Policy Note: Social Welfare

Social Welfare

Croatia Policy Notes 2016 Restoring stability, reviving growth and creating jobs

Social Welfare Key Messages Croatia’s generous and complex social welfare system relies excessively on categorical rather than poverty-focused benefits. To improve its ability to tackle poverty, and to do so in a more cost-effective way, Croatia needs to consolidate its social benefit programs and increase the share of spending on poverty-focused programs, including through a broader use of meanstesting mechanism. The previous Government has embarked on a reform program to strengthen its social welfare system and to increase its efficiency and effectiveness in combatting poverty.

These efforts would need to be continued.

Key Actions 

Initiate transfer of the administration of the GMB into the OSS in 2016, followed by the consolidation of the child allowance, non-contributory maternity/paternity allowances, the unemployment benefit, and subsequently of other social benefits, into the GMB in subsequent years.

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Introduce means-tested eligibility procedures for family-related benefits and review family-related tax expenditures.

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Accelerate the deinstitutionalization process by speeding up the transformation of large residential institutions into smaller care units, with a reduction in the inflow of new entrants into institutions and an expansion of alternative care models.

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Where Croatia Stands Now Six consecutive years of recession since the start of the global financial crisis in 2008 have led to a rise in poverty in Croatia. Using an absolute poverty line of $5 per day, the poverty rate was estimated at 9.8 percent in 2013, while relative poverty (the share of population with equivalized incomes below 60 percent of the median) was 19.4 percent in 2014, falling slightly from a high of 20.9 percent in 2011.

Spending on non-contributory social welfare is high and was protected during the crisis.

Croatia spends 4.8 percent of GDP on different types of non-contributory programs and policies 1, which is significantly higher than other Central and Eastern European countries. Spending is substantial even for cash transfer programs; Croatia spends about 2.5 percent of GDP on such programs. Government efforts to protect social assistance benefits and old-age pensions during the crisis have served to partially mitigate the impacts of the crisis on poverty.

responsibilities scattered across different ministries and institutions. Three separate ministries are in charge of setting social welfare policy (Ministry of Social Policy and Youth, Ministry of Labor and Pension System, Ministry of War Veterans) and four ministries with multiple specialized agencies and their networks administer social welfare programs. This fragmented administration raises the personal costs to beneficiaries applying for benefits at multiple agencies, augments the risk of error and fraud in the social protection system, and hinders policy making.

How Croatia Can Strengthen Its Social Welfare System

Croatia operates a generous and complex social welfare system that relies heavily on categorical as opposed to needs-based benefits. Croatia allocates 4.8 percent of public spending to non-contributory programs and policies, but only 0.3 percent allocated to social assistance (Table 1) is well targeted to the poor.

This suggests significant scope to raise the effectiveness of social welfare to address poverty and vulnerability by scaling down on some of the categorical programs and replacing them with income- or means-tested programs.

The Government has embarked in 2013 on a reform program to strengthen its social welfare system and to increase its efficiency and effectiveness in combatting poverty. It includes reforms to consolidate and improve the targeting and administration over its social welfare programs in recent years, with the introduction of the means-tested Guaranteed Minimum Benefit (GMB), the launch of a One Stop Shop (OSS) approach to benefit administration, a centralized disability certification, and efforts to reduce error, fraud and corruption in social benefits. Croatia has also launched a process of deinstitutionalization and transformation of its social welfare institutions, along with a reduction in the inflow of new entrants into large institutions. The reform agenda would benefit from continued efforts to reach wanted results.

Table 1. Targeting Accuracy of Social Protection Programs, 2011

Consolidating and improving the targeting of social welfare In 2013 Croatia started to implement a set of reforms to consolidate and improve the targeting and administration of the social welfare system to better and more efficiently protect those in need. As a first step, social policy was centralized under the Ministry of Social Policy and Youth to improve administrative coordination. The Government also rolled out a comprehensive management information system, developed with World Bank support, which increases the transparency and availability of information for policy making, and reduces the scope for error and fraud.

Source: Based on the latest available 2011 HBS.

Croatia’s social welfare system has over time also become costly to administer, with

Efforts to consolidate some cash transfer programs and improve targeting were legislated in a Social Welfare Law adopted in December 2013. The law created a new

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This definition includes traditional cash transfer programs for poor, war veterans’ pensions and child tax allowance.

