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1
Cash Transfers
Cornelia Mihaela Tesliuc
Social Safety Nets Core Course
February 26, 2008
1
2
Cash Transfers: Summary Sheet
Intended Beneficiaries• Poor working families• Those not expected to work – children, the
elderly, disabled • Those needing temporary relief
Targeting Methods• Means and proxy means and/or• Categorical: children, old, disabled, etc.
Needs Based transfers (which include food stamps), non-contributory pensions, family allowance
Disadvantages• Targeting methods can be information intensive • Transfers are fungible, subject to unintended
household uses
Advantages• Have lower administrative costs than many other
programs• Do not distort prices • Transfers can directly meet critical household
needs• Benefits can be differentiated by level of need,
household size or composition, etc.
Appropriate Context• Essential commodities available on the private market
Key Design Features• Good administration for selection of beneficiaries and cash/food stamp distribution• Distribution and reclamation chain for food stamps
2
3
Outline
• What are cash transfers?• Types of programs• How important are they?• Pros and cons• When are cash transfer appropriate?• Design considerations
3
4
A word of caution on terminology
• Universal versus targeted programs– The only universal SSN program is subsidies – all individuals can
benefit– All other SSN programs, including “universal child allowances”, are
targeted. Targeting method: categorical / demographic
• Cash transfers may be conditional or unconditional– “Conditional transfer” refers to the requirement that some condition
must be fulfilled by the recipient in order to receive the program transfer, such as workfare or human capital investment
– “Unconditional” DOES NOT mean “universal”
4
55
Types of cash transfer programs• Cash transfer programs provide cash or near-cash assistance to
the poor and certain deserving or vulnerable groups.
• Objective: Increase the incomes of the poor; facilitate government reforms; protect the poor from shocks.
• Type of programs– A. Needs-based social assistance programs – B. Social pensions: noncontributory transfers to offset the risks of old
age– C. Family allowances – D. Food stamps– E. Tax Credits
6
A. Need-based Social Assistance Programs• Common in OECD, Central and Eastern Europe, the
former Soviet Union, and some Latin American countries.
• Aimed at chronic poor• Government funded• May be guaranteed minimum income program, or
last-resort social assistance program• Involve some sort of means-testing (income and asset
testing for GMI, proxy-means testing for last-resort)• Income threshold: may be linked to average or
minimum statutory wages, or minimum cost of living6
7
A. Guaranteed Minimum Income (GMIs)
• Targeted cash assistance that guarantees a minimum for households below an income threshold;
• A safety net for the poorest, aims to cover the bottom 5-10% of the population. In practice, most cover less than 5%;
• Complementary to other social protection (pensions, unemployment benefits, family allowances);
• Benefit levels are generally equal to the difference between monthly hh income and the threshold, but vary according to hh size;
• Targeting based on income and asset testing by social workers through social welfare offices;
• Common in the new EU states, which introduced GMIs following the collapse of full employment under socialism; and OECD countries
Examples:(most European
OECD countries)
Belgium;Bulgaria;Czech Republic;Estonia;Finland;France;Germany;Hungary;Romania;Slovakia.
88
Target group Poorest 10%
Targeting method Income and asset test
Eligibility criteria Income, assets, family composition
Eligibility rules Nationally determined
Financing Central budget 100%
Implementation Deconcentrated units of the line ministry
Benefit level ~28 Euro ( June 1, 2005)
Varies depending of the applicant’s earned income
Benefit formula GMI Treshold – Total income of the family
Example: Bulgaria Guaranteed Minimum Income
Basic design features
9
Spending on GMIs in EU and Transition economies• In 2003/2004, the spending on GMIs in EU25 countries ranged between 0
(few countries which at the moment did not have such a scheme) and 0.8 percent of GDP, with an average of 0.2% of GDP.
