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Difficulties of Social Policy Reform: The Case of Severance Pay

In the previous blog entries, we suggested that Turkey's social security system might have entered a period of re-calibration. In this context, we proposed that one avenue for welfare state reform would be to aim at shifting the focus of Turkey's welfare effort from older persons towards the working age population and children. However, reforming social policy is not as straightforward as it might appear. The politics of welfare state reform is quite different from the politics of welfare state expansion. For different reasons, making changes to a social security system can be quite hard. In this entry, we will present one such case of a puzzlingly difficult reform, which has been on the agenda of Turkish politics for decades: severance pay. To understand the case of severance pay reform, which is rarely discussed in the comparative literature, we first need to understand what this policy consists of and how it historically developed in Turkey.

One of the key functions of modern welfare states is to provide protection in the case of unemployment. In most European welfare states, the main mechanism to provide this protection is unemployment insurance. In a nutshell, this policy consists of regular monthly payments to the unemployed, provided that the unemployed fulfills certain conditions. Since 1999, unemployment insurance also exists in Turkey. However, in Turkey only a small minority of the unemployed receive unemployment benefits (between 7 and 13 percent, depending on the way unemployment is calculated). Moreover, the benefit amount is rather meager (on average, 879 TL in July 2018).

Partly due to this low coverage and generosity of unemployment insurance, employees and labour unions commonly perceive another policy as their real protection against unemployment: severance pay (kidem tazminati). Surprisingly, this policy is rarely explored in comparative welfare state research (for an exception see Özkan 2016). While severance pay exists in most countries around the world, its precise form varies from country to country (Holzmann and Vodopivec 2012). In Turkey, severance pay is very well institutionalized and comparatively generous. In a nutshell, severance pay consists of a lump-sum payment by the employer to the employee (the amount of which is based on the employee's wage and length of employment) in the event of a termination of contract (for certain reasons). Thus, it cushions the income-loss of an employee who becomes unemployed, just as unemployment insurance does. Although the payment of severance pay is not conditional on unemployment (e.g. if the employee immediately finds new employment, she would still be entitled to receive severance pay) and although severance pay fulfills a number of other social functions (Basterzi 1995), it can thus be seen as a functional equivalent to unemployment insurance. Regarding protection in the case of unemployment protection, a key difference is simply that unemployment benefits are paid monthly, while severance pay consists of a lump-sum payment.

In Turkey, severance pay was established with the Labour Law in 1936. Benefits were initially meager and the policy had a limited scope. From the 1950s to the 1970s several reforms to severance pay legislation were made. Responding to demands by increasingly vocal labour unions, these reforms generally expanded both the generosity and coverage of severance pay. The last expansionary reform, which was legislated in 1975 when labour unions and leftist political parties were at the peak of their power, was far reaching: it doubled the amount of benefits (from 15 days' wages per year of employment to 30 days' wages per year of employment) and expanded the scope (by lowering the qualification period from 3 to 1 year of employment).

Unsurprisingly, these expansionary reforms drew the ire of business groups, which argued that high severance payments increased labour costs and thereby decreased their ability to create employment. In addition to calling for lower benefits, they suggested a severance pay fund should be created. Employers would make monthly contributions to this fund for each of their employees. These monthly contributions would be easier to manage for employers than a lump sum payment at the end of employment and would increase Turkey's chronically low savings rate (Gürsel & Imamoglu 2012). The creation of such a fund had already been foreseen in the 1975 reform, but its implementation had been postponed at that time.

With the military coup in 1980, the balance of power between labour and business shifted towards the latter. Therefore, it is no surprise that the military regime made cutbacks to severance pay. However, these cutbacks were surprisingly minor, consisting only of a re-introduction (and then a subtle decrease) of a benefit cap for severance pay. The military regime did not create a severance pay fund, nor did it lower the regular benefit amount or made any restrictive changes to the conditions of receiving severance pay. After the end of the military regime in 1983, various governments vowed to reform severance pay, either through creating a fund and/or changing the benefit amount. Yet, surprisingly there has been no change to severance pay legislation since 1983. This is surprising as various governments tried to reform the policy. In the next blog entry, we will explore why severance pay reform has not happened.

FURTHER READING:

Basterzi S (1995). Kidem Tazminati - Issizlik Sigortasi Iliskisi. Ankara Üniversitesi Hukuk Fakültesi Dergisi, 44(1-4): 313-334.

Gürsel S and Imamoglu Z (2012). Kidem Tazminati Reformu: Sorunlar ve Çözümler, BETAM Arastirma Notu, Bahçesehir Üniversitesi, Istanbul.

Holzmann R and Vodopivec M (2012). Reforming Severance Pay : An International Perspective. World Bank. Washington, DC: World Bank.

Ozkan UR (2016). Welfare regime change - or lack of change - in unemployment compensation. International Journal of Social Welfare, 25(2), 126-135.