José F. Alonso, Office of Research, Radio Martí[1],
Ricardo A. Donate-Armada, The Wyatt Company, and
Armando M. Lago, Ecosometrics Incorporated
DRAFT FOR COMMENTS. Any comments or inquiry, please fax them to: Armando Lago, Ecosometrics. (Work) 301-652-2640. (Fax) 301-907-8952
This paper quantifies the 1992 social safety net of Cuba as consisting of cash expenditures of 2,396 million pesos and in-kind expenditures and subsidies of 2,162 million pesos. The combined social safety net in 1992 was enormous, comprising 37.0% of the gross domestic product (GDP) of Cuba and 55.4% of all payroll wages. Several reform proposals were analyzed to reduce the burden of the social safety net on a declining economy. These reform proposal were directed mainly at pensions (retirement, disability and survivor's pensions), health insurance and unemployment compensation.
The future burden of pensions is expected to grow appreciably as a result of the aging of the Cuban population and the extravagant retirement promises of the Castro regimen. To ameliorate the burden of the pensions, the reform proposals consisted of delaying the retirement age of the Cuban population to 65 years old for both sexes (up from the current 55 years for women and 60 years for men) and to allow younger workers to opt for privately-managed Individual Retirement Accounts (IRAs) as in the Chilean system. These proposal will have the effect of diminishing the burden of pensions from 20% to less than 15% of payrolls.
The health reform proposals focused on maintaining the previous high health outcomes (i.e. life expectancy, infant mortality etc.) of the Cuban health system in the eighties, while reducing over investment, excess manning and waste. The proposed health reform actions include: i) restricting the family doctors program solely to rural and mountain areas, 2) revising the Cuban ambulatory health standards from the current 9.3 visits person to the 5.6 visits per person characteristic of Western Europe and North America, 3) reducing hospital overhead costs by eliminating excess housekeeping and clerical staff, 4) increasing hospital bed utilization from the current 72% to the 80% utilization rates of the mid-eighties, and 5) reducing the general and administrative costs of the Ministry of Public Health per se, whose overhead costs are the highest in the world. In addition two health financing options were analyzed: a health insurance option with 20% co-payments and an option without co-payments. The combination of health reform actions and financing proposals results in reductions in health costs from the current health system costs of 17.6 % of payroll wages to 8.3 % of payroll wages in the case of the reformed system with co-payment insurance options. Without co-payments, the reformed health system costs would diminish to 10.4 % of payroll wages. Proposals for reform of unemployment compensation restricted the unemployment benefits to 50% of salaries, as in the rest of Latin America.
The reform proposals result in payroll tax rates of 19.63% of wages for the employers and 13.60% of wages for the employee; payroll rates which exceed by a small margin those of Costa Rica. While the proposed employer payroll tax rate is smaller than Mexico's, the Mexican employee payroll tax rate is smaller than the rate proposed for Cuba. The proposed employer payroll tax rate of 19.63% of wages has the following components: 10.7% tax rate for pensions, 2.8% tax rate for health insurance with co-payment provisions, and 6.13% tax rate for unemployment compensation. The employee 13.6% tax rate on wages includes: 8.8% tax rate for pensions, 2.80% tax rate for health insurance with co-payment provisions and 2.0% tax rate for unemployment compensation. The government's share of the reform proposal of the social safety net is 12%, the employer's share is 52% and the employee's share is 36%. The government's share of the social safety net has therefore been reduced from the current 76% share to the proposed 12% share; the employer's share proposed is more than double the current 24% employer share.
Both the current and the proposed social safety net still result in considerable number of persons in poverty. A one-time increase in minimum wages from the current $ 1.55 US to $ 3.84 US is necessary to allow cuban workers to purchase the food rationing card in the black market, while the increase to $7.89 US will enable the Cuban workers to afford a balanced diet at black market prices. The Cuban minimum wage rates are so small in comparison to Cuba's international competitors, such as Jamaica, the Dominican Republic, Costa Rica and Mexico, that the proposed social safety net can be financed without adversely affecting Cuba's international competitiveness.
