Background Report on Targeting Mechanisms and Means … · Web viewTable of Contents. Executive Summary………………………………………………………………..7

Department of Social Development Project: SD13/2005

Review of Targeting Mechanisms, Means Tests and Values

for South Africa’s Social Grants

Final Report4 July 2007

Dr. Michael SamsonMr. Kenneth Mac QueneMs. Ingrid van Niekerk

Dr. Sheshi KanikiMs. Karen KallmannMr. Martin Williams

EconomicPolicyResearchInstitute

Table of Contents

Executive Summary………………………………………………………………..7

ES1 Introduction…………………………………………………………………………….7

ES2 The rationale for means testing social security grants……………………………7

ES3 A review of international experience on means testing……………………………7

ES4 Alternatives to means testing………………………………………………………...9

ES5 Analysis of the child support grant…………………………………………………..9

ES5.1 Review of the means test……………………………………………………9

ES5.2 Micro-simulation evidence………………………………………….………10

ES5.3 Review of benefit levels………………………………………………….…11

ES6 Analysis of the foster care grant………………………………………………….…12

ES7 Analysis of the older persons pension, the disability grant and…………….……12

the care dependency grant

ES7.1 Review of the means test…………………………………………………..12

ES7.2 Micro-simulation evidence…………………...…………………………….13

ES7.3 Review of benefit levels…………………………………………………….13

ES8 Overall recommendations…………………………………………………………...14

Part 1 The context for targeting in South Africa……………………………16

1.1 Introduction……………………………………………………………………………....16

1.2 The rationale for means testing social security grants………………………………16

1.3 The benefits of targeting………………………………………………………………..17

1.4 The costs of targeting…………………………………………………………………..18

1.4.1 Exclusion error………………………………………………………………..18

1.4.2 Administrative costs………………………………………………………....19

1.4.3 Private costs……………………………………………………………….…19

1.4.5 Indirect costs………………………………………………………………....19

1.4.6 Social costs…………………………………………………………………..20

1.4.7 Political costs……………………………………………………………...….20

1.5 The Targeting Test………………………………………………………………….…..20

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1.6 The theoretical underpinnings of targeting………………………………………..….21

Table of Contents (Continued)

1.7 General History of Social Assistance in South Africa…………………………….…25

1.7.1 History of the social pension……………………………………..….……...28

1.7.2 History of the Child Support Grant (CSG)…………………………………28

1.7.3 History of the Care Dependency Grant……………………………….…...29

1.7.4 Purpose and history of the Foster Child Grant (FCG)……………………30

Part 2 A review of the international experience on targeting………….…31

2.1 Introduction……………………………………………………………………...……….31

2.2 Unconditional social transfers………………………………………………………….31

2.3 Child-oriented programmes…………………………………………………….………32

2.4 Case studies on child-oriented programmes…………………………………………33

2.4.1 Child poverty in developed nations…………………………………………33

2.4.2 Mozambique………………………………………………………………..…34

2.4.3 Namibia……………………………………………………………………..…35

2.4.4 Kenya Cash Transfer for OVCs…………………………………………….36

2.5 Disability grants………………………………………………………………………….36

2.6 Case studies on disability grants………………………………………………………37

2.6.1 Mozambique (GAPVU)………………………………………………………37

2.6.2 Namibia…………………………………………………………...………..…38

2.7 Social pensions for older people………………………………………………………39

2.8 Case studies on social pensions………………………………………………………40

2.8.1 Lesotho……………………………………………………………………..…40

2.8.2 Nepal…………………………………………………………………………..40

2.8.3 Mauritius………………………………………………………………………41

2.8.4 New Zealand………………………………………………………………….42

2.9 Conditional cash transfers……………………………………………………………..43

2.10 Case studies on conditional cash transfers…………………………………………44

2.10.1 Brazil’s Bolsa Escola (now part of Bolsa Familia)……………………….44

2.10.2 Mexico’s Progresa (now Oportunidades)………………………………...44

2.10.3 Chile’s Solidario……………………………………………………………..44

2.10.4 Bangladesh Food-for-Education (now Cash-for-Education)…………...45

2.11 Public Works……………………………………………………………………………45

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Table of Contents (continued)

2.12 Case studies on public works……………………………………….……………….46

2.12.1 India’s Employment Guarantee Scheme (EGS)…………………………46

2.12.2 Ethiopia………………………………………………………………………47

2.12.3 Argentina…………………………………………………………………….49

2.12.4 Malawi………………………………………………………………………..49

2.12.5 Indonesia…………………………………………………………………….50

2.13 Alternatives to means testing…………………………………………………………51

2.13.1 Verified means testing……………………………………………………...51

2.13.2 Proxy means testing………………………………………………………..51

2.13.3 Community targeting……………………………………………………….52

2.13.4 Categorical targeting……………………………………………………….52

2.13.5 Self-targeting………………………………………………………………..53

2.13.6 Combinations of targeting mechanisms………………………………….53

2.14 Conclusions…………………………………………………………………………….54

Part 3 A review of South Africa’s means tests……………………………..553.1 Introduction………………………………………………………………………………55

3.2 Analysis of the Child Support Grant…………………………………………………..55

3.2.1 Review of the means test for the Child Support Grant (CSG)…………..55

3.2.2 Assessment of the means test for the Child Support Grant……………..56

3.2.3 Micro-simulation evidence for the Child Support Grant………………….57

3.2.4 Review of benefit levels for the Child Support Grant…………………….59

3.3 Assessment of the Foster Child Grant (Foster Care Grant)………………………..60

3.4 Analysis of the Older Person’s Pension, the Disability grant……………………….61 and the Care Dependency Grant

3.4.1 Review and assessment of the means tests for these grants…………..61

3.4.2 The scaling factor (ratio) between married and single individuals………68

and the rationale for different scaling factors

3.4.3 Micro-simulation evidence for the social pension…………………………71

3.4.4 Review of benefit levels for these grants……………………………….….73

3.5 The Social Relief of Distress Grant……………………………………………………73

3.6 Cost-benefit analysis of means testing social grants………………………………..74

3.6.1 Benefits and costs of means testing the social pension……………….…74

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3.6.2 Costs and benefits of targeting the Child Support Grant………………..76

Part 4 Policy recommendations……………………………………………….864.1 Introduction………………………………………………………………………………86

4.2 Recommendation for automated updates of the means test………………….……86

4.3 Rationale for linking social grant values to a poverty index……………………..…89

4.4 Linking the poverty index and the means test…………………………………….…89

4.5 Key questions for subsequent projects……………………………………………....90

4.6 Conclusions………………………………………….…………………………………..91

References………………………………………………………………………….93

Appendix 1 Government Gazette, 22 February 2005 No. 27316………………..…….99

Appendix 2 Project Terms of Reference provided by DSD……………………..…...101

Appendix 3 Alignment of this report to the Terms of Reference………………..……103

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Table of Figures

Executive SummaryFigure ES1. The evolution of the Child Support Grant benefit level…………………11

relative to inflation

Figure ES2. The evolution of the Foster Care Grant benefit level relative…………12 to inflation

Figure ES3. The evolution of the benefit levels for the Older Person’s……………..14 Pension, the Disability Grant, and the Care Dependency Grant (CDG) relative to inflation

Part 1 The context for targeting in South AfricaFigure 1.1 Social protection and growth………………………………………………….22

Figure 1.2 A virtuous circle………………………………………………………………...22

Part 2 A review of the international experience on targeting

Figure 2.1 Child poverty in developed countries………………………………………...33

Part 3 A review of South Africa’s means tests

Figure 3.1 The evolution of the Child Support Grant benefit level relative……….59 to inflation

Figure 3.2 The evolution of the Foster Care Grant benefit level relative………….61 to inflation

Figure 3.3 The evolution of the benefit levels for the Older Person’s……………..73 Pension, the Disability Grant, and the Care Dependency Grant (CDG) relative to inflation

Part 4 Policy recommendations

Figure 4.1: Inflation rates from FY2005 to FY2006 by category……………………….87

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Table of Tables

Part 1 The context for targeting in South Africa Table 1.1: A framework for assessing the efficacy of targeting………………...…..…..21

Table 1.2: Impact of the social pension on labour force participation………………….23

Table 1.3 : Impact of the child support grant on labour force participation……………24

Table 1.4: Impact of child support grant on female labour force participation………...25


Table 3.1 Micro-simulation evidence for the Child Support Grant……………………..58

Table 3.2 The means test for the social pension (single people)……………………...69

Table 3.3 The means test for the social pension (married people)……………………70

Table 3.4 Micro-simulation evidence for the social pension (75% take-up)…………71

Table 3.5 Micro-simulation evidence for the social pension (90% take-up)………….72

Table 3.6 Key demographic statistics for the social pension…………………………..75

Table 3.7 Eligibility and receipt of the Child Support Grant by mothers…………...….80

Table 3.8 Characteristics of mothers by CSG eligibility and receipt…………………..82

Table 3.9 Take-up rates for the CSG 2003-2005 by age…......………………………..83

Part 4 Policy recommendations Table 4.1 The impact of inflation adjustments on social grant spending………...…....88

Appendix 3 Alignment of this report to the Terms of Reference Table A3.1 Alignment of the objectives to the text of the main report………...…….102

Table A3.2 Alignment of the deliverables to the text of the main report……………102

Table A3.3 Alignment of the elements of scope to the text of the main report….…102

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Executive Summary

ES1. IntroductionThis Executive Summary highlights the Economic Policy Research Institute’s key findings and recommendations from the research project commissioned by the Department of Social Development entitled the “Review of Targeting Mechanisms, Means Tests and Values for South Africa’s Social Grants (#SD13/2005)”. The analysis documents a rationale for means testing social security grants, reviews the international experience on means testing and discusses alternatives. Building on these research findings, the report analyses each of South Africa’s major social grants, provides a review of the associated means tests (if any), presents evidence from the micro-simulation of alternative means tests specifications, and evaluates the benefit levels. The report concludes with specific and actionable recommendations.

ES2. The rationale for means testing social security grantsThe main rationale for means testing social security grants is to more economically deliver benefits to the poor. For a fixed budget, perfect targeting enables a social grant programme to deliver a higher level of benefits to poor households. Alternatively, for a fixed level of benefits, perfect targeting enables the programme to meet its objectives at the lowest possible cost. The assumption of perfect targeting, however, assumes a theoretical ideal. In practice, targeting is imperfect and always involves a significant basket of costs—administrative, private, social, economic and political. Extensive studies of targeting have documented the potential savings from more effective targeting as well as the significant costs imposed by targeting mechanisms.

A framework for evaluating targeting mechanisms—including means tests—starts with the baseline of universal distribution of grants. The poverty rate (or other targeting threshold) determines the potential gains from targeting. For example, a country with a 45% poverty rate potentially saves 55% of the cost of a universal programme. The framework requires the comparison of these potential savings with the total costs associated with targeting. While some costs are potentially calculable in rand terms (administrative and private costs and economic distortions), other costs (political and social costs) are harder to quantify.

Social grants are usually redistributive whether or not they are means tested or otherwise targeted. In South Africa’s case, the relatively progressive system of taxation ensures that the combination of financing and grant delivery leads to a significant redistribution of income. Economists frequently argue that universal social transfers provide the most efficient form of redistribution because there are no associated conditions that can distort people’s behaviour.

ES3. A review of international experience on means testing South Africa’s social grants are distinguished internationally by their relatively unconditional character. The main alternative type of scheme commonly employed in

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developing countries involves more rigid conditionalities—in terms of health, education or employment. There are numerous advantages of unconditional cash transfers over alternative means of social protection. They have lower administrative costs, which mean they can potentially provide the most cost-effective solution to poverty reduction. Unlike subsidies, they do not distort the price system and unlike in-kind transfers, they enable households to decide on and meet their most critical needs. Additionally it is easier to predict the budget for cash transfers as the benefits are fixed and do not depend on unpredictable commodity prices. Transfers can also help to provide one more macroeconomic stabiliser, since the net benefits to the poor tend to increase during a recession or in the face of an economic shock.

Targeted conditional transfer programmes share the objective of breaking the ‘vicious circle of poverty’ by concentrating resources on increasing human capital accumulation among the children of the poor, and through them, to directly tackle persistent or chronic poverty. At the same time, there is considerable variation in the scope, design and objectives across the range of programmes.

Brazil’s Bolsa Escola and Child Labour Eradication Programme (PETI) and Bangladesh’s Cash-for-Education programme focus on a single cause of poverty: deficient school enrolment and attendance. Mexico’s Oportunidades, Nicaragua’s Red de Proteccion Social (RPS), Honduras’ Programa de Asignacion Familiar (PRAF), Colombia’s Familias en Acción, and Turkey’s Social Fund, have a broader range of components which address specific dimensions and correlates of poverty: household consumption, early childhood interventions, schooling and healthcare. Chile’s Solidario has the widest range of interventions and addresses the multi-dimensional causes of poverty. Differences in the design and objectives of these programmes reflect different views of the causes of poverty. The first group of programmes is premised on the belief that the primary cause of persistent poverty is education deficits among the poor, arising from poor school attendance or from the competing pressures of child labour. The programmes in the second group are based on the view that education deficits, together with deficits in parenting, primary healthcare, and nutrition in early childhood, are the main factors explaining persistent poverty. Chile Solidario maintains that poverty is intrinsically multi-dimensional, and regards the household as a whole, and not only the children, as the main agent of change.

Conditionalities are often based on the view that impoverished households are poor because of their behaviour. Conditionalities, in this view, create incentives to change their behaviour and lead them out of poverty. In many cases, however, poor households face structural poverty—which their behaviour cannot change. In these cases, enforcing rigid conditionalities risks the most perverse outcome possible – punishing the poorest who faced the highest cost to comply with the requirements, particularly when high quality schools and health care are inaccessible. A World Bank conference in Istanbul in 2006 reached the conclusion that there was no conclusive evidence that conditionalities themselves promoted human development outcomes.

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International experience demonstrates that public works programmes are more likely to succeed when the link between poverty and unemployment is exceptionally strong. Since most programmes offer only short-term employment, they are more appropriate for transient rather than chronic poverty. It is also important that the value of assets produced through public works substantially offset the cost of the programme. Public works can be an expensive way to deliver social protection. The net income gains to the workers from the Trabajar programme in Argentina have been estimated to be just a quarter of the benefits paid by the government. Many programmes cost the equivalent of between $250 and $500 dollars to deliver $100 of net benefits to a household. Due to their high implementation costs, unless programmes generate substantial production-related benefits, they are unlikely to deliver social transfers in a cost-effective manner. For chronic poverty and deep structural unemployment, short-term public works have limited impact.

ES4. Alternatives to means testingSouth Africa’s approach to targeting can be classified as “verified means testing”, whereby the grant recipient directly reports the key targeting variable (income), and procedures are implemented to corroborate this information. Alternatives to verified means testing include unverified means testing, proxy means testing and universalism. Historical and international experience documents the substantial challenges developing countries face in implementing an effective verified means test. South Africa’s means tests now rank as some of the developing world’s most effective targeting mechanisms, demonstrating considerable improvement over the past five years. Nevertheless, it is relatively costly and continues to yield significant errors of inclusion and exclusion. However, many of the alternatives — proxy means testing, geographical targeting, community-based targeting, and others — are inconsistent with a rights-based approach. The main feasible and cost-effective alternative to consider is a more universal approach to targeting.

ES5. Analysis of the Child Support GrantES5.1 REVIEW OF THE MEANS TESTThe means test for the Child Support Grant is the most complicated of all the targeting mechanisms employed by the Department of Social Development, distinguishing among urban and rural households as well as the materials used in the construction of the caregiver’s dwelling. The urban/rural distinction aims to reflect the greater prevalence of poverty and the higher cost of living in rural areas.

The means test for the Child Support Grant reflects a strong theoretical understanding of the profile of poverty in South Africa. The focus on the means of the caregiver rather than the entire household takes into account the challenges of intra-household resource allocations. The utilisation of poverty proxies—informal dwellings and rural locations—reflects the nature of poverty in South Africa. In practice, however, the resulting complexity challenges the administrative capacity of the implementing institutions. Even Statistics South Africa has abandoned the task of identifying the urban/rural distinction at a detailed geographic level. The main strength of the means test today is that the Department of Social Development has significantly relaxed the

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strictness of its application. While this has led to the extension of the grant to households that do not strictly qualify, most of these are nonetheless poor households—and would qualify based on the standards of poverty established in 1998.

A major shortcoming of the means test for the Child Support Grant is that the income thresholds have not been adjusted since the programme’s inception. The threshold for rural (and some urban) households is R1100 per month, while that for urban households in formal dwellings is R800. Since 1998 the cost of living for poor households has risen approximately 72%.

ES5.2 MICRO-SIMULATION EVIDENCEEPRI simulated the social and fiscal impact of a number of alternatives to the existing means test for the Child Support Grant. The first scenario addressed the most salient problem with the existing test—the fact that the income thresholds for grant eligibility have not been updated since the programme’s inception. If these thresholds were adjusted for the inflation rate facing the poorest households, the 2005 urban threshold of R800 would increase to approximately R1300, and the rural threshold from R1100 to approximately R1750. Applying these new thresholds would result in an estimated 27% increase in eligibility in 2005—approximately another 1.3 million children would become eligible.

Of these 1.3 million newly eligible children, approximately 800,000 already receive the grant, although they are not strictly eligible. As a result, the adjustment of these thresholds for inflation would lead to an increase of approximately 500,000 new grants—an 8% increase over existing levels, at a cost of approximately R1.2 billion per year.

Another incremental improvement in the means test involves the elimination of the urban/rural distinction. This aspect of the means test reduces the transparency of eligibility and frequently delays the determination of entitlements. Eliminating the distinction and adopting the higher inflation adjusted thresholds would lead to an increase in eligibility of approximately 3.5%, but only a 2.4% increase in actual grants paid, since many of the newly eligible currently receive the grant. The additional cost of the change would be approximately R250 million.

At a broader level, the question arises of whether or not a means test is justified for the Child Support Grant. With the inflation adjustment and the elimination of the rural/urban distinction, more than three out of four of South Africa’s children qualify for the child Support Grant. This reduces the theoretical potential savings from targeting to less than 25% compared to the cost of a universal programme. This substantially increases the likelihood that the multiple costs of targeting—in terms of administrative and private expenditures, economic distortions, stigma, and political costs—exceed the realised benefits. The micro-simulation of the elimination of the means test indicates an increase in take-up by an additional 3.9 million children, at a cost of R9.3 billion.

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This increase reflects two effects: (1) The elimination of the means test reduces the barriers to access for poor households, so more currently eligible households receive the grant. Exclusion error will fall significantly. (2) Currently ineligible households—many of them paying income tax—begin to receive the Child Support Grant. The benefit effectively acts as a rebate of part or all of their tax paid, offsetting the fiscal burden of taxation. Both of these effects constitute significant benefits only obtainable through the universalisation of the Child Support Grant.

EPRI also modelled the extension of the Child Support Grant to age 18, maintaining the means test but adjusting the thresholds for inflation and eliminating the urban/rural distinction. The number of eligible children increases by three million (27%), and the number of grants paid increases by 1.8 million, at an additional cost of R4.4 billion per year.

ES5.3 REVIEW OF BENEFIT LEVELSThe Child Support Grant was implemented in 1998 with an initial benefit level of R100 per child per month. This benefit level was not adjusted until 2001, over which time inflation eroded the real benefits provided to poor households in terms of purchasing power. Adjustments to the monthly benefit level of R10 in 2001, R20 in 2002 and R30 in 2003 lifted the payment to R160 per month—more than offsetting the effect of inflation—regardless of how one measured the inflation rate appropriate for poor households. Systematic increases of R10 each year since then have kept the purchasing power of the benefit above the initial levels in real terms. Figure ES1 depicts the evolution of the Child Support Grant benefit level relative to inflation, showing the initial erosion in real benefits from 1998 and the positive impact of the grant adjustments from 2001.

Figure ES1. The evolution of the Child Support Grant benefit level relative to inflation

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Actual Level of the Child Support Grant versus the initial 1998 inflation-adjusted levels

80

100

120

140

160

180

200

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

All Items General CPI Index 1998=100 Lowest quintile (Metropolitan) 1998=100Food (CPI Metropolitan) 1998=100 Grain Products (CPI Metropolitan) 1998=100CSG 1998=100

R 100 R 110

R 130

R 160

R 170 R 180R 190

ES6. Analysis of the Foster Care GrantThe Foster Care Grant is not subject to a means test. Given the public service provided by foster parents, the case for a universal Foster Care Grant is particularly well supported. The benefit level for the grant stood at R360 in January 1998. Regular adjustments each year reduced inflation’s impact in terms of reducing the purchasing power of the benefit, although real purchasing power fell until 2004 with respect to the overall Consumer Price Index (CPI). Adjustments since 2004 have more than maintained the initial benefit level’s purchasing power relative to the overall price CPI. However, the prices of goods consumed by South Africa’s poorest households have risen significantly faster than the CPI over the past eight years. As a result, the purchasing power of the Foster Care Grant has not kept pace with the price index reflecting the spending patterns of the poorest in South Africa. Figure ES2 depicts the evolution of the Foster Care Grant benefit level relative to inflation, showing the erosion in real benefits from 1998, particularly with respect to the Consumer Price Index for the poorest 20% of the population. An additional monthly increase of approximately R40 would be required to restore the purchasing power of the level of benefit provided in January 1998.

Figure ES2. The evolution of the Foster Care Grant benefit level relative to inflation

ES7. Analysis of the Older Person’s Pension, the Disability Grant and the Care Dependency Grant 7.1 REVIEW OF THE MEANS TESTThe Older Person’s Pension, the Disability Grant and the Care Dependency Grant all employ the same means test. A major strength of these means tests is that the qualifying income thresholds are linked to the grant benefit levels. Thresholds are less visible to civil society and to policy-makers compared to benefit levels. Without an automatic link, thresholds tend to lag inflation rates even while benefit levels

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F o s te r C a re G ra n t v e rs u s 1 9 9 8 le v e l a d ju s te d fo r in fla tio n

3 0 0

3 5 0

4 0 0

4 5 0

5 0 0

5 5 0

6 0 0

6 5 0

J a n -9 8 J a n -9 9 J a n -0 0 J a n -0 1 J a n -0 2 J a n -0 3 J a n -0 4 J a n -0 5 J a n -0 6

All Ite ms G e n e ra l In d e x (M e tro p o litan ) 1998= 360 L o w e st q u in tile (M e tro p o litan ) 1998= 360F o o d (C P I M e tro p o litan ) 1998= 360 G rain P ro d u cts (C P I M e tro p o litan ) 1998= 360F C G

R 3 6 0 R 3 7 4 R 3 9 0

R 4 1 0 R 4 5 0

R 5 0 0

R 5 3 0 R 5 6 0

R 5 9 0

maintain much if not all of their purchasing power. The automatic link helps protect the regularity and predictability of social protection.

Nevertheless, the means tests contribute to significant distortions that increase the cost of targeting beyond the direct public and private costs of compliance. The assets test for the social pension creates disincentives to save. Low-income workers who accumulate modest retirement savings undergo considerable sacrifices yet are penalised with substantial reductions in the size of their social pensions. In addition, the structure of the means test essentially taxes non-grant income at a marginal rate of fifty percent—a tax rate that has been deemed excessively distortionary by international standards for decades. In addition, the treatment of joint spousal income can unfairly penalise individuals who neither earn income nor have control over their spouse’s income.

ES7.2 MICRO-SIMULATION EVIDENCEEPRI simulated the social and fiscal impact of elimination of the means test for the social pension under two different assumptions regarding take-up. International experience with universal pensions suggests that take-up rates usually vary between 75% and 90%. In South Africa’s case, a universal pension with a 75% take-up rate would lead to an increase in the number of pension payments equal to approximately 200,000—a 9% increase at a fiscal cost of R2 billion. At the upper end of the range, a universal pension with a 90% take-up rate would lead to an increase in the number of pension payments equal to approximately 650,000—a 31% increase at a fiscal cost of R6.8 billion.

As with the universal Child Support Grant discussed earlier, the universal provision of a social pension produces two effects: (1) The elimination of the means test facilitates access for poor older people who would qualify even under the means test, but lack the resources to comply. (2) Higher-income households—many of whom either currently pay or during their working years paid income tax—begin to receive the social pension. The benefit effectively acts as an investment return on their tax paid, offsetting the fiscal burden of taxation. Both of these effects constitute significant benefits only obtainable through the universalisation of the Older Person’s Pension.

ES7.3 REVIEW OF BENEFIT LEVELS The benefit levels for the Older Person’s Pension, the Disability Grant and the Care Dependency Grant are all identical and have been adjusted to maintain this parity. In 1994, the grant amount was R390 per month. The benefit level has been regularly adjusted each year, although not at a rate sufficient to maintain the benefit’s purchasing power even relative to the lowest relevant inflation rate—the overall Consumer Price Index (CPI). The differences for other more appropriate price indices are even greater. For example, the 1994 grant purchased over a hundred rand more food per month than today’s grant (expressed in terms of today’s prices). However, most of this erosion is due to the relatively small adjustments from 1994 to 1998, particularly compared to the high inflation over this time period. From 1998, the annual increases have more than offset the inflation rate measured by the overall CPI

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but have nevertheless lagged the increases in the cost of living for the poorest in South Africa. Figure ES3 depicts the evolution of the benefit levels of these grants relative to inflation, showing the initial erosion in real benefits from 1994 and the positive impact of the grant adjustments from 2001.

Figure ES3. The evolution of the benefit levels for the Older Person’s Pension, the Disability Grant, and the Care Dependency Grant (CDG) relative to inflation

ES8. Overall recommendationsThe rationale for means testing is primarily to save money. The evidence in this report, however, highlights the many costs of targeting, particularly through a verified means test. These include not only the financial costs of the required administrative capacity but also political costs, social costs, economic distortions and the direct costs to the beneficiary. In addition, means testing can lead to the exclusion of the poorest — the people that the social protection policy aims to reach. While international experience offers evidence about many alternatives to means testing, including proxy means testing, geographical targeting, community-based targeting, and others, these generally cannot be implemented within a rights-based approach. Reforms to the means testing process are most likely to be feasible, cost-effective and rights-based if they move in a more universal direction.

Much of the positive developmental and social impact of South Africa’s social grants results from their quasi-universal nature. Strict adherence to the targeting guidelines tends to reinforce exclusion and perverse incentives. Greater developmental and

14

Actual pension, disability grant and CDG levels versus inflation-adjusted 1994 initial levels

300

400

500

600

700

800

900

1000

Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

All Items General Index (Metropolitan) 1994=390 Lowest quintile (Metropolitan) 1997=470Food (CPI Metropolitan) 1994=390 Grain Products (CPI Metropolitan) 1994=390Level of pension, disability grant and CDG

R 390 R 410R 430 R 470

R 500R 520

R 540 R 570

R 620

R 700

R 740

R 780R 820

social benefits are likely to result from making these social grants formally universal—that is, by completely eliminating the means tests. Micro-simulation evidence documents that this is affordable. The evidence in this report supports the recommendation that the means tests for social grants be eliminated.