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Guaranteed Minimum Benefit (GMB), introduced in 2014, which consolidated four different social welfare benefits (the social allowance program, the extended unemployment benefit, the homeland war veterans’ benefit and the disabled World War II support allowance) and applied means-testing with a changed equivalence scale to protect the most vulnerable (single elderly and single parents).

Another important step towards consolidating the administration of major social welfare benefits and the unemployment benefit is the planned creation of a One-Stop-Shop (OSS), to be placed in the existing network of public administration offices throughout the country. In addition to reducing the personal costs to beneficiaries and the administrative costs of processing applications and paying benefits, the OSS will lay the foundations for deeper structural reforms, such as stronger policy coordination, harmonization of rules and procedures, and benefit consolidation. It is a gradual process which is expected to take several years.

According to initial plans, the creation of the OSS was supposed to commence in 2015 with the transfer of the administration of the GMB into the public administration offices. This reform has been postponed to 2016, however.

Administration of the child allowance, noncontributory maternity/paternity allowances, the unemployment benefit and, subsequently, of other social benefits is expected to be transferred into the OSS in subsequent years.

Croatia’s 2015 National Reform Program articulates the objective of consolidating social benefits through the GMB and implementing the OSS. It describes key milestones that need to be achieved and sets a deadline for completing the transfer of administration of four main benefits to the OSS by 2017. European Commission’s 2015 Country Specific Recommendations2 provide proposals to further consolidate social benefits (as there are still over 80 different social benefits) and increase the share of means-tested social benefits (currently accounting for less than 7 percent of all social protection benefits).

Strengthening the administration of disability benefits Croatia’s system of disability benefits is among the largest in the EU, both as a legacy of the conflict in the early 1990s and of weaknesses in the design and administration of the programs. Croatia spends about 3.6

percent of GDP on disability programs (disability pensions, transfers and other benefits), significantly above EU averages. This is largely the legacy of the Homeland War, but is also due to non-standard and loose disability criteria, lack of control, and lack of governance in the disability assessment system. This has resulted in large numbers of Croatians on the disability rolls.

Reforms to disability certification introduced in early 2015 are showing first positive effects. Until the recent creation of a Central Disability Certification Institute (CDCI) within the Institute for Disability Certification, Professional Rehabilitation and Employment of Persons with Disability, disability certification was spread across six sectors and agencies with no consistent methodology. Under the reforms, disability certification previously conducted separately by the pension, health, veteran, social, employment and education systems were consolidated, and a unified disability certification methodology was adopted and applied as of January 2015.

CDCI’s technical and operational capacity has been improving and initial results have been encouraging. The reform has helped reduce the inflow into disability programs, which was higher in Croatia than in comparable countries and might have been affected by error and fraud. New disability pensioners in 2015 stood at around 2,100, almost 4 times below the average new disability pensioners in the last decade. Strong implementation of the new methodology for disability assessment in 2015 yielded direct savings of almost 0.1 percent of GDP. Apart from fiscal savings, this reform is expected to result in faster, more transparent, and more client friendly certification process and service for clients.

Tackling error, fraud and corruption Croatia’s institutions and mechanisms to combat error, fraud and corruption (EFC) in the social protection and labor system need strengthening. Croatia operates a number of cash benefits with high a-priori risk of EFC, including disability pensions and allowances, income and means-tested programs (the child allowance and GMB programs), and income replacement programs. In November 2015, the Government approved a Strategy for Combating Error, Fraud and Corruption in the Area of Social Protection in the Republic of Croatia 2015-2020 and an action plan to operationalize the strategy needs to be developed in the first quarter of 2016. Successful implementation of the strategy

2

EC, Country Report Croatia 2015, and Council Recommendation of July 14, 2015

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and the action plan could generate significant fiscal savings in the system.

Promoting deinstitutionalization Croatia has made progress over the last years in the deinstitutionalization and transformation of residential social welfare institutions.

