Social Security in Labour: A Comparative Study

Chapter-6

Chapter 6
SOCIAL SECURITY OF LABOUR: A
COMPARATIVE STUDY

6.1. Social Security in United States

6.2. Social Security in UK

Contents

6.3. Social Security in Sweden

6.4. Social Security in India

6.5. Conclusion

Social security programmes are often described as the most

successful programme of the modern welfare states. But its long term
future is now in doubt1. International Social Security Association2 finds
that, while globalization is likely to erode the pension income of the older
persons, it will enhance their wealth and income from capital, leaving their
overall spending power slightly improved. The working age population,
which earns lower wages as a result of having less capital to work, is an
unambiguous loser from the globalization process. The situation is
different from country to country. As a result of these dire predictions,
there are proposals to reshape the social security system abound. An

1. Katherine L. Moore, “Privatisation of Social Security: Misguided Reform” 71 Tem. L.

Rev. 131. (1998).
2. ISSA Programme held in Sept. 25-27, 2000 at Helsinki, Introduction to the Research Paper
on “Social Security in the Global Villege” www.issa.org visited on 25th may, 2008.

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examination of the different kinds of social security systems function in

three countries, viz., U.S.A. U.K. and Sweden and how far they made
changes to cope up with the changes in the new economic order is
essential to this part of the study. Indian position is also briefly explained
for the sake of a comparative study.

6.1 Social security in United States

Historical Background and Development

Social security program in US began in limited sphere as a

measure to implement “social insurance” during great depression of
1930s. The idea behind the programme was to offer economic security
to Americans. The industrial revolution has changed the family
structure and multiple generations of one family were no longer living
together3. After stock market crash in 1929 and the ensuring depression,
Americans needed protection from financial worries. In the beginning
the Social Security Act4 when passed by FDR5, the retired workers and
the unemployed workers were the two groups covered by the
programme. Within a few years Congress added benefits for surviving

3. For important demographic changes happened in America ie, the industrial revolution
The urbanization of America The disappearance of the “extended” family, and a marked
increase in life expectancy-rendered the traditional systems of economic security
increasingly unworkable.www.ssa.gov/policy/docs, accessed on 7th October, 2008
4. In1932, the Federal Government first made loans, then grants, to states to pay for direct
relief and work relief. After that Special Federal emergency relief and public works
programmes were started. In 1935, President Roosevelt proposed to congress economic
security legislation and thus Social Security Act is passed and signed into law on August
14,1935.See, Historical Information, available in http://www.ssa.gov/history/brief.html,
accessed on 7th October, 2008
5. ‘Federal Intervention seemed to be the only option as private charities and state also had
budget woes’, Kathleen Santoro, “Social Security Privatization”,2006 (10)Holy Cross J. L.&
Pub. Pol’y 47

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dependants of deceased workers. Later it has become the largest

government programme in the world.

The basic nature of social security in US is social insurance

programme funded through payroll tax. i.e., a ‘pay as you go’ system
(PAYGO System)6. It is formally known as Old Age Survivors and
Disability Insurance Program7 (OASDI program). The OASDI
Programme is administered by the Social Security Administration
(SSA).The SSA is in the process of re-engineering the disability process in
order to restore public confidence in its programme and ensure a nurturing
environment for its employees8. Originally, in US the social security system
included unemployment insurance. However the term is now used to mean
only three benefits9, i.e., benefits for retirement, disability and death.

Eligibility Status

To become eligible for the benefits for family members or

survivors, a worker must earn a minimum number of credits based on
work in covered employment or self-employment. These credits are

6. I.e., to days retiree’s benefits are financed by social security taxes that today’s
workers are paying on a monthly basis.See, Elizabeth D. Tedrow Social Security
Privatization in Other Countries-What Lessons Can Be Learned For The United
States?2006 (14)Elder L.J. 35 at p.36
7. OA for retirement, S for Widows and Survivor’s Income, D for Disability Income. It
provides monthly benefits to qualified retired and disabled workers and their
dependants and to survivors and of insured workers, The OASDI Programme is
administered by the Social security Administration (SSA)which became an independent
agency in 1995. employees, employers and the self-employed pay taxes on earnings in
covered employment and self-employment up to an annual maximum taxable amount
for OASDI. See, Annual Statistical Suppliment,2005 Supp. Soc. Sec. Bull. 11(2005)
8. Larry M. Gropman, “Social Security”, 1997 Det. C. L. Rev. 755
9. These three benefits are provided by traditional private sector pension plans that still
exist.

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described as Quarters of Coverage (QC). Eligibility for most types of

benefits requires that the worker is fully insured. A fully insured
worker usually has a number of QCs at least equal to the number of
calendar years elapsing between the age of 21 and the year in which
he/she reaches the age of 62, becomes disabled or dies , whichever
occurs first. For workers who become disabled or die before the age of
62, the number of QCs needed for fully insured status depends on their
age at the time when worker becomes disabled or dies. A minimum of
6 QCs is required regardless of age for entitlement of benefits.

