Benefits System for Veterans and Invalids Needs to be Reformed

An Op Ed by Marco Mantovanelli,

World Bank Country Manager in Bosnia and Herzegovina

Published in Dnevni Avaz daily, January 31, 2009

“Queues for electric heaters,” reads one title in Bosnian newspapers. “No money for benefits. Protests threatened,” read another front-page title. You may think that these are recent media reports, but they are not.

I am referring to reports from some ten years ago, but there seem to be some disturbing similarities between then and now. Back then, gas in Bosnia and Herzegovina was in short supply as it has been for the past ten days.

If you will remember, ten years ago pensioners were being owed several months’ worth of pensions. They were demanding to be paid money that was their due and were threatening social protests as a response to the authorities’ apparent inability to solve this, seemingly insoluble, problem.

That problem was eventually resolved after the then High Representative, Wolfgang Petrich, had introduced a simple formula for calculating all pensions. It was based on a very simple principle; instead of pledged unrealistic pensions, each month pensioners were receiving as much money as it was collected during that month on the base of a coefficient.  Thereafter, pensions begun to be paid every month and as the economy picked up over the subsequent years, pensions grew steadily and even the arrears were eventually paid back.

This time round, the complaints and protests are coming from veterans and civilian invalids in the BiH Federation, whose benefit payments have begun to lag of late. As before, lack of budget coverage is being presented as the main cause behind the lagging benefit payments.

Once again, as in 1999, the authorities face a set of claims which are based on adopted legislation but cannot be met due to a shortage of cash in the public purse. Once again, adopted laws are in disagreement with the capacity to implement them in real-time.

However, most relevant laws that prescribe benefits in BiH Federation have an inbuilt formula mechanism similar to the one in the pension law. This means that short of generating cost savings in other budget areas, the authorities have a tool for avoiding delaying benefit payments and accumulating arrears. So, as it was the case with pensioners, if the coefficient is put to work, partial benefit payments could be paid out regularly in the amount of funds available for that period.

In addition to guaranteeing regularity of payments, this would also stop spiralling deficits that could undermine the financial stability of BiH Federation. The temporary use of the coefficient would also mean that as the government finances improve and economic situation brightens up, then, the benefits could resume to be paid without recourse to the cash rationing mechanism. 

But just as electric heaters are no fit replacement for central heating powered by gas, this solution only temporarily solves the authorities’ cash flow problem without tackling the fundamental issues concerning these benefits. So what would be the long term solution of this issue? In the past I have already raised the issue of benefit targeting. Now is the time to expand on it. How does poor targeting reflect on the veterans’ benefit programs?

The current system prescribes that people are entitled to money because they have the status of a veteran (with or without invalidity) or of a civilian invalid, regardless of their actual need. This approach means that those who hold good positions in public institutions or lucrative private firms receive the same benefits as those who have no income whatsoever and depend on social payments to feed their families.

Under veterans’ law, an adult family member with “other income” and no dependents can currently receive some KM160 per month – the equivalent of social allowance for a whole family with no income at all. The same applies to those who may receive disability payments while able to work and, actually, are earning good salaries. The laws allow them to legally draw benefits that can reach up to KM150 per month. In other cases this benefit is added to other social benefits like pensions, regardless of actual need.

When viewed on an individual basis, many of the benefits in question are small and unlikely to solve a person’s existential problems. Nevertheless, individually inconsequential amounts add up to hundreds of millions per annum that the authorities do not have.

The waste and ineffectiveness inherent in this method of helping people is mostly hurting those who really need this money for a safe and dignified existence. If the money were better targeted, individual recipients of these benefits should receive sums that would make some material difference to their purchasing power. Therefore, better benefit targeting rather than benefit arrears and cash rationing is a more lasting solution for it reorganises the premise on which the benefits are paid. This will also prevent further crowding out of other poverty alleviating programs, not to mention opportunities for public investments for stronger development and faster growth.

This reform is overdue.  These measures could lead to manifold benefits for years to come.  Now it is FBiH authorities themselves who need to undertake bold measures that would ensure uninterrupted payment of benefits for those who need them the most and fiscal stability of FBiH. We welcome the commitment to reforms in this and other sectors expressed in the recently completed social agreement in FBiH. The World Bank in close partnership with stakeholders in FBiH supports this course of reform.