Eliminating poverty in old age: are social pensions the answer?

Poverty in old age is prevalent in a large number of Latin American countries. Universal minimum pensions would be an effective and administratively simple way to substantially reduce poverty among the elder generation.

Photo: © Charlotte Kesl / World Bank

Alleviating poverty in old age requires a different approach from other age groups. Since poverty reduction efforts through labor market or education policies are ineffective, the only available instrument is to directly transfer money so the elderly can purchase goods and services. In rich countries, pension systems transfer money from the rich to the poor and often include a minimum pension that contributes significantly to reducing poverty.  But in developing countries, pension systems have such a low coverage that they cannot deal with old-age poverty.  In Latin America, which has what social scientists call a “truncated welfare state” - with income redistribution for the better-off and exclusion for those in need—most poor people are not covered by pension systems.

Some countries have responded by introducing social insurance programs that do not require citizens during their working years to pay into them. These “social pensions”, also called universal minimum pensions, are entitlements financed entirely out of the government’s general revenue paid out to certain categories of individuals, e.g. the population older than 65.  Only four developing countries have such arrangements for the whole old age population: Mauritius, Namibia, Botswana and Bolivia. They are easy to administer and do not require information on the income or assets of the beneficiaries. However, they offer a pension which is relatively low and not sufficient to lift its beneficiaries above the poverty line (with the exception of Mauritius). A second type of minimum pension is also universal but subject to means-testing. It can be completed by housing subsidy or the possibility of being admitted in a public nursing home.  A number of developing countries have universal means-tested pensions although the means test applies to the household and not to the individual. The most famous examples are South Africa and Brazil.  The Brazilian minimum pension, available to men over 60 and women over 55, corresponds to the minimum wage.

In a recent paper with Pierre Pestieau and Rabia Ali, I examine how much poverty in old age would be eliminated by introducing a universal minimum pension in 18 Latin American countries. We use SEDLAC household survey data for the most recent available year. 

Introducing social pensions would substantially reduce poverty among the elderly, sometimes very substantially as in Colombia, Honduras or Nicaragua.  Poverty would not decline much in Argentina, Brazil, Chile and Uruguay—because these countries already have minimum pensions and poverty rates are already among the lowest in the continent. 

We find that social pensions have much to be commended in terms of incentives (increasing households tendency to work, save money and have a greater sense of solidarity), spillover effects and administrative simplicity but they have a high fiscal cost.  The latter is is influenced by the age at which benefits are awarded, the prevailing longevity, the generosity of benefits, the efficacy of means testing, and the fiscal capacity of the country.

The affordability of minimum pension schemes varies with the poverty threshold that is chosen (e.g. $2.5-a-day, or half the median income) and the country’s average income level. As a rule of thumb, we can say that countries with national income above the Latin American average (about $6,000) could and should opt for a minimum pension equal to half the median income. For other countries, a $2.5-a-day pension appears reasonable. For the poorest countries—Honduras, Nicaragua or Paraguay—a $2.5-a-day pension will have noticeable anti-poverty effects and a cost ranging from 0.5 to 1.6 percent of GDP, which seems affordable. Bolivia (where a quasi-universal pension scheme exists) would continue to have a high poverty rate among elderly because the existing scheme provides benefits that are quite below the $2.5 a day poverty line.

These schemes, even if they were adopted by most Latin American countries, are not necessarily politically sustainable. There is always the risk to see it progressively eroded because of lack of political will. Elderly people particularly in developing countries do not have much political weight. Their demographic importance is small relative to OECD countries. To the extent that the majority of elderly live with their children, they cannot express their concerns truly independently. For these reasons it is important to give the “social pension” a constitutional status within a framework that takes into account socioeconomic parameters that change over time. For example, the age at which the pension is made available could vary with longevity (which generally improves over time as mortality rates decline in developing economies). Benefits should not be absolute but be linked to national income growth. As national income grows, a US$2.5-a-day pension quickly loses its attractiveness.