Retirement Benefits

The largest component of OASDI is the payment of retirement

benefits. In US throughout a worker’s career, the social security
administration keeps track of his or her earnings. The amount of the
monthly benefit to which the worker is entitled depend on that earning
record and upon the age at which the retiree chooses to begin receiving
benefits. The earlier stage at which the benefits are payable is 62 years
and full retirement benefits are dependent on a retiree’s year of birth.

Spouse Benefits

In US any current spouse is eligible and divorced or former

spouses are eligible generally if the marriage lasts for at least 10 years.
The spousal benefit is half the Primary Insurance Amount10 (PIA) of the
worker. Only after the worker applies for retirement benefits the non-
working spouse can apply for the spousal retirement benefits.

10. This is the basic social security benefit available to a worker. There is a formula for
calculating PIA based on average indexed monthly earning. See, http://www.ssa.
gov/history/brief.html, accessed on 7th October, 2008

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Disability

A worker who has worked long enough and recently enough to be

covered can receive benefits upon becoming totally disabled, regardless
of his or her age. The eligibility formula requires a certain number of
credits based on earnings to have been earned overall, and a certain
number within the ten years preceding the disability, but with more
lenient provisions for younger workers who become disabled before
having had a chance to compile a long earnings history.

The worker must be unable to continue in his or her previous job

and unable to adjust to other work, taking into account the worker’s
age, education and work experience. The disability must be long term
lasting 12 months resulting in death, or expected to result in death. As
with the retirement benefit, the amount of disability benefit payable
depends on the worker’s age and record of covered earnings.

Supplemental Security Income (SSI) uses the same disability

criteria as the insured social security disability program, but SSI is not
based up an insurance coverage. But a system of means-testing is used
to determine if the claimants’ income and net worth fall below certain
income and asset thresholds after the claimants establish disability.

Severely disabled children may qualify for SSI. In addition,

disabled minor children of disabled or deceased workers may receive
survivor’s benefits. A programme called Disabled Adult Child
Insurance Benefits (DACIB) provides benefits for the disabled adult
children of disabled or deceased workers.

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For disability determination at the Social Security Administration

has created administrative courts in the US depending on the state of
residence. A claimant whose initial application for benefits is denied
can request reconsideration or having before Administrative Law Judge.
It involves a re-examination of evidence and an opportunity for hearing
before disability hearing officer. The hearing officer then issues a
decision in writing, with reasons for his findings. If claimant is again
denied at the reconsideration stage, he can request hearing before
Administrative Law Judge. In some states SSA is implemented as a
pilot program that eliminates the reconsideration steps and allows
claimants to appeal an initial denial directly to an Administrative Law
Judge. Since the number of applications for social security is very
high11 the time for hearing is limited to 90 days of the request of the
claimant.

After hearing, the Administrative Law Judge issues decision in

writing. The decision can be fully favourable (the claimant is disabled);
partially favourable (the claimant is disabled in source point and not in
certain others as claimed) or unfavourable (not disabled at all). In case
of the last two decisions, the claimant can appeal to Social Security’s
Appeals Council and it accepts no hearings but written briefs. If the
claimant disagrees with the Appeal Council’s decision he can appeal the
case in the federal district court. As in most federal court cases an
unfavourable district court decision can be appealed to the appropriate
appellate circuit courts and an unfavourable appellate court decision can
be appealed to the United States Supreme Court.

11. Approximately 650,000 per year

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Survivor’s Benefit

If a worker covered by social security dies, a surviving spouse or

children can receive, survivor’s benefits. In several instances, survivors
benefit are available even to a divorced spouse. Survivor’s benefits to
non-disabled children are upto 18 years of age or the child graduation
from high school, whichever is later. The earliest age for a non-disabled
widow(er) benefit is 60 years. The benefit is equal to the worker’s full
retirement benefit for spouses who are at or older than survivor’s
normal retirement age (if the worker dies when the survivor is younger,
there is an actuarial reduction).

Reshaping the Social Security Law

The Social Security Act was passed in the year 1935 It is otherwise
known as Old Age Pension Act. This Act provided benefits to the retirees
and the unemployed and a lump sum benefit at death. Payments to current
retirees are financed by a payroll tax on current worker’s wages, half
directly as payroll tax and half paid by the employer. Though the
constitutionality of the Act was challenged in many cases, the courts
affirmed its validity.12

The original 1935 Act paid retirement benefits only to the primary
worker. Many types of people were excluded, like farm workers, the
self employed and anyone employed by an employer of less than 10
people. These exclusions intended to exclude those, as it would be
difficult to monitor compliance, and covered approximately half of the
civilian labour force in the US.

12. Steward Machine Co. v. Davis, 301, US 548 (1937); Helvering v. Davis, 301 U.S. 619.

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The 1935 Act also contained the first national unemployment

compensation program aid to the states for various health and welfare
programs and the Aid Dependent Children Program. The initial tax rate
was 2.0% of the first $3000 of the employees earning shared equally
between the employee and the employer. The tax rates were increased
by amending Federal Insurance Contribution Act generally in three
important ways. They are

(i) The widowed non-working spouse of someone entitled to an

old age benefit also entitled to an old age benefit.

(ii) Survivors (widows and orphans) became eligible for a benefit.

