Social insurance systems have played a major role in the development of modern fiscal states. In high-income countries they have both been a large source of public revenue, and have supported wider tax and state capacity – by strengthening fiscal reciprocity, encouraging formalisation, expanding administrative systems, and supporting finance systems. Today, comparable systems remain limited in many lower-income countries. This policy brief suggests that this has created specific challenges for their tax administration. More importantly, it argues that building sustainable social insurance systems and expanding tax capacity should be understood as complementary development projects. This does not imply that lower-income countries should necessarily replicate the social insurance systems or historical trajectories of high-income countries. Still, tax and social insurance policy need to be more closely integrated in lower-income contexts – recognising their shared administrative infrastructure, potential to reinforce formalisation and reciprocity, and the role that progressively subsidised social insurance can play in expanding both social protection and revenue mobilisation capacity in lower-income countries over time.
“The world’s strongest fiscal states were built not merely through expanding tax capacity in the narrow sense, but through the creation of large-scale contributory social insurance systems.”
Key messages:
- Historically, social insurance contributions (SICs) have made a significant contribution to fiscal state-building in high-income countries. They have not only been a major source of public revenue and health financing, but also laid the foundations for building consensus and infrastructure to expand tax capacity. They have boosted domestic saving and financing, formalisation, administrative development, and more visible reciprocity between citizens and the state.
- The much more limited role of social insurance in lower-income countries is an important and under-discussed aspect of their fiscal capacity challenge. Their limited coverage can mean both less social protection, and fewer incentives for formalisation, less visible fiscal reciprocity, and a narrower contributory base.
- Building social insurance systems can support wider tax capacity through several interconnected mechanisms. These include deepening domestic capital markets and supporting government financing, strengthening formal employment relationships and administrative systems, contributing to shared tax and digital public infrastructure, making fiscal reciprocity more visible, and mobilising resources for healthcare.
- Building sustainable social insurance systems and expanding tax capacity should therefore be understood as complementary development projects. This does not mean replicating the systems of high-income countries. Rather, governments and development partners should integrate social insurance more closely into domestic revenue mobilisation strategies, invest in shared administrative infrastructure, connect formalisation to tangible benefits, and use progressive tax financing to support wider access.
