Chapter 7: Financing
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This chapter discusses the various options for financing social protection. Basically, there are two main choices for financing social protection: contributory and non-contributory financing. In contributory schemes, size and composition of the insured population, insurable earnings, the benefit replacement rate and the level of funding are important elements. Main sources of non-contributory financing are: tax financing and non-tax financing from general government revenues or other sources, including transfers from donor agencies. Basic social protection packages cost around 2.5% of GDP for middle income countries and over 5% of GDP for low income countries. Strategies to finance these costs should consider the efficiency of the various financing options and their impact on poverty alleviation and income (re)distribution. Generally, all financing choices have their pros and cons and some are more applicable in certain circumstances than others. There is no one-size-fits-all. Countries with a history of social insurance may use this for further expansion of social protection, whereas other countries may resort to a non-contributory financing strategy.