(iii) Retirees who had never paid any FICA taxes became eligible for
old age benefits. In 1956, the tax was raised to 4.0% (2% for
employer and 2% for employee-equal contribution) and
disability benefits were added. In 1961 also the tax rate was
increased to 6%.

Medicare was added in 1965 by Social Security Act of 1965.

Supplementary Security Income benefits, though not exactly social
security benefit but welfare benefit prolonged to immigrants who had
never paid into the system even when they reached 65 years of age.

In the early 1980s there was concern about the long-term prospects
for social security because of demographic considerations. A commission
chaired by Alan Green Space made several recommendations. Under the
1983 Amendments to social security, the payroll tax rate was increased,
additional employees were added to the system, the full age retirement age

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was slowly increased and up to half of the value of social security benefit
was made potentially taxable income.

As a result of these changes, the social security system began to

generate a large surplus of funds intended to cover added retirement cost.
Congress invested these surpluses into special series, non-marketable US
Government bonds which are held by social security trust fund. Under the
law, the government bonds held by social security are backed by the full
faith and credit of the US government. The special series non-marketable
bonds currently held in social security trust fund are off-balance sheet and
are excluded from the US National Debt Calculation.13 These bonds
simply represent a promise to pay the trust fund later, whether by
increasing taxes, cutting benefits or simply borrowing some money.

Social Security Tax on Wages and Self Employment Income

Benefits are funded by taxes imposed on wages of employees and

self employed persons. In case of employment, the employer and
employee are responsible for one half of the social security tax with the
employees half being withheld from the employees’ pay check. In the
case of self employed persons too, independent contractors the person
himself is responsible for the entire amount of social security tax.

A separate payroll tax of 1.4% of an employees’ income paid

directly by the employer and an additional 1.45% deducted from the
employees’ pay check, yielding an effective rate of 2.9%, funds the
Medicare program. This program is primarily responsible for providing

13. “Status of Social Security & Medicare Programme: A Summary of 2005 Annual
Reports”, www.ssa.gov/OACT/TRSUM.html accessed on March 17, 2006.

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health benefit to retirees. The combined tax rate of these two federal
program is 15.3%.

Social Security taxes are paid into the Social Security Trust Fund
maintained by US Treasury. Current year expenses are paid from
current social security tax revenues. A Social Security Number (SSN)
is issued in pursuant to section 205(c) (2) of the Social Security Act14 is
provided with. A multitude of US entities use the social security
number as a personal identifier.

Legislative Changes from 1996

Contract with America Advancement Act of 1995 made a change

in the basic philosophy of the disability programme15. By this Act New
applicants for the Social Security or SSI disability benefits could no
longer eligible for benefits if drug addiction or alcoholism is a material
factor to their disability16.

The Personal Responsibility and Work opportunity Reconciliation

Act of 1996 is called as “welfare reform” legislation. Previously
lawfully admitted aliens could receive SSI if they met other factors of
eligibility. From the date of enactment no new non-citizens could be
added to the benefit rolls and all existing non-citizens beneficiaries ,

14. http://www.law.cornell.edu/usc-‘gi. http://www.ssa.gov/history/brief.html, accessed on

7th October, 2007
15. Previous policy has been that if a person has a medical codition that prevents him from
working ,he is eligible to Social Security regardless of the cause of the
disability.See.Larry DeWitt, SSA Historians Office. See www.ssa.gov/history 7th
October, 2007
16. Unless they can qualify on some other medical basis they cannot receive disability
benefits. Individuals in this category already receiving benefits ,have been be deleted
from the list .

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even the children eligible under old law, would be removed from the
rolls.

Ticket to work and Work Incentives Improvement Act of 1999

made a most significant change in the disability policy .This law creates
a Ticket to Work and Self -Sufficiency Programme which will provide
disability beneficiaries with a ticket they may use to obtain vocational
rehabilitation services and other support services from an employment
network of their choice. The new provisions provide a number of
safeguards to the beneficiaries to protect their benefits and health. Law
also provides for incentive payments to providers for successful
rehabilitation in which the beneficiary returns to work. Altogether the
Ticket to Work initiative seeks to shift the emphasis in the disability
programme away from mere maintenance of benefits to more toward
rehabilitating the disabled and assisting them in returning to productive
work.

The Senior Citizen’s Freedom to Work Act of 2000 eliminated the

Retirement Earnings Test17 which is provided under Social Security
Act, with effect from January, 200018.