Study Objectives and Background
Previously undertaken studies on Cuba's social safety net have shown the effectiveness of the Revolution as provider of universal health coverage and care capable of meeting citizens expectations. Many nations attempted to imitate or adopt Cuba's system as a model-paradigm. Fewer studies discussed the feasibility of Cuba's safety net as a direct result of the generous former Soviet Union financial assistance. Undeniably, the health system of Cuba was remarkable but nevertheless costly in many ways.
Today, without the same level of foreign resources available, the system can no longer provide and maintain an adequate level of services, as expected by the population, despite assurances and commitment by the leadership. As Cuba enters a transitional period towards democracy with reduced levels of economic activity, the social safety net will be further compromised. This presents a challenge for the leadership of the country.
Cuba's current social safety net had a pre-revolutionary predecessor, very developed in some areas while substantially lacking in others. At the onset of the Revolution, 52 social insurance institutions called "cajas", "fondos", "cajas de retiro", "seguros profesionales" and "seguro de los trabajadores", provided coverage pension and survivors benefits only to 50.0 percent of the salaried workers.[2] Of the 28,033 million pesos contributed to these social insurance institutions, 60.3 percent were paid to public sector retirement plans, 20.7 percent were paid to professional sector retirement plans and the remainder 19.0 percent were contributed to labor union retirement funds.[3] In addition, maternity benefits had been provided since 1938. Among these maternity benefits were six weeks pre-and post-maternity salary payments to insured members. While there was no public policy on unemployment compensation, private organizations provided severance payment to its workers mostly under collective bargaining agreements. Social legislation made it almost impossible to dismiss workers, except for theft and other major causes (such as going out of business.)
While there was never a national health insurance, medical assistance in pre-revolutionary Cuba was provided by a mixture of public hospitals, mutualist organizations (which provided pre-paid health services equivalent to our health maintenance organizations(HMO's)) and private clinics. Although there was no universal coverage, this did not prevent pre- 1959 Cuba from achieving the highest health outcome indices (i.e. life expectancy at birth and doctors per 1000 population) of the Americas after the United States and Canada.[4] As Julie Feinsilver indicates:
Cuba's health ideology and organization are not purely the result of the socialist nature of the revolution. Important precursors can be found in pre-revolutionary medical organization and ideology. Perhaps the most important pre-revolutionary organization was mutualism, a prepaid health plan much like the health maintenance organizations that became prevalent in the United States in the 1970's.
These mutual-aid societies in Cuba were established around the turn of the century by Spanish ethnic societies, such as the Asturians and the Galicians, in order to provide comprehensive medical services for their members. In 1938, the Transport Workers Union of Havana founded its own mutualist clinic to serve its members and others willing to pay the low fees. For the first time, blacks were included in a mutualist plan. Mutualist practice later spread to private group practice because of the overabundance of physicians in Havana. Only a few mutualist societies, however, had facilities in some of the provincial capitals. No such services existed in the rural areas.[5]
Clearly, prior to 1960, the innovative system of health financing existing in Cuba was pioneering and advanced. However, the Revolution decided to create a free-of-charge universal safety net for both the rural and urban populations. This was made possible by the trade subsidies and foreign assistance provided by the former Soviet Union. This economic assistance provided needed scarce resources (oil) at subsidized prices and was paid for and financed with Cuba's primary export commodity (sugar) at prices exceeding the world market. This bonanza allowed the government to pursue otherwise unattainable health goals.
An accessible and cost-shared effective social safety net system will be of the utmost consideration in a future democratic Cuba. Cuba now realistically faces shrinking financial conditions due to lack of material resources. For example, the reorganization proposed and partially applied by the National Assembly of the Peoples Power will cause a substantial reduction in food subsidies, income and welfare level of services.
This study proposes to examine two issues. First, if the present system of cash in payments, unemployment compensation and pensions, food subsidies and others can be kept and continued at the same level despite declining revenues on the Nation's budget? or must the social safety net be restructured to insure its viability given the financial reality without obstructing the potential economic recovery and development under free market conditions in a Democratic Cuba?
