The Social Welfare Law (SWL) passed by Mongolia’s parliament in January 2012 will bring much-needed reform to a system of pay-as-you-go contributions that has proved unsustainable and hampered growth in private insurance provision. Ending universal cash handouts and targeting welfare spending to the most vulnerable, the new Ministry of Human Development and Social Welfare (which replaces the former Ministry of Social Welfare and Labour) aims to create a more level field.
LEGACY SYSTEM: Instated in 1994 and revised several times, the Law on Social Insurance was designed as a universal system providing public pensions, health insurance, social welfare, workers’ compensation and unemployment benefits. The Social Insurance Fund (SIF), funded by contributions of 10% of salary from both worker and employer, is a contribution-funded scheme meant to be self-funding in the long run. Employer contributions are tax deductible up to $59 a month, while employee contributions are capped at $98. Further revisions to the SIF in 1999 provided for the establishment of individual pension accounts from 2000. The aim was that 3% of employee contributions would be invested in a state pension fund by 2005, and that the scheme would become half-funded by pay-as-you-go contributions by 2020. The age of eligibility for state pensions is 55 for women and 60 for men, with the value of pensions disbursed fixed as a function of individuals’ salaries and length of contributions to the scheme. Means-tested average monthly pension benefits stood at $24 in 2011, or 21.8% of average income and 170% of the international poverty line. The Social Welfare Fund (SWF), financed by transfers from the Human Development Fund (HDF), extends these benefits to those outside the system of formal employment. The HDF was created in 2008 as a sovereign stabilisation fund aimed at redistributing a portion of Mongolia’s mining revenues to improve human development indicators. It has been used for both universal cash handouts and payments linked to health care, pensions, education and housing, with no set limit for the value of payments in the HDF law. In practice HDF funds have been disbursed to significant cash handouts and to supplement gaps in SIF financing.
ENROLMENT: The burden of both the SIF and SWF has grown with enrolment. The number of pensioners rose from 193,300 in 2008 to 219,600 in 2011, while the number of Mongolians receiving disability benefits fluctuated from 62,000 in 2008 to 70,000 in 2010, dropping back to 67,000 in 2011. The General Authority for Social Welfare and Services reported that 550,000 Mongolians were enrolled in the social insurance scheme as of May 2012, a 13.6% year-on-year increase.
Enrolment in the scheme has not been generalised to the entire population, however. For instance, an estimated 35% of registered miners were covered by social insurance and 50% held social health insurance in June 2012, according to the UN Development Programme. The head of the ruling Democratic Party’s HDF working group, D. Zorigt, announced in October 2012 that half a million citizens, including many students, herders and informal workers, were not enrolled in any health or social insurance scheme. Meanwhile, the social health insurance system, meant to provide free-at-the-point-of-access health care for all, has proved inadequate. As patients have increasingly had to make payments to receive treatment from the limited public health care system, the number of people enrolled in the scheme has dwindled for several consecutive years, according to Germany’s GiZ, which argues that “acceptance of the citizens’ health insurance system is being eroded.”
TRANSFERS: Despite uneven coverage, the fiscal burden has grown in recent years. A 2008 campaign pledge by the previous government envisioned transfers of up to $1050 to each Mongolian from the HDF, drawn from mining revenue. Income shortfalls, however, meant parliament authorised annual transfers of $84 in 2009, with the latest universal cash transfers of $90 disbursed during the 2012 election. In March 2012 the cabinet raised average pension payments for the 318,000 benefitting pensioners by 28% to $113 a month. Another raise in May 2012 brought average payments to twice their 2008 levels. Yet the minimum pension value of $74 in July 2012, on which 53% Mongolians live, is still below a living wage, according to financial advisor UMC.
The expected growth in HDF disbursements, which accounted for 2.5% of GDP in 2011, would cause a “severe reduction in benefits for new retirees in 2015 and 2020 for women and men, respectively,” according to the World Bank. Following higher payouts from the HDF in 2011, worth a total of $1050 for every citizen in cash and benefits, the Ministry of Finance increased the size of the stabilisation fund from $200m to $500m in the first half of 2012. The additional $300m in HDF funding was earmarked for cash handouts, which it funded through advance tax payments from Erdenes MGL, the operator of the East Tavan Tolgoi mine.
PRIVATE COVER: The inefficiencies of the social insurance system have spurred growth in private health insurance, albeit from a low base, and, to a lesser extent, private pensions. Private health premiums have grown from $38,800 in FY 2009 to $58,300 in the first half of 2012, while private pension contributions have grown from $420 in 2010 to $12,530 in the first half of 2012. While all leading non-life insurers have rolled out health cover in the past three years, catering to the more affluent Mongolians seeking treatment abroad in particular, private pension provision remains very limited.
The birth of Mongolia’s first private life insurer, National Life Daatgal, in 2008 led to the launch of the first formal private pension policy in 2010, an endowment fund for insured individuals. Not meant to compete with the state system, the plan targets those outside the scheme seeking more flexibility in selecting the timing and amount of pension drawdowns. The current social insurance scheme provides for only $210 disbursements in case of death. While no rules on private pensions yet exist, Mandal Daatgal, established in 2011, has established two private schemes. The first, for larger corporates, was in talks with Khan Bank and Newcom in 2012 to conclude a group pension scheme. The second scheme, aimed at providing private pensions for small and medium-sized enterprises (SMEs), was in talks with the National Chamber of Commerce and Industry to propose pensions to its SME members.
REFORM: Some efforts at reforming the unsustainable system of cash handouts have passed parliament, although further legislation will be needed to produce wholesale reform. The new SWL was passed in January 2012 with effect from July, replacing the system of generalised cash transfers with a system targeting the poor and vulnerable strata of society. “We are against cash handouts,” O. Chuluunbat, the deputy minister of economic development, told OBG. “We will support children, pensioners and those on disability benefits, but we want to leave Mongolians of working age to work and provide for themselves, reducing the fiscal burden.”
“The SWL represents a significant step forward in efficiently fighting poverty, its implementation should be a priority,” the IMF said. The government formed in September 2012 has pledged to provide $14 a month to children up to the age of 18 over the next four years, with 800,000 people applying for the first payments through 13 commercial banks in October 2012. It expects to collect an additional $4.96m in revenue to replenish the HDF, which had been depleted by the hand-outs of the first half of 2012. “Previous governments have taken large amounts from the social welfare scheme for universal cash handouts,” Chuluunbat told OBG. “We aim to properly fund the social welfare fund by recovering funds, but this will probably take the whole of the next parliament session to achieve.”
While the SWF system has been revised to become more targeted, the parliament will need to address the inconsistent system of social insurance to create a more level playing field for private insurers, and the new Ministry is working with donors to propose further reform.
A key request from them has been to allow employees to choose who provides their pensions and health insurance. “The law should be amended to allow employees to decide whether their 10% personal contributions go to the public fund or through private insurers,” U.
Ganzorig, the president of Mandal Daatgal, told OBG.
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