23 May 2023 (The Magazine of Warsaw School of Economics)
On 16 May 2023, a scientific conference Subsidies or Cash Transfers. Dilemmas of Global Response to Inflation was held at the SGH Warsaw School of Economics.
The aim of the conference was to discuss the social aid provided in many countries of the world in response to the post-pandemic increase in inflation. The main dilemma was the relation between the scope of two forms of aid: common subsidies and direct targeted cash transfers to households – the former considered less and the latter more desirable. In most countries, including Poland, the former was clearly dominant.
The conference was prepared by the Department of Economic Policy and Monetary Theory of the Institute of Political Economy, Law and Economic Policy at the SGH Warsaw School of Economics.
Dr Michał Rutkowski, the Global Director for Social Protection and Jobs at the World Bank in Washington D.C., said that the World Bank tracks inflation in more than 180 countries and examines how they responded to the crisis caused by the COVID-19 pandemic as well as the present problems caused by inflation. A question arises of how to find the most effective ways of overcoming the consequences of inflation within social security policies in view of trends in different countries and on different continents.
Dr Rutkowski noted that there is a similarity between the actions taken during the pandemic and the inflation crisis. He claimed that the aid programmes launched during the pandemic period were unprecedented when it comes to social security, and the programmes being launched today have a similarly wide scope, although their impact is smaller. The main difference, however, lies in the role of subsidies (for fuel, food, fertilisers, fixed fees) as intervention tools (beside social aid) in fighting negative effects of COVID-19 or inflation. In response to the pandemic, they did not play any role when the purchasing power of households declined (lockdown), while in the fight against the effects of inflation they were used en masse (during the pandemic time, cash transfers within the social aid dominated). On average, subsidies account worldwide for 33% of all interventions and social aid for 31% (the others amount to: 6% for social security, 6% for labour market programmes, 6% for trade-related interventions and 19% for tax interventions).
Dr Rutkowski emphasised that the introduction of subsidies as an element of social security raises questions about long-term consequences of such a policy. While social aid is an understandable response to the shock, for example, of a pandemic as it is difficult to insure against this type of risk, there are many doubts with regard to subsidies introduced in the current crisis – believes the World Bank expert. He explained that, when a price shock occurs, the administrative response appears to be anti-inflationary, but artificial limitation of price levels may lead to hidden inflation and shortages. Another negative aspect of subsidies – as analysed by Dr Rutkowski – is that the purpose of social security is to help the poor, those at risk of poverty and those hit hardest, and not everyone, so these subsidies will have to be slowly reduced. They are extremely expensive, deprive prices of their market character and change their structure, in effect violating the market mechanism in its allocation and distribution functions, but they are also politically popular.
Professor Agnieszka Chłoń-Domińczak, director of the Institute of Statistics and Demography at the SGH Warsaw School of Economics, raised the issue of megatrends that affect the future of social security in the European Union countries.
They are:
- demographic problems;
- changes in the world of labour, where the priority is not given to contracts of employment for indefinite periods with full access to social security;
- digital revolution brings opportunities and threats to labour markets;
- and global migration processes resulting from climate change.
In addition to these trends, there are additional social security risks, such as those observed in 2021, including, for example, the fact that 16.5% of people aged 20-34 were not in education or work.
As emphasised by Professor Chłoń-Domińczak, the lack of development of professional competences hinders the return to the labour market.
By 2050, the number of people in the EU aged over 75 will rise to 75 million from the current 44 million, which will challenge both the pension system and long-term care. A pessimistic picture of the future is reinforced by the fact that 40% of workers are involved in non-standard forms of employment with limited access to social security, and often resulting not from their choice but a pure necessity. It is not uncommon for employees to operate on the basis of self-employment as sole proprietors.
Despite these disadvantages, a significant part of social security funding in the EU comes from contributions. Professor Chłoń-Domińczak noted, however, that in the event of shocks, such as pandemic, the role of tax revenues in their financing will grow, so it will be necessary to tax, for example, property. As far as the inflation shock is concerned, it is necessary to consider how to introduce mitigation measures also to limit inflation expectations. It seems that from this perspective, subsidies are effective, she claimed.