If the immediate elimination of the means test is not feasible, a transitional step is the adjustment of the Child Support Grant qualifying income thresholds for inflation. In addition, it is recommended that a single means test be applied to all households, eliminating the urban/rural distinction. For the 2007/08 fiscal year, this report recommends a single qualifying income threshold of R1900 per month.

In addition, it is recommended that all social grant benefit levels be indexed to the Consumer Price Index for the lowest quintile (the poorest twenty-percent of the South African population) as calculated and reported monthly by Statistics South Africa. The grant amounts should be adjusted monthly based on the latest statistical release. In addition, any means test income thresholds not indexed to grant benefit levels should be linked to this same price index.

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PART 1 The context for targeting in South Africa1.1 IntroductionThis report provides the Economic Policy Research Institute’s findings and recommendations from the research project commissioned by the Department of Social Development entitled the “Review of Targeting Mechanisms, Means Tests and Values for South Africa’s Social Grants (#SD13/2005)”. The “means tests” in South Africa take into account the material “means” or resources available to potential grant recipients in determining both whether they should receive benefits and what level of benefits they should receive. The analysis in this report documents a rationale for means testing social security grants, reviews the international experience on means testing and discusses alternatives. Building on these research findings, the report analyses each of South Africa’s major social grants, provides a review of the associated means tests (if any), presents evidence from the micro-simulation of alternative means tests specifications, and evaluates the benefit levels. The report concludes with specific and actionable recommendations.

1.2 The rationale for means testing social security grantsThe main rationale for means testing social security grants is to more economically deliver benefits to the poor. For a fixed budget, perfect targeting enables a social grant programme to deliver a higher level of benefits to poor households. Alternatively, for a fixed level of benefits, perfect targeting enables the programme to meet its objectives at the lowest possible cost. The assumption of perfect targeting, however, assumes a theoretical ideal. In practice, targeting is imperfect and always involves a significant basket of costs—administrative, private, social, economic and political. Extensive studies of targeting have documented the potential savings from more effective targeting as well as the significant costs imposed by targeting mechanisms.

A framework for evaluating targeting mechanisms—including means tests—starts with the baseline of universal distribution of grants. The poverty rate (or other targeting threshold) determines the potential gains from targeting. For example, a country with a 45% poverty rate potentially saves 55% of the cost of a universal programme. The framework requires the comparison of this potential savings with the total costs associated with targeting. While some costs are potentially calculable in rand terms (administrative and private costs and economic distortions), other costs (political and social costs) are harder to quantify.

Social grants are usually redistributive whether or not they are means tested or otherwise targeted. In South Africa’s case, the relatively progressive system of taxation ensures that the combination of financing and grant delivery leads to a significant redistribution of income. Economists frequently argue that universal social transfers provide the most efficient form of redistribution because there are no associated conditions that can distort people’s behaviour.

Means tests and other targeting systems potentially affect the equity impact of the social protection system. Means tests aim to direct resources more efficiently to the poorest, improving the redistributive impact of the social transfer intervention. In practice, however, means tests sometimes exclude the poorest, leading to perverse outcomes.

There is no necessary trade-off between equity and efficiency. Universal systems create fewer distortions and as a result yield more efficient outcomes. Since any kind of targeting system interferes with incentives, the elimination of the means test may improve the efficiency of the intervention. South Africa’s experience suggests that

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even the verified means test imposes little efficiency loss in terms of distorted work incentives. The developmental impact more than offsets the disincentive effects, leading to positive labour market impacts. Means tests often fail the standard of efficacy—although South Africa’s system currently performs fairly well by both historical and international standards.

1.3 The benefits of targeting“Targeting methods all have the same goal—to correctly and efficiently identify which households are poor or which are not.” (Coady et al, 2002)

The main argument in support of targeted transfer programmes can be summarised as ‘the equity of efficiency’. Accurate targeting allocates scare public resources more efficiently and equitably, meaning that it reduces benefit leakages to the non-poor and maximizes public resources available for transfers to the poor.1

This can be illustrated using the example of a programme that aims to deliver the equivalent of R100 per month to every poor person. In a population of 10 million people, of which 70% are poor, the cost of a transfer delivered to everyone (universalism) would be R1 billion per month. If it were possible to exactly identify the poor and deliver the transfers only to them (perfect targeting), the amount of the transfers themselves would fall to R700 million—a savings of R300 million. The approximate gross savings from targeting are proportional to the percentage of the population that is not poor. In this example, with a 70% poverty rate, the savings equal 30% of the cost of a universal grant. This simple calculation, however, ignores the costs of targeting.

Targeting saves on the financial cost of transfers but imposes other types of costs—administrative, economic, political, and social. The decision to target is informed by weighing the benefits against all the costs.

It is argued that the main benefit of targeting the poor is that it saves money by reducing the “inclusion error” of universal programmes. The ‘’inclusion error” refers to transfers to people who are not poor. Effective targeting makes sure scarce resources go to those who need them most. Universal programmes provide benefits to everyone within a certain category (older people, children, people with disabilities, all citizens), while targeted programmes aim to identify the poorest within these groups. Economists often argue that the real cost of targeting is what the same resources could achieve in a universal programme. What option will reduce poverty more, social transfers targeted to the poor or transfers provided universally? The answer depends on the cost of targeting, which in turn is determined by political, social, administrative and economic factors, which are discussed below. For example, the universal approach may be particularly relevant for low-income countries with high poverty rates. A recent study of fifteen African countries found little difference between universal provision and perfect targeting.2 Another study of South Africa’s job creation programmes found that untargeted social transfers may be more appropriate than targeted public works projects in areas with very high poverty rates.3

Other than the possible financial savings of targeting, there could be another two indirect benefits. First, the perceptions by policymakers and the public of the targeting mechanism may improve political acceptance of the programme. Second, the

1 Devereux S, 2002 page 2.2 Kakwani, Soares and Son (2005) find that “the values of PPP indices in conditions of perfect targeting show little difference from the values of indices resulted from universal transfers. This suggests that perfect targeting may not be necessary in cases such as these 15 African countries, where poverty is extremely high.”3 Haddad and Adato (2001), page 21.

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conditions used to target may be socially beneficial. For example, programmes requiring children to attend school and visit the clinic may reduce the number of beneficiaries while at the same time improving the human capital of the targeted group. Politically, the requirements that poor households ensure their children’s school attendance feeds the mindset some policymakers hold of the “deserving poor”. Economically, the improvements in education and health help break poverty traps. However, it is important to note that even unconditional transfer programmes have been found to improve human capital accumulation.4

On the other hand, targeting involves direct and indirect costs, which vary from country to country and depend on the targeting method chosen. The direct cost is the administrative expense incurred in implementing and complying with the targeting mechanisms, both by the government, the beneficiaries and third parties. Indirect costs include political, economic and social losses. The following sections discuss the important costs of targeting.

1.4 The costs of targeting1.4.1 Exclusion errorNo targeting process is perfect and therefore any attempt at targeting the poor will probably result in two types of error. Inclusion error, as mentioned above, is the mistake of providing a social transfer to someone in a household that is not poor. Exclusion error is failing to provide a transfer to a targeted household that is poor. Reducing inclusion error is the potential benefit of targeting and exclusion error is part of the cost. Inclusion and exclusion errors are not easily comparable. An unwarranted social transfer (inclusion error) is at best an unintentional tax rebate (with the associated costs5) and at worst a waste of money. On the other hand, depriving poor households of a source of social investment (exclusion error) can trap generations in poverty, with a social cost many times the unutilised fiscal expenditure. Some social policy analysts have suggested weighting exclusion errors several times that of inclusion errors.6

Exclusion errors can nearly completely cancel out the potential social protection benefits of transfers. Only about six out of a hundred of the poorest (bottom fifth) eligible households in Bangladesh receive the government’s social pension.7 During the early years of South Africa’s Child Support Grant, when targeting mechanisms were rigidly applied, only one out of ten poor households with qualifying children was able to access the transfer.8

More intensive targeting can actually backfire and increase exclusion error, particularly when it aims to ration diminishing resources. If non-poor but well-connected individuals can more easily defend their share of the benefits, the residual remaining for the poor will shrink. This happened when the Malawi Starter Pack programme (free seeds and fertiliser) introduced community based targeting – the benefits to the poor eroded.9

1.4.2 Administrative costs

4 Barrientos and Lloyd-Sherlock (2002), Duflo (2003), Samson et al. (2004).5 The economic cost of rebating to taxpayers a lump sum amount is usually less than the value of the transfer. The costs (referred to as deadweight losses) include the administration costs and any distortions created by the tax system.6 Devereux (2002), page 4, Cornia and Stewart (1993).7 Barrientos (2004), page 18.8 Samson et al. (2006).9 Levy and Barahona (2002), cited in Shepherd, Marcus and Barrientos (2005).

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There are many ways of targeting benefits, but they all need people, skill, time and money. A means test, for example, will require the repeated verification of the income or assets of households in order to decide whether they should receive benefits. The dynamics of poverty in many countries significantly increase the cost of targeting. When people move in and out of poverty frequently, appropriate targeting requires regular assessment of the targeting criteria.

Additionally, the high costs of administering targeting mechanisms may offset the savings from universal benefits and undermine the fiscal sustainability of the programme. Restricting coverage by introducing means testing or other eligibility criteria introduces incentives to individuals (programme officials and the general public) to conceal information or change their behaviour in order to access transfers. Identifying eligible (‘needy’) beneficiaries and introducing monitoring systems to minimise leakages through corruption and fraud can raise administrative costs to such an extent that savings are outweighed by increased costs of means testing and monitoring.10

Poor countries typically have less administrative capacity for targeting, and this is where the highest errors are likely to be. It is especially important to keep targeting simple in this context. Narrow targeting excludes. In OECD countries, the working poor are commonly excluded. In Kyrgyzstan, 96% of social assistance goes to poor families with children. Poor childless families are thus effectively excluded.11

Targeted programmes also risk fragmenting interventions to such an extent that coverage becomes either patchy or duplicated. Identifying specific areas where interventions should take place means that those areas receive assistance (often both from government and NGO’s), while other areas receive no assistance at all even though they may also be needy.12

1.4.3 Private costsPotential beneficiaries sustain direct costs in order to prove that they are eligible. Private costs include expenses for transportation to apply for benefits, time spent waiting (with the related loss of income and other opportunities) and the fees for obtaining necessary documentation (including "informal" fees in some cases). Prospective workers in the Maharashtra Employment Guarantee Scheme sometimes need to provide cash payments for obtaining and filling in appropriate forms, submitting them to the correct officials and enlisting the attention of the social services committee.13

1.4.5 Indirect costsIndirect costs can occur when beneficiaries change their behaviour in order to become eligible for the grant. Means tests that exclude potential beneficiaries who receive more than a specific income can discourage people from attempting to improve their earnings particularly if the targeting test is blunt. If a person earning less than R9 500 a year qualifies for two child support grants and is offered extra work that could earn her an extra R980 per year, she would choose not to take the job because she would in effect lose R3 600 each year. Targeting transfers to a specific geographical area could lead to increased migration, which could be expensive for the beneficiary but nevertheless preferable to destitution.

1.4.6 Social costs10 Devereux S (2002), page 3.11 Shepherd A, Marcus R, Barrientos A (2005), page 33.12 Devereux (2002), page 4.13 Pellisery (2005).

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Social costs from targeting include stigma, the possible deterioration of community cohesiveness and the potential erosion of informal support networks. While the provision of transfers can improve economic independence and reduce the impact of stigma, policy stances that reinforce negative stereotypes can exacerbate the psychological costs of the programmes. “Self-targeting mechanisms that rely on social stigma, thereby reinforcing the social marginalisation of transfer recipients, are incompatible with current definitions of development that emphasise social objectives (e.g. empowerment and dignity) as well as economic objectives.”14 The poor often depend on social networks that change when a beneficiary receives transfers. In some cases the beneficiary shares the added income, in other cases remittances to the grant recipient decline.15

A related point to note is that targeting can create resentment among excluded groups. Even when very small benefits are transferred, resentment at being excluded – directed either at beneficiaries and/or project administration – often tends to dominate over stigmatisation of beneficiaries. For instance, refugees from drought or conflict are often resented by the host population because refugees become eligible for benefits (from UNHCR or WFP) that are denied to locals who might be living in comparable poverty and vulnerability. Similarly, initial efforts to target benefits to AIDS orphans in Africa have been replaced by targeted support to all orphans – i.e. not selectively targeting AIDS orphans only – and to families caring for orphans, rather than providing benefits to orphans but denying these benefits from carers’ biological children. It is important to avoid beneficiaries being stigmatised by their neighbours because they are regarded as receiving special treatment.16

1.4.7 Political costsLoss of political support from those excluded from benefits by targeting may undermine the political sustainability of the programme. Since poverty and political marginalisation tend to go together, allowing the politically influential (and tax-paying) non-poor to benefit from broad-based anti-poverty programmes may secure a greater degree of public support than narrowly targeted programmes17 (this would be the case in programmes such as free basic education or free basic health care services). In the words of Sen (1995:14) ‘The beneficiaries of thoroughly targeted poverty-alleviation programs are often quite weak politically and may lack the clout to sustain the programs and maintain the quality of the services offered. Benefits meant exclusively for the poor often end up being poor benefits’

1.5 The Targeting TestOnly by comparing the net costs and net benefits of targeting can one definitively answer the question of whether or not to target the poor. Some costs of targeting can be relatively easily quantified, for example the direct administrative costs of implementing the targeting mechanism. Other costs can be estimated but exact measures are difficult to come to, for example the private costs of beneficiaries like the opportunity costs of waiting in a queue to fill out forms and the costs of putting together the documents necessary to pass the means test. Additionally it is difficult to quantify a cost of stigma.

Targeting can be guided by the principles in the table below, however it must be acknowledged that there is a subjective element to the policy decision of whether the

14 Devereux (2002).15 Bush et al. (2001), page 2.16 Devereux (2002).17 Devereux (2002), page 3.

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benefits in terms of cost savings from targeting outweigh the net costs, or whether universal delivery would be a less expensive option.

Table 1.1: A framework for assessing the efficacy of targetingCountry Characteristic Factors that suggest

targeting will REDUCE the cost of social transfers

Factors that suggest targeting will INCREASE the cost of social transfers

Government administrative capacity

If government capacity is strong then it is more likely to succeed in implementing targeting.

If government capacity is weak, then targeting may over-tax the government’s limited administrative resources – and may prove counter-productive.

Poverty profile If poverty rates are low, then targeting can potentially generate significant savings – and is more likely to reduce the costs of social transfers.

If poverty rates are high, then targeting has little potential to generate significant savings – and is less likely to reduce the cost of social transfers.

Social solidarity If social solidarity is strong, the middle class is more likely to accept the need to allocate resources to the poor, and targeting will incur lower political costs.

If social solidarity is weak, the middle class is more likely to resent their exclusion from social transfer programmes – and the political backlash may compromise the success of the programme.

Formalisation If the poor are well integrated into the formal economy, their economic status will be easier to verify – targeting will be less costly and more likely to succeed. In addition, the costs of complying with documentation requests and other private costs will likely be lower.

If the poor subsist in the informal economy their economic status will be difficult to verify – targeting will be more costly and less likely to succeed. In particular, documentation to meet targeting requirements will likely be costlier.

Stigma If the poor suffer little discrimination, stigma created by overt targeting mechanisms is likely to be less costly and targeting is more likely to reduce the costs of transfers.

If the poor suffer from significant social exclusion, targeting may highlight their plight and increase the psychological costs of poverty.

Source: Samson et al. (2006)

1.6 The theoretical underpinnings of targeting While economists and social policy analysts continue to debate the nature of the relationship between inequality and growth, few dispute that severe inequality undermines growth prospects. High inequality certainly reduces the impact of growth on poverty reduction. In a globalised world, growth increasingly depends on high quality human capital—inequality skews the distribution of education and other forms of human capital, and reflects a situation in which the poor cannot participate fully in the economy. And inequality erodes social stability—deterring investment and undermining growth prospects.

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Social transfers directly tackle inequality and poverty—they transfer resources from upper to lower income households in a relatively efficient manner. In many ways they promote economic growth. They provide households with resources to invest—in nutrition, education, health and other forms of human capital. They also provide security that underwrites the higher risk of productive ventures. Social transfers also provide liquidity that some recipients employ to finance immediate investments.

Yet some economists continue to posit a conventional view that there is a negative trade-off between social protection and growth. This is illustrated in the diagram to the left by the downward sloping curve. For example, the United Kingdom is depicted with a relatively high economic growth rate compared to Denmark, which in turn reflects a relatively high level of social protection. For the United Kingdom to increase its level of social protection, the negative trade-off

implies it would have to sacrifice some economic growth, as reflected by the directions of the arrows.

The wealthiest countries in the world—as a group—have the most comprehensive systems of social protection. Social security is an essential basic service in all successful states that have experienced long-term sustainable growth rates along side successful poverty reduction. This empirical regularity contradicts the notion of a negative trade-off. A more important question interrogates behaviour at low levels of social protection. The lower the level of social protection, the more likely will additional investments in social security promote economic growth. South Africa provides one convincing example. Prior to democratic elections in 1994, social protection was weak, and economic growth languished. By 2000 the government had implemented an improved social security framework and economic growth turned positive. Over the past five years spending on social protection has tripled—and the economy has enjoyed its broadest economic expansion in decades. A positive relationship between social protection and growth—as illustrated in the diagram above—suggests that South Africa’s experience is not coincidental.

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Figure 1.1 Social protection and growth

growth

social protection

Social protection andgrowth: the virtuous circle

Socialprotection

Economicgrowth

South Africa, 1980s

South Africa, 2000s

Figure 1.2 A virtuous circle

Conventional economic theory suggests that social grants may undermine labour force participation by reducing the opportunity cost of not working. Models developed for industrialised countries and applied broadly to South African data sometimes corroborate this hypothesis. However, when models are developed that reflect the labour market behaviour of South Africans who receive social grants, the results contradict this hypothesis.18 The response of very low income South Africans to a marginal increase in their income is significantly different from the response of median income South Africans.

The evaluation of the labour market impact requires the employment of an economic framework that interacts job search by workers (labour supply) with their ability to find a job, which depends on the willingness of firms to hire them (labour demand). A study by EPRI in 2004 found that workers in households receiving both pensions and child support grants looked for work significantly more extensively and intensively, and found employment more successfully. Disaggregated analysis into urban and rural areas and by gender documented that these effects are particularly strong for rural women.

More recent data confirms the result that working age adults in poor households that receive a social pension are more likely to look for work and more likely to find employment than comparable adults in households that do not receive the social pension. Matching the September 2004 Labour Force Survey to the March 2005 survey and correcting for mis-matched individuals provides a dynamic picture of how labour force participation changes for households receiving and not receiving the social pension.19

The table below compares the change in labour market participation for working age adults (those older than 16 years) in households with no employed individuals in September 2004 but including at least one older person (defined in terms of age eligibility for South Africa’s older person’s pension). The first row of data shows the proportion of adults who were employed in March 2005, broken down by status in terms of household receipt of the social pension. The second row shows the proportion of adults who were actively looking for work but not employed. (None of the adults in this sample were employed in September 2004.) The third row shows the proportion of adults who were not participating in the labour force.

Table 1.2: Impact of the social pension on labour force participation

corrected data

Household receives

social pension in 2004

Household does not receive social pension

in 2004

Improvement associated with social pension

Probability that a poor working age adult will: Find employment in 2005 9% 7% 2% Be actively looking for work in 2005 15% 13% 2% Not participate in the labour force in 2005 76% 80% 4%NOTE: Sample includes working age adults (older than 16) in households in the lowest income quintile with older people but with no working individuals in September 2004.SOURCE: Statistics South Africa Labour Force Surveys and EPRI calculations

18 For more information, see Samson et al. (2001) Samson et al. (2002), Samson (2003), Samson et al. (2003), Samson et al. (2004), Samson et al. (2005), Samson and Williams (2006), Williams (2007 forthcoming). Other studies with corroborating evidence include Posel et al. (2006) and Keswell (2004).19 After September 2004 Statistics South Africa ceased to track social grant status in its Labour Force Survey.

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In households that received the social pension, 9% of adults were employed in March 2005 and another 15% were actively looking for work. In households that did not receive the pension, only 7% were employed and another 13% were actively looking for work. Receipt of the social pension was associated with a 2% higher probability of finding employment and a 2% higher probability of actively looking for work. Alternatively, receipt of the social pension was associated with a 4% lower probability of not participating in the labour force.

The child support grant demonstrates a similar effect. Working age adults—particularly women—in poor households that receive a child support grant are more likely to look for work and more likely to find employment than comparable adults in households that do not receive the child support grant. The matched Labour Force Survey similarly provides a dynamic picture of how labour force participation changes for households receiving and not receiving the child support grant.

The tables below compare the changes in labour market participation for working age adults and working age women in households with no employed individuals in September 2004. The rows follow the format of the table above, with the first row showing the proportion of adults who were employed in March 2005, broken down by status in terms of household receipt of the child support grant. The second row shows the proportion of adults who were actively looking for work but not employed, while the third row shows the proportion of adults who were not participating in the labour force.

Table 1.3 : Impact of the child support grant on labour force participation

corrected data

Household receives

child support grant

Household does not receive

child support grant

Improvement associated with child

support grant

Probability that a poor working age adult will: Find employment in 2005 15% 13% 2% Be actively looking for work in 2005 20% 17% 3% Not participate in the labour force in 2005 65% 70% 5%NOTE: Sample includes working age adults (older than 16) in households in the lowest income quintile but with no working individuals in September 2004.SOURCE: Statistics South Africa Labour Force Surveys and EPRI calculations

In households that received the child support grant, 15% of adults were employed in March 2005 and another 20% were actively looking for work. In households that did not receive the child support grant, only 13% were employed and another 17% were actively looking for work. Receipt of the social pension was associated with a 2% higher probability of finding employment and a 3% higher probability of actively looking for work. Alternatively, receipt of the child support grant was associated with a 5% lower probability of not participating in the labour force.

The effects are even stronger for women, as documented in the table below. In households that received the child support grant, 15% of adults were employed in March 2005 and another 20% were actively looking for work—the same proportions as for all adults. In households that did not receive the child support grant, only 12% were employed and another 14% were actively looking for work. Receipt of the social pension was associated with a 3% higher probability of finding employment and a 6% higher probability of actively looking for work. Alternatively, receipt of the child support grant was associated with a 9% lower probability of not participating in the labour force.

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Table 1.4: Impact of child support grant on female labour force participation

corrected data

Household receives

child support grant

Household does not receive

child support grant

Improvement associated with child

support grant

Probability that a poor working age woman will: Find employment in 2005 15% 12% 3% Be actively looking for work in 2005 20% 14% 6% Not participate in the labour force in 2005 65% 74% 9%NOTE: Sample includes working age women (older than 16) in households in the lowest income quintile but with no working individuals in September 2004.SOURCE: Statistics South Africa Labour Force Surveys and EPRI calculations

While the magnitudes of these effects are relatively small, it is important to emphasise that social transfers are not intended as employment generating schemes. Their major impact is social protection—with support of labour market participation an ancillary outcome. Nevertheless, this evidence contradicts the misplaced notion that social grants create dependency. On the contrary, social grants support households to participate more actively and successfully in the labour market, assisting workers to break the poverty trap.

The increase in take-up of social grants in South Africa over the past five years has significantly reduced South Africa’s Gini coefficient as the income differentials across the income distribution have fallen. The increasingly progressive tax structure that has financed social grants has reinforced the reduction in the Gini coefficient. Using the data provided in the 2000 Income and Expenditure Survey, EPRI’s 2004 study documented that South Africa’s social grants have a significant impact in terms of reducing the Gini coefficient by 3 percentage points, from 63% to 60%.

1.7 General History of Social Assistance in South AfricaIn the early period of European settlement there was little poor relief and barely any other social services however Kruger notes that racial distinctions crept into the provision of those services that existed. British occupation in the early 19th century brought pre-Victorian English views on the distinction between the “deserving” and “undeserving” poor, and strengthened the racial bias in the provision of social services, a pattern that remained dominant for almost two centuries.20

Modern social assistance in South Africa21 mainly dates from the period 1910 to 1933, when many new schemes were introduced, although Africans and Indians were often excluded from benefits initially.22 The exclusion of Africans was predicated on the “civilised labour” view, that people accustomed to modern lifestyles and consumption patterns had greater need of social protection than those in rural subsistence agriculture, who were presumed to be better placed to meet traditional subsistence needs: “Rural natives were excluded from old-age pensions mainly on the assumption that Native custom makes provision for maintaining dependent persons. Urban Natives were excluded in consequence, regardless of their needs, owing ‘to the difficulty of applying any statutory distinction between them and other Natives’”23.

Military pensions date from 1919, and in 1928 social pensions were instituted for those whites and coloureds not covered by occupational retirement insurance, subject to age criteria and a means test to ensure that only the needy were targeted. The 20 Van der Berg (1999)21 This section draws heavily on the work of van der Berg (1999).22 Kruger (1992), page 159, cited in van der Berg (1999).23 SA, Social Security Committee (1944), page 19, as quoted by Kruger (1992), page 165.

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white population dependent on social pensions remained relatively small despite an increasingly liberal means test, as occupational retirement insurance covered the more affluent. In 1943, take-up rates amongst the elderly were 40 per cent for whites and 56 per cent for coloureds.24 By that year, only 4 per cent of all social assistance spending was on Africans (mainly targeted relief and pensions for the blind), 1 per cent for Indians and 16 per cent for coloureds.25 But in 1944 the Smuts government extended social old-age pensions to Africans26, though benefit levels were less than one tenth of those of whites and the means test far more stringent. By 1958, Africans already composed 60 per cent of 347 000 social old-age pensioners, although they received only 19 per cent of old-age pension spending. By 1978, after their numbers had grown by 5 per cent a year for two decades, Africans made up 70 per cent of the 770 000 pensioners and received 43 per cent of pensions. By 1990 this latter proportion had increased to 67 per cent.

In 1921 the South African government introduced a system of family support for the protection of white families in poverty. As with other benefits such as the old age pension and the disability grant, the family support measures were gradually increased in coverage to include coloured and Indian South Africans. Only Africans with rights to live in urban areas were at first included.27

In the 1960s the South African government started the process of creating the independent states (TBVC) and self-governing territories (the six homelands). Welfare for black people in the old white South Africa became a provincial function. By the beginning of the 1980s, the child and family benefits were administered through many different administrations. The grants (which had a Parent Allowance and a Child Allowance as part of the same grant) for whites, Indians, coloured people and black people in the provinces were called more or less the same thing. The main difference between administrations was the amount awarded. In line with all other social security benefits, the pattern was that whites received the highest amount, followed by Indian and coloured people at the same level, with Africans receiving the lowest amount.28

In the former welfare administrations serving black people there was little consistency in what happened to the State Maintenance Grants. Some administrations did not award them at all; some had them in the regulations but in fact did not apply them; some awarded only the child part of the grant, and not the parent part. As white levels of living increased, white people were gradually means tested out of the child and family part of the social security system. During the seventies and eighties there was a steep increase in the numbers of grants awarded to coloured and Indian people, while African people remained de jure or de facto excluded from the child and family grants.29

Around the time of the Second World War, other forms of social assistance also expanded. In 1936 and 1937, grants for respectively the blind and the disabled were instituted, but these were initially confined to whites and coloureds and only extended to other groups in 1946. War veterans pensions were instituted in 1941.30

Since the mid-1970s, attempts to give the homeland system and later the three-chamber parliament political legitimacy led to a rapid increase in the funds for social

24 SA, Social Security Committee (1944), pages 43-44 and 58, cited in van der Berg (1999).25 SA, Social Security Committee (1944), page 15, cited in van der Berg (1999).26 Van der Merwe (1996), page 378, cited in van der Berg (1999).27 Lund Report (1996).28 Ibid.29 Ibid.30 Kruger (1992), pages 167-170, cited in van der Berg (1999).

