In shaping social protection system it is necessary to find balance between several objectives. Social benefits ensure people’s income if they are unemployed, thus reducing poverty and inequality in society. However, the benefits also reduce efficiency, because motivation to work decreases.
The analysis was designed to examine the relationship between social allowances and benefits, and their impact on work motivation. The benefits were examined on the basis of their purpose. This approach made it possible to analyse whether benefits with the same purpose have different eligibility and activity requirements and if so, then why.
The purpose of allowances and benefits
The analysis of the benefits and allowances show that Estonian social security system provides protection against traditional social risks and assistance in case of need. However, the principles of the benefits do not sometimes support their objectives and there are problems with the correspondence of the eligibility requirements of the benefits with same purpose. Compared to other European countries, occupational accident and occupational disease insurance are missing from the traditional branches of social insurance in Estonia. Risks normally covered by these insurance types are currently hedged by different schemes.
Concurrent payment of allowances and benefits
Concurrent payment of several social security benefits does not usually serve a purpose, because in that case, the missing income is replaced multiple times and it can make employment unprofitable. In Estonia, a person is entitled to receive just one unemployment benefit at a time, but it is also possible to receive other types of benefits and allowances whose concurrent payment may reduce the incentive to work. Most problematic is paying the unemployment insurance benefit concurrently with the old-age pension under favourable conditions, the superannuated pension and the parental benefit. In all cases, the regular income is replaced by two alternative incomes. However, in some situations the concurrent payments may be justified. It was found that it is justified to pay unemployment benefits and pension for incapacity to work at the same time.
Impact on work motivation
International comparison shows that net replacement rates are low in Estonia, generating higher motivation to return to work. But low allowances and benefits involve relatively high risk of poverty among the unemployed persons compared to the rest of the population. Taking up employment, as opposed to receiving the unemployment insurance benefit, is not profitable, even if the wage would be noticeably lower than that received prior to receiving the unemployment insurance benefit.