rethinking social insurance as panacea for parlous corruption in nigeria

Australian Journal of Commerce Study

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Rethinking Social Insurance as Panacea for Parlous Corruption in Nigeria

Onafalujo Akinwunmi Kunle (Corresponding Author)

Department Of Accounting And Finance,

Lagos State University, Badagry Expressway, Ojo, Lagos State

Tel: +2348023055233 E-Mail: [email protected];

Eke Patrick Omoruyi,

Department Of Accounting And Finance,

Lagos State University, Badagry Expressway, Ojo, Lagos State

Tel: +2348029742444, E-mail : [email protected]

Abstract

Social insurance industry is not clearly defined in Nigeria to the extent that most people may not even

be aware of its socio-political and economic implications. A major economic goal is to have a socially

secured environment where there is less incentive to be corrupt which otherwise may be without social

insurance. The intent of this study is to link the state of social insecurity in Nigeria to degree of social

insurance which may explain the prevailing parlous corruption. Questionnaire and secondary data

(1996-2009) were used for regression analysis to evaluate the relationship of social insurance to level

of corruption in Nigeria. The result reveals that social insurance will significantly reduce the trend of

corrupt practices. Also unemployment rate is positively incidental to continued pervasiveness of

corrupt practices. The programmed withdrawal of the pension reform should be combined with

compulsory whole life and reversionary annuities from specialized insurers. Social insurance costs can

be reduced through social spending on education and health which transfers good health and quality

skills to the ability to secure employment and boost general productivity.

Key words: Parlous Corruption, Social insurance, Pension reform

1.1 Introduction

Social insurance is a publicly sponsored insurance project to handle personal risks so as to protect the

citizens against unemployment, death and old age, disability from loss of income (Musgrave and

Musgrave, 2004; and Feldstein, 2005). An old scheme is the social insurance literature is the Old Age

and Survivors Insurance (OASI) enacted in 1935 in the United States and later expanded to include

Disability Insurance (DI), health insurance plan in 1956.

Social insurance industry is not clearly defined in Nigeria to the extent that most people may not even

be aware of its socio-political and economic implications. A major economic goal is to have a socially

secured environment where there is less incentive to be corrupt. Social policy endeavours to protect

those vulnerable to social risks and the centric of politics is providing optimal social welfare (Valdes-

Prieto, 1994).

A major burning issue that raises concern on well being particularly for the aged is the provision of

adequate post retirement livelihood and managing health risks described as social security. Thus, social

security program is a well delineated part of social insurance comprising government sponsored

pensions, health insurance and unemployment insurance. It is therefore part of national politics. United

States President Obama‘s campaign focus was on reforming health insurance to take care of the most

vulnerable.

A major argument on the relevance of social insurance is the effect on economic efficiency as the risk

taker is confident that the possibility of loss is mitigated. Social insurance has this property because


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Nigerians in 1960s spoke about government employment as a secured job and tends to have a feeling of

social security. The affective trend rationally motivates workers to decline corrupt tendencies about 30

years ago. The rise to parlous corruption may be linked with fear of sudden unemployment, crippling

inflation and increase in medical costs.

Ogun et al (2005) highlight the alarming rate of 26/1000 Stroke incidents in South West Nigeria for age

40-60 contributing more to mortality rate. The demographic implications are that survivors will

become highly vulnerable to social risks while the social welfare implication of this phenomenon is to

seek economic protection for the eventualities of retirement, unemployment and old age sickness. In

the absence of social insurance scheme, an individual may be tempted to protect itself by illegally

acquiring wealth through corruption. This may explain why Okon (2011) declares that non payment of

pensions is unholy and a temptation to corruption. Ogundare (2013) quoting Ladi Rotimi Williams

emphases the same need of social security to reduce the prevalence of corruption.

The state of corruption in Nigeria is unthinkable. The origin might be traceable to rising

unemployment, increase in medical costs, galloping inflation coexisting with weak social insurance.

