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: Onafalujo@Yahoo.Com;
Eke Patrick Omoruyi,
Department Of Accounting And Finance,
Lagos State University, Badagry Expressway, Ojo, Lagos State
Tel: +2348029742444, E-mail : ekeopatrick@gmail.com
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. R2
= 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

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