Social Pensions: Why and How?

Pierre Pestieau

University of Liege, CORE and PSE

Conference on Non-contributory Pension for Lebanon

Beirut, May 31st, 2012

Outline1. Definition

2. Why ?

I Poverty in old age

I Political acceptance

3. How ?

I Universal

I Targeted

4. Political sustainability

5. Evidence

I Africa

I EU

I Latin Amercia

I Middle East

6. Conclusions

Definition

Cash transfers targeted to the elderly with no link to contribution

histories. It can be universal (unconditional) or means tested.

Why ?

I Low coverage in contribution-based pension schemes

Poverty among the elderly

I Live in larger households: ethical and data issues

I Higher than for other age groups? Mixed results

I More political acceptance; no responsibility

I Potential impacts:

I reduce elderly poverty

I reduce overall poverty

I reduce work effort

I spillover on health and education of children

I change living arrangements

How ?

I Implementation issues:I Benefit levels: absolute or relative

I Not too low: subsistence

I Not too high (relative to minimum wage, minimum

contributory pension if any):

· incentive effects

· budgetary cost

I Eligibility ages: should vary with LE.

I Residency condition

I Financing: general revenue or payroll taxation

I Universal or Targeting

I Universal: simple, no disincentives, political support but high

fiscal cost

I Targeting: low fiscal cost but complex (because of

informational constraints):

I based on individual elderly or household including non elderly;

I include income/assets of the elderly only or of all household

members

I proxy means tests (dwelling, assets, household demographics)

Political sustainability

I Programs for the poor tend to become poor program

I Bismarckian formula is not feasible in countries with meager

public sector

I Alternative: make it a constitutional right with benefits linked

to macroeconomic performance

Evidence

Table 1: Social pensions in developing countries

Countries Replacement ratio Age Cost in % GDP

South Africa 10 65/60 1.4

Mauritius 19 60 2

Botswana 9 65 0.4

Brazil (rural area) 24 60/55 1.0

Simulations

I Kakwani and Subbarao, 2004: 5 African countries: 70% of

poverty with cost between 0.7 and 2% of GDP

I Dethier et al. 2012: Latin America

I Vanderwinen, 2011: Europe

I Robalino, 2005: Middle East and North Africa

Table 2: Latin America (50 % median income)

Country Relative reduction Current poverty Relative cost (% GDP)

Argentina 0.69 0.13 0.012

Brazil 0.20 0.06 -

Chile 0.37 0.15 0.05

Mexico 0.41 0.27 0.07

Peru 0.63 0.23 0.016

Venezuela 0.58 0.21 0.016

Table 3: Middle East (15 % GDP per capita)

Country 2010 2040

60 65 60 65

Jordan 0.9 0.6 2.3 1.5

Lebanon 1.3 0.9 3.0 2.2

Conclusion

I Good idea

I Can be started small

I Goal: poverty alleviation and not childrens welfare