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assistance, especially for the elderly. Both the coverage of the African elderly population and the real value of the benefits paid increased markedly, and in 1993 there were almost twice as many Africans pensioners inside the homelands as outside. The flow of funds to the coloured and Indian communities also increased remarkably, but the fiscal costs of incorporating these relatively small groups into the mainstream social security system were manageable. The far greater fiscal challenge only came later, once the principle of moving to parity in social spending levels was reluctantly accepted in the late 1970s. From that time onwards, fiscal expenditures on social assistance rose rapidly to incorporate blacks into the system and to eliminate the racial barriers which had allowed the white welfare state to prosper in the first place. This led to the rise in social old-age pensions spending from 0.59 per cent of GDP in 1970 (a decline from the 0.80 per cent in 1960) to 1.82 per cent by 1993 (Smith Committee, 1995: D2.15) and a budgeted 2.51 per cent in 1998/99.

The levels and types of social grants were then a result of the peculiar nature of political patronage in apartheid society, and later attempts to deracialise benefit structures. Fiscal constraints precluded increasing black benefits to white levels, thus pension equalisation occurred through a combination of enhancing African pension benefits (by 7.3 per cent per year in real terms from 1970 to 1993) and rapidly eroding real white pensions (white resistance was limited due to the marginal political position of those small numbers of elderly or disabled poor whites who qualified under the means test). In 1980, white pensions displaced more than 30 per cent of the average wage, compared to only 8.6 per cent for African pensions; by 1993, when pension parity was achieved and discrimination in the application of the means tests eliminated, the pension displaced 15.5 per cent of the average wage.31

Under apartheid, white employment was secure (given preferential access to human capital development and to some jobs) and most social security needs could be met through social insurance. The major additional social security measures required were social grants for the elderly and for the disabled, and child and parent allowances. Social assistance was thus set up as a safety net for the white (relatively) poor who, in the wider South African context, were not the poorest. In contrast, the safety net for other groups was initially rudimentary or non-existent, but as apartheid became diluted through the decades, benefits were gradually extended to other race groups and benefit levels were unified. Some of that growth was generated by the creation of the homelands and the three-chamber parliament, some by the belated attempt to redesign social assistance schemes to be non-racial:(t)he social pensions and grants which were set up to protect the white population have gradually expanded their eligibility rules to include all South Africans. This makes it ... an unusually comprehensive system compared with that found in other developing countries... 32

.Through this historical process, the social security system changed dramatically in terms of the relative size of the two components, with the formerly less important social grants becoming the major part of the social security system, reaching far more people than occupational insurance.

1.7.1 History of the social pensionThe South African state old age pension was first introduced in 1928 as a form of income support for poor elderly whites. Only in 1944 did the pre-apartheid state extend the social pension to include members of other race groups, and even then, pension payment size was determined by race at a ratio of 4:2:1 respectively for

31 Van der Berg (1994).32 Lund (1993), page 22.

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Whites relative to Indians and Coloureds relative to Black South Africans. In practice, actual payment ratios were on the order of 12:6:1 using rural Black pensioners as the baseline group for comparison.33

From the late 1970s onward, these racially-based pension gaps were significantly reduced. To reduce these gaps, the apartheid state allocated large additional funds to social assistance schemes, particularly the pension. The state made these allocations in an attempt to legitimise the fiction of sustainable, self-governing states, also called homelands, for Black South Africans.34 During the 1980s, the size of pensions more than doubled for Black South Africans while it declined by 40 percent (in real terms) for Whites.35 By 1985, White pensions were only 2.5 times higher than those for Blacks and 1.5 times higher than those for those categorized as Coloureds and Indians.36 Take-up rates, particularly among elderly Black South Africans, increased markedly during this time.

By the end of the 1980s, the social pension had come to dominate the South African social assistance landscape for all race groups. There would have been major social resistance to any attempt by the apartheid state to cut back on the scope of the pension policy during the negotiations that preceded the transition to a post-apartheid era. Indeed, stakeholders in the negotiations never placed the issue of pension payout reduction on the agenda over the 1990 – 1994 period. On the contrary, the Social Assistance Act of 1992 provided steps to deracialise pensions and achieve pension parity, which was finally achieved in 1993, just one year prior to the first democratic elections. By 1993, the take-up rate among eligible Black South African men and women stood at 80 percent.37 At this time, the maximum benefit was R370, an amount equal to twice the median per capita income in rural areas38 and three times the level of the least generous World Bank poverty line.

Currently the grant is R820 per month. The pension funded out of general government revenues that are derived from progressive income taxes, costs approximately 1.4 percent of GDP each year. With 2.1 million beneficiaries, it constitutes the largest social assistance program in South Africa, with important redistributive and poverty-alleviation impacts.39

1.7.2 History of the Child Support Grant (CSG)40

The Child Support Grant (CSG) was introduced in 1998 to help alleviate the poverty experienced by many children in South Africa. The CSG is the State’s primary programme to realise the right to social assistance and other related socio-economic rights for poor children. As recommended by the Report of the Lund Committee on Child and Family Support (hereafter the ‘the Lund Report’), the CSG replaced the State Maintenance Grant (SMG) with a flat-rate child support benefit to be paid, through the ‘primary caregiver’41, to all children who qualify in terms of a test of the

33 Burns et al. (2005), page 103.34 Ibid, page 104.35 Monica Ferreira (1999), page 55 cited in Burns et al. (2005).36 Lawrence Schlemmer and Valerie Moller (1997) quoted in Burns et al. (2005).37 The remaining age-eligible Black South Africans were either in richer households with a private pension or were the very poor who had difficulty accessing pensions [Anne Case and Angus Deaton (1998)] quoted in Burns et al. (2005).38 Duflo 2003 quoted in Burns et al. (2005). 39 Department of Social Development (2002a).40 The analysis of this grant is taken from the work of Rosa S, Leatt A & Hall K (2005). 41 The Primary Care Giver is defined as “… a person whether or not related to the child, who takes primary responsibility for meeting the daily care needs of the child, but excludes –

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caregiver's means.42 The grant was intended to protect the poorest children in their most vulnerable younger years. However this has since been broadened somewhat with the extension of the grant to all children under the age of 14 years, which was progressively implemented over the periods 2003 – 2005.43

1.7.3 History of the Care Dependency Grant44

The care dependency grant was previously called the Single Care Grant and then Special Care Grant. The policy intention of this grant was to enable the full time care, in their own homes, of children with severe mental impairment from the age of five years. The Social Assistance Act of 1992 makes children with severe physical disability eligible for the grant as well, from 1 year old to 18 years of age.

The rationale for the Care Dependency Grant was that if support were not given at home, the child would inevitably be admitted to full time institutional care, at a much greater cost to the state. The rationale is reflected in direct and concrete terms in the formula used for the means test by the former House of Assembly: E = R - (B + C), where E is the amount to be paid, R is the ceiling, and is the (1995) R27 055 annual state subsidy to a child in institutional care, B is parents' income, and C is parents' assets.

The existence of this grant has been little known outside the former 'own affairs' administrations, and to some extent in the old provincial departments delivering welfare to African people. The procedures surrounding application were extraordinarily complex, requiring assessment by so many professional personnel that the grant was de facto impossible to get outside of a well-resourced urban situation. No central records were kept.

The Care Dependency Grant used to be applied for through the Department of Health, and commonly administered through the Department of Justice, through the Magistrate's Courts. Justice would draw the money from the bank; the mother signed a voucher and received the money; the Magistrate's Court sent the voucher back to Health, which would reimburse Justice for the actual amount of the grant but not for the administrative costs involved - a matter of persistent concern to the Department Justice.

The Care Dependency Grant was then delegated to the Department of Welfare (now Social Development), which deals with the grant in its entirety.

1.7.4 Purpose and history of the Foster Child Grant (FCG)45

Where children cannot be adequately cared for in the family setting, the next level of direct state financial provision for child support is the Foster Child Grant. The Foster Child Grant is designed to provide assistance to children who have been defined as “in need of care” (due to abuse and/or neglect) and placed in the custody of foster families by the Children’s Court in terms of the Child Care Act.

(a) a person who receives remuneration, or an institution which receives an award, for taking care of the child; or(b) a person who does not have an implied or express consent of a parent, guardian or custodian of the child.42 Lund Committee (1996), page 88.43 In terms of amendments to the Regulations (Government Notice No. R 460 of 31 March 2003), the CSG was extended to children under the age of 14, to be phased in over the period 2003 – 2005. The CSG was extended to children under nine years as of the 1st of April 2003, to children under 11 as of the 1st of April 2004 and to children under 14 as of the 1st of April 2005.44 Lund report (1996).45 The Foster Child Grant is sometimes referred to as the Foster Care Grant.

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The intention behind foster parenting is to provide some support to non-relatives who are willing to provide a child who is without related carers with a nurturing and safe home environment. There was a general policy among both state and voluntary welfare structures of exploring possibilities for placement in the extended family before looking at non-kin placements. In the 1980s the government started insisting that a relative who cared for children should receive a State Maintenance Grant rather than a Foster Care Grant. This policy was successfully opposed by child welfare organisations because State Maintenance Grants had a much lower value. It is the case now that many children are in the foster care of relatives. It is impossible, with present information systems, to estimate the numbers in kin, rather than non-kin, care.

The application process is complex and often lengthy, involving a full social work assessment of the applicant family and interviews with the child. Once a child has been placed in foster care, regular contact with the social worker is supposed to take place, to ensure the necessary support, to deal with problems, to facilitate contact between the child and the birth parents, and to promote reunification of the family if possible. Regular reports must be submitted by the social worker throughout the child's stay to ensure renewal of the court order and continuation of the grant.

The Foster Care Grant is not means tested in the same way that other grants are. Fostering is not seen as a poverty issue; society recompenses some of the costs of a non-parent in caring for a child. The child's income is taken into consideration - this could be from a trust fund, for example, or contributions from the child's biological parents. If the child's income per annum exceeds twice the annual value of the Foster Care Grant then no grant is paid. If it is less, then the full grant is paid.

The grant was initially designed to complement child protection services. The present value of the grant is R590 per month and is fixed in size. A foster parent is eligible for the foster child grant if the child is placed in the custody of a foster parent in terms of the Child Care Act (Act No.74 of 1983). A grant is not payable if the income of the child exceeds twice the annual amount of a foster child grant determined by the Minister, with the concurrence of the Minister of Finance. A foster parent qualifies for a foster child grant regardless of the foster parent’s income.

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Part 2 A review of the international experience on targeting

2.1 IntroductionMuch of the relevant evidence concerning means tests is drawn from international experiences in developing countries. The experience can be analysed within the context of five distinct groups of programmes, broadly divided into groups without behavioural conditions (such as South Africa’s social grants) and those with stronger conditionalities (for example, Mexico’s Oportunidades, Brazil’s Bolsa Escola, and public works programmes). The first group with be further divided into child-oriented programmes, grants that benefit those with disabilities and pensions for the elderly. The second group will include two major types of programmes—conditional cash transfer (CCT) programmes that target children and those that use public works programmes as a safety protection scheme.

South Africa’s social grants are distinguished internationally by their relatively unconditional character. The main alternative type of scheme commonly employed in developing countries involves more rigid conditionalities—in terms of health, education or employment. This section reviews the lessons derived from conditional cash transfer (CCT) programmes, including alternative targeting mechanisms. In addition, this section examines public works programmes.

2.2 Unconditional social transfers Unconditional social transfers are regular non-contributory payments made without any conditions placed upon the recipient. The payments are made by government (or non-governmental organisations) to individuals or households. The objective is to provide social protection in order to decrease chronic or shock-induced poverty, address social risk and reducing economic vulnerability. “Unconditional” refers to the fact that no one in the household of the recipient is expected to do anything specific (like work, school attendance, etc.) in order to qualify for the transfers. However “unconditional” does not mean there are no administrative requirements, such as proving one’s identity or qualifications for the programme, or rule out the use of targeting mechanisms such as age or income.

Unconditional transfers include social pensions, child support grants, family assistance, widows’ allowances and grants for people with disabilities. Social pensions are noncontributory cash grants to older people provided either universally (subject to age requirements) or with eligibility established through the use of a means test. Examples include pension programmes in Bangladesh, Brazil, Lesotho, Namibia, Nepal, South Africa, and other countries. Child and family allowances provide cash or near-cash like food stamps (the latter usually increases transaction costs and can create distortions for example when households must convert food stamps into cash in order to pay for essential medical treatment) which transfers to poor households or families. Examples include South Africa’s Child Support Grant, Namibia’s Child Maintenance Grants and Foster Parent Grants, Zambia’s Kalomo pilot cash transfer scheme, and Kyrgyzstan’s Unified Monthly Benefit. Examples of other types of programmes – such as Disability Allowances and Widow’s Allowances – include India’s National Family Benefit Scheme (NFBS), Bangladesh’s Assistance Programme for Widowed and Destitute Women (APWDW), Brazil’s disability assistance programmes, and Namibia’s and South Africa’s disability grants.

There are numerous advantages of unconditional cash transfers over alternative means of social protection. They have lower administrative costs, which means they

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can potentially provide the most cost-effective solution to poverty reduction.46 Unlike subsidies, they do not distort the price system and unlike in-kind transfers, they enable households to decide on and meet their most critical needs. Additionally it is easier to predict the budget for cash transfers as the benefits are fixed and do not depend on unpredictable commodity prices. Transfers can also help to provide one more macroeconomic stabiliser, since the net benefits to the poor tend to increase during a recession or in the face of an economic shock.

Unconditional transfers also pose important challenges to social analysts and policymakers. Information on the social and economic benefits is not always readily available, which may make the programme difficult to sell to taxpayers in particular. If the programme is targeted, poorly designed mechanisms can create distortions. Social transfers establish a new contract between citizens and the state, which means the government must be prepared to commit the resources necessary for a sustainable programme.

2.3 Child-oriented programmesApproximately half of the world’s poor are children.47 One form of categorical targeting (see the section on Alternatives to Means Tests for an explanation of this form of targeting) is the provision of benefits to households with children, particularly when the children are orphaned or otherwise vulnerable. When targeting children some of the administrative requirements include proof of age and the need for documentation that uniquely identifies the child. In some countries, older people are increasingly responsibility for grandchildren – especially in areas most affected by the HIV/AIDS pandemic. Issues such as linkages to education are specific to targeting children, particularly for programmes that impose conditions to ensure that children benefit from investment in human capital.

Social transfer programmes identify children as a vulnerable group for a number of reasons. In many countries, the number of children in poor households significantly exceeds the number of children in non-poor households. For example, in Mexico, Brazil and several other Latin American countries, the average poor household includes four children; the average non-poor household has only one child. In Africa, the number of orphans has steadily increased from 1990 to present – and forecasts project an increasing trend.48 Politically, programmes that target children appeal to politicians and electorates because they support the principles of equal opportunity and support longer-term development objectives through their impact on nutrition, health and education.49

Programmes categorically targeting children frequently employ secondary mechanisms to further reduce the number of eligible beneficiaries. A study of the United Kingdom’s categorical programmes for children found the administrative costs of the means-tested “Family Credit” were more than twice as high as the universal child benefit.50 The relative administrative costs in developing countries are likely to be much higher – since reliable income documentation is more difficult to obtain. The International Labour Organisation has demonstrated the affordability of benefits universally targeted to children in low-income African countries. The cost of providing a benefit equal to approximately $8 a month in purchasing power parity terms ranges from two to four percent of national income in most of the countries – and the

46 These arguments are drawn from del Ninno (2005), page 6 and Blomquist (2005), page 12.47 UNICEF (2000), page 41.48 Bellamy (2005), page 73.49 Coady, Grosh and Hoddinott (2004), page 73.50 Atkinson (1995) and Coady, Grosh and Hoddinott (2004), page 80.

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estimated cost declines over time as the children’s projected share of the population falls.51

2.4 Case studies on child-oriented programmes

2.4.1 Child poverty in developed nations:

Why is child poverty low in some countries and high in others?52

Despite their level of economic development, childhood poverty remains a problem in many developed nations. The figure below shows the child poverty headcount (i.e. the proportion of children in poverty) and the poverty gap (i.e., the income needed to bring children to the poverty line) in selected developed nations53.

In line with established OECD (Organisation for Economic Co-operation and Development) practices, children were identified as poor if they lived in households with a per capita income below half the median. The poverty headcount ranges from 2.6 per cent in Sweden to 22.4 per cent in the USA, and the poverty gap ranges from 0.07 per cent of GDP to 0.66 per cent of GDP respectively.

Scandinavian countries, which are located to the left of the above figure, show low levels of child poverty, while Anglo-Saxon countries, to the right of the figure, show high levels of child poverty. The differences in child poverty between these two groups of countries are not unique to the 1990s, but extend back in time, and have grown. 54

In trying to identify why this is so Esping-Andersen55 (1990; 1999) has identified structural differences in the way in which welfare provision is expressed in welfare regimes in the two groups of countries.

In Scandinavian countries, a social democratic welfare regime focuses on supporting human development through universal entitlements, defined as citizen rights. The 51 Pal, Behrendt, Leger, Cichon and Hagemejer (2005), pages 14-26 cited in Samson et al 2006.52 Cited in Barrientos and DeJong (2004), pages 7-8. 53 UNICEF, 2000.54 UNICEF, 2000.55 Esping-Andersen 1990; 1999 cited in Barrientos and DeJong (2004), page 7.

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Child poverty in developed countries

0%

5%

10%

15%

20%

25%

Sweden

Norway

Finland

Belgium

Denmark

Netherl

ands

France

Hungary

German

ySpain

Australi

a

Poland

Canada

UKIta

lyUSA

Country

Pove

rty ra

te %

0%

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20%

30%

40%

50%

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70%

Pove

rty g

ap %

diff

eren

ce

Poverty Rate (percentage of children living in householdswith income below the median)

Poverty Gap (difference between actual per capita incomeof children and other half median income as a proportionof GDP)

Source: Unicef, 2000

Figure 2.1 Child poverty in developed countries

welfare state is the principal provider, which ensures extensive redistribution of opportunities.

In Anglo-Saxon countries, on the other hand, in which a liberal welfare regime focuses on protecting households and individuals from market failure, markets are the key welfare providers while the welfare state has a residual function.

This distinction is also reflected in the policies that focus on children and their families.56 Forssén57 found that Scandinavian countries took an early lead in introducing and developing universal child allowances, maternity leave and benefits, and service provision to households, including childcare. These, together with the high rates of labour force participation of mothers, account for the low levels of child poverty. This early lead has been sustained.

By contrast, Anglo-Saxon countries experienced a sharp rise in child poverty in the 1980s and 1990s. These remain high despite extensive tax and benefit reforms aimed at strengthening work incentives for mothers. In the UK, child poverty doubled in the period from 1979 to the mid-1990s as a consequence of demographic change, deterioration in labour market opportunities and changes to the benefit system. The Labour Party, which took power in 1997, promised to reverse this trend, cut child poverty by half by 2010 and eradicate it within 20 years. A reform of tax transfers for families with children introduced generous in work-related benefits, including childcare, in a bid to attract mothers into employment. Out-of-work benefits for mothers with children were also improved. While child poverty has fallen in recent years, the rate has been slower than expected. Dickens and Ellwood58 estimate that poverty in the UK and the USA fell by three percentage points following the reforms introduced by Blair and Clinton respectively. This falls some way short of targets, and leaves child poverty rates in these countries ten times higher than those in Sweden.

2.4.2 Mozambique59 The GAPVU cash transfer program was an important safety net for urban Mozambique. Within the urban sector it reached about 16 percent of all urban households. The programme was particularly important for female-headed households; almost every second beneficiary household was headed by a woman. Empirical evidence on the performance of the programme has, however, been quite limited.

The two largest groups of GAPVU beneficiary households were those with the elderly and households with malnourished children. The composition of beneficiaries, however, varied considerably by city, which is suggestive of uneven regional implementation of the program, reflecting, in part, uneven administrative capacity across regions.

Datt et al found that the means testing of the beneficiaries' income was largely ignored in practice; 85 percent of the beneficiaries had pre-transfer consumption levels above the required (income) threshold of Mt. 24,000 per person per month. They surmise that this may point to substantial latent costs of enforcing means testing, but that also leads one to question the wisdom of setting an income threshold that is so low (about one-fourth of their reference poverty line) as to be clearly unenforceable.

56 Kamerman and Kahn, 2003 cited in Barrientos and DeJong (2004), page 8.57 Forssén, 2000 cited in Barrientos and DeJong (2004), page 8.58 Dickens and Ellwood, 2003 cited in Barrientos and DeJong (2004), page 8.59 Datt et al (1997).

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Nutritional indicators for preschool children from all beneficiary households were suggestive of high rates of both chronic and acute malnutrition. High rates of morbidity were also reported for these children. There was also some (non-consumption based) evidence that GAPVU beneficiary households were more deprived than urban households, in general.

This was reflected, for instance, in the poorer nutritional indicators for the beneficiary households, their poorer housing conditions, more limited access to better sources of drinking water, and their sparing use of electricity as a source of light, relative to the general urban population. Thus, even without the strict enforcement of the eligibility conditions, a certain amount of targeting (of the urban deprived groups) was effectively achieved by the program. The relatively small amount of the transfer benefit could have contributed to this outcome. Similarly, the revealed willingness of an average beneficiary to wait upwards of 7 hours to receive their monthly payments from "Finanças" was also consistent with better targeting.

2.4.3 Namibia60

Namibia has three grants targeted to children: the maintenance grant, foster parent grant, and place of safety grant. All the three grants are administered by the department of Social Welfare.

The maintenance grant consists of a parent's grant (N$160) and a children's grant (N$60 per child for the first three children). The parent's grant is given only to single women who either have never been married, or are divorced, or widowed or has been deserted by her husband for a period of 3 months or longer; or to women whose husband is in receipt of a social pension; or whose husband has been certified to be unfit for remunerative work, or is imprisoned. However, for unclear reasons, a parent's grant is not payable to a woman who is in receipt of a social pension. It is means-tested inasmuch as the parent's income should not exceed N$500 per month. No children's grant is payable to any parent, unless such parent is a woman placed in the circumstances described above, or a man who is in receipt of a social pension. Several supporting documents are needed, including birth certificate, marriage certificate, school report, death certificate, etc.

Foster parent grants are given to any person who undertakes the temporary care of any child who has been placed in his/her custody. An amount of N$220 (N$160 per foster parent and N$60 per foster child) per month is granted; and there is no restriction on the number of children. Like the maintenance grant, the regional distribution is skewed in favour of relatively developed regions, the North receiving almost nothing.

A place of safety grant is awarded for very brief periods to any family willing to accept a child found in difficult situations or is being abused. The amount approved is N$10 per child per day.

All the three grant programs in Namibia are good on paper, but seem to suffer from numerous implementation problems due to limited administrative capacity, and appear to be heavily urban-biased and pro-rich. By the very nature of conditions of eligibility, only children of single women can hope to receive a maintenance grant. About one-third of the families are headed by women in Namibia. Approximately a third of the children under the age of 15, or about 200,000, may be living in female-headed households. At present, the total number of children receiving maintenance and foster

60 This section is taken from the work of Subbarao K (1996) “Namibia's Social Safety Net: Issues and Options for Reform”. POLICY RESEARCH WORKING PAPER.

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parent grants is no more than 3,500, or about 2 percent of the children living in female-headed households. The total expenditure on these grants during 1996-97 is budgeted to be N$5.2 million, or 0.001 percent of the total government current account expenditure. If all vulnerable children -- estimated to be approximately 10 percent of the children in female-headed households -- are covered by maintenance grants, fiscal sustainability may still not emerge as a serious issue. But abuse, pro-rich and urban bias are likely to plague the program.

The reasons for urban, pro-rich bias stem from the fact that the program was introduced to serve the white population prior to Independence. The program has never been adapted to fit in with the realities of post-Independent Namibia. Besides, it is not clear to what extent these grants are acting as an obstacle to responsible parenthood. 2.4.4 Kenya Cash Transfer for OVCs61 Initial evaluation of the pilot Kenya Cash Transfer for OVCs62 suggests that the transfer of Ksh. 500 (£3.80) per month has been spent on food, clothing, shoes, medical expenses and other minor household purchases. School attendance has increased and some children with HIV/AIDS have been able to obtain anti-retroviral treatment. The project has strong political backing and will scale up to 2,500 orphans.

Such programmes can achieve scale by reaching large numbers of children and at relatively low cost per child. For example, almost 1 million children benefited from conditional transfers in 2003 in Zimbabwe. In Mozambique, conditional transfers support 300,0000 OVC students, roughly 10 percent of the 2.3 million primary school-aged children at a total cost per child of $20.63

2.5 Disability grantsA key challenge in the categorical targeting of people with disabilities is the identification of the eligible impairment, limitation or participatory restriction. Most programmes identify beneficiaries through information provided by censuses and through efforts to promote self-identification.64 The typical qualifier is whether or not a person faces a physical or mental impairment that leaves him or her unable to work. For example, in South Africa, “according to regulations issued by the national Minister of Social Development, a person is only eligible if the degree of his or her disability makes him or her incapable of entering a labour market.”65 In Namibia, according to the Ministry of Health, a person with a 50 percent disability as determined by a medical doctor would be eligible for the disability grant. For example, "if an individual develops full-blown AIDS and is incapable of working, such a person would qualify for a disability grant by virtue of being incapable of adequately providing for their own maintenance, and not by virtue of being HIV-positive."66 However, in practice establishing a person’s ability to work is difficult and subjective. Invisible and episodic impairments – such as severe lower back pain or certain mental illnesses – cannot be

61 Chapman K (2006) “Using Social Transfers to Scale Up Equitable Access to Education and Health Services Background Paper”, Scaling up Services team, DFID Policy Division page 862 Cash Subsidies for Children Affected by HIV/AIDS – Background paper on the pre-pilot andpilot initiatives (March 2005). UNICEF/DFID(?) cited in Chapman K (2006).63 OVC in Education Sector Programmes. Extract from OVC Toolkit. World Bankhttp://info.worldbank.org/etools/docs/library/108875/toolkit/sector/education3.htm cited in Chapman K (2006).64 Mitra (2004), page 17.65 Nattrass (2006), page 3.66 UN Integrated Regional Information Networks, July 27, 2005, Namibia, “Government reacts on AIDS disability grant reports”, accessed 1 April 2006 at http://www.aegis.com/news/IRIN/2005/IR050772.html.

