REFLEXIONS ON

SOCIAL PENSIONS IN

SUB-SAHARAN AFRICA Phillippe Leite & Melis Guven

Morning Symposium on

"Social Assistance vs. Social Pensions”

April 3rd 2013

PART 1: SUB-SAHARAN

AFRICA CONTEXT

• High levels of poverty across all population groups

• Limited fiscal space

• High levels of informality and Low levels of formal contributory pension systems

• Recent demographic changes: declining fertility rates and increasing longevity

• Increase old age dependency rates and young population

• A share of elderly population have no regular income, and no access to health care

• Women, who is likely to be out of formal labor market, tends to live longer and look after young family members are specially vulnerable.

• Despite mild economic growth, elderly still are subjected to poverty, and deprived of basic services (mainly health care)

PART 2: WHY SOCIAL

PENSIONS ?

Challenges with Contributory Schemes

• Low Coverage: Contributory pension schemes in Sub-Saharan Africa

cover very few people due to the large informal sector in most of

livelihood activities and employment; no significant coverage

increase in past decades.

• Limited Impact on Poverty Reduction: Contributory pension

schemes do not have impacts on poverty reduction since

beneficiaries are not poor

• Formal sector in SSA is too small and pension schemes largely benefit civil

servants.

• Fiscal Challenge: Most countries are seeing a deterioration on the

financial situation of contributory pension schemes (low contribution

rates and generous benefits); spending increasing but for a small

segment of the population

• Inefficencies in Administration: High administrative costs further

increasing the fiscal cost

• Demographic Aging : Most countries are still young but

demographic aging will take place rapidily

New Social Policy Agenda: social pensions to address the coverage gap

• Other policies are being considered and piloted to alleviate poverty, particularly cash transfers.

• Increased scope and discussion for Social Pensions (non-contributory pension) programs. • Social Pensions as the way of addressing the coverage

gap in the context of the persistently low coverage of contributory pension schemes.

• but limited research nor conceptualization of the problem and no systemic presentation of issues related to Social Pensions

PART 3: SUB-SAHARAN

AFRICA EXPERIENCE

• Universal

• Botswana, Mauritius, Namibia, Seychelles, Uganda, Zambia pilot

program and Kenya pilot program

• Pensions tested

• Lesotho, Swaziland and Nigeria - Ekiti State

• Means-tested

• South Africa, Cape Verde, and Kenya pilot.

• Benefit levels vary between 4% and 35% of per capita

GDP

• Annual costs range from 0.3% of GDP in Botswana where the

benefit level is the lowest to 1.8% of GDP in Lesotho where the

benefit is the highest.

• Universal x Targeted: Social pension programs in Zambia is deemed

largely insufficient in reaching the elderly without other subsistence

income who remain largely uncovered by safety nets. Even universal

programs have exclusion errors.

• Stand alone or part of a broad cash transfer: Social pensions were

introduced in some countries (Swaziland for example) to lighten the

burden on the elderly caring for orphans. They have provided some

support to orphans who live with an elderly person. However, as 55

percent of poor children in Zambia do not live with an elderly person,

25 percent of orphans are not poor, and 85 percent of extremely poor

children are not orphans.

• Old-age benefits may not be the most efficient programs for protecting

vulnerable children such as orphans.

Elderly people: 65 years-old and more

Half of median

# % #pension FGT(0) FGT(1)

Ghana 2005 1,039,355 4.68 27,787 15.5% 5.1%

Malawi 2010 523,355 3.71 10,303 12.3% 2.6%

Mali 2009 469,541 3.69 7,859 9.5% 1.9%

Mauritius 2006 87,851 7.17 16,188 3.3% 0.8%

Mozambique

2008 637,455 2.96 29,862 15.3% 5.5%

Nigeria 2010 7,545,263 4.65 84,006 10.9% 3.2%

Zambia 2010 315,640 2.42 19.8% 6.3%

Elderly people: 65 years-old and more

Cost: closing the elderly poverty gap

Annual

Cost

($PPP

millions)

# AVG daily

transfer

($PPP)

GDP

($PPP

millions)

% of

GDP

Ghana 2005 2,790 1,039,355 7.4 34,858 8.0%

Malawi 2010 247 523,355 1.3 11,082 2.2%

Mali 2009 1,400 469,541 8.2 14,593 9.6%

Mauritius 2006 58 87,851 1.8 15,921 0.4%

Mozambique

2008 333 637,455 1.4 18,397 1.8%

Nigeria 2010 4,550 7,545,263 1.7 318,278 1.4%

Zambia 2010 208 315,640 1.8 17,173 1.2%

Country Program Benefit level

(LCU)