Spending on means-tested last resort income support in selected countries
0
0.10.2
0.3
0.40.5
0.6
0.70.8
0.9
% o
f G
DP
10
GMIs Outcomes in selected countries• Coverage – percentage of persons covered in each quintile• Targeting – percentage of funds going to each quintile• Adequacy – share of beneficiaries’ consumption covered by the benefit
• Bulgaria, Estonia, Lithuania, Poland, and Romania – Means tested income support are residual programs– Spending around 0.2% of the GDP on these benefits
1 (poor) 2 3 4 5 (rich) Total
Bulgaria 15 1 1 1 0 4Estonia 10 2 1 0 0 3Lithuania 14 2 1 1 0 4Poland 9 2 1 1 0 3Romania 19 2 1 0 0 4
Coverage (%)quintiles of pre-noncontributory transfers
11
GMIs Outcomes (cont’d)
1 (poor) 2 3 4 5 (rich) TotalBulgaria 26 7 9 5 7 18Estonia 43 22 13 18 11 32Lithuania 22 9 14 4 2 16Poland 39 24 21 15 13 29Romania 31 16 12 7 9 26
Adequacy (%)quintiles of pre-noncontributory transfers
1 (poor) 2 3 4 5 (rich) Total
Bulgaria 83 4 7 3 3 100Estonia 77 14 5 2 2 100Lithuania 80 9 8 2 1 100Poland 64 18 10 4 3 100Romania 85 10 3 1 1 100
Targeting (%)quintiles of pre-noncontributory transfers
12
B. Social Pensions• Designed to offset old-age poverty risk, for those above
age 65 who:– Incomplete employment history– Informal sector workers who prefer to stay outside
contributory system– Lifetime poor
• Funded mainly from general revenues, social insurance fund or payroll surcharge
• Benefit: ranges from 14% to 36% of average wage • Setting appropriate benefit level
– If high relative to minimum contributory undermines incentives to contribute (Uruguay case)
– If too low, won’t contribute to poverty alleviation, admin costs become large share of total (Argentina, Turkey)
• Total cost can vary: – 70% of poverty specific threshold to those 65+ in 15 African
countries ranges from 0.7% of GDP in Madagascar to 2.4% in Ethiopia (Kakwani and Subarrao, 2004)
12
Examples:Australia, New
ZeelandCanadaSouth Africa,Namibia,Mauritius,BotswanaIndia,BangladeshNepalBolivia, Chile,
Argentina, Costa Rica, Uruguay, Brazil
13
Social Pension Examples
• Chile: shifted from a social-insurance to a mandatory private insurance system in 1983. Govt. fully funds a minimum social pension (equivalent to $39/month) as a “bottom tier” of the privately funded system to men >65 and women>60. Covers abound 8-10% of pensioners.
• Bangladesh: Govt. funded; community targeted means-tested social pension for low-income >57 years persons. Provides Taka 120/month ($2).
13
14
Social Pension Brazil and South Africa example
• Factors behind the development of development of non-contributory pensions– Government committed to expand welfare– Explicit redistribution from urban to rural to
reduce migration– Cash transfers to poor older people politically
acceptable because less likely to create work disincentives
– Social pensions seen as instrumental in reducing social unrest
15
Social Pension Brazil and South Africa example
Impacts• South Africa
– Incidence of poverty (at 1$/day) would have been 40% rather than 35% in the absence of pensions (Case and Deaton, 1998)
– Health status of children and older people were higher in benficiary HHs (Case 2001)
– Enrollment rates of school age children higher among pension beneficiary households (Duflo 2003)
• Brazil– Increased access to credit (electronic banking card used as proof of
creditworthiness (Schwarzer and Quero, 2002)– Use part of pensions to purchase seeds and agricultural tools (Delago
and Cardoso, 2000)– Enrollment rates of school age children higher among pension
beneficiary households (Carvalho 2000)
16
C. Family allowances
• Offset child raising costs (32-45% of LDC population are kids compared to 15-18% in higher income nations).
