NATIONAL INSURANCE CONTRIBUTIONS (NIC)

In addition to income tax, citizens generally pay an additional contribution - which may be the same for everyone, but is more likely to be one related to their income - with a further contribution from the employer. When first begun these payments were for specific purposes-, for example, to pay for basic health care, for allowances from the state in times of need, and as a contribution towards an eventual pension. In other words, it was effectively compulsory social insurance levied by governments against possible future deprivation. Today, such contributions rarely cover the amounts paid out. A national insurance contribution or a social security payment is simply an additional tax. However, by no means all countries have social security systems. The idea was pioneered by the UK and the Scandinavian countries, but has now spread to most industrialized nations (especially in Europe). Though there has been some cutting back in the past decade, there is nevertheless broad agreement that the system is valuable and that it provides an important safety net for those in need or in retirement.

A number of the world's poorest countries are unable to operate effective social security systems, generally because the}' do not have enough people in paid employment to generate the necessary funds. Some of the newly emerging industrialized countries have taken a different approach, however.

In Singapore and Malaysia, for example, all workers and employers put substantial proportions of their wages into a special fund. This then accumulates. Individuals may then withdraw money for specific purposes such as housing. On retirement, the money reverts to the individual for his own use. There is no pension as such. Investment in, and the release of funds from, the Consolidated Provident Fund (as it is called in Singapore) have enabled Singapore to achieve one of the highest rates of home-ownership in the world (over 8096). It should be recognized, however, that this is not a tax as such: indeed, the contributor receives tax-free interest of his accumulated funds. Rather, it is a form of compulsory saving for wage earners. No government pension is paid.

(from "Guide to International Finance" by Alen M.)

I. Answer the following questions:

1. Is NIC related to people’s income?

2. Who pays further contribution for the workers in paid employment?

3. What were these payments for at first?

4. How can you characterize the additional contribution the citizens pay now?

5. How did these payments begin?

6. What do most countries think about this system?

7. What approach has been taken by the newly emerging industrialized countries?