According to Professor Chłoń-Domińczak, the key issue to consider is also how fiscal policy can make redistribution effective, i.e. well adjusted to the possibilities of the state budget and at the same time satisfying the most urgent social needs. In this context, the researcher postulated treating part of social spending (primarily pre-school education and lifelong education) as an investment in human capital, which allows the application of the golden rule of public finances to ensure financing of social security.
Professor Krzysztof Marczewski, from the Economic Modelling Unit at the SGH Warsaw School of Economics, asked whether the golden rule does not contradict expenses for the elderly (over 80 years of age), which can hardly be treated as investment expenses. Professor Chłoń-Domińczak emphasised that social investments translating into an increase in national income should secure all social groups and in this approach, the golden rule does not contradict spending on the elderly.
Professors: Tomasz Michalski, Adam Śliwiński and Marek Monkiewicz from the Department of Risk and Insurance at the SGH Warsaw School of Economics, jointly presented the issue of supply streams in the social security system. Professor Śliwiński emphasised that they adopted a cybernetic approach focusing on the categories of social security systems and subsystems. The system in this approach is perceived as a set of interacting elements, i.e. entities that have certain properties (attributes) and are interrelated in cooperation. On this basis, it can be concluded that systems should be strict (there is no problem with determining what belongs to them), immutable (elements always belong to the system), complete (each element belongs to one of the subsystems) and functional (function is the criterion for system identification).
Professor Michalski presented the subsystems (subsets of system elements isolated by their properties and relationships) of the Polish social security system: social insurance (old age pension), health care, rehabilitation of the disabled, social aid and supplementary social benefits. The supply streams of the security system include insurance based on the principle of solidarity and reciprocity, savings as an unconsumed part of household or state income and investment, i.e. financial involvement in a given project in order to achieve a certain profit in the future. The expert referred to the difficulties in implementing the idea of social security despite clearly identified streams. This idea, as he put it, is based on social solidarity which is implemented by the state in the form of a commitment of citizens, and not philanthropy. It turns out that in the case of Poland, subsequent reforms of the old age pension system, which is one of the social security subsystems, led to a change in the nature of the supply streams from investments (under the third pillar – the Open Pension Funds – OFE) into savings on the Social Insurance Institution (ZUS) sub-accounts and into contributions on ZUS accounts. There is a problem with regard to specifying the character of these streams and consequently the differences in the risks associated with them; contributions are characterised by the risk of old age, savings – by the risk of access, which is often conditional, and investments – by speculative risk. Professor Michalski appealed for the completion of information policy in order to make the public aware of the specificity of the constantly introduced changes to the pension system (currently there are also Employee Capital Plans).
Professor Monkiewicz noted that there is too little literature on the correlation of supply streams and the related risks. Insurance – as mentioned before – is characterised by the risk of old age, so the event of entering retirement age results in the payment of benefit. The contributory system means that the more we deposit, the more we get when this event occurs. When it comes to investments, our shares will be worth as much as the market values them at the time of payout. At worst, they may be worthless. And savings should be indexed for a given indicator, said Professor Monkiewicz. He sees modern technologies as an opportunity to optimise supply streams. In Poland, it seems that the boundary conditions are met, namely there is a large electronic database available.
The series of speeches was closed by Professor Marek Góra of the Department of Economics I at the SGH Warsaw School of Economics, pointing to the need for accounting for the issue of proportion in the deliberations on social security – if a certain age group receives more and more benefits, others must receive less and less (it looks different in the case of significant economic growth). In view of this, product generating groups must also be taken care of so as not to overburden them too much with social security costs, which makes the golden rule a necessity.
Professor Góra looked at the problem of current inflation in a broad context, emphasising its sources, for example in the actions undertaken by governments during the COVID-19 pandemic, when it was easy to spend money that was not actually available, and there was a widespread awareness that it would result in inflation. According to the speaker, we regressed in the sphere of public finances, because the procedures for spending public money were softened, which in “normal times” would be described as a quasi-corrupt system of spending funds. A question may be asked about other effects the pandemic left behind. Some important historical events come to mind as they significantly transformed the world. For example, the plague epidemic (Black Death) in the fourteenth century became an impulse for the emergence of proto capitalist economies as a result of the shortage of labour and increase in the price of workforce, while both 20th world wars increased the role and importance of women in society, said Professor Góra.