• Easy to identify beneficiary families• Can be pro- or anti-natalist• Wide child age eligibility range (<3 to <21)• Often a flat-rate benefit, birth grant and other
allowances provided• Recent trend: targeting, mean-testing and
higher benefits for the poor and for unwed mothers
• Higher benefits accorded to families with children with special needs
16
Examples:Most OECD
European countries
Central and Eastern Europe, Former Soviet Union countries
South AfricaArgentina
17
Example: Family allowanceThe South African Child Support Grant
• Introduced in 1998 to replace the state maintenance grant. As of 2006, the program provides a monthly grant of R 190 (about US$27) to 7.1 million poor children younger than 14.
• 65 percent of all the children in South Africa live in families that would qualify for the program and 80 percent of these actually participate into the program.
• Take-up rates were lower when the program first started because of the difficulty of getting documentation for children and caregivers.
• The government made substantial efforts and was able to increase the participation of poor children in the program, but some work remains to be done to reach those poor families without proper documentation
18
The South African Child Support Grant, cont.
• Implementing agency: the South African Social Security Agency, separate government agency
• Eligibility: documentation to demonstrate primary responsibility for care giving, proof of age, official proof of employment and income of the applicant and spouse
• Payment of benefits: managed and monitored at national level and disbursed by third party contractors at provincial level
• Low administrative costs• Impact: program linked to reduction in poverty, higher labor
market participation, and increase in school attainment.
19
D. Near Cash: Food Stamps
• Food stamps, vouchers or coupons are cash-like instruments that can be used to purchase food at authorized retail locations
• The value of the stamp is backed by gov. commitment to pay
• Amount of transfer based on the gap between the amount spent on food and the amount needed to acquire a minimum food basket
• Some programs restrict HHs to buy only a few specific foods or they may allow them to purchase any food
Examples:United StatesHondurasSri LankaMexicoColombiaJamaica (until
2002)
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Tax Credits (TCs)• Income support provided through the tax
system for those who work and fill an income tax statement.
• People with earnings below a set level of income pay negative tax (e.g. receive a transfer) on the shortfall of their earnings below the threshold;
• Can take the form of a cash benefit (UK), and/or as a reduction in the amount of taxes paid or withheld from earnings (US, Netherlands);
• May be accompanied by other assistance, including credits for child care and housing (UK, NZ are focused on family support);
• Preconditions are a global income tax; personal ID #s; small informal sector (no TCs exist in high informality EU countries (Greece, Portugal).
Examples:US: EITC;UK: Working Families
Tax Credit;NZ: Working for
Families;Netherlands: Tax
Credit;Ireland: Family
Income Supplement;
Australia: Family Tax Benefit
Canada: Child Tax Benefit.
21
Different cash transfer programs often weave a comprehensive SSN: example from Bulgaria
Targeted Social Assistance Programs
GMI (monthly cash allowances) Heating allowances
Child allowances
General objectives –poverty alleviation:
(а) to assist citizens who are not able to satisfy their basic living needs on their own;
(b) social reintegration of beneficiaries;
Specific objectives:
• to add up to the incomes of poor persons and families up to a legally defined threshold;
• to stimulate an active behavior (work requirement);
• to contribute to the social integration of beneficiaries (link to other services).
• to guarantee minimum heating for low income groups of population in winter season.
•to encourage low-income parents to bring up their children;
•to stimulate children to go to school.
Targeting method Means test combined with the category approach (filters)
Eligibility criteria
Centrally determined.
income, family size, age, labor and health status of applicants and their family
income status of families and enrolment in school
Type of financing
Based on the principle of national solidarity:
Financed from general revenues from taxes.
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How Important are Cash Transfers?