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http://info.worldbank.org/etools/docs/library/108875/toolkit/sector/education3.htm

easily documented. The determination of disability is often a complex individual medical assessment, frequently requiring a visit to a health clinic or doctor. The subjectivity of the process inevitably gives rise to both inclusion and exclusion errors.67

Guaranteeing inclusive social transfers requires providing physically and socially accessible advice centres and delivery mechanisms.68 Namibia’s privatisation of social pension payment processes led to the closure of pay points, undermining physical accessibility for beneficiaries.69

Much of the debate over how to implement social transfers for people with disabilities revolves around the choice between mainstreaming and categorically targeting people with disabilities.

“Mainstreaming” in this case refers to the policy of improving access for people with disabilities to the social transfers available within society. While targeting transfers to people with disabilities provides critical resources and can improve the individual’s bargaining power within the household, the targeting process requires substantial administrative capacity and cost and may lead to segregation rather than inclusion.70

Mainstreaming requires less administration, better promotes inclusion and more broadly reaches the poor, but may require a much longer-term commitment to be effective.71 In addition, mainstreaming social transfers for people with disabilities requires that the needed resources are available to the broader population.

2.6 Case studies on disability grants

2.6.1 Mozambique (GAPVU) 72 During the conflict situation of the early 1990s the Government of Mozambique successfully implemented a social transfer programme supporting those disabled or displaced by the country’s civil war. The scheme – known by its acronym GAPVU (Gabinete de Apoio à População Vulnerável, loosely translated as “the Cash Payments to War-Displaced Urban Destitute Households Programme”) – provided very small but significant cash transfers to more than 70,000 households by 1995. Initiated in 1990 by the Ministry of Finance and later managed by the Ministry for Coordination of Social Action, its purpose was to reduce destitution in Mozambique’s 13 principal urban centres.

With a staff of 92 people in 1995, GAPVU reached 16% of all households living in Mozambique’s cities and towns, providing the only functioning programme to broadly address the needs of the urban poor, particularly older people and individuals with disabilities. In some areas GAPVU increased household income by up to 41%. While the transfer was very small – about US$6 per person each month – it contributed significantly to food security and promoted trading activities and supported home gardens. It reduced the headcount poverty rate by approximately six percentage points, and the poverty gap by even more.

One problem with programme implementation was the means test – the income threshold for programme eligibility was only about 25% of the poverty line. With strict enforcement, the programme would have served a tiny fraction of the poor. In 67 Mitra (2004), page 9.68 Mitra (2004), page 15.69 Subbarao (1996), page 16.70 Mitra (2005), page 15.71 Mitra (2005), page 16.72 Devereux (2002), (2003) and (2005) and DFID (2005), Datt et. al. (1997) cited in Samson et al. (2006).

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practice, the means test appeared to have been largely ignored, and this contributed to programme success. Another problem resulted from the urban focus – with 85% of Mozambique’s population in rural areas, their exclusion limited the potential social impact.

Given the low state capacity and limited fiscal resources, the programme worked remarkably well in the first five years – but grew increasingly strained as pressures built for more rapid expansion. With overheads and administrative expenses limited to 7%, administrators and phantom beneficiaries seized opportunities for corruption, and widespread fraud caused government to suspend the programme in 1997. It re-emerged as the National Institute for Social Action programme shortly thereafter, and continued similar operations on a smaller scale. GAPVU’s failure does not discredit the capacity of a fragile state to successfully implement a social transfer programme but rather underscores the need to properly resource sound administrative systems and effective monitoring and supervision.

2.6.2 Namibia73 Namibia is one of the few African countries to provide an extensive non-contributory transfer to people with disabilities (together with Liberia, Mauritius, Mozambique and South Africa). However, in 1995 only about a quarter of the estimated 44,000 people with disabilities received a social transfer – approximately ten thousand receiving a disability grant and one thousand receiving a pension for the blind. The 2001 Namibian census estimated a much higher incidence of disability – with over 85,000 people affected. In particular, women and those residing in certain rural regions receive disproportionately fewer pensions.

Many of the registered beneficiaries find it difficult to access the pension. Registration procedures can be excessively arduous for people with disabilities, requiring both birth and citizenship certificates which many Namibians do not possess. The travel necessary to access the documentation effectively excludes many of those with disabilities. The payment procedures are complicated requiring both an identify document and computer verification, and system failures regularly exclude eligible beneficiaries who often do not receive their payments retroactively once the computer faults are corrected.

Since few rural Namibians have access to bank accounts, beneficiaries carry the pension home in the form of cash, creating vulnerability to theft and misappropriation. When the Department of Social Welfare privatised the pension payment service in the mid-1990s, the private contractor – Cashmaster Payment Services – reduced the number of distribution points, exacerbating the problem and increasing the transport costs incurred by people with disabilities. The privatisation also significantly increased administrative costs, with one estimate suggesting an increase of 400%.

73 Subbarao (1996) and Bruhns et al. (1995) cited in Samson et al. (2006).

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2.7 Social pensions for older peopleTargeting older people through a non-contributory pension is a very important social transfer in many developing countries. While universal pensions may benefit non-poor individuals, they are extremely effective at reaching the poor.

The World Bank74, praised schemes that provide benefits “to everyone of pensionable age, regardless of income, wealth or employment history, as in New Zealand and the basic pensions paid by the Nordic countries. They note that administratively, this is the simplest structure, with the lowest transaction costs, which is an important advantage in developing countries with limited institutional capacities and incomplete record keeping systems. It avoids the disincentive to work and save inherent in means tested plans. Its universal coverage helps ensure that the poverty reduction objectives are met, provides a basic income for all old people”.

Another more recent World Bank report reiterates that a universal age pension “is probably the best way to provide poverty relief to the elderly. Considering the difficulty of identifying who among the elderly is poor, the principal merit of the program is that its universality avoids the targeting issue”. The authors warn, though, that “its principal merit is also the principal problem: fiscal affordability, especially in low-income countries”75. The two reports briefly mention the existence of a non-contributory pension scheme in Mauritius, but provide few details and fail to analyse its fiscal affordability. This is a pity for Mauritius provides clear evidence that universal basic pensions can be affordable in a low-income country.

Despite their obvious advantages for low-income countries, there are few examples of universal pensions in the world today. They are known to exist only in six other developing countries: Namibia, Botswana, Bolivia, Nepal, Samoa and Brunei76. Mauritius is now a prosperous middle-income country, but it was a poverty stricken colony of Britain when it introduced universal age pensions in the 1950s. The experience of Mauritius shows that universal, flat pensions are feasible in low-income countries. Only New Zealand, a much wealthier nation, has a longer history of universal pensions.77

Categorical targeting to older people can be combined with other mechanisms – Chile’s CAS-PASIS achieves a high degree of progressive targeting using a proxy means test, while Costa Rica’s non-contributory pension allows social workers wide discretion to make eligibility determinations during an office interview and effectively targets the poor. However, these techniques undermine a rights based approach and can erode transparency.

One advantage of universal pensions is that they appeal to taxpayers more than other approaches, as most taxpayers will eventually receive the inter-generational transfer. Some countries, such as South Africa and Brazil, combine individual assessment with categorical targeting in the form of a means-tested social pension. This combined model could be difficult to implement in low-income countries due to the added complications and costs of means testing which could overburden the government’s administrative capacity. In addition to the public costs, the bureaucracy of means tests may be expensive for the targeted individuals and exclude many of the poor who cannot afford the private costs of qualifying for the pension. Additionally, the need for

74 World Bank (1994), page 240 cited in Willmore (2006).75 Holzmann et al. (2005), pages 95-96.76 Willmore (2006).77 St. John and Willmore (2001)cited in Willmore (2006)

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proof of age complicates categorical targeting to older people. Given the poor registry systems in many developing countries (particularly decades ago), many older people do not possess formal documentation of their age. If the costs of obtaining the documentation are high, many of the poorest are likely to be excluded.

2.8 Case studies on social pensions

2.8.1 Lesotho78

In November 2004 Lesotho implemented a universal non-contributory Old Age Pension for those over the age of 70. Lesotho is one of the world’s poorest countries and is coping with a severe AIDS pandemic. Many older people in Lesotho are increasingly vulnerable, particularly as the impact of HIV/AIDS and social change erode support networks. Rural households in 1993 averaged twice as many adults over 60 compared to households in the capital city (Maseru), and the incidence, depth and severity of poverty in rural areas were more than double that of the capital. Only 6% of non-poor household members were over 60 years of age, but 9% of poor and very poor household members were over 60. By 2002, the number of poor older people had significantly increased. Older people are increasingly responsible for the care of orphans and vulnerable children. As a result, the benefit amount of M150 per month (US$25) has a broad impact.

Given the scarcity of fiscal resources, Lesotho’s choice of a universal pension rejects the fiscal case for targeting. (Nepal is the only other lowest income country to run a universal pension programme.) Given Lesotho’s income distribution, the extra expenditure on non-poor older people may be less expensive than the sum of the various costs of targeting – not the least consideration is that the taxpayers funding the programme may benefit from it someday.

At a cost of M117 million per year (1.4% of national income, 7% of government spending), the programme requires a substantial but affordable allocation of government resources. The programme does not require donor financing. The programme is operating successfully, and benefits 50% more women than men. While most of the transfers are spent on food, medicine, clothing, children’s education and other necessities, some older people have been able to invest in raising chickens, whose eggs they can market to further support their livelihoods. Other older people have invested in different microenterprises – demonstrating the growth and benefit multiplier effects of social transfers. The high eligibility age constitutes a form of categorical targeting, reducing both the programme cost and its effectiveness in targeting poverty. The government is planning to lower the eligibility age to 65 years, adding 49,000 more older people at a cost of another M88 million per year.

2.8.2 Nepal79

In 1994 the Nepalese Government announced the implementation of the Old Age Allowance Program. Older people needed a Nepalese citizenship certificate, which verified their age, to apply for the pension. At the time of the announcement, 20% of the eligible older people did not possess these certificates. The government encouraged older people to apply for them, but supporting documents verifying age, place of birth, current address and father’s name were required. Proof-of-age can be very difficult, but the government was open-minded about the problem. During the recent electoral campaign the Election Commission of Nepal had issued an identity card, which included the age of the voter. These cards were allowed as proof of age, enabling some Nepalese to gain the pension. Most older people had a horoscope,

78 Devereux (2005), World Bank (1995) and Mason (2003), cited in Samson et al. (2006).79 : Rajan (2002) cited in Samson et al. (2006).

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which contained an accurate date of birth. The government allowed older people to apply for the citizenship certificate using the horoscope to verify their age. Older people were not required to undergo expensive medical verification of their age, making the application process easier and dramatically improving take-up of the pension.

2.8.3 Mauritius80

Mauritius, has provided elderly residents with non-contributory age pensions since 1950. The scheme became universal in 1958. Mild income tests were reintroduced in 1965 and again in 2004. Targeting proved to be unpopular, and universality each time was restored. Government added a mandatory, contributory pillar in 1978 that does not replace the flat, non-contributory pension. Instead, it promises participants (approximately half the labour force) an income related benefit to top up the universal pension.

Policymakers in Mauritius from 1950 to 1958 sought to reduce the fiscal cost of older persons pensions by subjecting applicants to a test of individual income or, if married, to a test of the combined income of the applicant and his or her spouse. They succeeded in reducing the number of old age pensioners by about 20 or 25 per cent compared to what might have been expected with a universal programme.

As Mauritius gained experience with non-contributory pensions, calls to tighten rules of eligibility subsided, and discontent with means testing grew. Honest citizens who reported their earnings were shocked to see their pensions reduced by the full amount of other income. They quickly learned to hide their true income. In the words of one member of the Legislative Council, it became “difficult to assess the true position of those poor people and furthermore it does not profit the Government to such a large amount of money”.81 In 1958, Government abolished the income test and began to award pensions to all who qualified by age, subject only to a residency requirement. Mauritian policymakers learned that even though means tests promise great benefits by targeting benefits, they have costs that offset their budgetary appeal.

A major complaint was the power that an income test gives bureaucrats, and the corruption that sometimes accompanies this power. A government minister explained that this was a key reason that Government decided to table legislation in 1958 to abolish the income test:“[W]e know that if an unfortunate person applies for old age pension and does not have any support, it would take months ... [to] obtain the old age pension. I can very well understand why certain elements in the country are against the doing away of the means test. Once this is got rid of, every person who is entitled to receive old age pension would be able to apply for it and, as a matter of law, as a matter of right, will be entitled to it. It will not be a question of whether one Member of the House or some of his friends happen to be persona grata with certain officers.... This is one way in which up to now political power has been obtained in certain quarters in this country. This is a fact, ... and this is one of the things which thisGovernment has decided to stop.” 82

When an applicant has right to a pension simply by submitting proof of age, the government official has little power. When an official is asked to certify the income of an applicant, he obtains power, which provides opportunity for corruption and for abusive invasion of privacy.

80 Willmore L (2006).81 Debates, 4 December 1951 quoted in Willmore L (2006).82 Mr. Rault, Debates, 1 April 1958 quoted in Willmore L (2006).

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The mild income test that was in effect from around 1965 through 1976 avoided these administrative and invasive costs because the test was simple: filing and paying income tax disqualifies you for an age pension. This rule gave no discretionary power to bureaucrats, and was not intrusive. Nonetheless, the test provided citizens with yet another reason to distort information, to hide their income, to avoid filing an income tax return. Those who filed a return lost their entire pension, equivalent to a tax of at least 100% on the pension, even higher in the case of incomes that were only borderline taxable, since the age pension itself was no longer taxable.

In August of 2004, for the third time in history, Government imposed an income test on basic retirement pensions. Pensioners younger than 90 years of age, with annual income greater than Rs208,000 (US$7,500), found their monthly pensions reduced by 50% of one twelfth of the amount of income exceeding this threshold. This time the income test was short-lived, for the ruling political coalition lost the national elections of July 2005. A new government moved quickly to “end the humiliation previously imposed on pensioners by abolishing the targeted approach and reinstating [the] universal pension to all pensioners” (Mauritius, 2005).

Mauritius ended up with a system of universal age pensions by accident, not by design. Basic, flat pensions from the very beginning in 1950 were regarded as temporary, something to take care of the needs of the elderly until the day a contributory, income related system of pensions could be put into place. Nonetheless, once the non-contributory system was in place, it proved to be both popular and durable. The long awaited arrival of contributory pensions in 1978 was followed not with the replacement, but rather a strengthening of a system of basic, flat pensions for all elderly residents.

2.8.4 New Zealand83

The New Zealand state pension, called New Zealand Superannuation (NZS) is a flat-rate, universal state pension payable to people aged over 65 who are resident, and have lived in the country for ten years since age 20, five of which must be since age 50. NZS is not income- or asset-tested. From 1985, a ‘surcharge’ on superannuitants’ other income over an exempt amount reduced the value of NZS for richer pensioners. It was unpopular and was removed in 1998.

The level of NZS benefit is reviewed each year, but has to be kept between 32.5% and 36.25% of the net average wage. This is usually described by ‘65 at 65’, that is, at age 65 a married couple will receive at least a net 65% (two times 32.5%) of the net average wage. The lower thresholds for single pensioners living alone and single people sharing accommodation are set at 65% and 60% of that for a married couple rate respectively.

NZS is based on individual, not household, entitlement. 93% of people over pension age receive it. Means-tested income support is available, on the same basis as people of any age. NZS is intended to be sufficient to cover living costs in retirement for people who own their own home. An additional means-tested supplement for people with high accommodation costs is available.The role of the state in pensions consistent with the NZS-style Citizen’s Pension is described as follows:

…the ability to retire in a degree of personal comfort, without worry and with dignity, is the least that citizens can expect in a modern, developed economy…..it is also most

83 Taken from O’Connell A (2004).

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they can expect. They cannot expect the state to maintain in retirement the incomes people became accustomed to during their working lives.\

2.9 Conditional cash transfers Conditional cash transfers provide money to poor families under an agreement between the programme agency and the beneficiaries. In order to obtain the transfer, households must actively satisfy certain conditions; such as ensuring their children attend school regularly or visit health centres. They are called targeted human development programmes because the main aim of the cash transfer is to enhance investment in human capital.

Targeted conditional transfer programmes share the objective of breaking the ‘vicious circle of poverty’ by concentrating resources on increasing human capital accumulation among the children of the poor, and through them, to directly tackle persistent or chronic poverty.84 At the same time, there is considerable variation in the scope, design and objectives across the range of programmes.

Brazil’s Bolsa Escola and Child Labour Eradication Programme (PETI), and Bangladesh’s Cash-for-Education, focus on a single cause of poverty: deficient school enrolment and attendance. Mexico’s Oportunidades, Nicaragua’s Red de Proteccion Social (RPS), Honduras’ Programa de Asignacion Familiar (PRAF), Colombia’s Familias en Acción, and Turkey’s Social Fund, have a broader range of components which address specific dimensions and correlates of poverty: household consumption, early childhood interventions, schooling and healthcare. Chile Solidario has the widest range of interventions and addresses the multi-dimensional causes of poverty.85

Differences in the design and objectives of these programmes reflect different views of the causes of poverty. The first group of programmes is premised on the belief that the primary cause of persistent poverty is education deficits among the poor, arising from poor school attendance or from the competing pressures of child labour. The programmes in the second group are based on the view that education deficits, together with deficits in parenting, primary healthcare, and nutrition in early childhood, are the main factors explaining persistent poverty. Chile Solidario maintains that poverty is intrinsically multi-dimensional, and regards the household as a whole, and not only the children, as the main agent of change.86

There has been some discussion among the agencies responsible for the programmes in Latin America about the issue of conditionality.87 The frequency, extent and mode of monitoring programme conditions all add to the costs of administering the programmes, which explains why these have not been implemented in full in several countries.88 Conditionality may also create some perverse outcomes. Conditions may penalise the very households who are in most need of support but who are held back by social constraints or adverse outcomes. In theory, households which do not meet the conditions have to be suspended, thereby further constraining their chances of overcoming poverty. In practice, however, the sympathetic application of conditionality means that suspension is rarely enforced. There is emerging evidence that non-compliance is rare when the programme has been in place for a while and beneficiaries are fully informed of their entitlements and responsibilities. This has prompted the suggestion that conditionality may therefore not always be 84 Barrientos A, DeJong J (2004), page 24.85 Ibid.86 Ibid.87 Ayala Consulting (2003) citied in Barrientos A, DeJong J (2004) page 28.88 For example, Jamaica’s Programme of Advancement through Health and Education (PATH) involves monitoring nine different conditions.

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necessary to guarantee the effectiveness of a programme.89 Additionally, most current targeted cash transfer programmes exclude poor regions which do not have the necessary infrastructure of service provision.90 .

2.10 Case studies on conditional cash transfers

2.10.1 Brazil’s Bolsa Escola (now part of Bolsa Familia)The Bolsa Escola (‘school bag’) programme in Brazil provides a cash transfer of between US$5 and US$15 to households with children aged between 6 to 15 years of age which is conditional on the children enrolling in school and having an attendance record of at least 85 per cent. The programme was originally introduced by the municipality of Campinas, but later spread to other municipalities and became a federal programme in 2001.91 The cash transfer is targeted at households with a per capita income below US$90 per month. (Brazil uses a single basic income-level for all benefits). The Bolsa Escola currently reaches 8.2 million children in 5 million households.92

2.10.2 Mexico’s Progresa (now Oportunidades)Mexico’s Progresa was introduced in 1997 to support poor households with children in small rural communities.93 The programme pays a household consumption subsidy of US$12.5 per household per month, plus a school subsidy of between US$8 and US$30.5 per child of school-going age per month, depending on the school grade, plus an annual subsidy of between US$15.5 and US$20.5 per child to cover school materials. The combined transfers are capped at US$75 per household per month in order to reduce fertility incentives and preclude benefit dependency. The subsidies are conditional on children having a school attendance record of at least 85 per cent, and on mothers and infants attending regular primary healthcare examinations and parenting sessions. Targeting takes place in two stages: a first stage, in which poorer geographical areas and communities (less than 2,500 inhabitants), with existing health, education and transport infrastructure are selected; a second stage, in which poorer households (based on a proxy index94) are selected. The programme reached 2.6 million (or 40 per cent of) rural households in Mexico in 2002. In March 2002, the programme was renamed Oportunidades and extended to cover urban areas.95

2.10.3 Chile’s SolidarioChile Solidario is more comprehensive than either Bolsa Escola or Progresa, although it includes a conditional cash transfer as a key component. This programme is targeted at the 250,000 households living in extreme poverty in Chile (i.e., with an income below the level needed to purchase a minimum subsistence basket). The programme is designed to provide comprehensive and sustained support to identified households motivated to change their circumstances. These households are provided with a package of integrated services and cash transfers. During the first 24 months, households are assigned a social worker who arranges support in several key areas: health, education, household dynamics, work, income and housing. A contract is agreed with the household. A consumption subsidy is paid to the household, in addition to other benefit entitlements, and access to services is tailored to the specific needs of the household. These could include skills training, disability rehabilitation, drug prevention and rehabilitation, child protection, control of household violence, and 89 Ayala Consulting (2003) citied in Barrientos A, DeJong J (2004), page 28.90 Sedlacek et al. (2000) citied in Barrientos A, DeJong J (2004), page 29. 91 Bourguignon et al. (2002) cited in Barrientos A, DeJong J (2004), page 24. 92 Bolsa Escola (2003) cited in Barrientos A, DeJong J (2004), page 24.93 Morley and Coady (2003).94 A more detailed explanation of proxy testing is provided in Part 2 of this paper.95 Barrientos A, DeJong J (2004), page 23.

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school-based support. At present, the programme covers 113,116 households and will gradually expand to full coverage of more than 250,000 households.

2.10.4 Bangladesh Food-for-Education (now Cash-for-Education)Ravallion and Wodon (2000) examined the impact of Bangladesh’s Food-for-Education programme. The programme provided food to poorer households on condition that children had a school attendance record of at least 85 per cent. It is premised on the view that child labour displaces schooling, with long-term consequences for the prospects of children in poorer households. The food subsidy is intended to compensate households for the withdrawal of children from paid employment. In 1995/6, the programme covered 2.2 million children or 13 per cent of enrolments.

The study found that, although school enrolments rose in response to the food subsidy, the decline in incidence of child labour was less than proportionate. The authors estimate that ‘the reduction in the incidence of child labour by boys (girls) represents about one quarter (eighth) of the increase in school enrolment rates’.96 It would appear that child labour does not fully displace schooling, but can displace the non-school and non-work activities of children. On average, children attend school for 17 hours a week in Bangladesh (three to four hours per day for 120 days per year). An earlier ILO study of programmes providing economic incentives to reduce child labour and support schooling concluded that a combination of school-based incentives, remedial education, income-generating activities, and awareness-training for parents, was likely to be more effective than any of these components on their own.9798 .HILD POVERTY AND CASH TRANSFERS – CHIP REPORT NO 42.11 Public Works“Public works” are programmes that involve the regular payment of money (or in some cases in-kind benefits) by government or non-governmental organisations to individuals in exchange for work. The World Bank characterises public works as an instrument for responding to acute or transient shocks.99The aim of such programmes is to reduce poverty by providing low-wage work to those who need it. Public works therefore prevent or reduce distress selling of assets, promoting consumption smoothing during periods of disrupted access to income. This situation may occur as a single, one-off shock, resulting from a particular event, or may be cyclical, relating for example to an annual shortfall in labour demand at a given point in the agricultural cycle. In these circumstances the World Bank argues that the use of a public works instrument offering temporary employment may be appropriate, in terms of cost and impact, particularly where the output of the programme is an asset which will reduce the vulnerability of the community to future shocks.100 . Examples include; Argentina’s Trabajar public works programme, Bangladesh’s Cash-for-Work and Food-for-Work public works programmes, Ethiopia’s Productive Safety Net Programme, India’s Employment Guarantee Scheme in Maharashtra, Malawi’s public works programmes run by its social fund (MASAF), and South Africa’s Expanded Public Works Programme (EPWP).

The projects often have political appeal, supporting their implementation and sustainability. The project orientation facilitates geographic targeting to areas of high unemployment and poverty.

96 Ravallion and Wodon (2000), page 173.97 Anker and Melkas (1996).98 The above information is cited in Barrientos A, DeJong J (2004), page 25.99 2001 World Development Report.100 Cited in McCord A (2005).

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Some of the drawbacks to public works programmes are that they are often expensive and difficult to administer, which puts a strain on government capacity. They are not appropriate for many of the most vulnerable (children, older people, those with disabilities) who are unable to accept the kind of employment offered. In some countries the work requirement fosters a gender bias. It is often difficult to target those of the poorest who live in remote and inaccessible locations. In most cases the projects offer employment of only a short duration, which undermines the delivery of a sustainable social impact. Sometimes the assets created by the projects are of poor quality, failing to contribute the expected productivity impact.

Public works programmes are more likely to succeed when the link between poverty and unemployment is exceptionally strong. Since most programmes offer only short-term employment, they are more appropriate for transient rather than chronic poverty.101 It is also important that the value of assets produced through public works substantially offset the cost of the programme. Public works can be an expensive way to deliver social protection. The net income gains to the workers from the Trabajar programme in Argentina have been estimated to be just a quarter of the benefits paid by the government.102 Due to their high implementation costs, unless programmes generate substantial production-related benefits, they are unlikely to deliver social transfers in a cost-effective manner. For chronic poverty and deep structural unemployment, short-term public works have limited impact.

2.12 Case studies on public works

2.12.1 India’s Employment Guarantee Scheme (EGS)103

India’s Employment Guarantee Scheme (EGS) in the state of Maharashtra aims to address the problem of transient poverty during the agricultural lean season. The programme provides guaranteed employment at a subsistence-level wage while constructing productive infrastructure and other assets. The developmental projects seek to address short-term poverty while supporting longer-term development. The work requirement and the low wage intend to target the poor – and the exclusionary impact on those unable to work is offset somewhat by the government’s social pension and food subsidies.

In order to participate, individuals must register a “demand for work” with the local village authority, which is then obliged to offer work within 15 days or else to provide an unemployment allowance. The work project site must make available potable water, childcare, first aid, a shaded place for rest breaks, and other amenities. Projects must be labour-intensive, spending at least 51% of their budget on unskilled labour. In addition, they must generate productive assets, with a priority given to water conservation.

The law requires the creation of a new project when at least 50 workers who have demanded jobs cannot be accommodated in existing public works. Committees at the state, district and block council (Panchayat Samiti) levels implement the Employment Guarantee Scheme. The Panchayat Samiti is an elected block council which plans, co-ordinates and implements development policy initiatives and social welfare programmes of the state government. The state Planning Department manages overall responsibility for the programme, with district-level authority vested in the Collector, who receives quarterly budget allocations from the state. Dedicated taxes

101 Jones (2005), page 2, cited in Samson M et al (2006).102 Ronconi, Sanguinetti and Fachelli (undated), page 21, Jalan and Ravallion (1999), cited in Samson M et al. (2006).103 Gaiha and Imai (2005) and Gaiha and Imai (2006) cited in Samson M et al. (2006).