This is aggravated by the weakening traditional Nigerian family support system as a social risk

management tool. In the absence of expected social protection mechanism, all rational individuals seek

financial protection against future threats, and might be tempted to engage in corrupt practises to

increase present value of wealth. Parlous corruption may be the outcome of long run poorly defined

social insurance. The intent of this study is to link the state of social insecurity in Nigeria to degree of

social insurance which may explain the prevailing parlous corruption. It will facilitate the

understanding of social policy required to redesign social insurance, and pinpoint the limitations and

the need to revise the pension reform (2004). This paper hypothesises that parlous corruption in

Nigeria is not significantly related to the level of social insurance provided

1.1.1 Conceptual Framework and Literature Review

The link between corruption and social insurance are yet to be connected in contemporary literature.

This study conceptualises the application of utility theory to insurance which satisfies the condition that

an individual whose utility function is u prefers amount y to amount z provided that y > z; that is, the

individual prefers more money to less (Dickson, 2005). Decision making is based on expected utility

criteria such that an individual has no preferences between two courses of action if the expected utility

results in the same amount of wealth. Thus, in an economic transaction where an individual has two

options, either to take bribe now to increase wealth against future income loss or not to receive bribe

because wealth is maintained by social insurance; the expected utility of each course of action

facilitates the decision reached.

Giving bribe or corruption is linked to economics of financial crime such as money laundering, stock

market manipulations, drug trafficking, and much more (Lynch and Phillips, 1971). Becker (1974) and

Freeman (1999) argue that the economic approach to handle crime is to reduce unemployment rate and

joblessness. In the same vein, Ades and Di Tella (1997) provide insights to business approach to

combating corruption by paying higher wages and pensions to bureaucrats in Singapore and Hong

Kong where the lowest of corruption was reported. Low social spending on education by government

causes joblessness and unemployment thereby increasing dependency ratio (Sen, 1997; Todaro and

Smith, 2009). An aggravation of dependants within the economy could motivate those in employment

particularly senior bureaucrats to build up wealth through corruption to support dependent family

members. If most families have only one employed person and five dependants without guarantee of

health care, education, job security and unstable pensions, the tendency will be to take to illegitimate

opportunities offered by corruption.

The absence of social insurance motivates increasing need to seek other means of financial protection

which Evans and Rauch (1995) refer to as ―predatory‖ behaviour. According to Amundsen (2000) the

theory of redistributive corruption is a form of socio-economic transfer even though it is illegal where

benefits are transferred to the society at the expense of the state. A society has this nature of collective

risk which must be shared in form of social insurance otherwise a self defensive mechanism would be

adopted, which may prompt corruption. Hence, the pervasiveness of corruption is intuitively predicted

by poor social insurance, high unemployment and inflation rate.


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Social insurance is expected to promote social capital and stability in a nation and therefore increase

economic efficiency (Ades and Di Tella, 1997). On the other hand corruption is a by-product of fear of

income uncertainty (Akinade, 2010).

The traditional social networks of African and Nigerian families use self insurance to manage personal

and social risks, but Insurance theory views this as inadequate to manage the personal insurance risks

(Ogunshola, 1984). The risks of old age, disability, unemployment and retirement is scary; and the fear

of destitution can prompt negative risk management tools like corruption. Sarkar and Hassan (2001)

note that corruption impacts negatively on economic growth and which implies the worsening of the

ability of government to provide social insurance. The pension reform Act (2004) could not be

ascertained as social security vehicle as it does not guarantee life annuities, permanent health insurance

and social benefits from government due to structural unemployment and risk of endowment.