17. The retirement earnings test applies only to people below normal retirement age (NRA), which
ranges from age 65 to 67 depending on year of birth. Social Security withholds benefits if your
earnings exceed a certain level, called a retirement earnings test exempt amount, and if you are
under your NRA. One of two different exempt amounts apply, depending on the year you
attain your NRA http://www.ssa.gov/OACT/COLA/rtea.html accessed 7th October, 2007
18. Beneficiaries under full retirement age (FRA) with earnings in excess of certain exempt
amounts may have all or part of their benefits withheld as a result of annual earning test.
See, Curt Pauzenga,” Social Security (Old Age, Survivors and Disability Insurance)”
2005 Supp. Soc. Sec. Bull. 11

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Three Models of U.S. Social Security Reform

Recently the Government offers three alternative plans (Model I,II

&III) for reforms. They are as follows:

Model I allows workers to invest up to 2 % of their taxable income in

to a personal account. Traditional benefits if received would then be setoff
from the personal account contributions. In Model II the workers could
contribute up to 4.5% of their taxable income. Social Security benefits
would be set off from the contributions, but the additional interest of 2% of
the workers contribution, compound over the worker’s career. Model III
involves a 2.5% contribution from payroll taxes, plus a 1% additional
contribution by the employee , up to 1000 dollars maximum. Benefits then
be setoff from the account of the contributions but the additional interest
rate reduction under this model would be 2.5 %.

Under all these three models there are changes in the way that
benefits are calculated. In the current system benefits are indexed to
current wages but here the benefits would be indexed to prices.

Comparison with Private Pensions

Although social security is sometimes compared to private

pensions, the payment of disability benefits distinguishes social security
from most private pensions. A private pension fund accumulates the
money paid into it, eventually using those reserves to pay pension to the
workers who contributed to the fund. Social security on the other hand,
is fundamentally a wealth transfer system. A private system can refund
because it does not try to cover everybody, so they can be net savers
and net borrowers; on the other hand, social security system operates as

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a pipeline through which current tax receipts from worker, are used to
pay current benefit to retirees, survivors and the disabled. Although
there is a social security trust fund that holds the cumulative excess of
taxes withheld over benefits paid, unlike a private pension plan, the
social security trust fund does not hold any substantial marketable
assets to secure worker’s paid-in contributions. Two broad categories
of private pension plans are: (1) defined benefit pension plans; (2)
defined contribution pension plans. Out of these, social security is more
similar to defined benefit pension plan in which benefits ultimately
received are based on some sort of pre-determined formula. Defined
pension plans generally do not include separate accounts for each
participant. But in a defined contribution pension plan each participant
has a specified account in the funds put into that account by employer in
the participant or by both. Here the ultimate benefit is based on the
amount in that account at the time of retirement. Private pension are
governed by Employee Retirement Income Security Act, which requires
minimum level of funding. The purpose is to protect workers from
corporate mismanagement and outright bankruptcy. In terms of
financial structure, social security would be analogous to an under
funded pension, i.e., where savings are not enough to pay future
benefits without collecting future tax revenues19.

19. In 1981 a National Commission on Social Security Reform was established by President
Reagan and sent its recommendations in 1983 Unanimously the Commission recommended
that The Congress in its deliberations on financing proposals, should not alter the fundamental
structure of Social Security programme or undermine its fundamental principle. The National
Commission rejected proposals to make the social security programme a voluntary one, or to
transform it into a programme under which benefits are a product exclusively of the
contributions paid or to convert into a fully funded programme or to change it into a
programme under which benefits are conditioned on the showing of financial need. See,
Report of National Commission on Social Security Reform 1983 46 Soc. Sec. Bull. 3

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On February 2, 2005 President George Bush in his Statement of

the Address described the social security system as “headed for
bankruptcy”20 and outlined in general terms, a proposal based on partial
privatization21. Critics responded that privatization would worsen the
program’s solvency outlook and would require huge new borrowing22.

International Social Security Agreements

In today’s global environment, people often relocate from one country

to another, either permanently or limited time basis. This poses challenges
to business, governments and individuals seeking to ensure future benefits
or having to deal with taxation authorities in multiple countries. The
President is authorized to enter into international Social Security
Agreements to coordinate the U.S. Old Age, Survivors and Disability
Insurance (OASDI) with comparable programmes of other countries. To
that end the U.S. has signed treaties, often referred to as ‘totalization
agreements’ with other social insurance programs of various foreign
countries23.

International Social Security agreements have two main purposes

for U.S. First they eliminate dual social security coverage and the

20. It is reported that by 2040, Social Security will no longer be able to pay its obligations.
www.social securityonline.org visited on 12th June, 2008.
21. Private account would replace in part the defined benefits that that Social Security
Recipients can expect today. See, also supra n. 1 at p.74
22. The system of private account would present a serious cash flow problem to the
system, and undermine the social insurance function of social security. The second
argument is that it would place women minorities and the disabled at a
disadvantage. Third is the privatization will reduce many of the auxiliary benefits
that available today. See also Kathleen Santoro, “Social Security Privatization” 10
Holy Cross J. L.& Pub. Pol’y 47at p.55 ,(2006)
23. Currently has agreement with 21 countries. See www.ssa.gov/OACT, accessed on 8th
October 2008

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second is to help in filling gaps in benefit protection for workers who

have divided their careers between the U.S. and the other country. They
eliminate dual social security taxation when a worker from one country
works in another country and is required to pay social security taxes to
both countries on the same earnings. Those who divided their careers
may fail to qualify their social security benefits from one or both
countries because they have not worked long enough to meet the
criteria. Under an agreement these workers and their family members
may qualify for a partial U.S. benefit based on totalized credits from
both countries.