Deinstitutionalized care is overwhelmingly more effective than institutional care, especially for children, and deinstitutionalization has been a longstanding policy objective in Croatia. The implementation of deinstitutionalization had been lagging behind, however. Toward this end, Croatia developed a Master Plan on Deinstitutionalization and Transformation of Social Welfare Institutions in 2010, adopted an Operational Plan to implement the Master Plan in late 2014, and formed a national team for deinstitutionalization comprising of four full-time engaged experts in early 2015. Each residential institution has come up with a transformation plan, and the Ministry of Social Policy and Youth has been actively supporting the transformation process to date in 32 such institutions.

Significant progress has been made on the deinstitutionalization of individuals from a number of large institutions into organized housing and foster care. Continuous support is also being provided to the residential social welfare institutions in the preparation of project proposals for developing new community services or the transformation of existing social welfare institutions, to be financed under the European Social Fund (ESF) and the European Regional Development Fund (ERDF).

Unfortunately, the inflow of new entrants into institutions has not being reduced. As a result, the targets for deinstitutionalizing individuals have not been reached.

Strengthening work incentives in the social welfare system A significant reliance of Croatia’s jobless on social welfare benefits raises questions on how to ensure that programs do not create disincentives to work. More than 36 percent of the unemployed population and about 47 percent of the out-of-work population3 in the bottom quintile receive some kind of social welfare benefits. The new Social Welfare Act introduced a number of provisions aimed at encouraging work-able beneficiaries to transition from assistance to work, including: penalties for workable beneficiaries who refuse a job offer; incentives for beneficiaries to transition to work,

by offering a 3-month period when the benefit is gradually adjusted downwards; and measures to ensure cooperation between social welfare centers and local public employment offices. The Croatian Employment Service (CES) has to cater to the needs of a larger and more heterogeneous population of jobseekers, making it more challenging to fulfil its mission of counseling. The CES does not have clear rules to establish categories of jobseekers and no systematic way to prioritize resources and allocation of programs based on categories. The World Bank provides technical assistance for statistical profiling techniques as a tool to support activation and counselling work.

How the World Bank Group Can Help The World Bank has been supporting the development of Croatia’s social welfare system for over 17 years through two investment projects and a number of technical assistance activities.

Currently, the Government of Croatia is implementing a EUR70 million Social Protection System Modernization Project, with financing from the World Bank, in support of a set of reforms to strengthen the country’s social protection system and make it more cost-effective. Reforms supported by the project include (i) the consolidation of major social welfare and unemployment benefits under a one-stop-shop network; (ii) harmonization of disability certification; (iii) development of a system to prevent, detect, and correct error and fraud; (iv) de-institutionalization of vulnerable children and adults by increasing family-type environments outside of the institutions, and improving care and quality standards for these groups; and (v) development of better activation measures for those at risk of becoming long-term unemployed.

The project combines a results-based approach, with EUR50 million allocated for disbursement upon the achievement of 14 results indicators, and another EUR20 million allocated for critical investments and technical assistance. The project became effective in December 2014 and has so far disbursed EUR1.9 million or 2.7 percent of the loan. Another EUR4 million is ready to be disbursed for two achieved disbursement-linked indicators. The project has initiated activities in all areas supported by the operation, albeit at a slower pace in the second half of 2015. The World Bank team stands ready to provide strong implementation support to enable the government’s reform efforts.

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Out of work is defined as the combination of inactive and unemployed individuals, as opposed to employed, retired, in education or training and with disabilities

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More broadly, the World Bank stands ready to support Croatia in strengthening its social welfare system through a range of types of support including via (i) ex-ante evaluation of social protection reforms (in pensions, active aging, employment policies; social welfare and social services); (ii) implementation support for such reforms; and/or (iii) evaluation of the performance of existing programs (i.e. assessments of the quality of implementation processes, their success in reaching the poor, their impact on the welfare outcomes of their beneficiaries and the cost-benefit ratio of these programs). Support efforts could further include data collection and analysis in areas where the evidence base on the Government’s reforms efforts is limited.

Croatia Policy Notes | Social Welfare

This Policy Note was produced by the World Bank to inform policy debate in Croatia. This note was prepared by Ivan Drabek, Senior Operations Officer and Emil Tesliuc, Senior Economist.

The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent.

For any questions regarding this note, please contact Vanja Frajtic, Communications Associate, (vfrajtic@worldbank.org).

THE WORLD BANK OFFICE ZAGREB: http://www.worldbank.org/en/country/Croatia

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