1.1.2 Social Insurance, Unemployment, Inflation rate and Dependency ratio: Implications on Corruption

Social insurance varies from one country to the other due to the population and financial structure

which informs the socio-economic policy that is critical to costing of benefits derivable (Atkinson and

Dickson, 2000). Actuarial Standards Board (1998) considers social insurance to be government

sponsored program. They characterised the features to include:

a. The program, including benefits and financing method, is prescribed by statute.

b. The program provides for explicit accountability of benefit payments and income,

usually in the form of a trust fund.

c. The program is financed by contributions (e.g., taxes or premiums) from or on

behalf of participants, which in some programs are supplemented by government

income from other sources. Investment income on program assets may also be

used to finance the program.

d. The program is universally (or almost universally) compulsory for a defined

population, or the contribution is set at such a subsidized level that the vast

majority of the population eligible to participate actually participate.

Social insurance is broad and is theoretical a shock absorber for social flashpoints such as temptation of

corruption, and it is couched uniquely from the sociological framework of the polity. Many countries

however attempt the solution to social welfare by managing economic parameters.

Emmerij (1999) implicates that social policy leans on abstract economic indicators such as inflation

rates, interest rates and Gross Domestic Products, which are market determined instead of ―flesh and

blood‖ indicators like income distribution, access to health and education, and social security that is

based on politics.

Social insurance is used interchangeably with social security in the literature but the slight difference is

that social security focuses on redistribution of income to the poor and vulnerable. Steiner (1983)

addresses social security as pension and subsidized access to health care. In the United States, it is the

amount paid to the unemployed, the disabled and persons living at age 65 and above under the Old

Age, Survivorship, Disability Insurance (OASDI) scheme (Musgrave and Musgrave, 2004). In some

countries like Australia, it is the amount paid to the poor using the mean‘s test. The funding of the

scheme is based on actuarial projections and financed through taxation or combined with minimum

contribution from workers. The theory of social security is explained by economics of welfare (Bhatia,

1978).


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The irreplaceable duty of the State means social justice and the gradual construction of equality are

related to politics, and not the market (Vazquez, 2011). It means social policy; an instrument of

political economy is used to drive income redistribution, of which social security is central. Pension

schemes that are subsidized and mean‘s tested are more of social security programme while social

insurance are broadly determined schemes, covering the whole population and only event conditioned.

Social spending guided by social policies tends to wrongfully focus on managing economic variables

without the stabilising insurance components. Pigou (1961) in Bhatia (1978) mentions the distribution

of national dividend as a major economic welfare function. Social insurance financed partly by tax falls

within this domain. A stable society with minimal corruption is expected to have co-existing socio-

economic welfare variables –social insurance, low unemployment rate, low inflation rate and low

dependency ratios otherwise financing of social insurance will not be feasible Choe (2011). The end

which should justify the means is not measured by more in the indicators but better standard of living

and lower level of corruption; this being the ultimate estimator of progress (Vazquez, 2011).

The demographic structure in Nigeria in terms of income distribution is indicated by the Gini

coefficient, a measure of the degree of income inequality in a nation given as (51) in 2000-2003

(Earthtrends, 2003 and World Bank, 2004). Gupta, Davoodi, and Alonso-Terme (1998) liken income

inequality measure to represent Gini-coefficient and inequality in social spending. The lower the

coefficient the better is income distribution, the easier it is to design social security policies otherwise

corruption is prompted.

1.1.3 Pension Reform Act, 2004 and Social Insurance

Muralidhar (2001) describes pension system as a mechanism for household allocation of life resource

to cover the entire life. Pension reforms were initiated all over the world due to actuarial risks of

defined benefit schemes and fear of destitution at old age (World Bank, 2004). The Nigerian pension

reforms were cued from here but with its peculiar characteristics which are funding risk, unstable

financial market, investment risk, regulatory risk, longevity risk and weak professionalism (Onafalujo

and Eke, 2010). The switch to defined contributory scheme in Pension reform (2004) absolved some

risks, but obviously does not tackle investment risk, longevity risk and actuarial risk. To compound this

retirement and old age risk, there is no provision under the National Health Insurance Scheme (NHIS)

for retirees unless they deploy part of their benefits to buy health insurance. Also, it is not yet inclusive

and death risk is highly unmitigated because of low life insurance penetration in Nigeria (Ojumah,

2013). The gap of non guaranteed life annuities, unemployment insurance and disability insurance in

pension reform (2004) is a function of social insurance policy and latently these risks could result to

corruption.