6.2 Social Security in U.K.

The United Kingdom is a unitary state in which the central

government substantially directs most government activity. British
social policy was dominated by Poor Laws, first passed in 1598 and
continuing till 194824 Britain’s social security system dates back to the
19th century and was enacted based on the overriding principle that the
individuals should be insured “against the contingency of their growing
old and being unable to earn a living”25The first laws relating to social
security was Old Age Pension Act,1908, Disability Insurance Act,1911
and Old Age and Survivors Insurance 1925. In 1942, the Beveridge
Report proposed a system of national insurance based on three
assumptions i.e., family allowances, a national health service and full

24. http://www2.rgu.ac.uk/publicpolicy.
25. Mathew Owen &Frank Field, “Pension Reform in Britain: Alternative Modes of
Provision”, in James Midgley & Michael Sherraden (Eds), Alternatives to Social
Security : An International Enquir Auburn House ,London(1997) p.91 at p.94

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employment. The labour government in1945 introduced the following

three Acts:

(i) The National Insurance Act, 1946 which implemented

Beveridge Scheme for social security;

(ii) The National Health Services Act, 1948; and

(iii) The National Assistance Act, 1948 which abolished the Poor
Law while making provisions for welfare services.

In simple terms British pension system is based on two tiers. The

first tier, introduced in 1908 is mandatory and provides a basic flat–rate
weekly benefit, which is independent of earning. It is financed on a
PAYGO basis26.The level of benefit from this basic pension ensures
very low benefits. The second tier introduced in 1961, provides earning
related benefits from public or private pensions.

National Insurance

National Insurance is a system of taxes, and related social security

benefits that has operated in the UK since its introduction in 1911 and
extended in 1946. The name national insurance was adopted as an
expression of the government aspiration that the system should be
qualitatively different from conventional general taxation such as
income tax. Initially, the most important contributory benefits were the
State Retirement Pension and Unemployment Benefit. With the
introduction of employer payroll tax deduction (Pay-As-You-Earn or
PAYE) employee’s national insurance contributions were collected

26. Lillian Liu, “Retirement Income Security in the United Kingdom”, 62 Soc. Sec. Bull.23 at p.25

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along with income tax. This replaced the old system of purchasing a
contribution certificate or stamp. In the contemporary United Kingdom
budget national insurance contribution are a significant source of
government revenue comparable with value added tax.

Contribution to National Insurance Contributions (NICs) falls into

a number of classes. Class 1,2 & 3 NICs paid are credited to an
individual’s NIC account, which determines entitlements to certain
benefits including the state pension. Class 1A, 1B and 4 NICs do not
count towards benefit entitlements but must still be paid if due.

Class I contributions are paid by employees and their employers.

They are deducted from their gross wages by the employer, with no
action required by the employee. The employers also match their
contributions. Lower Earning Limit (LEL), Earning Threshold (ET)
and Upper Earning Limit (UEL) are the milestone figures which
determine the rate of NIC. The rate is:

(i) Below the LEL, no NIC is paid

(ii) Between LEL and ET, NIC are not paid but are credited as if
they were earning employees

(iii) Between the ET and UEL, NICs are paid at the rate of 11%
on earning by employees and 12.8% of earnings by
employers.

(iv) Above the UEL, NCCs are paid at the rate of 1% on earnings
by employees and 12.8% of earning by employers.

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Class I.A contributions are paid by employers on the value of

company cars and other benefits in kind of their employees and
directors at the rate of 12.8% of value of the benefits in kind. Class 1.B
were introduced on 6th April 1999 and are payable whenever an
employer enters in to PAYE Settlement Agreement for tax. Class 1.B
NCCs are payable only by employers and payment does not provide any
benefit entitlement for individuals.

Class 2 contributions are fixed weekly amounts paid by the self

employed. They are due regardless of trading profits or losses, but people
on small earnings can apply for exception from paying and those on high
earnings with liability to either class 1 or 4 can apply for different from
paying. While the amount is calculated to a weekly figure, they are
typically paid monthly or quarterly. Class 3 contributions are voluntary
NICs paid by people that wish to fill a gap in their contributions record
which has arisen either by not working or by their earnings being too low.
The main reason for paying class 3 NICs is to ensure the “10 years’ worth”
of contributions required for entitlement to the state pension. “10 years’
worth” is the amount that would be accrued through 520 weeks of earnings
at the LEL for people with higher salaries, this might be achieved in less
than 10 years.

Class 4 contributions are paid by self-employed people as a

portion of their profits, calculated with income tax at the end of the
year. Below the earning threshold no class 4 NICs are due. Above the
earnings threshold and below the upper earnings limit class 4 NICs are
paid at a rate of 8% of trading profits. Above the upper earnings limit

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class 4 NICs are paid at the rate of 1% of trading profits. They do not
form part of a qualifying contribution record for any benefits, including
the state retirement pension.

People who are unable to work for some reason may be able to
claim NIC credits. There are equivalent to class 1 NICs, though they
are not paid for. They are granted wither to maintain a contribution
record while not working, or to those applying for benefits whose
contribution record is only slightly short of the requirements for those
benefits. In the latter case, they are unavailable to fill ‘gap’ in
contribution records for some benefits.

