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Key Text Social Pensions: Their role in the Overall Pension System

Author: R Palacios and O Sluchynsky
Date: 2006
Size: 47 pages (408 KB)

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Summary

Are social pension schemes (SP) an effective way of alleviating poverty among the elderly in developing and transition countries? What issues need to be considered in formulating pension policy in developing countries? This study for the World Bank reviews the global experience with social pensions, finding that coverage and cost of schemes varies widely.

Social pensions (SP) – cash transfers with little or no link to previous contribution or work history – are used in many countries to provide income support for the elderly. It is argued that they address the gaps in the chronically low coverage by contributory schemes, and are effective at reducing poverty among the elderly. SPs can play either core or supplementary roles. In the latter case they provide a safety net for the lifetime poor or those who are missed by the contributory mandate. In the former case, cash transfers are paid to most or all citizens above a certain age.

Across the 21 countries surveyed there are wide differences in coverage and cost. It is necessary to look at indicators of the size of benefits and coverage to assess the role of SPs (core or supplementary) in any country. The study finds that:

The available evidence on poverty among the elderly is mixed and does not support targeting this group on a categorical basis
‘Supplementary’ SP schemes vary in terms of targeting performance and impact on poverty of the elderly. They do not and cannot have a major impact on overall poverty rates, but can provide safety nets if well targeted
‘Core’ SP schemes all had positive impacts on health and education for children living with their pension-recipient grandparents, and in shifting households from subsistence to surplus agriculture
‘Core’ SPs can also affect household structure by providing flexibility to work seeking adults to seek better employment away from home
‘Core’ SPs are expensive for poor countries with limited sources of revenues and imply potentially important trade-offs.

A number of important areas relating to SPs need research. These include lack of knowledge about administrative costs, optimal institutional arrangements, determinants of take up rates, and relationships with/impacts on contributory schemes. More research is also needed on the relative poverty of the elderly, the relationship between income and longevity, and intra-household allocation of resources in multi-generational households. While indirect benefits were seen from ‘core’ SP programmes, there has been no analysis of whether direct expenditure in health, education and livelihoods would have been more effective. Proposals to introduce or expand SPs:

Should be measured against four main criteria; fiscal space and trade-offs, impact on savings and work incentives, size of the coverage gap, and ability to apply means-testing.
Depend on country-specific circumstances. Assessment will be fundamentally different for ‘core’ SPs where income security will depend heavily on transfers and costs will be significant relative to the budget.
Face challenges in setting appropriate eligibility, levels of benefit, targeting, minimising incentive problems, and designing administrative and fiscal transfer processes.

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Source: Palacios, R., and Sluchynsky, O., 2006, 'Social Pensions Part 1: Their role in the Overall Pension System', Social Protection Discussion Paper No. 0601, World Bank, Washington