This paper will explore several options for the design of a social safety net in a democratic Cuba. As a result of the unavailability of Cuban statistics on several of the topics researched in this paper, this exploration and analysis of the social safety net is labelled "a first approximation". In addition, some of the data needed for a complete design of options are not published by the Cuban Government. The methodology pursued in this paper uses on several occasions broad averages which need to be separated into components for the eventual final design of Cuba's social safety net.
Definition and Design Criteria of the Social Safety Net.
The social safety net is defined as "in-kind" and "cash" income transfers provided, for the purpose of maintaining a socially acceptable minimum level of health and welfare, higher or at least equal to the subsistence level provided to those households suffering from either temporary unemployment or from long term poverty. This definition of the social safety net is thereby associated with the definition of poverty and the desire to raise households above the subsistence level.
The focus on "in-kind" and on "cash" benefits assures the ability of the population in distress to rise above the subsistence level. This definition limits the social safety net to specifically include: pension plans, sick pay, unemployment compensation, social assistance payments, health benefits, housing subsidies, student aid and in-kind food distribution benefits (such as food stamps and specific food subsidies). Not included are: educational expenditures such as teacher salaries, books, repairs and depreciation of buildings and equipment. Student cash allowances and in-kind (room and board) aid are included. In addition, excluded in this first approximation are: employment training programs and public works and others, such as investments expenditures, which are sometimes included in some less restrictive definitions of the social safety net.
Design Principles
The design of the proposed social safety net will abide by the following principles[6]:
a) Poverty Mitigation: the social safety net is designed to minimize the costs of avoiding poverty status by targeting the social transfers solely on the persons suffering from either unemployment and/or poverty. The poverty relief criterion insures that every one receives a level of income equal at least to the subsistence level.
b) International Microeconomic Efficiency: the social safety net is designed so as not to increase production costs for industries and products facing international trade competition.
c) Macroeconomic Efficiency: the social safety net does not contribute to budgetary imbalances.
d) Domestic Microeconomic Efficiency: the social safety net has no adverse effects on incentives to work, save and invest, and does not distort relative prices in the economy.
e) Administrative Ease and Cost: the social safety net is easy to administer, is resistant to fraud, and its cost is as inexpensive as possible.
The social safety net design options are evaluated in terms of the above principles in the last section of this paper.
An Overview of the Current Cuban Social Safety Net.
A brief overview of the social safety net of Cuba during the period 1980-1992 is presented. Table 1 presents the costs of pensions, unemployment compensation, health, social assistance and housing, food, and educational subsidies.
Pension and Maternity Benefits. These benefits comprise old age pensions, disability and survivor's pensions and maternity benefits. The costs and revenue figures for the selected years 1980-1987 come from Félix Argüelles Varcárcel[7]. The post-1987 figures come from the Comité Estatal de Trabajo y Seguridad Social[8].
Social Assistance Benefits. These benefits, which include some small in-kind components, were taken from Félix Argüelles Varcárcel's study of social security.[9]
Children attending day care facilities, called "Círculos Infantiles," also receive food subsidies. The cost of food per child per year at the Círculos Infantiles runs from 70-75 pesos; the parents pay a portion of these costs, which range from 3 to 40 pesos depending on their incomes. The subsidy hovers around 51 pesos per child assisting the day care facilities.[10]
Unemployment Compensation Benefits. Prior to the economic dislocations that started in 1990, Cuba had an unemployment compensation system based on years of working on the job. The benefits accumulated roughly as one month of unemployment compensation per year on the job, up to a maximum of one year of unemployment compensation.[11] Rodriguez and Carriazo Moreno[12] report that the average unemployment benefit paid in 1981 amounted to 70.0 percent of the average annual salary (i.e. corresponding to 170 pesos per month) and that according to the 1981 Census of Population and Housing the unemployment rate was 3.4 percent of the economically active population. By November 1990, the unemployment compensation system was changed to adapt it somewhat to the economic dislocation and high unemployment rates which resulted from the loss of the Russian trade subsidies and foreign aid. This current, post-1990 system has been excellently summarized by Carmelo Mesa-Lago[13] and its cost is estimated in this section.