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(including taxes on urban formal sector employees) together with a matching contribution from the state government finance the scheme.Launched in 1965, the government expanded the programme after the extended drought in 1971 and legally institutionalised it with the Employment Guarantee Act of 1979. The most significant poverty reduction programme in the state of Maharashtra, the scheme created 90 million person-days of employment in 1997. Reaching the poor, however, has posed significant challenges.

From 1979 to 1989, the non-poor participation rate rose from 39% to 55% while the proportion of the poor not participating rose from 81% to 86%. Low overall participation rates do not reflect a lack of demand for jobs, but rather complicated registration procedures, inaccessible work-sites and the management of the programme. The proportion of female participation significantly lags their share of registration due to the programme’s failure to provide childcare, discriminatory wages and the particular burden long distances to work sites place on women.

Nevertheless, the programme provides substantial benefits. Studies of household data indicate that the employment guarantee has contributed to higher market wages for agricultural workers – both through the improved productivity generated by the assets created, and the improved economic power and worker solidarity the programme promotes. Many of the benefits of the productive assets accrue to large landholders, encouraging their political support but missing an opportunity to accelerate pro-poor development. The scheme successfully improves the income stability of poor rural households, reducing reliance on usurious credit, productive asset sales and hunger as responses to income shocks. The programme generates little disincentive effects – workers seek higher wage employment and take advantage of better opportunities when they become available. The relative success of the programme has inspired the implementation of a national Employment Guarantee Scheme.

2.12.2 Ethiopia104

In 2004 Ethiopia’s Productive Safety Net Programme (PSNP) replaced the relief-oriented national Employment Generation Scheme. The PSNP provides social transfers to food-insecure households in order to prevent the loss of livelihood-supporting assets while enabling communities to expand developmental infrastructure. The programme improves on previous schemes in that it: Provides transfers in the form of cash rather than food Improves the strategic importance and the quality of the assets created Integrates public works with other developmental initiatives and priorities of line ministries Creates long term employment that supports the development of sustainable livelihoods.

The design of the programme builds on several key principles: The project managers allocate their resources to employing workers as much as possible, as opposed to purchasing inputs or machinery. The community participates actively in the selection, planning, monitoring and evaluation of public works projects. The programme commits to employing workers and creating community assets for a longer term horizon, with projects planned and integrated inter-sectorally with other development initiatives. Since the programme does not create enough jobs to meet the needs of everyone who wants work, administrative and community targeting is used to identify poor food-insecure households.

104 : McCord (2005) cited in Samson M et al (2006).

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The programme offers jobs close to where the poor live, with features that promote participation by women and reduce their regular work burden.

Ethiopia’s previous experience demonstrated that public works implemented in isolation from other developmental initiatives were unlikely to make a sustainable impact on livelihoods – their poverty-reducing impact was limited to the life of the schemes. When administrative and executive capacity is limited, duplicating implementation structures constrains the government’s ability to deliver social protection. Recognising this, the PSNP aims for co-ordination, for example, integrating public works with agricultural extension initiatives. Non-governmental organisations distribute seeds and fertiliser, promote new high value crops and provide credit and other inputs, enabling households to take advantage of the productive assets created by the public works programmes. In addition, 20% of the wage budget is reserved for social transfers to households in which no one is able to work.

Ensuring that the assets created by public works are appropriate and high quality requires time and money and limited resources can erode the ability of the programme to provide jobs to the poor appropriately. The PSNP imposes conditions for verifying the productive contribution of the public works prior to approval and implementation of the project. In the face of delivery delays exacerbated by these requirements, the PSNP has sometimes compromised on asset quality in order to achieve its more fundamental social protection objectives. Ethiopia’s initial experience with the PSNP shows that an effective shift to a more developmental orientation requires better planning and coordination, more technical assistance, increased resources (particularly for non-wage income support), and greater community ownership.

The logic of annual emergency appeals (common with the previous Employment Generation Scheme) fails in the face of the increasingly predictable nature of Ethiopia’s increasing food insecurity. Recognising this, the PSNP has succeeded in mobilising donor support for longer term funding. With three to five year commitments, both donors and the government can plan more effectively and realise efficiencies. In theory, this will enable the PSNP to assure beneficiaries of secure and regular transfers, serving a productive insurance function that supports the poor to undertake riskier but more rewarding investments. In the first year, administrative and delivery problems have eroded this benefit. More resources are required to ensure that the programme delivers reliable social protection to the poor.

The government’s administrative, technical and financial capacity constraints have posed the greatest challenges to the success of Ethiopia’s PSNP. The developmental orientation of the programme increases the costs, yet promises much greater benefits.

The PSNP’s innovations, in terms of long term commitment, labour intensity, high quality assets, and developmental integration, offer a solution that tackles the roots of poverty while providing for the immediate needs of social protection. Realising this potential requires a more substantial commitment of financial and human resources. If they are not forthcoming, unconditional transfers may provide a more effective, comprehensive and economical strategy for achieving social protection.

2.12.3 Argentina105

The Argentina government’s response to increasing unemployment is to provide temporary work, paying a relatively low wage, working on social infrastructure or community services. Participants in public works projects usually require assistance in order to obtain regular employment. The government designed the Proempleo

105 Galasso, Ravallion and Salvia (2002), page 23 cited in Samson et al. (2006).

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Experiment to evaluate the effectiveness of offering employers a wage subsidy and specialised training to assist participants to make the transition out of public works schemes. Randomly selected low-wage workers received the subsidy and training.

Under the experiment, one randomly selected group of workers received a voucher that entitled a private sector employer to a wage subsidy that covered part of the total wages paid to the employee. A second similarly randomly selected group was offered limited training as well as the subsidy voucher. A third randomly selected group received nothing but the right to continue in the public works programme. This group provides the basis for comparison in order to identify the effects of the interventions.

Before the programme began, a baseline survey measured the living conditions of all the participants in the programme. After 18 months of the Proempleo Experiment, 14% of the workers in the group receiving the vouchers had found a private sector job – versus only 9% in the group which received no additional benefits (the control group). The difference was found to be statistically significant.

The workers who were able to successfully exit the public works programme were mostly women, as well as younger and more educated workers. The additional training also slightly improved the chance of employment, however, this was only apparent when statistical techniques were applied to control for the sample selection choices. The impact of training was particularly important for those with better initial education.

While Proempleo did not promote a major transition from public works to private sector jobs, the experiment cost little and managed to support some increase in private sector employment. Scaling up the experiment, however, might not increase the benefits substantially. With limited numbers of workers with vouchers, employers might receive the subsidy certificate as a tacit government endorsement of the worker. As the number of participants increase, the value of the certificate becomes diluted. In addition, the offer of a subsidy might help programme participants to find work – but perhaps to fill those positions created by retrenchments motivated by the company’s desire to attract subsidies for hiring new workers. In this case, there is no employment gain for the economy – rather an economic loss as firms pay the costs of restructuring and retraining new workers.

2.12.4 Malawi106

Malawi’s Social Action Fund (MASAF) generally makes no explicit provision in its public works programmes for those households in which no one is able to work. Children, lactating mothers, the sick and malnourished in Malawi (as well as in Ethiopia) sometimes choose to participate in these projects because there is no alternative social transfer available. This experience demonstrates the risk of assuming labour-constrained vulnerable groups live in households where someone is able to work.

While MASAF funds the Social Support Project (SSP), which provides some social protection for vulnerable groups (including orphans and vulnerable children), this programme is not integrated with the implementation of public works. As a result, in some areas public works benefit workers but fail to meet the more pressing needs of the most vulnerable. The work conditionality assumes that poor households have idle labour willing to work if employment is made available.

106 McCord (2005a).

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International experience with public works documents strong demand for these jobs, with most programmes required to resort to non-wage rationing mechanisms. Two factors can work against the poorest in their attempts to access benefits through public works – they often have the least spare time available to commit to public works, and the targeting mechanisms do not always reach them.

Unconditional grants are often more effective in reaching these households. The cost of delivering benefits through public works to older people, child-headed households or those severely affected by HIV/AIDS is likely to be significantly higher than the cost of an unconditional transfer. Complementary social transfers to households with no one able to work are a critical element of efficient and equitable public works programmes.

A study commissioned by the Government of Malawi’s National Safety Nets Unit together with the Malawi Social Action Fund (MASAF) analysed the wage-setting process for public works projects in the country. The study found that even very low wages were ineffective in rationing the limited number of public works jobs to the very poorest – and these low levels of transfers compromised the social protection offered by the programme. Instead, the report recommends setting the size of the transfer to reflect the cost of living – approximately MK54 in 2004 compared to the revised public works wage rate of MK37. Because the higher wage rate would increase the attractiveness of public works employment, improved community targeting would be required.107

2.12.5 Indonesia108

In the face of Indonesia’s economic crisis of the late 1990s, the government tasked the Ministry of Public Works with responsibility for a labour-intensive employment programme in mid-1998. As the crisis unfolded, the ministry repeatedly failed to roll out an effective programme. It became apparent that the required mission contradicted the ethos and culture of the organisation.

The public works ministry was organised to mobilise staff and contractors in order to deliver high quality projects. The ethos of the organisation revolved around the pride of building the product. To subordinate this to the objective of employing low-wage unskilled labour clashed with the organisational culture. Planners feared that low wages aimed at self-targeting would fail to attract the skilled labour required for high-quality delivery. Labour-intensity conflicted with the engineering mentality prevalent in the organisation.

The economic crisis had nearly ended when a revised programme began implementation. In the face of ongoing disagreements about the appropriate design elements, the government phased out the programme. .

2.13 Alternatives to means testingSouth Africa’s approach to targeting can be classified as “verified means testing”, whereby the grant recipient directly reports the key targeting variable (income), and procedures are implemented to corroborate this information. Alternatives to verified means testing include unverified means testing, proxy means testing and universalism. Historical and international experience documents the substantial challenges developing countries face in implementing an effective verified means test.

107 Chirwa, McCord, Mvula and Pinder (2004) cited in Samson et al. (2006).108 Pritchett (2005), page 30 cited in Samson et al. (2006).

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South Africa’s means test now ranks as one of the developing world’s most effective targeting mechanisms, demonstrating considerable improvement over the past five years. Nevertheless, it is very costly and continues to result in relatively high errors of inclusion and exclusion.

2.13.1 Verified means testing“Verified means testing” method requires a civil servant to directly assess, household-by-household or individual-by-individual, whether the applicant is eligible for the program. There are three main approaches: third-party verification of income; the applicant provides documents to verify income or related welfare indicators; or a simple interview is used to collect information.

An advantage of means testing is that, in the best of cases, it is very accurate. However it is limited in that it requires high levels of literacy and documentation of economic transactions, preferably of income. It is administratively demanding where there are meaningful attempts at verification and it is the method of targeting most likely to encourage work disincentives.

This method is particularly taxing on the prospective beneficiary as they must document individual or household income or assets, or any other variables the means test depends on to demonstrate livelihoods. It is often costly to gather this information. Problems also arise when the poor rely heavily on informal sector sources of income and the practicalities of verifying these livelihoods substantially increase the cost of the means test.

Verified means testing would work in circumstances where declared income is verifiable or circumstances in which some form of self-selection limits applications by non target groups; where administrative capacity is high and where benefits to recipients are large enough to justify the costs of administering a means test. 109

2.13.2 Proxy means testingProxy-means tests involve generating a score for applicants based on fairly easy to observe characteristics of the household such as the location and quality of the home, ownership of durable goods, demographic structure of the household, and the education of the adult members of the household. The indicators used in calculating this score and their weights are derived from statistical analysis of data from detailed household surveys. Eligibility is established by comparing the score against a predetermined cut-off.

The advantages of this method of testing are that it is verifiable and may lessen concerns about politicisation or randomness of allocation of transfers; it uses readily observable household characteristics and it is less likely than the means test to discourage taking on additional work.

The limitations of this method are that it may seem arbitrary; it requires a large body of literate and probably computer-trained staff, and moderate-to-high levels of information and technology. There are natural inaccuracies at a household level, although it is good on average; it is insensitive to quick changes in welfare, like a crisis. There are also some difficult practical challenges relating to the regularity of updating the formula. Updating the formula and re-testing the population (referred to as “recertifying”) tends to be expensive, and is usually conducted on a three-year cycle or less frequently on an ad hoc basis.110 Paradoxically, transparency can

109 Coady et al. (2002).110 Coady, Grosh and Hoddinott (2004), page 53.

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undermine a proxy means test – by making it easier for households to manipulate their circumstances in order to qualify for the programme.111 Effective outreach policies are critical to minimise exclusion errors – this management arrangement frequently fails to receive the necessary attention112.

This mechanism would work in circumstances where there is a reasonably high administrative capacity; where there are programs meant to address chronic poverty in stable situations and where it is applicable to a large program or to several programs so as to maximise return for fixed overheads.113

2.13.3 Community targetingA community leader or group of community members whose principal functions in the community are not related to the transfer program decides who in the community should receive benefits. The benefit of this method is that it takes advantage of local information on individual circumstances and it allows for local definition of need and welfare.114 This model can also facilitate community mobilisation, empowering disadvantaged groups and legitimising the social transfers programme with positive political consequences.115

The limitations of this approach is that local actors have other incentives besides good targeting of the program; it may lower authority or cohesion of local actors; it may continue or exacerbate patterns of social exclusion and if local definitions of welfare are used, evaluation is more difficult and ambiguous116. Since community-based targeting decentralises important policy elements of targeting, it may lead to varying benefit levels for the same groups in different regions. This undermines the objective of horizontal equity and in some cases may lead to inefficient population movements.

Appropriate circumstances exist where local communities are clearly defined and cohesive; for programs that propose to include a small portion of the population; and for temporary or low benefit programs that cannot support an administrative structure of their own.

2.13.4 Categorical targetingCategorical targeting is also referred to as statistical targeting, tagging or group targeting. It - involves defining eligibility in terms of individual or household characteristics that are considered to be easy to observe, hard to falsely manipulate, and correlated with poverty. Age, gender, ethnicity, land ownership, household demographic composition or location, are common examples. Geographic targeting is often used and often in tandem with other methods117.

Geographic indicators aim to target the poor of a particular region, and are commonly used with conditional cash transfer programmes and in response to national disasters. Geographical targeting determines eligibility for benefits at least in part based on the location of the beneficiary’s residence.118 Disparities in living standards between

111Subbarao, Bonnerjee, Ezemenari, Braithwaite, Graham, Carvalho and Thompson (1997), pages 20-21.112 Coady, Grosh and Hoddinott (2004), page 55.113 Ibid.114 Coady et al (2004).115 Conning and Kevane (2000), pages 2-3.116 Coady et al (2004).117 Ibid.118 Coady, Grosh and Hoddinott (2004), page 47.

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regions and communities, caused by differences in climate, natural resources, geography and/or public policy, can be found in nearly every country.119

Social transfer programmes, particularly those with limited resources, frequently adopt mechanisms that restrict their scope to those areas with the highest concentration of poverty. Conditional cash transfer programmes frequently employ poverty maps, surveys and administrative data in order to supplement other mechanisms with geographical targeting. Public works programmes frequently rely on geographical targeting to identify communities that will most benefit from projects.

One of the key advantages of geographical targeting is its potential simplicity. Particularly in emergencies, geographical targeting provides a mechanism for immediate delivery to the hardest hit areas. However, geographical targeting alone risks generating large errors of both exclusion and inclusion if poverty is not spatially concentrated. Particularly at a regional level where income disparities are usually large, geographical targeting includes many non-poor households while excluding regions, which nonetheless contain many of the poor.120.

2.13.5 Self-targetingSelf-targeting is the characteristic of a universal transfer programme that is designed to be attractive primarily to the poor. The non-poor are supposed to voluntarily choose to forego the potential benefit – either because of the costs of participating, the resulting stigma, or the associated conditionalities (work requirements, access costs etc). Self-targeting was once considered less expensive than other mechanisms because the psycho-social costs of stigma were generally ignored.121

But in reality self-targeting also involves significant inclusion and exclusion errors. For example, public works programmes often employ the combination of work requirements and low wages to promote self-targeting by the poor. In some very poor countries, however, members of less poor households may still seek employment at wages that are too low to even provide the very poorest with adequate social protection.122 At the same time, the work requirement excludes those who are unable to supply labour to the programme – often the most vulnerable in the society.123 In countries where the poor need transfers the most, the wage rate necessary to effectively self-target the poor is so low, the programme could not honestly claim to be offering significant levels of social protection.124

2.13.6 Combinations of targeting mechanismsEach of the mechanisms for poverty targeting has strengths and weaknesses. Appropriate combinations of instruments can provide complementarity, with the different strengths effectively offsetting the weaknesses. For example, Mexico’s Oportunidades conditional cash transfer programme combines geographic targeting, proxy means tests, and community participation. Brazil’s Bolsa Escola employed a poverty line approach together with elements of community control. Many old-age pensions – like those in Brazil, India and South Africa – employ categorical targeting (age and sometimes gender) together with means testing. Other pension

119 Bigman, and Fofack (2002), page 129.120 Bigman and Fofack (2002), page 136.121 Stigma can be defined as “the feeling of shame that may come from an open admission that one is poor and in need of help”. [Grosh (1994).] Stigma can also be externally reinforced, increasing the social costs for those affected.122 Chirwa, McCord, Mvula and Pinder (2004).123 Devereux (2002), pages 8-9, Gebre-Medhin and Swinton (2001).124 Devereux (2002), pages 9-10.

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programmes, however – like those in Lesotho, Namibia, and Nepal – are universal within their categorical age targets.

2.14 ConclusionsThis evidence highlights the many costs of targeting, particularly through a verified means tests. These include not only the financial costs that increased administrative capacity would require but political costs, social costs and the direct costs to the beneficiary. There is also the serious cost of excluding the very people that the social protection policy aims to reach.

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3.1 Introduction This section of the paper evaluates each of South Africa’s social grant programmes with a focus on each grant’s means test. The analysis sheds light on the appropriateness of current targeting mechanisms in terms of the means test, asset test, scaling factor and other relevant features. The discussion first reviews the current means test on a grant-by-grant basis, documenting how the targeting process was derived. The historical approach examines the evolution of each respective means test. The analysis assesses the weaknesses and strengths of the current means tests for each type of social grant. Micro-simulation analysis provides evidence of the relative effectiveness of means testing.

The primary purpose of a means test is to efficiently allocate scarce social resources to those who need them the most—the poorest. This analysis assesses the weaknesses and strengths of means testing in South Africa in terms of how effectively it achieves this objective. In particular, the analysis quantifies errors of exclusion and inclusion—what percentage of poor households is excluded from the grants, and what proportion of the grants are distributed to households that are not poor.

3.2 Analysis of the Child Support Grant3.2.1 Review of the means test for the Child Support Grant (CSG)The means test for the Child Support Grant is the most complicated of all the targeting mechanisms employed by the Department of Social Development, distinguishing among urban and rural households as well as the materials used in the construction of the caregiver’s dwelling. The urban/rural distinction aims to reflect the greater prevalence of poverty and the higher cost of living in rural areas.

A primary caregiver will qualify for the CSG if the primary care giver (PCG) and the child: Live in a rural area in either a formal or informal dwelling and the personal income

of the PCG and his/her spouse is below R13,200 per annum. Live in an urban area in an informal dwelling and the personal income of the PCG

and his/her spouse is below R13,200 per annum. Live in an urban area in a formal dwelling and the personal income of the PCG

and his/her spouse is below R9,600 per annum. The amount of R9,600 is only applicable to a person living in an urban area and who occupies a brick/concrete or asbestos dwelling.125

A successful application for the grant is therefore, in part, dependent on the PCG establishing that she and her spouse comply with a means test that is linked to her/their personal income.126

Personal income is defined as income earned or received by the PCG and includes income earned or received by his or her spouse, after all the permissible deductions referred to in Regulation 15 have been made.127 Deductions are made for the Unemployment Insurance Fund, pensions, tax, medical aid and other grants.128

125 Sections 2 (d) and 4 of the Social Assistance Act read with Regulation 16 (2) to the Act (as amended by GN 813 of 25 June 1999).126 Section 4 of the Social Assistance Act.127 Definition of ‘personal income’ read with Regulations 14 (1) and 15. (Definition and Regulation 14 (1) and 15 (1) substituted by R1233 of 23 November 2001).128 The PCG will receive grants for up to six non-biological children and an unlimited number of biological children.

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3.2.2 Assessment of the means test for the Child Support GrantThe means test for the Child Support Grant reflects a strong theoretical understanding of the profile of poverty in South Africa. The focus on the means of the caregiver rather than the entire household takes into account the challenges of intra-household resource allocations. The utilisation of poverty proxies—informal dwellings and rural locations—reflects the nature of poverty in South Africa. In practice, however, the resulting complexity challenges the administrative capacity of the implementing institutions. Even Statistics South Africa has abandoned the task of identifying the urban/rural distinction at a detailed geographic level. The main strength of the means test today is that the Department of Social Development has significantly relaxed the strictness of its application. While this has led to the extension of the grant to households that do not strictly qualify, most of these are nonetheless poor households—and would qualify based on the standards of poverty established in 1998.

A major shortcoming of the means test for the Child Support Grant is that the income thresholds have not been adjusted since the programme’s inception. The threshold for rural (and some urban) households is R1100 per month, while that for urban households in formal dwellings is R800. Since 1998 the cost of living for poor households has risen approximately 72%.

Poverty threshold levelsThe means test threshold levels of R800 and R1,100 per month for the CSG are considered very low since they have not been adjusted for inflation.

The value of the grant, however, has kept pace with inflation in recent years, (though not in the earlier years), rising from R100 in 1998 to R190 in 2006, and R200 currently. The Minister of Finance has undertaken to continue to raise the CSG value to keep in line with rising costs caused by inflation. But without raising the thresholds for the means test in line with inflation, the threshold becomes lower and lower in real terms.

Budlender et al shows the impact of not adjusting the means test thresholds by firstly calculating how much R800 and R1,100 in 2004 are worth in real terms compared to what they were worth in 1998; and by secondly showing what the two thresholds should have been in 2004 if the real levels were maintained at the 1998 levels. They show that to keep pace with inflation, the thresholds would have needed to be set at R1,123 and R1,544 respectively in 2004. Instead, in 2004 the value was equivalent to the buying power of R570 and R784 in 1998.129 This means that many children who would have been eligible, using a means test adjusted for inflation, are excluded from accessing the CSG although they are as poor as other children who were eligible for the CSG in 1998.130

The other issue with the means test thresholds is that they do not necessarily reflect a ‘reasonable’ poverty line. The concept of a poverty line is controversial since income poverty is a very narrow definition of poverty, and many different lines are used by social policy analysts. Using a poverty line of R430 a month, Woolard found that 74.9% of children aged 0 – 17 in South Africa are poor. This amounts to more than 13 million children. Using a R215 per month poverty line, Woolard found that 54.3% of children across South Africa are ultra-poor. This means that 9.7 million children from

129 The adjustments are based on the consumer price index (CPI) for all items in metropolitan areas as reported by Stats SA (Viewed 4 January 2005: www.statssa.gov.za).130 Budlender et al also provide an analysis of the number of children who would be eligible for the CSG under a means test threshold adjusted for inflation.

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birth to age 17 are living in deep poverty131. At the same time, poverty is not evenly distributed across the country. The Eastern Cape (72%), Limpopo (69%) and KwaZulu-Natal (60%) experience the highest child poverty rates132, and together these three provinces are home to 60% of income-poor children. The issue of whether an income measure of poverty should be used and, if so what line should be used, is an area that requires more research.

Discrimination against larger householdsA further flaw in the means-testing mechanism is that it does not take into account the number of people living in the household, and the number of children that have to be cared for within the financial means of the PCG. This test thus can be said to discriminate against certain family structures, for example, larger families and caregivers with more dependants, particularly women.133

In the interviews conducted for the CSG costing paper134, the size of the primary caregivers’ families and the number of children in their care varied considerably; yet the same income threshold applied to all of them. The inequity created by the means test in this regard undermines and contradicts the gains made with the open ‘caregiver’ concept in trying to get away from discrimination against certain family structures. The same income threshold that applies to an applicant who has four children to support applies to an applicant who has two children to support.This could be resolved either by re-constructing the means test to take into account the applicant’s number of dependants or by eliminating the means test completely so that anyone who needs a CSG for a child can get it.

Two-tier means testThe means test for the CSG distinguishes between caregivers in formal dwellings in urban areas and those in informal dwelling and rural areas in terms of income thresholds. The distinction between these settlement types is based on a wider (capability-based) definition of poverty, which includes considerations of access to and quality of services. The split means test was designed to compensate, in some way, for the likelihood that rural people and those in informal settlements are further from services and thus have to pay more or take longer to access them, and for the fact that rural services are often poorer in quality, such as fewer or no doctors. Furthermore, poverty in South Africa is deeper and more widespread in rural areas than urban areas.135

It is however unclear whether housing type and location have a substantial enough effect on resources for children’s well-being to warrant two quite different income thresholds in the means test.

131 Coetzee & Streak (2004), pages 17-18, cited in Rosa et al. (2005).132 Coetzee & Streak (2004) cited in Rosa et al. (2005).133 Haarmann 1998, page108, cited in Rosa et al. (2005).134 Budlender et al. (2005).135 May, Woolard and Klasen (2000) calculated that in 2000, 71.6% of poor people reside in rural areas, and that 70.9% of all rural people are poor. Formal sector employment is very scarce in rural areas, and there has been a rapid decline in farm employment.

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3.2.3 Micro-simulation evidence for the Child Support GrantEPRI simulated the social and fiscal impact of a number of alternatives to the existing means test for the Child Support Grant. The first scenario addressed the most salient problem with the existing test—the fact that the income thresholds for grant eligibility have not been updated since the programme’s inception. If these thresholds were adjusted for the inflation rate facing the poorest households, the 2005 urban threshold of R800 would increase to approximately R1300, and the rural threshold from R1100 to approximately R1750. Applying these new thresholds would result in an estimated 27% increase in eligibility in 2005—approximately another 1.3 million children would become eligible.

Table 3.1 Micro-simulation evidence for the Child Support Grant

Of these 1.3 million newly eligible children, approximately 800,000 already receive the grant, although they are not strictly eligible. As a result, the adjustment of these thresholds for inflation would lead to an increase of approximately 500,000 new grants—an 8% increase over existing levels, at a cost of approximately R1.2 billion per year.

Another incremental improvement in the means test involves the elimination of the urban/rural distinction. This aspect of the means test reduces the transparency of eligibility and frequently delays the determination of entitlements. Eliminating the distinction and adopting the higher inflation adjusted thresholds would lead to an increase in eligibility of approximately 3.5%, but only a 2.4% increase in actual grants paid, since many of the newly eligible currently receive the grant. The additional cost of the change would be approximately R250 million.