1.1.4 METHODOLOGY

This study develops the model for the relationship between parlous corruption and social insurance by

adapting Ades and Di Tella (1997) equation of corruption and economic efficiency. Following this, the

plausible axioms that explain the existence of parlous corruption is implicitly presented in a Model Specified as follows:

Corinx = f( Scins, Infrt, Umrt)

─ + +

The tendency towards corruption can be significantly reduced with employment of social insurance,

coupled with the management of inflation and social spending on education and health which otherwise

will result in unemployment. The signs indicate the direction of relationship of the explanatory

variables as a-priori expectation. The Explicit form of the model becomes:

Corinx= f (α0 − α1Scins + α2Infrt + α3unemprt + ui)

Where the dependent variable is Corinx = corruption rate; explanatory variables are Scins = Social

insurance; Infrt = inflation rate; unemprt = unemployment rate; α0 = constant; α1, α2 ,α3 are coefficients

of respective independent variables and ui = error term.


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1.1.5 Data Collection

Data on inflation rate was obtained from World CIA facts book and unemployment rate from National

Bureau of Statistics. Primary data was used for pension returns guarantee and social insurance.

Structured questionnaire were distributed by hand to a randomly selected senior lecturers in economics

and management sciences in higher institutions in Lagos state, senior civil servants at Lagos state

secretariat and chartered stockbrokers on quota basis. These categories of workers are expected to

understand issues in pension reform (2004), social insurance and social security. Ordinary Least Square

technique was used to estimate the tenacity of corruption as being related to the degree of social

insurance and other intervening variables. Annual index of perceived corruption 1996 – 2009 was

obtained from Transparency International.

The lowest level of corruption corresponds to 10 and the highest level been designated as 0. This was

reversed to align easily with our measurement of social insurance which is in ascending order.

1.1.6 Result and Discussion

The regression analysis of social insurance on corruption index in Nigeria is estimated as follows:

Corinx= 8.328 -0.967Scins -0.002Infrt + 0.017unemprt

SD (0.252) (0.209) (0.014) (0.017)

Pa.corre. -0.826 -0.29 0.304

VIF 1.52 1.15 1.34

R2 = 0.728, adj. R

2= 0.65, F = 8.928, Sig F = .004 Durbin Watson = 1.786 (see appendix 1)

The appropriate signs produced by the regression result presented above supports the a priori

presumption that parlous corruption is significantly influenced by prevalence of weak social insurance

support, unemployment rate but not by inflation rate in Nigeria. The coefficient for the principal

variable (social insurance) is significant at 5%, while the result of the coefficient of determination at

72.8% explains the extent to which the social insurance, unemployment and inflation rates explain the

trend of corruption. This is further validated by the adjusted R2 of 65%. This result is significance at

5% of the joint influence F-test. Thus indicating that irrespective of the imperfections of any of the

explanatory variables; their combined influence are potent to explain the outcome of corruption in

Nigeria. Furthermore, the Durbin Watson statistics of 1.786 is moderate, evidencing absence of first

order serial correlation in the explanatory variables, while the estimated standard error of the regression

of 0.2864 is significantly low for the result.

Being an exploratory study, the outcome of the analysis significantly provides the understanding that a

weak social insurance structured within the political economy could further confound corrupt practices.

This is in line with the conceptual insurance theory that an socio-economic mechanism must be

inclusively addressed to stem the natural fear of pervasive uncertainties of the future. Unemployment

rate is found to be exogenously significant to the incidence of corruption, implying that social policies

with social insurance content such as social spending on education and health should be of high

budgetary concern to stem unemployment rate. Although, inflation rate does not conform to a-priori, it

is plausible to rigorously manage inflation as a social welfare indicator as suggested by May, et al

(1998), Bhatia (1978).