New Labour Welfare Reforms

Since 1997 British Government has transformed work and

opportunity in Britain. The economic stability and labour market
flexibility, with employee’s rights and active welfare to work
programmes, have combined to produce the highest employment after the
reforms27. With a goal of raising employment rate to 80% and reduce the
number of working age ,of people who are dependent on benefit and to
continue to close the employment gaps between different groups U.K.,
made these changes28 . Hence the government has given more stress on
innovative employment programmes and improved incentives to
work29.The work focused benefit regime provides help and advice on jobs

27. Green Paper issued by Department of Work and Pensions on “ A New Deal for Welfare:
Empowering People to Work” http://www.dwp.gov.uk/welfare reform / legislation_ green_
paper.asp
28. Ibid.
29. by providing support through tax credit system , by substantially increasing childcare
provision and by introducing the minimum wage.http://www.dwp.gov.uk.

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and training for people who can work and financial help for those who
cannot30 through ‘Job Centre Plus31’. This agency is responsible for the
new changes in pensions and benefits generally.

Based on the Pension Committee Report, reforms were also

proposed in pension for the ageing society taking it as the first
priority32. In 2002 itself Britain introduced State Second Pension
crediting the low earners and some careers who missed out the State
Earnings Related Pension Scheme33.

The Government has set five tests for the reform package. It says
that any reformed pension system must34:-

(i) promote personal responsibility (to avoid under saving for

retirement);

(ii) be fair(in protecting the poorest women and children);

(iii) be simple (in clarifying the roles of state, employer and the
worker);

(iv) be affordable( in maintaining a strong market economy); and

(v) be sustainable (by being amenable to future trends)

30. See, www.jobcentreplus.gov.uk, accessed on 12th September 2009

31. An agency of Department of Work and Pension.
32. “Security in Retirement: Towards A New Pension System”, White Paper published by
Department of Work and Pension.See,www.dwp.gov.uk/pensionreform/whitepaper.asp
Prime Minister’s forward.
33. The predecessor of the State Second Pension Plan
34. http://www.dwp.gov.uk/pension reform, accessed on 12th September 2009

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There are many critics to these reforms. The main criticism is that
there is nothing new. Some argue that ‘welfare to work’ is the same
ideology behind Poor Law Act of,160135. Another criticism is against
partnership between public and private sectors where there is chance of
loosing charitable aspect36 and welfare provision37. The government’s
aim is to provide claimants a single point contact in case of controversy,
then the quality and training of the officers who carry out the function
becomes vital38.

According to British Pension’s Commission, the present level of

pension right level accrual, both public and private, will be insufficient
to fund an adequate retirement. The insurers have told the Britons that
their private accounts are unlikely to match their second tier public
benefit and to move back into public system. In 2004, nearly five lakh
workers opted for state system39.

6.3 Social Security in Sweden

Sweden had a long successful economic formula of a capitalist

system interrelated with substantial welfare element. But it was

35. Julian Fulbrook, “New Labourer’s Welfare Reforms: Anything New?” 64 Mod. L.
Rev.243 (2001) at p.249.
36. Id. at p. 253
37. Presently pensioners receive 63%of their income from state benefits, 25% from
occupational pensions and 12% from personal pensions. Since occupational pensions is
unevenly distributed. The British Govt. tries to reverse 60/40 State /private balance by
expanding voluntary pension provision by pension funds and private companies. Trade
unions argue that this will not lead to a substantial increase in in pension saving. See,
Report of British –German Trade Union Forum Conference ,”Tomorrow’s Welfare
State” http://www. Agf.org.uk/pubs
38. See supra n.35 at p. 254
39. Elizabeth D. Tedrow, “Social Securitization in Other Countries –What Lessons Can be
Learned for theUnited States?”, 14 Elder L. J. 35 (2006)at p.501

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challenged in 1990s by high unemployment and 2000-02 by the global

economic downturn. But the fiscal discipline in the country helped to
withstand.40

The Swedish Social Insurance System consists of two tiers. A flat

rate basic pension funded on a PAYGO basis and an income related
supplementary pension (ATP)41. Workers are contributing 2.5% of
eligible earning to their private accounts known as premium pensions,
and the remaining 16% of payroll contributions continues to fund
benefits on PAYGO Basis42. In Sweden, the expenditure has been
classified into four categories: general/cash, general/in kind selective/
cash and selective/in kind.43

In Sweden, sickness disability and old age accounted for over 70%
of the social security budget. Selective benefits only come up to 6%.
Cash benefits dominate over in kind44 but most cash benefits are taxed
and hence net benefits are considerably smaller. Sweden found that the
growth in public expenditure for social security is to a large extent
burdensome. Rejection of the fact that existing welfare state provisions
gradually become expensive due to exogenous forces such as ageing
population and new technologies in healthcare. There was also a

40. http://www.apl.se ,www.ppm.nu/tpp/infodocument/1, accessed on 8th October 2009.