At a broader level, the question arises of whether or not a means test is justified for the Child Support Grant. With the inflation adjustment and the elimination of the rural/urban distinction, more than three out of four of South Africa’s children qualify for the child Support Grant. This reduces the theoretical potential savings from targeting to less than 25% compared to the cost of a universal programme. This substantially increases the likelihood that the multiple costs of targeting—in terms of administrative and private expenditures, economic distortions, stigma, and political costs—exceed the realised benefits. The micro-simulation of the elimination of the means test

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Analysis of the Child Support Grant Existing means test

Means test adjusted for

inflationEligible children receiving the Child Support Grant 4,519,203 5,745,005% increase in eligible children receiving the Child Support Grant 27.1%Ineligible children receiving the Child Support Grant 1,254,479 511,365Total children receiving the Child Support Grant 5,773,682 6,256,370% increase in children receiving the Child Support Grant 8.4%Eligible children NOT receiving the Child Support Grant 3,750,252 4,150,809Ineligible children NOT receiving the Child Support Grant 3,897,935 3,014,690Total children under the age of 14 13,421,869 13,421,869Eligible children under the age of 14 8,269,455 9,895,814Eligibility ratio 61.6% 73.7%% increase in number of eligible children with new test 19.7%Exclusion error 45.4% 41.9%Inclusion error 21.7% 8.2%

indicates an increase in take-up by an additional 3.9 million children, at a cost of R9.3 billion.

This increase reflects two effects: (1) The elimination of the means test reduces the barriers to access for poor households, so more currently eligible households receive the grant. Exclusion error will fall significantly. (2) Currently ineligible households—many of them paying income tax—begin to receive the Child Support Grant. The benefit effectively acts as a rebate of part or all of their tax paid, offsetting the fiscal burden of taxation. Both of these effects constitute significant benefits only obtainable through the universalisation of the Child Support Grant.

EPRI also modelled the extension of the Child Support Grant to age 18, maintaining the means test but adjusting the thresholds for inflation and eliminating the urban/rural distinction. The number of eligible children increases by three million (27%), and the number of grants paid increases by 1.8 million, at an additional cost of R4.4 billion per year.

3.2.4 Review of benefit levels for the Child Support GrantThe Child Support Grant was implemented in 1998 with an initial benefit level of R100 per child per month. This benefit level was not adjusted until 2001, over which time inflation eroded the real benefits provided to poor households in terms of purchasing power. Adjustments to the monthly benefit level of R10 in 2001, R20 in 2002 and R30 in 2003 lifted the payment to R160 per month—more than offsetting the effect of inflation—regardless of how one measured the inflation rate appropriate for poor households. Systematic increases of R10 each year since then have kept the purchasing power of the benefit above the initial levels in real terms. Figure 3.1 depicts the evolution of the Child Support Grant benefit level relative to inflation, showing the initial erosion in real benefits from 1998 and the positive impact of the grant adjustments from 2001.

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Figure 3.1 The evolution of the Child Support Grant benefit level relative to inflation

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Actual Level of the Child Support Grant versus the initial 1998 inflation-adjusted levels

80

100

120

140

160

180

200

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

All Items General CPI Index 1998=100 Lowest quintile (Metropolitan) 1998=100Food (CPI Metropolitan) 1998=100 Grain Products (CPI Metropolitan) 1998=100CSG 1998=100

R 100 R 110

R 130

R 160

R 170 R 180R 190

3.3 Assessment of the Foster Child Grant (Foster Care Grant)

The benefit level of the Foster Child Grant (FCG) is currently R400 more than that for the Child Support Grant (CSG). This creates an incentive for non-biological caregivers of orphans to seek the FCG rather than the CSG.

While the grant was not originally intended to assist people affected by poverty, in practice it is being used in this way: thousands of caregivers who have taken in children orphaned by HIV/AIDS are applying for and receiving the FCG to help them gather sufficient income to meet the basic needs of the child. This practice encounters problems in that the children’s court process is costly and the number of social workers and magistrates has not been increased to meet the extra demand for foster grants. Child protection services are suffering terribly due to social workers having too heavy loads and children are children desperately in need of placement with families, are having to wait very long periods in institutions.136

Foster placement is intended to be a temporary means of support and care until a permanent place can be found in an appropriate person's home, through adoption procedures. Most children needing fostering and adoption come from, and are likely to be placed in, poorer communities. Many foster parents would like to adopt their foster children, and integrate them fully into their families as one of their own. The lack of subsidy for adoption, however, makes them remain 'temporary' foster parents until the child reaches adulthood, with the child and the foster family thereby locked permanently onto the welfare rolls.137

Given the public service provided by foster parents, the case for a universal Foster Care Grant is particularly well supported. The benefit level for the grant stood at R360 in January 1998. Regular adjustments each year reduced inflation’s impact in terms of reducing the purchasing power of the benefit, although real purchasing power fell until 2004 with respect to the overall Consumer Price Index (CPI). Adjustments since 2004 have more than maintained the initial benefit level’s purchasing power relative to the overall price CPI. However, the prices of goods consumed by South Africa’s poorest households have risen significantly faster than the CPI over the past eight years. As a result, the purchasing power of the Foster Care Grant has not kept pace with the price index reflecting the spending patterns of the poorest in South Africa. Figure 3.2 depicts the evolution of the Foster Care Grant benefit level relative to inflation, showing the erosion in real benefits from 1998, particularly with respect to the Consumer Price Index for the poorest 20% of the population. An additional monthly increase of approximately R40 would be required to restore the purchasing power of the level of benefit provided in January 1998.

136 Streak (2005c).137 Lund Report (1996).

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Figure 3.2 The evolution of the Foster Care Grant benefit level relative to inflation

3.4 Analysis of the Older Person’s Pension, the Disability Grant and the Care Dependency Grant

3.4.1 Review and assessment of the means tests for these grantsThe Older Person’s Pension, the Disability Grant and the Care Dependency Grant all employ the same means test. A major strength of these means tests is that the qualifying income thresholds are linked to the grant benefit levels. Thresholds are less visible to civil society and to policy-makers compared to benefit levels. Without an automatic link, thresholds tend to lag inflation rates even while benefit levels maintain much if not all of their purchasing power. The automatic link helps protect the regularity and predictability of social protection.

Historical evolution of the means tests138

The apartheid means tests (pre-1996) were relatively more complex than their successors.139 Regulations pertaining to social assistance had become increasingly heterogeneous in the three administrations of the former tri-cameral parliament, the four old provinces that administered welfare for blacks outside the homelands, the six self-governing homelands and the nominal independent TBVC homelands (Transkei, Bophuthatswana, Venda and Ciskei). Accordingly, there were a number of means tests rather than one, although with many common elements reflecting their common ancestry. There was a disregard or threshold, which in practice approximated 30% of the maximum benefit level. Beyond this income level, every rand of income earned led to an equal reduction in the benefit level, i.e. the marginal tax rate in this income range was 100%.

The pension was paid in discrete amounts of R10, but in 1992 amounts smaller that R90 per month in the case of whites were not paid out, implying a cut-off level of 138 This section draws heavily from van der Berg (2001).139 Van der Berg (2001), page 126.

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F o s te r C a re G ra n t v e rs u s 1 9 9 8 le v e l a d ju s te d fo r in fla tio n

3 0 0

3 5 0

4 0 0

4 5 0

5 0 0

5 5 0

6 0 0

6 5 0

J a n -9 8 J a n -9 9 J a n -0 0 J a n -0 1 J a n -0 2 J a n -0 3 J a n -0 4 J a n -0 5 J a n -0 6

All Ite ms G e n e ra l In d e x (M e tro p o litan ) 1998= 360 L o w e st q u in tile (M e tro p o litan ) 1998= 360F o o d (C P I M e tro p o litan ) 1998= 360 G rain P ro d u cts (C P I M e tro p o litan ) 1998= 360F C G

R 3 6 0 R 3 7 4 R 3 9 0

R 4 1 0 R 4 5 0

R 5 0 0

R 5 3 0 R 5 6 0

R 5 9 0

private income of R4 140 per annum or R346 per month above which no pension was paid. Married applicants were treated similarly, except that the combined income and assets of the couple were taken into consideration and the total divided by two. Given economies of scale for larger households (i.e. two people living together can do so more economically than two separate individuals), this regulation favoured married couples with earnings above their single counterparts.

To show eligibility, elderly or disabled applicants for social pensions had to provide a detailed account of all their sources of private income and their assets, to be “confirmed by a person familiar with the applicant. In rural areas this may be the Induna (headman) or tribal elder, who must accompany the person to the district pension office”. 140 If such income (including the deemed income from assets) fell below the exclusion level, such persons qualified to receive a pension. To receive the full pension, though, their income had to fall below the threshold level. Beyond this threshold, a sliding scale applied whereby increases in income or deemed income led to a reduction in the grant paid. In practice this marginal “tax” rate or clawback in the pension for all increases in private income amounted to 100 per cent (80 per cent for blacks), versus 50 per cent in Australia and 20 per cent in New Zealand.141

Under apartheid, both maximum grant levels and the means test differed between race groups.

In both 1986 and 1992 blacks experienced the sharpest relative income drop at the exclusion level, even though their pension levels were less than those of other groups. But most homelands had for all practical purposes abolished the application of the sliding scale or clawback, although retaining it in their regulations; they argued that it proved too difficult to implement and to explain to older people.142 In these cases the full pension was paid up to the exclusion level. Consequently this drop was most severe in the homelands.

Though changes to the means tests between 1986 and 1996 had made the system more complex and reduced racial disparities, its structure remained essentially unchanged. Changes in exclusion levels and in racially defined benefit levels excluded more elderly white people from receipt of social pensions, but included more blacks.143 In 1992 the marginal “tax” rate for blacks outside the homelands was reduced to 80 per cent: for every R75 that private income exceeded the threshold level, the pension was reduced by only R60 (up to the exclusion level). An addition was that 8 per cent of the value of assets above a certain level was deemed to be income, and that a value was attached for this purposes to housing. The value of a house for calculation of deemed income was usually set quite low, however, so as to leave owners of modest homes unaffected. The Mouton Committee (1992:615-622, Annexure G5) provides details of the operation of the means test in April 1992.

The Mouton Committee recommended reducing the pension clawback to 50 per cent and also that only 50 per cent of occupational and private pensions should be included in the calculation of private income, which implied a 25 per cent rather than a 100 per cent clawback on income from private and occupational pensions over a certain range.

140 Legal Resources Centre (1987), page 14, quoted in van der Berg (2001).141 Mouton Committee (1992), page 47, quoted in van der Berg (2001).142 Lund (1993), page 16, quoted in van der Berg (2001).143 As the means test is linked to benefit levels, changes in the latter have an impact on both eligibility and benefits.

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In 1996 the apartheid means tests were replaced by a new common set of regulations. Implementing these new uniform regulations was not without problems and components of the old system still pervaded implementation of and views pertaining to social assistance. The Mouton Committee’s recommendations were only partly incorporated into the new uniform regulations: the new formula did reduce the clawback from 100 per cent to 50 per cent, thus considerably ameliorating the poverty trap. Thus every additional one rand of private income reduced the pension by only 50 cents, leaving the recipient 50 cents better off. This reduced the disincentive to earn over that income range for those who otherwise qualified for a social grant, whether in the form of private provision for retirement (in the case of the elderly), or, particularly for the disabled, by accepting low-paying jobs. However, as “[h]alving the tax rate, like doubling the benefit level, raises costs both by increasing benefits to existing recipients and by increasing the number of potential beneficiaries”144, the new means test as promulgated raised the exclusion level from R6 708 to R13 416 for single potential beneficiaries with no assets.

An analysis of the old means test, the unified means test as formulated in the 1996 regulations, and the unified means test as it was intended illustrates problems with the means tests.145 Naturally, people closest to the income range where the poverty trap operated benefited most from the 1996 changes in the means test; moreover, the reduced disincentive to earn private income presumably also most encouraged this group to earn additional income. Around the old exclusion level for single pensioners of just over R6 500, the new formula increased their post-grant income by up to one third. For married pensioners this effect operated similarly at around R13 500 of combined income.

From the point of view of individual incentives the changes in the means test did indeed make sense. However, the rapid increase in take-up after the new regulations were introduced raised fiscal concern in government circles, as it was unclear to what extent this resulted from better coverage and administration or from increased eligibility due to the higher exclusion level. The new unified formula also meant that many earning relatively low private incomes became eligible for larger grants than before.

Data based on the Living Standards and Development Survey (LSDS) of 1993, adjusted to 1996 population and price levels, show that the great majority of older people had very low pre-grant incomes. In fact, only among white older people did more than one-quarter (61%) have a pre-grant income per person146 exceeding R900 per annum in 1996 figures. A substantial proportion of the older whites had relatively high private incomes: almost 30% earned more than R24 000 per older person per annum, which presumably came mainly from occupational or private pensions and earnings from accumulated savings. As occupational retirement insurance (pension

144 Barr (1993), page 249, quoted in van der Berg (2001).145 More details were also included in 1996 on the valuation of income and assets, which lessened somewhat the bias in favour of assets. 146 For couples, this income was calculated as half of the combined income of the older couple, in line with the treatment of couples by the means test. The definition of income in this section includes all private sources of income (but excluding social grants), excluding subsistence agriculture and informal sector income, net of deductions from wages for taxes, UIF contribution, etc. Using gross rather than net remuneration figures increases the mean income of older people by only 2 percent and the frequency distribution insignificantly, indicating that for most of this age group, this distinction in negligible. Among males less than 65 and women less than 60, income based on gross rather than net remuneration is 38 per cent higher, reflecting the fact that deductions as work play a significant role here. However, for the sake of consistency, all figures are shown as net after deductions.

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and provident funds) had largely excluded previous cohorts of black workers, many retired with little private provision for retirement (it would have placed them in a much better position than the full social old-age pension), this reduced their incentive to provide for retirement. Thus few black people, particularly, had enough private retirement income to be independent of state means of support in old age.

Amendments to the 1996 means test were incorporated into the 1998 means test. A number of factors were considered in this regard:

The deemed or inputed value of assets was no longer used, but income actually generated from assets was rather regarded as part of income for purposes of assessing eligibility and rates of benefits. This eases administration, as it is exceedingly difficult to ascertain the value of assets and very few applicants have enough assets that substantially affect benefit levels and therefore warrant much attention.

An exclusion level for assets (including residential assets) was reintroduced. All single applicants owning residences or other assets with a market value of 30 times the maximum benefit or married couples who own homes or other assets worth 60 times the maximum benefit are automatically excluded from any benefit, unless they can show cause why such residence or assets should not be considered adequate means to provide for their retirement (e.g. where there are very large bonds on such residences.) This is in line with the recommendation in the Smith Committee (1995:44) that the value of the residence should not be totally excluded from the means test and with the practice in many OECD countries to consider the value of the residence as a proxy for material means.

The disregard of 30 per cent of the maximum benefit level that had applied in the past and was also intended with the new unified formula was reintroduced. Fewer than half a dozen OECD countries have a disregard that exceeds 40 per cent of the benefit payable, while a too small disregard would lead to many receiving reduced grants and would have made greater demands on accuracy of the information to apply the sliding scale.

Given the increased fiscal costs associated with the higher cut-off level and suggestions from provinces that pensions below a certain minimum should not be paid because of prohibitively high administrative costs compared to grant value, the exclusion level was lowered. This excludes some less poor people who formerly qualified for small grants from social grants and also reduces the administrative costs of the grants. The exclusion level was thus set at a level of one and a half times the maximum grant. This implies a reduction of 21% in post-pension income for those at this exclusion-level private income, a high but tolerable drop-off in income for those at this exclusion-level private income, a high but tolerable drop-off in income when considering that these are people whose pre-grant income is already 1 ½ times the maximum pension and that few older people fall in the income range where they are affected by such a poverty trap.

The disability grantThe purpose of the Disability Grant for adults is income maintenance for people who cannot provide for themselves due to the disability.

To qualify for a disability grant the applicant has to be over 18 years of age and have a physical or mental disability of longer than six months duration which renders him or her unfit to provide sufficiently for his or her maintenance.In addition, The applicant must not refuse to undergo the necessary medical treatment, unless

the treatment may be life-threatening;

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The spouse must also comply with the means test (i.e. household income is assessed)

The applicant must not be maintained or cared for by a state run institution; and, The applicant must not be in receipt of another social grant, in respect of him or

herself.

Payment is a monthly pension. The 2006 maximum amount is R820 and the amount payable is determined in accordance with a set formula.

The means test is the same as the test for qualification for a social old age pension. The maximum amount payable (R820 in 2006) is calculated on an annual basis and is multiplied by 1.15 if he or she is single (or by 1.075 of the applicant and his or her spouse’s income if married), and then the applicant’s income (or half the income of the applicant and spouse) is subtracted from this amount. If the resulting amount is less that R100,00, then no grant is payable. In addition, where the applicant’s assets exceed 30 times the maximum annual grant payable (or 60 times the total assets of the applicant and spouse) no grant is payable. The disability grant is a variable grant, designed to tax marginal income at 50% across the relevant range and so soften poverty traps.

In reality this sliding scale of benefits is rarely used as the majority of applicants fall well below the means-test thresholds and therefore qualify for the full amount.147

LapseThe temporary disability grant will continue to be received by the recipient until it lapses. If it is a permanent grant then it will continue until the recipient reaches the age of 60 (for women) or 65 years (for men), at which stage it will then be converted into an old age pension. The grant will also lapse on the last day of the month in which the beneficiary dies or when the beneficiary is admitted to a state institution. The grant also lapses when the recipient becomes employed and his/her income rises above the threshold amount of the means test.

Targeting through the application of the means test discourages people from taking on work in order to raise their level of income. This makes them increasingly dependent on the cash grant. If a person with a disability is formally employed, added disability expenses incurred are not considered, and so it becomes less worthwhile to work since the additional income will (in theory) reduce the size of the grant.

An important consideration for evaluating the means test for the Disability Grant (as well as the Care Dependency Grant) is the relevant model for social protection. Social grants not only tackle poverty, they also help households cope with the social shocks that undermine people’s well-being. Households caring for people with disabilities usually face greater costs—in terms of additional out-of-pocket expenses for medical care and adaptive devices, income foregone because of the requirements of care work, and the often reduced income-generating capacity of people with disabilities, particularly in the face of existing discrimination. Households regardless of income level face these costs—social grants help to mitigate the impact. Eliminating the means test on the Disability Grant (and the Care Dependency Grant) provides a type of “zero pillar” for a disability insurance system. “Zero pillar” in this context indicates a basic level of social protection for all those households coping with a disability. For those households including people with disabilities, there are two 147 “Social Security Policy Options for People with Disabilities in South Africa: An International and Comparative Review” Prepared by The Child Health Policy Institute and The South African Federal Council on Disability for The Committee of Inquiry into a Comprehensive Social Security System, March (2001).

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possibilities: a poor household receives the grant or a non-poor household receives the grant. In the case of poor households, the grants are truly “social” in the sense that the poor households have likely not paid through taxes contributions that cover the cost of the benefit. However, in the case of non-poor households, members have likely paid through taxes contributions that constitute contributions towards what is logically (if not de jure) a disability insurance scheme. Many of the advantages of a “zero pillar” social insurance component (through a social pension) apply to a universal benefit for people with disabilities.

Current grant and qualifying criteria for the Care Dependency GrantThe care dependency grant for 2006 is R820 per month. In order to qualify: The applicant must be a parent, primary caregiver or foster parent of the child who

requires and receives permanent care or support services.

The child must be a South African citizen. However, foster parents need not be South African citizens.

The child may not be cared for on a 24-hour basis for a period exceeding six months in an institution that is fully funded.

Both the applicant and the child must be resident in South Africa.

The child must be between one and 18 years old.

The applicant, spouse and child must meet the requirements of the means test. In this case, the income of the entire family should be less than R48 000 a year or R4 000 a month, and less than R17 760 per year for the child.

Assessment ProcedureA parent or foster parent can apply for a Care-Dependency Grant (CDG) if a medical report from a medical doctor who is employed in a government hospital shows that the child in question needs care and that the parents are in fact able to care for the child at home. In order to qualify, the child must remain in the care of the parents, must have adequate accommodation, food, clothing and medical care, and must be tested to determine whether he/she can attend a specialised school at the age of six years. The child must not be permanently cared for in a government hospital.

While a few children with chronic illnesses, such as epilepsy, may receive the CDG, generally this group of children, including those with moderate disabilities and those affected by HIV/AIDS, are not covered by the current provisioning and receive no form of assistance to meet their extra needs.

Assessment of the means test for the disability grantThe means test potentially creates perverse incentives in that the grant is lost in its entirety if the family earn even R1.00 more than the R48 000 prescribed by the means test or if the child earns even R1,00 more than R17 760 prescribed. The South African Federal Council for Disability and the Children’s Institute found that in practice, the means test is rarely used correctly, it is administratively demanding and has been reported as demeaning.

Other problems with the CDG and recommendations for improvement include:

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The current purpose of the CDG, to enable permanent home care, only for permanently disabled children, is limiting and inadequate, and open to different interpretations.

The purpose of the CDG should not be poverty alleviation, but rather to meet the extra needs of the child due to the illness or disability. It should be to promote their survival, development, protection and participation.

Eligibility criteria should be determined by the need resultant from the particular disability of illness, and not dependent on the nature or severity of the disability or illness.

Attention should be paid to the family context of the child, to improving their environment.

There is a lack of clear definitions (disability, severe/moderate, permanent home care) in the current legislation. This has serious implications for inclusion/ exclusion criteria and makes targeting extremely difficult.

There is lack of clear definition between non-disabling or intermittent chronic illnesses and those that lead to disablement.

The current definition is purely a medical definition of disability. Economic and social aspects are not considered, nor the 'cost', or burden on the family.

Eligibility Criteria

Currently the CDG benefits only severely disabled children permanently at home, and do not cater for the many others with milder disabilities, or those in day care facilities.

There is no provisioning at all for children with chronic illnesses, including HIV/AIDS. These children have many additional needs and expenses and caring for them constitutes a large burden on the family's resources.

It is extremely difficult for care-givers (non-parents and 'nonformal' foster parents) to access the grant. Access should be granted to this group of carers, and should include child-headed households, which will be more common in the future.

There is a lack of clarity regarding the eligibility of children in daycare centres or LSEN schools for the CDG, and there exists differing practices among different provinces. Uniformity in definition and eligibility criteria is essential.

There are many children who are not in receipt of the CDG and who attend state subsidised special schools, yet require special home care after school hours and during the school vacation. There are no policy guidelines for special after care.

Assessment procedures

Due to the unclear eligibility criteria, the assessment test can be highly subjective and open to the personal interpretation of the Medical Officer.

There is lack of training and guidelines in the assessment procedure. A child can only be assessed and qualify once one year old. This delay can cause

suffering to new-born babies requiring extra care due to their disability or health condition.

Currently the assessment is on purely medical grounds. It should also take into account the costs of the required medical treatment, the level of care required (hours and intensity), the costs of assistive devices, specialised clothing and nutritional needs, transport costs and the need for special schooling.

There are problems identifying what constitutes 'permanent home care'. Perhaps this clause should be removed entirely, and eligibility determined by need.

Reviewing of cases must also be examined.

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3.4.2 The scaling factor (ratio) between married and single individuals and the rationale for different scaling factors

Qualifications and Means TestWomen over the age of 60 and men over the age of 65 qualify for the old age pension.

The maximum amount payable (R820 in 2006) is calculated on an annual basis and is multiplied by 1.15 if he or she is single (or by 1.075 of the applicant and his or her spouse’s income if married), and then the applicant’s income (or half the income of the applicant and spouse) is subtracted from this amount. If the resulting amount is less that R100,00, then no grant is payable. In addition, where the applicant’s assets exceeds 30 times the maximum annual grant payable (or 60 times the total assets of the applicant and spouse) no grant is payable. The old age pension is a variable grant, designed to tax marginal income at 50% across the relevant range and so soften poverty traps.

The size of the grant for an unmarried person is calculated according to the formula D = 1,15 A – 0,5 B and for a married person, according to the formula D = 1,075A – 0,5B Where A = the maximum grant payable per annum as approvedB = the annual income of the applicant in the case of an unmarried person, or half the applicant and his or her spouse’s annual income in the case of a married person andD = annual grant amount payableNo grant amounting to less that R100 per month is payable

Additionally 8% of all assets will be used in the calculation of the means test. Living accommodation registered in the name of the applicant or spouse that is

occupied by the family, will be given a value of nil for the application of the means test.

The definition of assets is wide and includes: Immovable property owned by an applicant or their family. Property held under leasehold. Cash investments. Bonds, loans and debts in favour of the applicant. Interest in shares, endowment policies or any accounts with banks and financial

institutions. Cash on hand. Share capital or assets of a company or institution.

The definition of income includes: Any compensation received in cash or as a pension. Profits from a company or farm, which the applicant or spouse owns personally or

as a member of a family business. Income derived from an inheritance or trust fund. Income obtained from rented property or cash investments.

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Assess the weaknesses and strengths of the current means tests148

As is usual with such a test, the South African means test creates a classical poverty trap and related incentives for holding back information about income sources. The poverty trap results from a 50 per cent clawback on pension income between the threshold and exclusion levels and the complete cut-off of pensions at the exclusion level. The application of the means test is complicated by the fact that both eligibility and benefit levels are determined by the level of private income which is difficult to verify. Where such a large proportion of the population receives social pensions, administratively policing this becomes very burdensome.

A further problematical aspect relating to the means test is its impact on behaviour regarding retirement provision. The clawback mechanism reduces incentives to qualify for such benefits. Many low-income workers would gain little from own retirement provision, as their social pensions are reduced. They are thus encouraged to gain access to their accumulated retirement savings before retirement, as they are not penalised for this by a reduction in their social pension. They also prefer their occupational retirement benefits in the form of a lump sum (as is possible in a provident fund) rather than as pensions, because the value attached to accumulated assets in the means test acts as less of a disqualification for receiving social pensions than pensions income does.

Given wide coverage of the population by social pensions and all the problems associated with the means test, it would appear logical to consider introducing universal coverage for older people by abolishing the means test. This would transform the presently means-tested old-age pension into a categorical income transfer, thereby removing the perverse incentives relating to its poverty trap aspects.

The means test for the older person’s grant (single people) based on 2006-07 values is illustrated in table 3.2 below. The table shows monthly grants for various levels of income for a single person.

Table 3.2 The means test for the social pension (single people)

148 This section draws on the work of van der Berg (2002).

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A R 9,840 Scaling factor: 1.15 B applicant's income or 1/2 joint income if marriedD annual grant payable (1.15A - 0.5B)

B D monthly MAX monthlyR 0 R 11,316 R 943 R 9,840 R 820

R 5,000 R 8,816 R 735 R 8,816 R 735R 10,000 R 6,316 R 526 R 6,316 R 526R 15,000 R 3,816 R 318 R 3,816 R 318R 20,000 R 1,316 R 110 R 1,316 R 110R 25,000 R 0 R 0 R 0 R 0

Table 3.2 shows that a qualifying older person with no income will in theory receive the full amount of the grant—R820 per month in 2006. However, an older person receiving R5,000 in annual income will lost an annual grant amount of R1,024—the monthly grant level falls by R85. The first R,000 in earned income is effectively taxed at a rate of approximately 20%. Subsequent earning are “taxed” at a higher rate. An older person earning R10,000 per year faces a further reduction in benefits (compared to the older person earning R5,000 per year) of R2,500 per year—an effective tax rate of 50%. The monthly benefit level falls to R526. At an income of R20,000 per year, the older person’s grant falls to R110 per month—and with just marginally greater income, the calculated grant falls below the minimum threshold payable and disappears.

