency social funds and social investment funds. All three share similar features which distinguish them from traditional central ministries: they are national and multi-sectoral, use targeting, are complementary rather than substitutive, rely on innovative and efficient methods, act in a simpler, faster and more flexible manner, employ highly skilled personnel, are mostly financed by external funds and promote participation of non-governmental activities.
Most developing countries have social security systems which provide social insurance against individual loss of income by sharing the risk among the population. Schemes most commonly cover at least work-related injury and retirement pensions for those leaving work because of age or disability. However, many such schemes are small and limited to urban workers in the formal sector. Usually less than 10% of the population is covered, that coverage beings closely related to income, work skills and the influence of pressure groups. By contrast, the more urbanized, middle-income countries have social security arrangements covering most of the work force, receipts exceeding 5% of GDP.
Social security may distort savings, as expected benefits serve as a replacement. It can also affect the labour market by inducing early retirement and by introducing distortionary marginal taxes on wages.
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