He also wondered if COVID-19 “plowed” our lives so much that it should become an impulse for something new and better at the same time, or it left only costs. According to him, there were certainly major changes in the world of labour, as remote work became widespread to “detach” the place of work from its performance, reviving discussions about its effectiveness. Undoubtedly, social ties were weakened, and it is difficult to make them return to their pre-pandemic form. The expert wondered if perhaps all we have to do is to maximise what is good and to minimise costs in the post-covid world. In the current situation, we wonder whether the fight against the costs of inflation should be done through subsidies or through cash transfers. On the one hand, it is said that people themselves better manage their own funds, but on the other hand, there are lower costs of their joint allocation, e.g. in the case of kindergartens, which in addition equalise the chances of social advancement, noted the professor. As he pointed out, money transfers have a disadvantage as they make citizens clients of politicians, and the appropriate distribution of transfers can “buy” elections. However, regardless of whether we are considering the introduction of subsidies or transfers, we have no guarantee that in the future money will be secured in the state budget to finance them, he claimed.
The discussion panel was opened by Dr Zofia Czepulis-Rutkowska, a specialist in the field of social security for the elderly. She raised the issue of financing long-term care created by financial benefits and services necessary for normal operation. Dr Czepulis-Rutkowska referred to the fact that the needs of individual people change over time, so at a certain moment someone may require financial support, and later there may be a need for hospital care. Unfortunately, long-term care is not widely perceived as a risk, hence the lack of building special systems of this type of care. It is implemented in most cases within the framework of existing forms of social aid and health care, which affects the difficulties in financing, especially in the face of the increase in costs (in the Scandinavian countries, they already amount to about 3% of GDP), said the expert. The population is ageing, so the natural course of action is to formalise the long-term care (more expensive than when families take care of loved ones), which allows families to remain in the labour market. There is also a desire to demedicalise care, which may be facilitated by the trend of healthy ageing: the healthier life style we have, the less often we go to hospital, she said.
Dr Czepulis-Rutkowska claimed that technology can become helpful in reducing the cost of care, which she supported by the example of the use of artificial intelligence in Japan in the field of long-term care. Unfortunately, its funding streams will always remain insufficient, which is why it is necessary to combine public and private funding,” she said. As the case of Germany shows, the dominance of the contributory pension system does not fully meet the needs. This is also true about the United States, where private financing dominates.
Professor Iga Magda from the Department of Economics at the SGH Warsaw School of Economics referred to the dilemma of subsidies vs transfers. According to her, the strength of subsidies is better targeting of funds than in the case of transfers, because they allow for financing desirable purchases, e.g. healthy food, not alcohol. In the short term, when shocks occur, a kind of policy mix should be used, i.e. subsidies or transfers should be introduced depending on the requirements of the situation, and sometimes support for the care for the elderly should be introduced. In the long term, however, all aid must be targeted at the poorest, as in the case of transfers. Professor Iga Magda also noted that it is worth considering the effectiveness of actions from a gender perspective, because some programmes are clearly in favour of either women or men.
Professor Agnieszka Chłoń-Domińczak stressed the need to conduct demographic policies in a broad context, and not only from the point of view of fertility and supporting almost exclusively families with children. In this context, Professor Marek Góra stressed that the demographic programme is badly prepared, while in terms of financing collateral, it seems that the tax source for people 85+ is appropriate, while younger people should use the contributory system.
Professor Tomasz Michalski sensitized to the need for information when it comes to the need to extend the retirement age as an action necessary to meet the discussed challenges.
Professor Wojciech Pacho, Head of the Department of Applied Economics at the SGH Warsaw School of Economics, asked whether the research on the discussed issues takes into account only the direction from inflation to social security, or whether the impact of security on price increases is also examined. Professor Feliks Grądalski noted that in the discussion on inflation, its source is not without significance when we want to find means to cope with it. According to the professor, we deal with supply inflation caused first by the pandemic and now by the war. A behavioural component is also important, i.e. the reactions of entities that justify raising prices with the occurrence of inflation. This can be counteracted by introducing instruments encouraging savings based on valorisation. Transaction demand would then be transformed into savings demand.