41. It was created through 1998 Legislation. Seee also, Elizabeth D. Tedrow,SocialSecurity
Privatization in Other Countries- What LessonsCan Be Learned for the United States?
(2006) 14 Elder L. J. 35 at p.53
42. Susan Stanahan & Carol Simons, Sweedens Choice, available at http://www.aarp.org
/bullettin/social sec/ss_sweden.html visited on 16th May, 2008
43. Public Expenditure for Social Protection in Sweden Relative to GDP in 1998, Ministry
of Social Affairs, Sweden, (2001).
44. Lars Sodr Strom and Klas Rikner, Privatisation of Social Insurance with Reference to
Sweden, Clarendon Press, Oxford (2004) at p.167.

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growing awareness of risk that welfare state has become a ‘black hole’
in the public budget gradually absorbing resources for other perhaps,
more urgent needs. Various measures to cut public expenditure for
social security were implemented by Sweden also in the 1990s. These
expenditures fell over 5% points in just 6 years, from 38.6% relative to
the GDP in 1993 to 33.3% in 1998.

Social Insurance Schemes make up the major part of public

expenditures for social security with respect to cash benefits. These
schemes include old age pensions, disability pensions, sickness insurance,
parental insurance, worker’s compensation and unemployment insurance.
In addition, there are benefits in kind such as healthcare.

Sickness Insurance

In Swedish Sickness Scheme, individuals are compensated for loss

of income due to temporary illness. Compensation is given irrespective
of cause of illness i.e., no distinction is made between illness caused by
a common cold, a work or traffic accident, sport activities etc. The
compensation is given into two parts: (1) sick pay from the employer
during the first two weeks of sickness episode, the sick pay period and
thereafter; (2) a sickness benefit from the social insurance. In Sweden,
there is no formal limit for the period one can receive sickness benefit.
However, in case an individual’s working capacity is permanently
reduced the sickness benefit will be replaced by a disability pension. In
Sweden law carefully regulates both part of the compensation. Thus
employers are not free to have a higher or lower sick pay than stipulated
equity as well as efficiency arguments are used in favour of this

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regulations. Its purpose is to make sure that the rate of co-insurance is

kept reasonable high and the same for all workers.

The main two advantages of having insurance in the hands of

competing private insurance companies which forced Sweden to shift
are:

(i) Differentiation: Competing insurance companies are likely to

take all steps possible to promote prevention on the part of the
insured.

(ii) Diversification: Competing insurance companies are likely to

offer policies adapted to the performance of various
(major/minor) groups in the society.

There are two types of work injuries—accidents and diseases. For

accidents, it is often possible to determine when and where the injury
has arisen. It is therefore easy to change appropriate employer with the
costs. Injuries caused by diseases are very difficult to handle. Private
insurance for work injuries would imply large differences in premiums
for employers in different branches.

Pensions

The Swedish Pension system has three parts. A social pension

scheme, supplementary negotiated pension schemes and individual
pension plans. The social scheme is public and two others are private-
the difference between them being that the negotiated schemes are
collective, similar or identical for all members of the respective group,
while individual plans are adapted to each person’s preferences. The

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three parts are closely interrelated. The negotiated schemes and

individual plans are to a large extent merely supplements to the social
scheme. Social pension schemes are as a rule mandatory and thus
protect the interest of tax payers to mandate a system that requires
everyone to pay into a scheme that provides adequate coverage in old
age. The adequate level should at least include subsistence needs.

This pension reform is recently implemented and it includes a

system of individual accounts giving individuals substantial flexibility
in their choice of investments. At the same time other Swedish Social
Insurance system such as unemployment insurance45 sickness benefits
and parental leave has remained unchanged. The major reform is made
in old age pension system i.e., the defined benefit scheme by national
defined contribution system.46 Between 1998 and 2001 the system was
converted from a 100% PAYGO system to a system where some money
is saved and invested.47

Government pension payments are financed through an 18.5%

pension tax on all taxed economies in the country, which comes partly
from a tax category called public pension fee (7% on gross income) and
30% of a tax category called employer fees on salaries (which is 33%
on a retted income). Since January 2001, the 18.5% is divided into two

45. Swedish Unemployment Insurance is under private management. It is not mandatory.

There is a benefit society for each Federation of Labour Unions handling cash benefits
according to rules stated by law.
46. Martin /Feldstein and Horst Siebert (Eds) Coping with the Pension Crisis: Were does
Europe Stand? University of Chicago Press, Chicago (2001) p.324.
47. See supra n.1.

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parts 16% goes to current payments and 2.5% to individual retirement

accounts, which was introduced in 2001.

Analysis of Recent Developments

From 1998 onwards Sweden has started its reform measures to

strengthen social security. In 1999 a new system of social insurance
notional accounts plus mandatory individual “premium pension” accounts
was established. It is a transition from the old system established in 1938
and continued in 1958. The earning related old-age pension system based
on average income was replaced by a new system where notional account
is calculated using an annual index based on development of an average
wages, an annuity factor depending on average life expectancy at the time
of retirement and a norm for the expected increase of average wages in
future years. The premium pension is based on contributions plus net
returns converted in to an individual, joint, fixed, or variable annuity.
Annual pensions are made subject to taxation. A programme for
unemployment benefits are also provided by 1997 legislation replacing the
1934 Act for the job seekers. This is a subscribed programme consisting of
basic insurance and a voluntary income related insurance system and the
source of payment is payment by insured as membership fee and the
employer’s contribution calculated as a % of payroll.