• Level of spending
• Coverage of the poorest
• Generosity (level of benefit)
22
2323
How Important are Cash Transfers? Spending on Social Insurance and SSNs
Social Protection Spending, Region Averages
2.5 1.73.6
1.3 1.0 0.9
13.2
8.33.0
3.8 2.91.4
0
2
4
6
8
10
12
14
16
18
OECD (N=23) Eastern Europeand Central Asia
(N=25)
Middle East andNorthern Africa
(N=10)
Latin Americaand Carribean
(N=25)
East Asia Pacific(N=4)
South Asia (N=5)
% o
f GD
P
Social Safety Nets Social Insurance
Notes: Data on 69 countries taken from WB Public expenditure reviews or other similar work. For OECD, data from the OECD Social Expenditure database (OECD, 2004). Different years, most data from 2000 to 2003.
24
How Important are Cash Transfers? Coverage of the poorest 20% by SP programs in transition economies
240% 20% 40% 60% 80% 100%
Tajikistan
Uzbekistan
Kyrgyzstan
Moldova
Georgia
Azerbaijan
Armenia
Albania
Belarus
Bosnia Hertzegovina
Kazakhstan
Macedonia
Serbia-Montenegro
Romania
Bulgaria
Russia
Lithuania
Poland
Estonia
Hungary
Only Social Assistance Both SI and SA Only Social Insurance Not covered
Coverage of the poorest quintile by Social Protection Programs
Countries ranked in decreasing order by per capita GDP in 2000 PPP
25
How Important are Cash Transfers? Generosity: Need-based assistance
25
Generosity of Needs-based social assistance programs in transition economies
0% 10% 20% 30% 40% 50% 60%
Tajikistan
Azerbaijan
Kyrgyzstan
Moldova
Serbia-Montenegro
Albania
Kazakhstan
Bulgaria
Uzbekistan
Belarus
Russia
Bosnia Hertzegovina
Armenia
Hungary
Lithuania
Poland
Romania
Estonia
Georgia
Macedonia
Generosity = benefits / consumption of the beneficiary household
26
How Important are Cash Transfers? Generosity: Family allowances
26
27
How Important are Cash Transfers? Generosity : Social Pensions
27
28
How Important are Cash Transfers? Generosity : social assistance
28
Relative Incidence: Social Assistance
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Q1 Q2 Q3 Q4 Q5
Tra
nsf
ers
as %
of
To
tal
Inco
mes
(C
on
sum
pti
on
)
Argentina
Brazil
Chile
Colombia
Dom. Republic
Guatemala
Mexico
Peru
Transfers as a share of Total income/consumption, selected countries in Latin America
Source: Linder, Shapiro, Skoufias (2006) Redistributing Income to the Poor: Public Transfers in Latin America and the Caribbean
2929
Cash transfers: Pros and ConsPros Cons
Least-cost solution to reduce current poverty.
Subject to price inflation
Consumer decide how to use the cash to meet their needs
Use might not be optimal (unintended use of transfers) – if not with women
Do not distort prices Work disincentives
Automatic stabilizers (guaranteed minimum income programs)
Attractive to local elites –limited political popularity
Benefits can be differentiated by level of need, household size, composition
Implementation can be information intensive
Low administrative costs Reduces fiscal discretion, contributes to expenditure creep
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When is Cash Appropriate?• To reduce current (income or consumption) poverty• When transitory shocks (or reforms) trigger large welfare
losses among the vulnerable• When the vulnerable have either permanent or mobile
access to financial facilities• When food is too costly to transport, and is locally
available. • During emergencies when there is an adequate food
supply. • When the “demand” for health, nutrition and education
services is insufficient (or the returns from child labor too high) for parents to improve children’s human resource development
30
31
When are cash transfers an inappropriate part of a safety net?