A married person faces a different trade-off because of the lower scaling factor. Table 3.3 below shows the grant values for a married person under the same income levels as discussed for the single person above (where the income levels are calculated as half the couple’s joint income. This illustration of the results of the means test is based on 2006-07 values

Table 3.3 The means test for the social pension (married people)

Table 3.3 shows that a qualifying married older person with no income will in theory receive the full amount of the grant—R820 per month in 2006—just like the single person described above. However, a married older person receiving R5,000 in annual income (based on half the combined couple’s income) will lost an annual grant amount of R1,762—the monthly grant level falls by R147. The first R,000 in earned income is effectively taxed at a rate of approximately 35%--significantly higher than the marginal tax rate for the single person. Subsequent earning are “taxed” at the same 50% marginal rate that applies to single people. The result of the higher tax rate on the initial earnings is that the pension disappears at a lower income threshold. While the single person in the example above earning R20,000 per year still received a marginal pension (R110 per month), the married person with an income of R20,000 (based on half the couple’s income) would receive no social pension.

The means tests contribute to significant distortions that increase the cost of targeting beyond the direct public and private costs of compliance. The assets test for the social pension creates disincentives to save. Low-income workers who accumulate modest retirement savings undergo considerable sacrifices yet are penalised with

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A R 9,840 Scaling factor: 1.075 B applicant's income or 1/2 joint income if marriedD annual grant payable (1.075A - 0.5B)

B D monthly MAX monthlyR 0 R 10,578 R 882 R 9,840 R 820

R 5,000 R 8,078 R 673 R 8,078 R 673R 10,000 R 5,578 R 465 R 5,578 R 465R 15,000 R 3,078 R 257 R 3,078 R 257R 20,000 R 0 R 0 R 0 R 0R 25,000 R 0 R 0 R 0 R 0

substantial reductions in the size of their social pensions. In addition, the structure of the means test essentially taxes non-grant income at a marginal rate of fifty percent—a tax rate that has been deemed excessively distortionary by international standards for decades. In addition, the treatment of joint spousal income can unfairly penalise individuals who neither earn income nor have control over their spouse’s income. The rationale for the different scaling factors aims to reflect how married couples benefit from “economies of scale”—savings from sharing their spending. Two people may not live as inexpensively as one, but neither does it cost twice as much. The lower scaling for married couples reflects this presumed economy. However, depending on household structure, that mechanism may be inappropriate. It assumes a high degree of sharing within the household, which does not necessarily take place. Given the elimination of “marriage penalties” throughout South Africa’s tax code, it may be appropriate to make this neutrality consistent and base the means test (if it persists) on individual income and not marital income.

3.4.3 Micro-simulation evidence for the social pensionEPRI simulated the social and fiscal impact of elimination of the means test for the social pension under two different assumptions regarding take-up. International experience with universal pensions suggests that take-up rates usually vary between 75% and 90%. In South Africa’s case, a universal pension with a 75% take-up rate would lead to an increase in the number of pension payments equal to approximately 200,000—a 9% increase at a fiscal cost of R2 billion.

Table 3.4 Micro-simulation evidence for the social pension (75% take-up)

In 2005 with the existing means test, the micro-simulation indicated 1.9 million eligible recipient s of the social pension, along with 0.2 million ineligible recipients—based on reported incomes in the 2005 General Household Survey, based on the weights of the sampled individuals scaled to the entire population. The estimated 2.1 million total pensions is in line with Socpen data and the estimates reported by the National Treasury.

The elimination of the means test will not necessarily result in 100% coverage, and certainly not immediately. Currently, approximately 300,000 eligible older people do not receive the social pension. Assuming 75% take-up, a universal social pension will

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Analysis of the Older Persons Pension Existing means test

No means test (75% take-up)

Eligible people receiving pension 1,936,986 2,292,718% increase in eligible people 18.4%Ineligible people receiving 165,463 0Total people receiving the pension 2,102,449 2,292,718% increase in people receiving the pension 9.0%Rand increase in cost of pension (millions) R 1,985Eligible people NOT receiving the pension 309,456 764,239Ineligible people NOT receiving the pension 645,053 0Total age-eligible people 3,056,957 3,056,957Eligible people 2,246,442 3,056,957Eligibility ratio 73.5% 100.0%% increase in number of eligible people with new test 36.1%Exclusion error 13.8% 25.0%Inclusion error 7.9% 0.0%

lead to an approximately 18% increase in eligibility, but only a 9% increase in the actual payment of pensions. The fiscal cost of the universal pension at 75% take-up increases the amount of pension payments by approximately R2 billion. Exclusion error rises to 25% because of the substantial increase in eligibility (and the assumption of 75% take-up), but inclusion error disappears (since everyone is now eligible.

The take-up rate would not likely stabilise at 75%. Over time, more and more people would become aware of the social transfer, and the universal nature of the benefit would eventually erase any stigma associated with the pension. At a conservative upper end estimate of take-up, a universal pension with a 90% take-up rate would lead to an increase in the number of pension payments equal to approximately 650,000—a 31% increase at a fiscal cost of R6.8 billion.

Table 3.5 Micro-simulation evidence for the social pension (90% take-up)

The number of eligible people receiving the grant rises by 42% (with the assumption of 90% take-up), while the total number of actual grants paid rises by 31%. The fiscal cost of the universal pension at 90% take-up increases the amount of pension payments by nearly R7 billion. Exclusion error falls to 10%—lower than the current level of 14% because the more transparent and direct delivery systems associated with a universal pension will make it easier to reach the poor.

Over time, the take-up rate may well rise above 90%, although no country has effectively reached 100% take-up of a social grant.

As with the universal Child Support Grant discussed earlier, the universal provision of a social pension produces two effects: (1) The elimination of the means test facilitates access for poor older people who would qualify even under the means test, but lack the resources to comply. (2) Higher-income households—many of whom either currently pay or during their working years paid income tax—begin to receive the social pension. The benefit effectively acts as an investment return on their tax paid, offsetting the fiscal burden of taxation. Both of these effects constitute significant benefits only obtainable through the universalisation of the Older Person’s Pension.

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Analysis of the Older Persons Pension Existing means test

No means test (90% take-up)

Eligible people receiving pension 1,936,986 2,751,261% increase in eligible people 42.0%Ineligible people receiving 165,463 0Total people receiving the pension 2,102,449 2,751,261% increase in people receiving the pension 30.9%Rand increase in cost of pension (millions) R 6,767Eligible people NOT receiving the pension 309,456 305,696Ineligible people NOT receiving the pension 645,053 0Total age-eligible people 3,056,957 3,056,957Eligible people 2,246,442 3,056,957Eligibility ratio 73.5% 100.0%% increase in number of eligible people with new test 36.1%Exclusion error 13.8% 10.0%Inclusion error 7.9% 0.0%

3.4.4 Review of benefit levels for these grantsThe benefit levels for the Older Person’s Pension, the Disability Grant and the Care Dependency Grant are all identical and have been adjusted to maintain this parity. In 1994, the grant amount was R390 per month. The benefit level has been regularly adjusted each year, although not at a rate sufficient to maintain the benefit’s purchasing power even relative to the lowest relevant inflation rate—the overall Consumer Price Index (CPI). The differences for other more appropriate price indices are even greater. For example, the 1994 grant purchased over a hundred rand more food per month than today’s grant (expressed in terms of today’s prices). However, most of this erosion is due to the relatively small adjustments from 1994 to 1998, particularly compared to the high inflation over this time period. From 1998, the annual increases have more than offset the inflation rate measured by the overall CPI but have nevertheless lagged the increases in the cost of living for the poorest in South Africa.

Figure 3.3. The evolution of the benefit levels for the Older Person’s Pension, the Disability Grant, and the Care Dependency Grant (CDG) relative to inflation

3.5 The Social Relief of Distress Grant

If a person is unable to support their family's basic needs because of a crisis of a temporary nature, they can get a monthly payment for up to three months, called a social relief of distress award.

The following of situations qualify one for a social relief of distress award:(a) The person is awaiting permanent aid;

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Actual pension, disability grant and CDG levels versus inflation-adjusted 1994 initial levels

300

400

500

600

700

800

900

1000

Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

All Items General Index (Metropolitan) 1994=390 Lowest quintile (Metropolitan) 1997=470Food (CPI Metropolitan) 1994=390 Grain Products (CPI Metropolitan) 1994=390Level of pension, disability grant and CDG

R 390 R 410R 430 R 470

R 500R 520

R 540 R 570

R 620

R 700

R 740

R 780R 820

(b) The person has, for a period of less than 6 months, been found to be medically unfit to undertake remunerative work;

(c) No maintenance is received from a person obliged to pay maintenance and proof is furnished that efforts be made to trace such a person or to obtain maintenance were unsuccessful;

(d) The breadwinner is deceased and insufficient means are available;(e) The breadwinner has been admitted to an institution for less than 6 months;(f) The person has been affected by a disaster, although the area of the community in

which he or she lives has not yet been declared a disaster area, or by any other emergency situation; and

(g) The person is not receiving assistance from any other organisation;(h) The person has appealed the suspension of his or her grant; and (i) The person is not a member of a household that is already receiving social

assistance”.

Additionally there is a special form for transport money for people who have been told by their doctor or clinic that they need special medical treatment but cannot afford to get to the place of treatment; or have been promised a job but do not have money to get to the place of employment. This is only available once.

Additionally sub regulation (3) states: “Notwithstanding the provisions of sub regulations (1) and (2), assistance may be rendered in exceptional cases where the Director-General is of the reasonable opinion that refusal may cause undue hardship”.

According to regulation 29(a) and (c) respectively, the amount of the grant shall notexceed the maximum grant payable for an adult, or the amount of the child support grant for an award to a child, respectively. This amounts to R820.00 and R190.00 respectively per month in 2006.

3.6 Cost-benefit analysis of means testing social grants

The cost-benefit analysis of the means test varies by type of grant—because the social and policy context is different, and because of the important distinguishing features of the means test for each type of grant. The case for making the social pension universal is the strongest—because of the relatively low benefits of means testing, the relatively high potential costs in terms of perverse incentives, and the current policy initiatives with respect to social insurance. The arguments for the Child Support Grant are more complex—the potential benefits from means testing are greater, but the spectrum of costs are broader—particularly in terms of excluding the poorest.

3.6.1 Benefits and costs of means testing the social pension

In 2005, the age eligible population for the social pension included 3.1 million older people—approximately 7% of South Africa’s population. Based on Socpen data and estimates from the National Treasury, only approximately 2.1 million people were actually receiving the social pension—about 68% of the total age-eligible population (based on the eligibility age of 60 for women and 65 for men).

However, based on the micro-simulation of the means test using data from the 2005 General Household Survey, approximately 200,000 recipients should not have qualified for the social pension. This represents an estimate of inclusion error associated with the grant. Of the 2.1 million actual recipients, 1.9 million satisfied the

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means test. In addition, between 0.2 million and 0.3 million people were likely to be eligible but were not receiving the social pension. (The wide range represents different approaches to implementing the means test with limited household survey data. These statistics are based on the definition of age eligibility that differentiates between men and women. Approximately 0.5 million he number of men over 60 years of age excluded from this analysis—representing approximately 16% of the estimated age-eligible population. These statistics are summarised in Table 3.6 below.

Table 3.6 Key demographic statistics for the social pension

SOURCE: Statistics South Africa General Household Survey (GHS) 2006

The cost of providing the 2007/08 level of the pension (R870 per month) to an additional 0.8 million age-eligible but income-ineligible older people is approximately R8.4 billion per year. This is the most expensive scenario—assuming full take-up.This does not include the cost of the additional 0.2 million older people who are currently eligible but not receiving the pension (approximately R2.1 billion).Equalising the age of pension eligibility for men and women at 60 years would also involve additional expense (approximately R5.2 billion).

The costs of making the social pension universal can be weighed subjectively against the benefits. First, significant private and administrative costs of means test enforcement will be eliminated. Second, the stigma associated with the social pension will be diminished. While not a major factor, this stigma accounts for some reluctance on the part of poor qualifying older people to apply for the grant. The reduction of the private costs and stigma will reduce the exclusion error associated with the social grant.

In addition, the elimination of the means test will erase the perverse incentives created by the targeting mechanism that dampen savings and labour supply. The shortage of private savings undermines economic growth in South Africa and leaves older people with insufficient resources for retirement. Means testing of income during retirement penalises older people for working to supplement their income. The asset test reduces the incentives of poor households to save—since an accumulation of assets aimed at supporting retirement can be offset by the loss of the pension. A universal pension does not distort private incentives. Older people receive the full benefit of their retirement savings and work effort. Particularly as South Africa’s population ages and the dependency ratio rises, proper incentives can help the nation finance the fiscal burden.

In addition, as South Africa reforms its national pension system, a true “zero pillar” universal pension provides a more effective foundation for a multi-pillar system. Means testing does not easily integrate into a layered system of retirement savings.

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Demographic category (July 2005) People PercentTotal age-eligible population 3.1 million 7%Actual recipients 2.1 million 68%Eligible non-recipients 0.2 million 6%Income ineligible older people 0.8 million 26%Males aged 60 - 64 0.5 million 16%

In addition, since the cost of paying universal pensions to the non-poor is largely financed by the same recipients, the payments do not represent a net cost to the government—they are effectively a capitalised tax rebate to those who have contributed through the tax system.

The weighing of costs and benefits in the face of non-quantifiable elements (such as stigma and the poverty created by exclusion errors) is necessarily subjective. However the emerging consensus for a universal pension reflects the preponderance of evidence arguing for the elimination of the means test.

Likewise, a similar case can be made for eliminating the means test for the Disability Grant and the Care Dependency Grant, based on the discussion in section 3.4. Just as a universal social pension provides an effective foundation for a national pension system, a universal Disability Grant and Care Dependency Grant provide a similar foundation for a national system of disability insurance.

3.6.2 Costs and benefits of targeting the Child Support Grant

While many of the arguments for universal pensions and disability grants also apply to the Child Support Grant, there are important distinctions. First, the number of Child Support Grant beneficiaries vastly exceed the potential number of older people and people with disabilities. Second, the arguments for insuring the contingency of having children are less clear than those for old age and disability. Third, the problem of child poverty creates structural problems for the South African economy. The failure to reduce child poverty not only creates substantial equity problems, it also undermines the capacity of policy-makers to resolve the pressing problems of unemployment and inadequate economic growth.

The costs of the means test can be quantified along a number of dimensions. First, there are the administrative and private costs that create fiscal and bureaucratic burdens. Second, to the extent that the means test excludes the poorest, it reinforces a poverty trap by intensifying the inter-generational transmission of poverty. Third, the means test can create perverse incentives not to work—particularly for men.

Rejections on the grounds of failing the means testThe process of administering the grant by asking the applicant questions about their income when the applicant knows that they will be refused the grant if they earn over a certain amount, creates perverse incentives for applicants not to disclose their income fully. This is compounded by the fact that there is no standard verification of the documentation presented in the application process, as it would simply be too complicated and too costly to administer. This is therefore a waste of time and related administrative costs in checking and double-checking forms, when the checking is potentially ineffective. It is also argued that this is a waste of time and administrative costs because most people who would take the trouble to apply for the CSG would need it – it is assumed that the wealthy would thus not be accessing the grant for these reasons.

Administrative barriers and costs to applicants It is likely that more poor people are excluded due to the requirements for the means test than due to the means test itself. High administrative barriers have to be hurdled in order to apply for the CSG, and especially to pass the means test. The requirements for passing the means test, as outlined above, are particularly onerous and make up the bulk of the application process.

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CSG applicants are required – for purposes of the means test – to produce official proof of their and their spouse’s employment and income status, and proof of marriage if the primary caregiver is married. It was found that this proof is required to different extents and in varying forms in the different district offices. In addition, various other requirements not stipulated in the regulations, related and unrelated to the means test, are required by various offices. These are outlined below and starkly highlight the various barriers that applicants encounter in applying for the CSG. One could imagine that this may deter some applicants:

In Khayelitsha, if the primary caregiver is married, a certified marriage certificate and a copy of spouse’s identify document is required.

If not married and unemployed, the applicant needs to specify in an affidavit that they are single and unemployed, and explain how they survive (who supports them). The person who supports them must complete a declaration stating that they are supporting the applicant – in this case this is not an affidavit.

If the applicant has a bank account, they need to provide bank statements for the past three months, but in most cases applicants do not have bank accounts. They need proof of maintenance if they receive it, but in most cases the biological father is not supporting the child.

If they own their house, they need to show the market-related value of the house – this information is on the rates bill they receive from the municipality. Market related value needs to be declared even if it is a subsidy house. There are different ceilings for the value of fixed assets for married and unmarried applicants. For single applicants the ceiling is R277,000 and for married R427,000. In Khayelitsha Site C, there is a lot of double occupation of properties – only one household has the title deed that enables them to prove ownership. If the application is from the household without the title deed (backyard resident), the owner of the property must complete the proof of occupancy form to confirm that the applicant is living on the property, and this must be specified in the affidavit.

In Atlantis, if the applicant is divorced, a full divorce order is needed from the High Court.

In Atlantis, if the applicant is employed, the employer must complete a VRT144 form (a very outdated form which still refers to the House of Representatives) and a copy of a payslip. If unemployed, their previous employer must complete the form and state if there was any lump sum payout on termination.

If the child is of school-going age, a letter from the school to confirm attendance was required at a number of the sites. This is also a way of checking that the child is actually living in the area. (In a later interview, a screening official indicated that she thought school attendance was a prerequisite for getting the CSG if the child was over seven years).

If the applicant is not the biological mother, a consent form must be completed. If the father of the child pays maintenance, proof of this has to be obtained from

the court. But very few children receive maintenance, and not all maintenance is paid through the court.

In East London, if you own a house you have to produce a bank statement (three months) and proof of ownership of the house. We were told that this was not relevant to the means test for the CSG unless you are earning rent from it, irrespective of the value of the house.

In Worcester, they do not require proof of occupancy but accept the word of the applicant on the affidavit.

The Western Cape and the Eastern Cape applied different requirements for customary marriages. The applicant must make an affidavit regarding their customary marriage if they are married under African customary law. A standard format affidavit had to be completed in Mt Ayliff before a traditional leader or a

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ward councillor to confirm that the person was in fact married. The affidavit must then be taken to the police to be affirmed. In Umtata, if applicants are married under customary law, proof is required in the form of a letter from the chief or their municipal councillor. In East London, Muslims had to bring a letter from the Imam and a letter from the headmen was required for African customary marriages. In the Western Cape it was not clear how officials treated customary marriages – “nobody is clear about it”, according to one official. In Worcester they treat people in customary marriages as single (unmarried) and do not take joint income into account.

Secondly, the two-stage application process and the various requirements incur travel costs for applicants and their children, especially in rural areas. Sometimes the applicant has to go to the next big town because the majority of the social services offices are located in urban centres. This also potentially incurs childcare costs during the day of application as the trip to the office might take a half to a full day.

This is a common scenario since the majority of poor people reside in rural areas and many poor children live with a de facto single mother. In addition, a convoluted administration process results in repeated visits to the social security office and generally requires visits to other offices such as Home Affairs (for birth certificates and identification documents) and the South African Police Services (for affidavits and certification).

Budlender et al (2005) showed the average costs incurred by applicants related to the means test to be about R25 for various transport costs for travel to social services offices, police stations and Home Affairs offices, as well as photo-copying costs to complete the means test portion of their applications. They estimated the total money costs to beneficiaries by adding together the SAPS and Department of Social Development money costs and adding the estimate for lost earnings. Overall for the sample, visits which related in some way to the means test part of an application required close on eight hours of time. Both time and money costs were higher in the Western Cape than in the Eastern Cape. While the costs incurred may not seem high, the time spent seems an inordinate amount for a requirement of proof that is largely unverifiable.

Non-verifiable means testThe requirement of proof of income attached to the payment of the CSG is also problematic. While it can be understood that proof of income would be necessary to avoid fraudulent claims and to ensure that support reaches the intended beneficiaries, the requirements of proof placed on CSG applicants are difficult to justify, unnecessary, ineffective and in some instances ultra vires – outside the law.

Firstly, income is extremely difficult to prove in South Africa, with such large numbers of people working in the informal sector. In addition, there is the broadening of the casual labour market, where you find many kinds of independent and irregular contracts (such as seasonal work), especially among the poorest. One quarter of all employment among Blacks and Coloureds is not permanent.149 Again, proof of this kind of irregular income is not possible and could be detrimental to an application for the CSG.

Thirdly, in South Africa, the majority of people who do qualify to receive the CSG on behalf of a child/ren in their care, or who are eligible for the OAP for example, are not able to access many of the formal systems required by these standards of proof of

149 Aliber (2005), page 15.

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income. Many of the poor in South Africa are unbanked, are unlikely to hold title deeds on property, and may never have been in the kind of stable employment that would allow them to approach previous employers for letters about their employment status.

The Department of Social Development thus requires sworn statements under oath(affidavits) regarding applicants’ financial situations to get around the difficulty of proof.

There is no way to get evidence of an applicant’s income, particularly for the majority who are unemployed. The motivation behind this system was explained by a social security official interviewed for this research:

“Within our own system there are big, big gaps… All the gaps in the legislation we cover with affidavits. Affidavits are more about us covering all the bases. If someone withholds information and we find out then we can use it against that person. Then the department has grounds to recoup the money.”150

It appears then that the department realises the limitations of the system but continues to make people sign statements under oath so that they have some legal documentation that they can draw on should the need arise to prosecute the applicant for fraud. It is not clear why it is not legally sufficient for applicants to fill in forms and sign them as being true – as required for other administrative procedures.It is argued that the advantages of a non-verified means test are that it is relatively cheaper and faster to administer. However, in the South African context it creates incentives for potential beneficiaries to lie, requires many documents that households have difficulty in accessing and involves extra and unnecessary costs to the government that could be better spent elsewhere.

Administrative cost to the governmentIn the analysis of the cost to the Department of Social Development151, all the officials whose responsibilities bore any relation to the means test were interviewed at each site, and an average cost calculated. In the Western Cape, six steps were identified as involving the means test and in the Eastern Cape only four or five steps. The time costs of additional staff, who dealt with a varying proportion of applicants in ways that related to the means test, for example investigating officers, were not taken into account. The total cost to the department was just under R18 per application of the means test. This amounts to a total cost of R169,096,000 to the department for once-off applications for all children currently eligible for the CSG (under the age of 14).

The requirement that CSG applicants should provide official proof of employment, as well as proof of their and their spouse’s income status, mainly requires action on the part of police officers, who have to certify marriage certificates or divorce decrees, and attest to affidavits declaring the earnings of applicants and their spouse.In Mt Ayliff (Eastern Cape), the SAPS deployed a dedicated police officer to accompany the mobile units to the various rural areas everyday. This is all the police officer does every day of the week. Nevertheless, when the Children’s Institute visited the SAPS offices to interview the police, they found many people there who were getting birth certificates and identification documents certified, and affidavits affirmed. The police spend a lot of time on documentation related to grants applications and it does not seem to be an efficient or appropriate use of their time. They in fact indicated that it would be a great relief to them if they didn’t have to do all the certifications and affidavits.

150 Quoted in Rosa et al. (2005).151 Budlender et al. (2005).

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Budlender et al (2005) calculated an average of five minutes per applicant for the police processes of affirming, certifying or affidavit tasks related to the means test. For the costing it was assumed that all applicants must make at least one visit to the police. They estimated the cost to the government as R2.70 per CSG applicant.To work out the cost of implementing the means test to the SAPS alone, the number of eligible children was multiplied by the cost incurred at R2.70 per child in applying the means test (based on Budlender et al estimates). The total cost to the SAPS in respect of all currently eligible children is estimated at R24,323,898.152 This is a conservative estimate since it is calculated on the basis that the cost of the means test is incurred only once in respect of each child. Instances where various applications are made on behalf of the same child due to change of caregiver, change of province or reapplications for children whose grants have lapsed, were ignored.

Despite the relatively low cost incurred by the government for SAPS time incurred per application on a unit basis, these costs aggregate to very substantial amount in light of the applications on behalf of millions of children. In addition, this cost appears unnecessary, because field research documents that they do not provide an effective way of accurately determining the income or employment status of applicants. In addition, representatives from SAPS report that this role is burdensome, particularly where offices are already under-resourced and their other responsibilities are of paramount importance. It is suggested that if the Department of Social Development requires affidavits, it may be more cost-effective for both the government and beneficiaries to have a commissioner of oaths based at the respective offices of the Department of Social Development.

A national survey of poor communities in 2006 found a significant number of caregivers aware of the child support grant but believing they were not eligible because they were employed or not poor—in spite of the fact that they qualified according to the means test. The imposition of a relatively complex means test creates confusion, risk and stigma in the minds of many eligible recipients. These factors reduce the incentives to apply—and deprive their children of resources that would reduce their poverty and support developmental outcomes.

The table below reports summary statistics for mothers of children in Statistics South Africa’s 2005 General Household Survey. Eligible mothers have significantly lower income than non-eligible mothers, and recipients have lower income than non-recipients. However, the average recipient is poor—both the average eligible recipient and the average non-eligible recipient. Likewise, the average eligible non-recipient is poor. This documents an important result—most eligible households excluded from the Child Support Grant as well as most ineligible households erroneously receiving the Child Support Grant are poor. (The average non-eligible non-recipient household was not poor.)

Table 3.7 Eligibility and receipt of the Child Support Grant by mothers

# of obs.

Household Size

Labour incom

e

Grant incom

e

Total incom

eEligible recipients 5468 6.57 89 116 205

Eligible non-recipients (Ex-error) 3149 6.45 137 69 207Non-eligible recipients (In-error) 1550 5.74 355 89 444

Non-eligible non-recipients 3191 5.07 1160 23 1184SOURCE: Statistics South Africa’s GHS 2005 and Williams’ calculations

152 Using adjusted weights and eligibility under current means test thresholds.

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The most striking difference between eligible recipients and non-eligible recipients was the amount of labour income received. The average eligible recipient received R89 per month, while the average eligible non-recipient received R137 per month. The average labour income of the eligible non-recipient was greater than the average grant income of the eligible grant recipient. The evidence from the 2006 survey together with this quantitative analysis suggests that poor households that nonetheless receive small but significant amounts of labour income may be deterred from applying for the grant because of the means test—either through its stigmatising effects or through the mistaken assumption of non-eligibility. A universal child benefit is less likely to exert these effects and is thus more likely to reach these excluded households.

The table on the following page provides a broader range of social and economic statistics for mothers of children in the survey. As expected from Table 3.7, eligible recipients depend far more on grant income than do eligible non-recipients—although those households not receiving the Child Support Grant may receive other grant income, particularly from the social pension and the Disability Grant. Eligible non-recipients depend much more on labour income and remittances. Likewise, non-eligible recipients support an even greater proportion of their consumption through labour income but much less through remittances than either eligible recipients or non-recipients. Those who are neither eligible nor receiving the Child Support Grant have a much greater reliance on labour income.