Professor Marczewski added that in relation to the fight against the effects of inflation, subsidies can be justified by the fact that no social group is responsible for the war, as a result of which the prices of raw materials increased, so helping only selected groups would be controversial. Subsidies are therefore easy to implement politically and technically, and when the authorities are weak, they must use such measures. According to the professor, it is also worth noting that the introduced subsidies are counterproductive to long-term goals, e.g. the Sustainable Development Goals.
Finally, Dr Michał Rutkowski stressed the fact that aid programmes during the COVID-19 pandemic were to be temporary (6 months maximum), but in some countries it is impossible to finish them for political reasons. In the case of programmes to fight the effects of inflation, their temporary nature is also indicated. In addition, there were problems connected with the fact that the exogenous impulse that caused inflation (supply shock) entailed a behavioural component resulting in higher inflation expectations. Dr Rutkowski referred here to the issue raised by Professor Grądalski and Professor Pacho.
Subsidies, which were widely used to fight the social costs of inflation, proved to be very harmful in some countries (e.g. Latin America). Where fuel subsidies had been removed for decades, they were reinstated, undoing previous efforts. However, they are used due to the ease of their implementation and the possibility of addressing, although in the era of technological changes, cash transfers can be addressed more effectively, said Dr Rutkowski.
In social security financing, more attention should be paid to the need to move away from the strict distinction between the categories of security system supply streams. The world is changing and the number of contributory systems that must be co-financed from the state budget, i.e. from the tax system, is growing. Therefore, we should talk about a mixed system, in which funds for this purpose must be secured, said Dr Rutkowski. A question may be also asked how to finance social security while maintaining the golden rule of public finances. It turns out that it is possible if we treat spending, for example, on lifelong education (including on-the-job learning) as investment in human capital. Perhaps the pandemic will be a permanent impulse for changes not only in this area, but also in the perception of social security in general?
Dr Małgorzata Korczyk, assistant professor at the Department of Economic Policy and Monetary Theory at the SGH Warsaw School of Economics.
The scientific conference Subsidies or Cash Transfers. Dilemmas of the Global Response to Inflation was the second conference on social policy in the world perspective, which was attended by Dr Michał Rutkowski, the Global Director for Social Protection and Jobs at the World Bank. The first conference held on 21 March 2022 was entitled “Social Security in the Pandemic Period. How Did the World Respond?”
The conference was organised by the Department of Economic Policy and Theory of Money, at the Institute of Political Economy, Law and Economic Policy in the Collegium of Management and Finance. It was officially inaugurated by Professor Piotr Wachowiak, the Rector of the SGH Warsaw School of Economics. The next speaker was Professor Joanna Wielgórska-Leszczyńska, the Dean of the Collegium of Management and Finance.
Barbara Socha, the Undersecretary in the Ministry of Family and Social Policy (a graduate of master and doctoral studies at the SGH Warsaw School of Economics) was the guest of honour. Minister Socha discussed the main issues of contemporary Polish social policy, with a particularly strong emphasis on the demographic factor.
The conference consisted of two parts. The first part was chaired by Professor Ryszard Bartkowiak, director of the Institute of Political Economy, Law and Economic Policy. In this part, speeches were delivered by: Dr Michał Rutkowski from the World Bank, the speech Subsidies or Cash Transfers. Dilemmas of the Global Response to Inflation); Professor Agnieszka Chłoń-Domińczak of the Institute of Statistics and Demography, the speech The Future of Social Security in EU Countries. Is It Possible to Introduce a Golden Rule?; jointly professors Tomasz Michalski, Adam Śliwiński and Marek Monkiewicz of the Institute of Risk and Financial Markets, the presentation Supply Streams in the Social Security System and Professor Marek Góra of the Department of Economics I, the speech The Pandemic Has Passed, the Problems Have Remained.
The second part was chaired by Professor Zbigniew Polański, head of the Department of Economic Policy and Theory of Money. It was a panel discussion attended by Professor Agnieszka Chłoń-Domińczak, Dr Zofia Czepulis-Rutkowska of the Institute of Labour and Social Affairs, Professor Marek Góra, Professor Iga Magda of the Department of Economics I and Professor Tomasz Michalski. The conference was concluded by Dr Michał Rutkowski.
The organisation, setting and efficient course of the conference was supervised by Małgorzata Wojakowska-Żeglińska, of the Institute of Political Economy, Law and Economic Policy.