• Shallow financial markets (hard to move cash)• When administrative targeting is not possible, hence
self-targeting is the only option (no inferior cash)• When supply of essential goods and services has
been disrupted (wars, natural disasters)• When programs aim explicitly to modify recipient
consumption behavior (e.g. cash rarely given to substance abuse victims)
• When safety net is funded with in-kind contributions (e.g. food aid recipient countries)
31
32
Design Considerations
1. Keep expectations reasonable (!)2. Program responds appropriately to risk and is
fiscally sustainable3. Resources targeted to the needy/vulnerable4. Benefits are adequate5. Avoid undesired incentive effects (will be covered in a
separate session)
6. Transfers are gender inclusive7. Adequate administrative capacity8. Political support is sustainable
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1. Reasonable Expectations
• Cash transfers don’t “solve” poverty or eliminate risk
• Some benefit leakage will occur• Not all needy can be covered by any single
program• Urban-bias happens• Number of programs typically expands when
social protection systems are developed
33
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2. Program is Sustainable • Long-term sustainability
– Adequate budget available for annual total benefit outlays and administrative costs
• Threat to sustainability: insufficient budget to meet program objectives– Arrears– Discretionary, instead of rule-based allocation of benefits– Partial payments– Understaffing, which leads to greater leakage– Ad hoc adjustment to inflation, erosion of purchasing
power
34
35
2. Program responds appropriately to riskEstimating Transfer Costs: Needs-Based Program
35
36
3. Targeting: Beneficiary Selection and Exit Rules
Other sessions will cover targeting in detail;
• No “perfect” targeting:– Target groups typically receive 30-75% of direct benefits
in cash transfer programs around the world;– Cash transfers are better targeted than in-kind
• Entry and exit conditions must be well-known and be enforced:– Must be a steady flow of expected entry and exits to
avoid dependency and exploding costs36
37
4. Benefits are adequate
Covered in a separate section
• Generosity– measured by replacement-income concept or transfer-to-
wage ratios
• Incentive effects. Concerns over:– Reduction of the labor effort of beneficiaries– Crowding out of private transfers (remittances, charity)– Changes in savings and investment behavior– Changes in attitudes (e.g. less motivation to acquire
human capital)37
38
6. Making Cash Transfers Gender-Inclusive
• Why?– Female headed households may face greater risks– Women may make better use of transfers– Poverty payoffs to better women’s nutrition and
empowerment shown to reduce half or more of infant malnutrition.
• How?– Gender reviews to identify risks and legislative inequity– Old-age pensions and family allowances tend to “self-
target” women– Legislative reform to provide equal access to welfare
38
39
7. Administrative Capacity to Deliver
Challenges• Political interference in staffing
& investment• Fragmented policy making and
programs fragmented amongst many agencies
• Delays in processing claims• Poor record-keeping• Failure to explain the schemes
to members and public• Poor terms of service• Excessively complex
procedures and regulations• Neglect of compliance, M&E
and policy research functions
Reform Options • Establish professional criteria
and staff certification boards • Separate policy and
operational aspects---contract out the later to social partners
• Consolidate and harmonize programs
• Central gov to prepare guidelines and local govs to prepare implementation rules
• Earmark funds for M&E, audit, and policy research
• Automation after basic systems in place
39
40
8. Sustainable Political Support
• New programs tend to start during a crisis but political interest quickly fades;
• Avoid changing structure of key programs to de-politicize the intervention;
• Analysis, information outreach and social partner consultation can help build political consensus and sustain support
• Programs with good M&E may gain and maintain support • Political sensitization needed to avoid patronage in
design, and conflict between assistance and development spending
• Universal or narrow targeting
40
41
Cash Transfers: Summary Sheet
Intended Beneficiaries• Poor working families• Those not expected to work – children, the
elderly, disabled • Those needing temporary relief
Targeting Methods• Means and proxy means and/or• Categorical: children, old, disabled, etc.
Needs Based transfers (which include food stamps), non-contributory pensions, family allowance
Disadvantages• Targeting methods can be information intensive • Transfers are fungible, subject to unintended
household uses
Advantages• Have lower administrative costs than many other
programs• Do not distort prices • Transfers can directly meet critical household
needs• Benefits can be differentiated by level of need,
household size or composition, etc.
Appropriate Context• Essential commodities available on the private market
Key Design Features• Good administration for selection of beneficiaries and cash/food stamp distribution• Distribution and reclamation chain for food stamps
41