The first analytical step consists of estimating the amount of unemployment in 1989 and in 1992. Estimates and projections of the Cuban labor force are available from the International Labor Organization (ILO)[14], but suffer from discrepancies between the actual population figures and the ILO population projections, as well as between the labor force participation rates projected by the ILO and the actual labor force participation rates of several cohort groups. For example, there are major differences between the 1990 labor force participation rates projected by the ILO for the cohorts in age groups 55-64 and 65+ years old and the actual labor force participation rates experienced by these age cohort groups in 1989 as published in the 1989 Anuario Estadístico de Cuba.[15]
In view of these discrepancies, it was decided to use the ILO labor force participation rates, except for the cohort age groups in question, whose labor force participation rates would be taken from the actual 1989 employment figures. These labor force participation rates were applied to the actual population figures published by the Cuban government.[16] Procedure which resulted in estimates of the economically active population of the order of 4.366 million persons in 1989 and 4.493 million persons in 1992. The 6% unemployment rate typical of 1989 results in an estimate of 247,000 unemployed persons, who were compensated at 70% of average salaries under the old unemployment compensation regime.
An earlier study by the authors[17] estimated the 1992 civilian employment as 3.006 million workers , a significant decrease from the actual 1989 employment level of 3.87 million persons. Assuming a military employment level of 320,000 persons[18] in 1992 (the lowest level possible is 250,000 persons) renders an unemployment level of 1.167 million persons in 1992, more than four times the number of unemployed in 1989. This estimate of the unemployed in 1992 is larger than Mesa-Lago's who assumes a level double our estimate of the size of the armed forces of Cuba.
The rest of this analysis follows Mesa-Lago's cost analysis of unemployment compensation benefits, referred to earlier. The benefits include unemployment compensation for the 143,000 new entrants into the 1992 labor force, 80% of which are assumed not to find jobs and to receive unemployment benefits of 1,220 pesos per year. Of the remaining persons in the unemployment pool, that is, 1,052,600 persons in 1992, 50% are reassigned to other jobs, with the remaining 526,300 persons not reassigned receiving unemployment compensation benefits of 1,383 pesos annually. These employability assumptions and benefit amounts are identical to Mesa-Lago's but result in higher unemployment compensation costs of 867.44 million pesos in 1992 due to differences in the estimates of the persons employed. Mesa-Lago's lower estimates are due to using un-adjusted ILO population projections and labor force participation rates and finally to estimating a larger Cuban armed forces.
Health Benefits. The health benefit figures include both current and capital expenditures on health. The source of these figures is the Cuban Ministry of Health[19].
Housing Subsidies. The housing stock was projected using as a starting point the 1981 estimate of 2,364,778 units.[20] The additions to the housing stock were projected using the rates of net new units presented in Carmelo Mesa-Lago's study of the Cuban social safety net[21]. Eight percent of the number of housing units were assumed to pay subsidized rents amounting to six percent of average incomes, while six percent of the units were assumed to be subsidized but paid no rents. The rest of the eighty-four percent of the housing units were assumed to be privately owned. These proportions come from the Cuban Census of Population of 1970, as quoted by Mesa-Lago[22], and are used in this first approximation for the lack of better figures. The subsidy per unit was estimated as the difference between rents paid (i.e. at 6% of average incomes) and the cost of repairs, which according to Mesa-Lago[23] was three times the value of subsidized rents in the socialist block countries.
Food Subsidies. As discussed in an earlier paper by some of the authors[24], the Cuban average wage rates comprise only 70 percent of the value of the marginal productivity of labor. Accounting in part for this discrepancy between wages and marginal productivity is the Cuban government policy of subsidizing the retail prices of food, clothing and electricity so as to develop a distribution of consumption expenditures that is more equal than the distribution of wages.