Benefit level

(US$ eq. a

day) % of GDP

Botswana (UMIC) Old Age pensions (U) P 220 1.79 0.33%

Kenya* (LIC) Older persons (M) S 1,500 0.81 0.02%

Lesotho (LMIC) Old Age pensions (U de

facto) M 300 1.95 1.77%

Mauritius (UMIC) Non-contr. retirement

pensions (U) Rs. 2,945 6.14 1.70%

Swaziland (LMIC) Old Age Grant (U) E 200 1.43 0.60%

Cape Verde*

(LMIC) Old Age Pensions (M) E 4,500 2.28 0.40%

Namibia* (UMIC) Old Age Pensions (U) N$ 450 3.00 1.36%

South Africa*

(UMIC) Grant for Older (M) R 1,100 7.40 1.14%

Enlarge scope: SP&L systems Administrative

Infrastructure and

Institutional

Arrangements

Fiscal and

Macro-

economic

Stability

Governance and

Accountability

Legal and

Regulatory

Supervision

Social

Pensions

or old age

assistance

Unique

identification

Means-testing

infrastructure (as

needed)

Application and

eligibility

certification

processes

Record-keeping

and data

management

Disbursement

mechanisms

Fiscal

capacity

to

support

benefit

commitm

ent the

face of

aging.

Rules, roles and

controls

supporting elderly

assistance.

Transparent

disclosure of

benefit formula

and means

testing.

Mechanisms for

redress of

complaints

Legal

foundation

supporting

rules, roles

and controls.

External

audit and

evaluation

Periodic

independen

t

assessmen

t

Monitoring

and

evaluation

processes

60%

77%

29%

40%

23%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

All 20 13 LICs 7 MICs

Donor influenced Government managed

But donnor influence

affects capacity of a

country to efficiently

implement a program

FYI

• Chilean experience to increase protection of elderly population

• For individuals with no savings capacity:

• Stronger social safety net

• Special measures for targeted groups (e.g. women)

• For individuals with limited savings capacity

• Improve incentives to save

• Provide complementary benefits

• For individuals with savings capacity, not currently covered:

• Mandate participation

• Increase compliance

• Challenge

• expand coverage of policies for elderly population given that:

• Individuals with no or limited savings capacity.

• Firms with low productivity

• but

• Without affecting behavior

• Generating equity

• Being financial sustainable and effective

FOR REFERENCES: OTHER

CHALLENGES -PARAMETERS

DESIGN OF SOCIAL

PENSIONS

• Parameters • Benefit level

• Fixed but small, fixed at the minimum wage level, variable but adding up to the poverty line?

• Age • Arbitrariness, determined by individual capacity to work, function of

health / longevity • Difference between life expectancy and age chosen matters for the

fiscal constraints • Targeted or Universal

• Universal cost more but it is more attractive; political support; strong fiscal constraints implies conditionalities;

• Financial support can comes from taxes but efficient taxation on those who do not need or means test are procedures that are “similar”

• But even in Universal programs errors of exclusion exist and can be large (significant)

• Income effects: Minimum pensions are expected to have disincentive effects on individual decisions

• Retirement Decision: avoided if age is not too low

• Prodigality Effect: individuals who would save for retirement can be temped to avoid savings

• Longevity: increase in dependency ratios as a result of increased longevity and declining fertility increases minimum cost. At the same time minimum pensions would, by themselves, induce an increase in longevity since they would provide the elderly with better food and health care.

• Spillover effect: drop in labor supply of prime-age individuals, increase in health of children...

• There is a “wisdom” that universal is administratively simple, but universal have exclusion errors and people simple forget that administration of a larger caseload of beneficiaries requires more investments (e.g. in many countries IDs as age-prof documents are inexistent among the elderly population.

• Cost of such a programs far from negligible but it is reasonable.

• The affordability of minimum pension schemes depends on the benefit size, poverty and age threshold chosen

• Benefits should not be absolute but linked to national income growth.

CONCLUSION

• Poverty in old age is still prevalent.

• Social pensions would be an effective tool to fight poverty

but not alone • It is important to study and understand the causes of the low coverage

of contributory pensions and its reasons

• It is important to define new tailored strategies (SP&L system) to

increase coverage

• In other words, we must have the SP&L system vision so that improvements

in mandatory and voluntary contributory schemes are required to significantly

expand coverage beyond a tiny fraction of workers currently covered after

almost half a century in operation.

• Bring the SP&L system vision to the debate

• Example (1): Due to fiscal space

• Targeting social pensions should often be the preferred solution

• If targeting is used, why a separate program rather than integration into a general social assistance program

• Example (2): Matching defined contribution (MDC)

• MDC take a long time to mature and have any impact on old age poverty

• MDC policy and social pensions can be linked and harmonized to achieve clear objectives over time.

• Social pension dependence will be greater for older workers and gradually be replaced by dependence of younger workers on MDCs.