Overview

What are Safety Nets Programs?

Social Safety Nets are non-contributory transfer programs targeted to the poor or those vulnerable to poverty and shocks.  Some people refer to such programs described as social assistance or social welfare programs.  Common safety net programs include:

• Cash Transfers
• Food-related Programs
• Price & Other Subsidies
• Public Works

Also included are means to ensure people’s access to essential public services, such as:

• Health care services
• Education, electricity and housing

Informal (private) safety net arrangements are also important in protecting household income, and must be considered in the design of formal mechanisms.  Cash and food transfers between households are important in many regions; labor exchange is common in sub-Saharan Africa; and zakat – charitable giving expected of every able Muslim adult – is important in many Islamic countries.

Safety nets mostly transfer income in one way or another to needy people.  In contrast, social insurance programs, such as contributory pensions or unemployment insurance, are largely related to earnings and need not include any transfers (though many schemes do contain an element of cross-subsidization).  Social insurance programs help households manage risk, but before the fact. Safety nets take up the load where households cannot participate in social insurance schemes or when the benefits from those are exhausted.

What is the Role of Safety Nets?

Safety net programs have two key functions in economic policy.  Their traditional role is to redistribute income and resources to the needy in society, helping them to overcome short-term poverty.

A more recently identified role for safety nets is to help households manage risk.  Knowing that safety nets exist can allow households to take initiatives that incur some risks, but bring potentially higher returns, such as growing higher yield varieties of crops and using modern farming methods; concentrating household labor on the highest return activities rather than working in many separate informal activities; holding assets in more productive, but less liquid ways than cash under the mattress.  When hard times do hit households, safety nets reduce the need to make decisions that will diminish the chances of escaping poverty in the long run, such as withdrawing children from school or selling the assets that the household’s livelihood rely upon.

At the national level, away from household worries, effective safety nets can also contribute to society’s choice of effective policies in other areas.  They can broaden support for sound fiscal and trade policy, as well as allow the design of other social sector policies and programs to concentrate on efficiency rather than equity goals.  For example, if sound safety nets are in place, the pension program can focus on improving the efficiency of providing benefits to contributing workers rather than finding ways to provide cash transfers to those who have not made adequate contributions.

The wide range of safety net programs reflects the fact that households may be exposed to a variety of shocks and risks, be they temporary or permanent, idiosyncratic (that is affecting specific households, such as illness or death of a breadwinner) or covariate (that is affecting communities or countries, such as droughts or shifts in terms of trade), and these may need to be addressed through a variety of instruments.  While safety net programs may be an important part of it, safety nets can never be the whole or sufficient answer to poverty reduction and risk management.  They must be fit appropriately into the existing and complementary policy context.

Governments and international financial institutions can play an important role in helping households manage daily risks and cope with losses when they occur.  The notion that safety nets should be a permanent feature of social policy and not simply a temporary response to crisis is increasingly being embraced by the international development community.

What are the Right Safety Nets?

Countries will need a blend of safety net programs, because each option covers some risks and groups better than others, each requires different administration and factors into the political economy of social policy differently.  There is no widely accepted formula for what the right mix of programs should be.  It will depend on the risk factors, on the role of allied social policies, on the country’s income level and administrative capacity and on the society’s preference with respect to risk, equality and autonomy.

The safety net as a whole should provide coverage to three rather different groups:

• The chronic poor – even in "good times" these households are poor.  They have limited access to income and the instruments to manage risk, and even small reductions in income can have dire consequences for them.
• The transient poor – this group lives near the poverty line, and may fall into poverty when an individual household or the economy as a whole faces hard times.
• Those with special circumstances – sub-groups of the population for whom general stability and prosperity alone will not be sufficient.  Their vulnerability may stem from disability, discrimination due to ethnicity, displacement due to conflict, "social pathologies" of drug and alcohol abuse, domestic violence or crime.  These groups may need special programs to help them attain a sufficient standard of well-being.

Regardless of the mix of programs used, each should be cost-effective in its own right, with appropriate benefit levels, administrative systems and targeting mechanisms.  Indeed, there is broad consensus about "good practice" with respect to these characteristics, much more so than with respect to the appropriate mix of programs.