The determinants and sustainability of social insurance spending: A cross-country examination

Most of the social insurance systems in the world are expected to face financial crises in the first decade of twenty-first century. This paper examines the determinants of social spending using a simultaneous equation framework that encompasses a number of competing hypotheses. Contrary to previous work, this analysis decomposes total social spending into its constituent components, and extends the examination to a large set of developing countries. Disaggregation of social expenditure is important because the empirical analysis shows that each component of social spending responds differently to each determinant e.g. income level and income distribution. Among our findings are: (1) the international differences in social spending can be explained mainly by a country's demographic structure and its degree of economic openness; (2) the higher the degree of political democratization, the higher is spending on unemployment insurance; and (3) of the four components of social insurance, only an increase in unemployment insurance would decrease the growth of an economy.