1.1.7 Conclusion

The findings show that the existence of parlous corruption is related significantly to weak social

insurance in Nigeria with the inverse partial correlation of 82.6%. Though inflation rate is not

significant in the model, the partial correlation of 30.4% of unemployment rate with corruption index

indicates the relevance of focusing on reducing unemployment rate as a form of social insurance. It is

therefore suggestive that a rethinking of social spending on education and health and indeed

infrastructural development be construed as social insurance mechanism in the political economy of

Nigeria. The elements of social insurance which were to be the driving force of the scrapped National


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Social Insurance Trust Fund (NSITF) should have been incorporated into the Pension Reform Act

(2004). The non-availability of unemployment insurance, disability insurance, non-inclusiveness of

NHIS and guaranteed returns on contributory pension scheme weakens the level of social insurance

that would have been contextually ingrained in pension reform 2004. Corruption cannot abate when

economic agents fear future financial insecurity which explains its parlous state in Nigeria. Future

research will analyse a cross country analysis of the relationship of corruption index to the quality of

social insurance across different jurisdictions particularly in developing economics.

1.1.8 Recommendations

Nigeria‘s state of parlous corruption can be mitigated to some reasonable extent if carefully structured

public and private personal insurances are put in place. One of the potent social security vehicles are

life and health insurance, unemployment insurance and guaranteed contributory pension and this

should be addressed in the next Pension and Social Health Insurance review. The Nigerian government

should address how persons aged 65 and above, and below age 15 could have access to affordable

health care. The pricing of life insurance could be actuarially refined to expand the scope and create a

better platform for survivor insurance. NHIS should roll out products on disability and possibly trauma

insurance to manage new trends in health risks such as stroke. Social insurance costs can be reduced

through social spending on education and health which transfers good health and quality skills to the

ability to secure employment and boost general productivity. This also facilitates the reduction in

dependency ratio and promotes social stability.

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Appendix I Table 1: Summary of Regression Analysis of Social Insurance on Corruption Index

Model Summaryb

Model R

R

Square

Adjusted R

Square

Std. Error

of the

Estimate

Change Statistics

Durbin-

Watson

R Square

Change

F

Change df1 df2

Sig. F

Change

1 .853a .728 .647 .28640 .728 8.928 3 10 .004 1.786

a. Predictors: (Constant), unemplrate, infltnrate, socins

b. Dependent Variable: corindx

Table 2: Summary Statistical Analysis of Corruption showing B and Std. errors


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Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

T Sig.

95.0%

Confidence

Interval for B Correlations

Collinearity

Statistics

B Std. Error Beta

Lower

Bound

Upper

Bound

Zero-

order Partial Part Tolerance VIF

1 (Constant) 8.328 .252 33.068 .000 7.767 8.889

Socins -.967 .209 -.941 -4.636 .001 -1.431 -.502 -.837 -.826 -

.764

.660 1.515

Infltnrate -.002 .014 -.024 -.133 .897 -.032 .029 .290 -.042 -

.022

.867 1.153

unemplrate .017 .017 .193 1.010 .336 -.021 .055 -.272 .304 .167 .747 1.339

a. Dependent Variable: corindx

Table 3: Social insurance, corruption index, inflation rate and unemployment rate in Nigeria (1996 –

2009)

Year Social insurance

Inflation rate

Unemployment rate

Corruption index

1996 1 29.262 2.9 8.5

1997 1 8.536 3.2 8.3

1998 1 9.986 3.2 8.1

1999 0 6.617 3.1 8.4

2000 0 6.938 13.1 8.8

2001 0 18.032 13.6 9

2002 0 13.681 12.6 8.4

2003 0 14.023 14.8 8.6

2004 0 15.02 13.4 8.4

2005 0 17.856 11.9 8.1

2006 1 8.227 12.3 7.8

2007 1 5.392 12.7 7.8

2008 1 11.583 14.9 7.3

2009 1 11.959 19.7 7.5