6.4 Social Security in India48

The general frame work of social security legislations in India

includes Employees’ Provident Fund, Gratuity, Employee’s Insurance,

48. Chapter5,6 and 8 elaborately discuss social security in India. This part is narrating the
present system in India for the purpose of comparative study only.

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Employee’s Pension Scheme and National Social Assistance Programme.

Social Security to the workers in the organized sector is provided through
five Central Acts, namely, the Employees State Insurance Act, the
Employees Provident Fund & Miscellaneous Provisions Act, the
Workmen’s’ Compensation Act, the Maternity Benefit Act, and the
Payment of Gratuity Act. In addition, there are a large number of welfare
funds for certain specified segments of workers such as beedi workers,
cine workers, construction workers etc.

The types of programmes in India include Provident Fund with

Survivor (Deposit Linked) Insurance and pension fund, gratuity
schemes for industrial workers and social assistance system. In 2004, a
voluntary old age, disability and survivors benefits scheme introduced
under unorganized sector social security scheme for employees and self
employed persons between the age of 36 to 50 having a monthly
income Rs. 6500/- or less. This means that India is having a lot of social
security benefits under different heads. More over, a single benefit is
provided under many heads also. For example old age benefits are
provided by provident fund, pension scheme, gratuity scheme and old
age pension under social assistance also. Like wise permanent disability
benefit is provided by provident fund scheme, pension scheme and
gratuity scheme. The survivor’s benefits are provided through provident
fund, survivor (deposit-linked) insurance scheme, pension scheme
(widow(er)’s pension, orphan’s pension, other eligible survivor’s
pension), gratuity scheme, funeral grant and survivor grant under social
assistance. Generally the coverage comes under social assistance and
social insurance.

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Relevant amendments are proposed in the EPF and MP Act as also

in the ESI Act. The consultation process is on with reference to the
amendment suggestions received in case of the Maternity Benefit Act
and the Workmen’s Compensation Act.

Innovative measures are proposed in the running of the Social

Security Schemes of Employees’ Provident Fund Organisation and
Employees’ State Insurance Corporation. This includes flexible benefit
schemes tailored to the specific requirements of different segments of
the population.

Most social security systems in developed countries are linked to

wage employment. In India, the situation is entirely different from that
existing in developed countries. The key differences are49:

(i) India does not have an existing universal social security system;

(ii) India does not face the problem of exit rate from the workplace
being higher than the replacement rate. Rather on the contrary
lack of employment opportunities is the key concern;

(iii) 92% of the workforce is in the informal sector which is

largely unrecorded and the system of pay roll deduction is
difficult to apply.

6.5 Conclusion

The new trend in all countries is that the State is trying to

withdraw from its responsibility to provide security benefits to their
workers. They do it either by privatizing or through converting

49. http://labour.nic.in/ss/overview.html, accessed on 20th September, 2009

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assistance to contributory insurance. In United States, the government is

trying to increase pay roll tax rates and promote rehabilitation
programmes which enable workers to return to work. International
social security agreements with other countries by U.S. to enable the
workers who divide their career between U.S. and other countries is a
good initiative to be taken into consideration. U.K. introduced
innovative employment programmes and improved incentives to work.
They modify the social security system by increasing personal
responsibility and creating an affordable and sustainable reform
package. Sweden has taken a balanced approach in providing social
security in cash and in kind benefits. They changed to 100% PAYGO
system based on membership fee and employers’ contribution. As the
social, economic and political situation in India is highly different from
other nation states, India has to find out solutions for maximum social
security coverage in tune with its own resources and needs. The
position in India with regard to social security can be differentiated
mainly on three grounds.

(i) Lack of effective grievance redressal mechanism:- In India the

social security benefits are under different legislations and
under different schemes. Some legislations provide for
redressal fora and some do not. Many of the benefits under
schemes are not a matter of legal rights to get adjudicated
under a court of law.

(ii) Lack of comprehensive coverage:- The system prevailed

under other countries are providing coverage irrespective of
any classification for coverage. All are legally entitled to one

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benefit scheme or other benefit scheme. But in India majority

are outside the legally covered social security programmes50.

(iii) Constitutional Mandate:- Unlike any counterpart Indian

Government is constitutionally bound to provide social
security to its citizens51

Apart from this, in the contemporary world, the domestic legal

scenario is highly influenced by international agreements and sovereignty
of nation is said to be re-defined. This influence is made a sweeping
change in India too. Hence it is highly necessary to understand the labour
and trade law relationship and how it affects the states’ welfare measures
for labour force. In this context a deliberation up on the question whether
there is any conflict between trade liberalization and labour rights becomes
indispensable.

The next chapter is an attempt to examine the relationship between

international trade law and labour rights.

…....YZ…....

50. In India 66% of workforce are under unorganized sector and outside the coverage area
of legally declared social security benefits. Some of them are covered under different
schemes declared by Government from time to time.
51. This aspect will be discussed in detail in Chapter 4

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