Estimates of the magnitude of the food subsidies vary significantly. Relying on Claes Brundenius figures[25], Medea Benjamin, Joseph Collins, and Michael Scott[26] reported that the food subsidies in 1980, including both retail sales subsidies and subsidized meals at work places, were of the order of 25 pesos per month per person, which results in a high estimate of food subsidies of 2,908.2 million pesos for 1980. A more moderate estimate is presented by Rodriguez and Carriazo Moreno[27], who based on information published in the newspaper Gramma[28], estimated that the differences between retail prices and production costs for key food items were 1,887 million pesos in 1980. According to Rodriguez and Carriazo Moreno, the 1981 price reform reduced these subsidies to 671 million pesos for 1981.
More recent information on food subsidies is presented by Enrique Pérez Marín and Eduardo Muñoz Baños[29], who mention that the Cuban government during the eighties financed nearly three million food rations daily via food and nutrition programs at hospitals, schools and at work places, supplying nearly 20% of the calories and nutrients of the Cuban population during this period. Pérez Marín and Muñoz Baños[30] also mention that by 1987, the Cuban government was financing deficits in agricultural production of the order of 600-800 million pesos annually to subsidize food consumption. These figures appear conservative and do not take into account subsidies in transportation, commercialization and marketing, and industrial processing.
Students' Room and Board Subsidies. The educational subsidies included in the Cuban social safety net include in-kind benefits, such as room, board (food) and clothing given free of charge to boarding students and the board and clothing awarded to semi-boarding (semi-internos). In addition a selected number of students from low income families receive a monthly cash stipend of 10-20 pesos.[31] However, this cash benefit is not estimated in this study because data could not be located on the number of students who received the stipend.
The room and board subsidies were estimated by comparing the costs of elementary, secondary, higher and special education of regular students, boarding students and semi-boarding students. Differences between the costs of regular students and semi-boarding students were estimated as 72 pesos per student, closely corresponding to the costs of feeding children in day care facilities. Differences between the costs of boarding and semi-boarding students were estimated as 60 pesos per student for room and 72 pesos for board (food). These annual cost figures were developed from the information presented by Rodríguez and Carriazo Moreno[32] and are close to the costs presented in Brundenius[33].
Summary of the social safety net
An initial analysis of the social safety net, as portrayed in Table 1 , reveals a structure of benefits that is largely non-targeted, with most of the benefits accruing to the general population, rather than to the poor. Indeed, only the unemployment compensation program, the nutrition program at the day care centers, the social assistance programs, and the housing subsidy program appear targeted on the needy, the poor and the unemployed.
In addition, all the social safety net programs contribute to the macroeconomic budgetary imbalance. Adding housing subsidies, food subsidies, day care subsidies and educational room and board subsidies at their 1989 levels to the 1992 expenses in pensions, unemployment and health care results in an estimate of the 1992 Cuban social safety net of $4,558.3 million pesos, amounting to 37.0 percent of the Gross Domestic Product (GDP) and 55.4 percent of 1992 wage-bill of the Cuban economy. In 1992, cash expenditures amounted to 2,396 million pesos, that is, 52.6 percent of the social safety net. The in-kind transfers were approximately 47.4% of the social safety net. The pension and maternity programs only recovered 55% of their costs in 1987, and the only other program with a user fee or social insurance payment is the day care. Unemployment benefits, health benefits are provided free, without a social insurance copayment, and food price discounts are huge. By their lack of reliance on market mechanisms to finance the social safety net, the Cuban government is seriously affecting its domestic microeconomic performance and incentives to reduce waste in the system.
A first step in the right direction would be to end subsidies to food and other consumption goods, with a concomitant one-time increase in wages and pension payments in order not to reduce the income and well-being of the general population affected. This would mean increasing 1989 wages and pension payments by as much as 800 million pesos, ( i.e. increasing total wages paid by 686 million pesos and pension payments by 113 million pesos). Other elements of the social safety net require more complex reforms and redesigns and are discussed next in more detail. These include pension and maternity benefits, health insurance and unemployment compensation.
Go to Section II