On a number of vital indicators of access to social and economic services, eligible recipients and non-recipients look very similar. Eligible recipients have greater access to electricity from the grid but less access to piped water than eligible non-recipients. However, there is little difference in terms of their proximity to offices of the Department of Social Development. However, non-eligible recipients are significantly closer to these offices, and ironically, those who neither qualify nor receive the grants are even closer on average.

Eligible non-recipients are slightly better off in material terms that are eligible recipients—the non-recipients have moderately higher average incomes and spend a greater share of this income on food. As a result, they report lower prevalence rates of both adult and child hunger.

Eligible non-recipients are significantly less likely to be unemployed than are eligible recipients—both in the broad and official definitions. Non-eligible non-recipients and recipients are much less likely to be unemployed than either of these groups. Interestingly, eligible non-recipients also live in areas with significantly lower unemployment rates than those eligible and receiving the Child Support Grant. This suggests that community effects may have an effect on take-up. If the prevailing culture views the Child Support Grant as an alternative to work, and most people in the community have access to and value work, the stigmatising impact of grant receipt may be greater. This stigma adversely affects children—since they are the primary victims of low grant take-up.

One important difference is that eligible recipients are only about half as likely to fail to send their children to school than eligible non-recipients. 4% of the children in eligible recipient households fail to attend school—while 7.1% of those in eligible non-recipient households fail to attend school. A consistent finding in studies of social grants is that they promote human capital development and help break the inter-generational transmission of poverty.

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Table 3.8: Characteristics of mothers by Child Support Grant eligibility and receipt

Eligible CSG

recipients

Eligible non-

recipients

Non-eligible

recipients

Non-eligible

non- recipients

Main income source

Wages/salaries 29.7% 39.4% 65.4% 86.6%Remittances 13.5% 18.7% 12.3% 6.7%

Grants 51.3% 33.3% 17.0% 3.5%Other 5.5% 8.6% 5.4% 3.2%

Electricity from grid 71.4% 68.7% 75.8% 90.7%Piped water on site 47.7% 49.8% 59.4% 80.6%Rooms per person 0.70 0.74 0.71 0.94

Access to telephone 57.3% 56.6% 67.7% 79.5%Close public transportation 71.9% 69.1% 75.2% 78.8%

Distance to welfare

office (usual

mode of transport)

0-14 min 9.2% 11.4% 11.9% 25.6%15-29 min 28.8% 26.5% 31.9% 37.0%30-44 min 27.9% 28.7% 28.5% 23.1%45-59 min 12.9% 12.1% 10.7% 7.1%

60 min or more 21.2% 21.3% 17.1% 7.2%Adult hunger 29.0% 26.9% 19.3% 7.7%Child hunger 27.7% 25.6% 18.1% 7.2%

Household school attendance rate 96.0% 92.9% 97.4% 97.7%

Household per capita expenditure 126 148 215 517

Shares of household

expenditure

Food share 61.8% 62.1% 53.0% 44.2%Transport share 10.8% 11.6% 14.7% 16.1%

Housing share 5.5% 5.5% 7.2% 13.8%Clothing share 8.2% 8.0% 11.2% 12.6%

Other share 13.7% 12.8% 13.9% 13.3%

HouseholdUnemploy-ment rates

Household narrow unemp.

Rate 49.0% 40.7% 18.9% 12.9%Household

broad unemp. Rate 68.2% 60.4% 34.5% 22.3%

PSU narrow unemp. Rate 39.6% 35.7% 33.7% 25.9%

PSU broad unemp. Rate 57.6% 52.5% 48.9% 36.7%

SOURCE: Statistics South Africa’s GHS 2005 and Williams’ calculations

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This last statistic underscores a substantial cost of the means test to the extent that it increases exclusion errors. Children excluded from social grants are deprived important developmental benefits that can increase their chances of eventually finding employment. Over the past several years, however, take-up rates have increased substantially. Table 3.9 below documents the tend by age up to 2005. Since then, take-up rates have continued to climb. However, this increase in take-up has been in large part due to less rigid enforcement of the means test.

Table 3.9 Take-up rates for the CSG 2003-2005 by ageAge 2003 2004 2005

0 15.8% 25.9% 27.9%1 38.5% 50.8% 58.0%2 44.3% 58.3% 65.0%3 46.3% 60.6% 68.2%4 44.1% 60.3% 67.5%5 47.1% 60.3% 69.7%6 36.6% 57.8% 66.6%7 24.0% 54.3% 61.4%8 7.3% 45.0% 58.2%9 3.3% 29.9% 55.8%

10 1.4% 10.3% 46.9%11 1.0% 4.4% 30.9%12 1.0% 1.3% 13.4%13 0.8% 1.1% 5.8%

SOURCE: Statistics South Africa GHS and Williams’ calculations

Labour market impactsA number of studies have established positive impacts of social grants on labour market participation and employment.153 Nevertheless, means tests can create negative incentives to work, since income can make the recipient ineligible. The net impact on job search and employment will depend on two competing forces. The resources provided by the social grants provide resources for looking for work and bolster productivity with the effect of improving candidates employment prospects. The means test, however, reduces the rewards from work, by sometimes forcing recipients to choose between benefits from work and those from the social grants.

The increase in the scope of the social grants over the past several years has created a type of natural experiment that allows for the testing of the causal relationship between receipt of social grants and participation in the labour market.154 The government’s receipt raising of the age limit for social grants creates a pool of observations in the General Household Survey that enable the testing of the impact of social grants on labour market behaviour of mothers of children, and the spouses of these mothers. Since the income received by men differs on average significantly from the income of women, this natural experiment sheds some light on the different transmission effects of social grants on labour force participation and employment. Since women as likely caregivers are usually the direct recipients of the grants, the 153 Samson et al. (2002, 2004), Posel, Fairburn, and Lund (2006), and Keswell (2004) . 154 Williams (2007), Samson and Williams (2007).

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positive resource effects are likely to be stronger. Since men on average receive higher incomes when they find employment, they are more likely to face a choice between jobs and grants, and the disincentive effects are likely to be stronger.

The empirical evidence can be assessed through pooled regression analysis on data from 2002 to 2005. From 1998 until 2002, children up to (but not including) the age of sever were eligible to receive the Child Support Grant, conditional on the application of the means test. In April 2003, the age of eligibility was increased from seven to nine, and then to eleven in April 2004. In April 2005, the current age limit of fourteen was established. The empirical analysis takes advantage of the fact that in 2002 children aged seven and eight would not be eligible for the Child Support Grant, whereas from 2003 to 2005 they would have become eligible.

This change in the ages of eligibility support the estimate of employment equations for mothers and fathers that cut across the years from 2002 to 2005, with the presence of seven and eight year old children in the respective households providing information about the impact of social grants on labour market behaviour. This test addresses some of the critical statistical problems that have plagued previous labour market analyses. Unobserved heterogeneity and selection bias in cross-sectional data make it difficult to separate out the causal effects of social grants.

In addition, the rising take-up rates for social grants as illustrated in the table above provide further information that enables the testing of labour market impacts. For some age groups take-up rates have increased by more than twenty percentage points. By 2005 the prospects of mothers (and fathers) to actually receive the grants for which they qualify had increased substantially.

While Statistic South Africa’s Labour Force Survey would appear to be the appropriate data set for this analysis, its questionnaire does not provide sufficiently detailed data on the relationships between caregivers and children, making it impossible to accurately micro-simulate the means test. The General Household Survey provides sufficiently detailed relationship information to carry out these tests. Pooling the General Household Survey worker data sets provides approximately 400,000 person-year observations. The statistical analysis controls for province and year effects as well as demographic and social variables. The regression analysis identifies the impact of a child’s age on the labour market behaviour of caregivers and their spouses. In particular, focusing on mothers and their husbands provides a relative comparison of the positive resource impacts on job search and employment, as well as the perverse incentives created by the means tests.

Certain results emerge clearly from the empirical analysis.155 The effects of Child Support Grant eligibility and take-up create significant and positive effects on broad labour force participation consistently for caregivers who are mothers. The statistically significant effects on narrow labour force participation and employment success are nearly always positive, although the results vary slightly depending on the specification of the model. The evidence clearly implies that the receipt of the Child Support Grant addresses the resource constraints to labour market success. However, this analysis does not rule out that means tests create perverse incentives—it simply documents that the positive impact of secure reliable social transfers has a more powerful impact on promoting labour force participation and enhancing success in job search.

155 Williams (2007), Samson and Williams (2007).

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The statistical analysis of labour market behaviour for husbands provides clearer evidence of the impact of the perverse incentives. The statistical analysis of husbands relies on a smaller sample—22,170 husbands compared to 55,460 mothers—but it is more than sufficient to support statistical significance. The labour market models include control variables for education, age, household composition and other social and economic variables as well as the fixed effects for both province and year.

The results for husbands tend to be somewhat positive, although far less significant than for mothers. This supports the hypothesis that there are both positive resource effects from social grant receipt and perverse incentives from the means tests. Mothers almost always are the direct recipients of the grants, so the positive resource effects are likely to have a more consistent impact on their labour force participation. Importantly, the median monthly income for a husband transitioning from unemployment (or non-participation) to employment is R910 per month—which is often enough to make the household ineligible for a Child Support Grant. On the other hand, the median monthly salary for a woman making the transition to employment is only R600 per month—which is far less likely to eliminate her chances of receiving the Child Support Grant, particularly if she is the only income earner in the household.

The positive labour market outcomes for mothers reflect the important resource benefits from receipt of the Child Support Grant in the face of weak if any perverse incentive effects. For husbands, however, the resource effects are somewhat muted by the indirectness of the benefits, and the higher potential income from employment creates a starker trade-off: work and lose the social grant, or give up employment (which itself can be costly) and retain the Child Support Grant. The weak labour market impacts observed for husbands suggest the active influence of perverse incentives. Eliminating the means test is likely to improve the positive labour market impact of the social grants.

Overall assessment of the means test for the Child Support GrantLike with the means tests for the social pension and disability grants, the assessment of the costs and benefits of the means test for the Child Support Grant is fairly subjective. The one major commonality is that the non-poor who benefit from the grant are largely the same people who finance the programme through their taxes. Providing the grant to them in return offers political benefits that help sustain the programme while reducing administrative and private costs that undermine the impact of the programme. In addition, the elimination of potentially perverse incentives supports more developmental outcomes and stimulates economic growth and job creation.

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Part 4 Policy recommendations

4.1 IntroductionThis section of the report provides concrete and actionable recommendations supporting the ongoing improvement of South Africa’s system of social protection. Based on the careful analysis of the key issues addressed in the first three parts of the report, the following discussion identifies policy recommendations for reforms of the targeting mechanisms/means tests for social security grants as well as the asset test, scaling factors and other features.

The analysis in this report supports the conclusion that means testing provides an imperfect instrument for targeting social protection. The main argument in its favour is that in some circumstances it might allocate very scarce resources more effectively to the poorest. The costs, however, can be very substantial.

In South Africa’s case, the benefit is of limited value. The nation’s rights-based approach guarantees access to social security broadly—and constitutes South Africa’s most effective intervention for reducing poverty. South Africa possesses adequate fiscal resources to sustain grant payments without means testing. Means testing creates demonstrated administrative and private costs, political and social consequences, economic distortions and perverse incentives as well as a psycho-social burden and stigma. EPRI recommends the elimination of the means test as the first priority.

Since it may not be possible to immediately eliminate the means test, it is important to assess interim reforms that can address the aspects of means testing in most immediate need of reform. International experience demonstrates that the simplest most direct targeting mechanisms are generally more effective than those that require substantial bureaucratic resources. An important direction towards more universal benefits is the simplification of targeting mechanisms. For example, analysis of the social pension’s asset test suggests that it is not rigorously applied. The asset test has the potential to undermine savings and create other perverse incentives, while arbitrary enforcement erodes the horizontal equity of social grants. The benefits do not appear to justify the costs of uniform enforcement.

At the same time, it is important that means tests reflect economic trends—such as inflation—less they become inadvertently more distortionary. In particular, to the extent that they rely on nominal values, these values should be updated regularly for inflation.

4.2 Recommendation for automated updates of the means test EPRI has consulted with the Department of Social Development regarding a mechanism for updating thresholds that determine the means test. After reviewing international experience and the historical evolution of real grant values in South Africa, EPRI recommends the adoption of the Consumer Price Index weighted for the consumption basket of the poorest twenty percent of the population (CPI-poor) as the guide for annually updating the means test thresholds on an automatic basis.

The evidence in this report shows that inflation has substantially eroded the real purchasing power values of nominal thresholds used for the Child Support Grant. This erosion has excluded an increasing number of poor people from eligibility. Most of the ineligible households that nonetheless receive the Child Support Grant would

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be eligible if the grant thresholds had been updated based on CPI-poor on a regular basis since 1998.

The CPI-poor measure is calculated by Statistics South Africa on a monthly basis. The figure below shows various measures of inflation as calculated by Statistics South Africa, from fiscal year 2004/2005 to 2005/2006. It is clear that inflation affects upper income groups differently from those in lower income households. The inflation rate for the poorest of 4.6% is nearly fifty percent greater than that for the highest income quintile—at 3.2%. One of the main reasons for this difference is the greater weight for food in the consumption basket of the poorest—and the fact that food prices rose at a rate about two percentage points higher than the other goods in the overall consumption basket.

While there are other options for indexing the means test thresholds, they do not offer the same degree of social protection as maintaining the purchasing power of essential needs.

Some means tests are linked to measures of wages in the economy—for example, Brazil links the means tests for some of its social grants to the minimum wage. The poor in South Africa targeted by existing social grants generally lack access to labour markets—caregivers of children, people with disabilities and older people. Given the volatility of real wages, maintaining the purchasing power of an essential basket of goods and services provides more effective social protection maintaining a link between grant values and wages.

Another option involves linking the means test to overall growth in income in the economy. Changes in economic growth that yield proportional benefits to the population will reduce the number of eligible beneficiaries while increasing South Africa’s fiscal capacity. If a major purpose of the means test is to allocate scarce resources, growth-linked adjustments to the targeting mechanisms could improve the effectiveness of the social security system in reducing poverty. A link to overall income levels better addresses relative poverty. The recommendation for the CPI-

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SOURCE: EPRI calculations from Statistics South Africa data

Figure 4.1: Inflation rates from FY2005 to FY2006 by category

0%

1%

2%

3%

4%

5%

6%

Food Basket ofthe very

poor

Basket ofthe poor

Medianbasket

Middleclassbasket

Upperincomebasket

CPI inf lation

poor index, on the other hand, aims to protect against absolute poverty—defined in terms of protecting access to a fixed basket of goods and services.

The analysis in section 3 for each of the social grants shows the evolution of grant values relative to the proposed CPI-poor index as well as the overall Consumer Price Index, as well as for a broad food price index and a more narrow index measuring the cost of basic grains (more relevant for the very poorest). Since the poor in South Africa spend a substantial proportion of their income on non-food items (approximately 50%), a food-based index provides less than satisfactory social protection.

The analysis of section 3 can be applied to the Department of Social Development’s 2007/2008 fiscal year projections for grant spending in order to show the impact of an inflation adjustment to grant levels reflecting the Consumer Price Index for the poorest quintile (CPI-poor).

The real purchasing power of the Old Age grant, the Disability Grant and the Care Dependency Grant has eroded significantly since 1994 when measured against an estimate of CPI-poor. The 1994 value of R390 per month has increased only 123% in nominal terms, compared to the CPI-poor index growth of a projected 149% through fiscal year 2007/2008.156 The current 2007/2008 grant level of R870 would require an additional 12% increase in order to maintain the 1994 purchasing power. This adjustment for inflation would have required additional spending in 2007/2008 of a projected R2,601 million for the Old Age Pension, R1,845 for the Disability Grant, and R130 million for the Care Dependency Grant.

Likewise, the real purchasing power of the Foster Care Grant has eroded moderately since 1998 when measured against CPI-poor. The 1998 value of R360 per month has increased only 72% in nominal terms, compared to the CPI-poor index growth of a projected 82% through fiscal year 2007/2008. The current 2007/2008 grant level of R620 would require an additional 6% increase in order to maintain the 1998 purchasing power. This adjustment for inflation would have required additional spending in 2007/2008 of a projected R181 million. The Child Support Grant levels have increased more rapidly than inflation since 1998 and require no further adjustments in order to maintain their real 1998 purchasing power.

Table 4.1: The impact of CPI-poor inflation adjustments on social grant spending

Social GrantBase year

Grant level in

base year

Grant level in

2007/ 2008

% increase in grant level

since base year

CPI-poor inflation

since base year

Required inflation

adjustment

DSD projection

for 2007/08 (millions)

Adjusted for inflation

2007/08 (millions)

Additional expense

required for adjustment

Old Age 1994 390 870 123% 149% 12% R 22,564 R 25,164 R 2,601Disability 1994 390 870 123% 149% 12% R 16,009 R 17,854 R 1,845 Permanent 1994 390 870 123% 149% 12% R 12,270 R 13,684 R 1,414 Temporary 1994 390 870 123% 149% 12% R 3,739 R 4,170 R 431Foster Care 1998 360 620 72% 82% 6% R 3,257 R 3,438 R 181Care Dependency 1994 390 870 123% 149% 12% R 1,132 R 1,262 R 130Child Support Grant 0 - 6 1998 100 200 100% 82% - R 10,022 R 10,022 - Child Support Extension 1998 100 200 100% 82% - R 9,324 R 9,324 - CSG - Children 7 - 8 1998 100 200 100% 82% - R 2,867 R 2,867 - CSG - Children 9 - 10 1998 100 200 100% 82% - R 2,810 R 2,810 - CSG - Children 11 - 13 1998 100 200 100% 82% - R 3,647 R 3,647 -

R 62,306 R 67,064 R 4,758 Total

156 The estimated CPI-poor from 1994 to 1997 is a weighted average of the headline CPI and the food component price index, based on estimated weights from the 1997 to 2007 measures provided by Statistics South Africa.

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4.3 Rationale for linking social grant values to a poverty index

The dynamics of poverty tend to undermine the effectiveness of static social policies over time. In particular, inflation and the changing structure of poverty and inequality can erode the real purchasing power and appropriate targeting of social grants.

By linking social grant values to a poverty index, the poor are better protected from economic shocks that increase their cost of living. As documented in the previous section, the standard measures of inflation are frequently not appropriate for the poorest. The weight of food in the consumption basket of upper income groups (and even middle income groups) is much lower than that for the poorest. As a result, standard inflation measures will not adequately protect the poorest in the face of some of the worst kinds of shocks—those that undermine food security.

The Consumer Price Index weighted with the consumption basket of the poorest 20% of the population provides more effective and automatic protection—and it is freely available on a monthly basis from Statistics South Africa.

Automatic updates free the process from political influence. South Africa’s historical experience and the lessons of other countries demonstrate that social grants risk stagnating if appropriate political forces are not aligned. This political risk can be eliminated through an automatic (even constitutional) link between the annual CPI-poor inflation rate and the value of grants.

4.4 Linking the poverty index and the means testSince 2001 the values of social grants have been regularly updated on an annual basis—with one interim adjustment in the face of economic shocks. While the means test thresholds for the social pension, the Disability Grant and the Care Dependency Grant automatically update with the benefit level, the thresholds for the Child Support Grant does not.

The system for updating the values of respective social grants has worked well since 2001. The main problem with the mechanics of means testing has been the frozen income eligibility thresholds for the Child Support Grant. The relative invisibility of these thresholds (compared to grant values) reduces the political incentives to maintain them at more socially protective levels.

In order to address this problem, it is recommended that until the means test is eliminated, the income thresholds should be linked to the grant values in a manner similar to the structure of the means test for the social pension. With a recommended monthly income threshold for 2006/07 of R1,900 and a current grant value of R200, the annual income threshold would be set at 114 times the monthly grant value.

Likewise, it is recommended that the means test for the Care Dependency Grant be eliminated, and that until this objective is achieved, that the thresholds be adjusted for inflation. Currently, the family income must be less than R48 000 a year or R4 000 a month, and less than R17 760 per year for the child. Adjusted for inflation with a 1992 base value, these values in 2007 would be R120 000 per year for the family and R44 400 per year for the child. In terms of ratios, the family income threshold would be 138 times the value of the grant, and the child income threshold would be 51 times the value of the grant.

With grant values set on an annual basis (or possible more frequently in the face of a severe shock to the livelihoods of the poor), the means test values would be updated

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on a regular basis but not in a manner that creates undue bureaucratic complexity. The basic formula for the means test would not change—and the only parameter that would be updated would be the value of the grant. Given the political interest in this value, the likelihood of stagnation is remote. With the acceptance of the recommendation of automatic updates for grant values based on the poverty index, the means test would then automatically update as well.

4.5 Key questions for subsequent projects Based on the research carried out in this project, EPRI has identified a number of critical research issues that would provide substantial benefits to the Department of Social Development if addressed in future projects with more intensive scopes.

First, in light of the current policy initiatives with respect to implementing a national social insurance system, it is important to motivate how eliminating the means test for the social pension provides a more effective “zero pillar” for the pension system. The Department of Social Development is currently pursuing this research.

Similarly, it would be useful to conduct a similar analysis for the disability grant. Just as a universal social pension provides a “zero pillar” for a more comprehensive pension system, a universal disability grant (non-means tested) provides a foundation for a more comprehensive system of disability insurance.

Targeting mechanisms create different types of problems for the Child Support Grant. In particular, stigma may adversely affect the demand by eligible caregivers for the public resources aimed at protecting poor children. Fieldwork has documented that some caregivers are reluctant to apply for the grant because they associate it with “poor households”, even though they themselves qualify according to the terms of the existing means test. Stigma from applying for and receiving the Child Support Grant primarily affects the caregiver—however the failure to apply shifts the costs to the children. However, no nationally representative study has yet quantified the extent of this social cost.

Targeting mechanisms can also create broader problems with work incentives—particularly if income thresholds are enforced without sliding scales. If receipt of a Child Support Grant depends discretely on a caregiver’s income falling below R800 per month, then a caregiver receiving the grant and earning R750 has little incentive to earn much more. Rarely will income-generating opportunities offer such a substantial increase that they compensate for the loss of the grant. This creates a perverse incentive to remain poor—creating what some people refer to as “dependency”. Dependency is usually a consequence of poor targeting mechanisms rather than the grants themselves. Given the prominent place the idea of dependency holds in the minds of many policy-makers, more focused research on this question would promise significant value to the Department of Social Development.

Section 3.6.2 of this report provides the results of rigorous statistical analysis that assesses the possible perverse incentives for job search and employment success created by means testing. The results are highly suggestive, although not conclusive beyond a reasonable doubt. The evidence clearly documents a positive labour market impact from the receipt of the Child Support Grant, particularly for women. However, it frames the trade-off that differs in practice for men and for women. Since women as presumptive caregivers are more

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likely to be the direct recipients of the Child Support Grant, they are more likely to realise the positive resource benefits from the social transfers. In addition, since on average they receive a lower salary than men when they find employment, they are less likely to lose their eligibility for the Child Support Grant. Husbands, on the other hand, usually experience the benefits of the Child Support Grant indirectly—through a reduced drain on their resources as the household receives increased income to meet the basic needs of children. In addition, since husbands are more likely to receive a higher income if they find employment, they are more likely to jeopardise the household’s eligibility for social grants. These differences likely explain the substantially positive impact of the Child Support Grant on the labour force participation and employment of mothers, as well as the much weaker impact on husbands. A more thorough analysis, particularly using the latest Income and Expenditure survey linked to more detailed Labour Force Survey analysis, may provide more rigorous evidence concerning the perverse labour market incentives resulting from the means test. It is important to note that these possible perverse incentives do not result from the Child Support Grant itself, but rather from the income test that constitutes an element of the means test. The direct effect of the Child Support Grant itself is likely to be substantially positive.

4.6 ConclusionsThe rationale for means testing is primarily to save money. The evidence in this report, however, highlights the many costs of targeting, particularly through a verified means test. These include not only the financial costs of the required administrative capacity but also political costs, social costs, economic distortions and the direct costs to the beneficiary. In addition, means testing can lead to the exclusion of the poorest — the people that the social protection policy aims to reach. While international experience offers evidence about many alternatives to means testing, including proxy means testing, geographical targeting, community-based targeting, and others, these generally cannot be implemented within a rights-based approach. Reforms to the means testing process are most likely to be feasible, cost-effective and rights-based if they move in a more universal direction.

Much of the positive developmental and social impact of South Africa’s social grants results from their quasi-universal nature. Strict adherence to the targeting guidelines tends to reinforce exclusion and perverse incentives. Greater developmental and social benefits are likely to result from making these social grants formally universal—that is, by completely eliminating the means tests. Micro-simulation evidence documents that this is affordable. The evidence in this report supports the recommendation that the means tests for social grants be eliminated.

If the immediate elimination of the means test is not feasible, a transitional step is the adjustment of the Child Support Grant qualifying income thresholds for inflation. In addition, it is recommended that a single means test be applied to all households, eliminating the urban/rural distinction. For the 2007/08 fiscal year, this report recommends a single qualifying income threshold of R1900 per month. For the care dependency grant, the family income threshold would increase to R10 000 per month and the child income threshold would increase to R3 700 per month.

In addition, it is recommended that all social grant benefit levels be indexed to the Consumer Price Index for the lowest quintile (the poorest twenty-percent of the South African population) as calculated and reported monthly by Statistics South Africa. The grant amounts should be adjusted monthly based on the latest statistical release. The historical adjustments required to maintain base level purchasing power are 12% for

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the Old Age grant, the Disability Grant and the Care Dependency Grant (an additional increase of R100 for 2007/2008), and an increase of 6% for the Foster Care Grant (an additional increase of R35 for 2007/2008).

In addition, any means test income thresholds not indexed to grant benefit levels should be linked to this same price index. The existing asset tests for social grants should be eliminated in order to reduce the potential for poverty traps and perverse incentives.

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Appendix 1 Government Gazette, 22 February 2005 No. 27316

CHAPTER 4DETERMINATION OF INCOME THRESHOLDS

Determination of the amount 19 (1) The Minister must, with the concurrence of the Minister of Finance, determine the grant amounts and the formula to be used when calculating such amounts for disability, war veteran's and older person's grants, by notice in the Gazette .(2) The income of a married person and his or her spouse must, be taken into account when applying the formula referred to in sub-regulation (1), irrespective of whether the couple is married in or out of community of property.(3) The Agency must, if it is satisfied that an applicant who is married was deserted by his or her spouse for a continuous period of at least three months, or the spouse is unable to support the applicant, grant approval for the marriage not to be taken into consideration when determining the means of the applicant.

Determination of assets20 (1) When determining the assets of the applicant and his or her spouse, in the case of a disability, war veteran's and older person's grant application -(a) any assets donated by either the applicant or his or her spouse must be taken into account;(b) the difference between the selling price of immovable property and the amount on which transfer duty was paid, where the selling price is less than the amount on which transfer duty was paid, must be taken into account;(c) the Agency must, if he or she is satisfied that an applicant or his or her spouse had impoverished himself or herself or relinquished assets in order to obtain a grant, take such assets into account;(d) the municipal or market value of immovable property owned and occupied by the applicant and his or her spouse must not be taken into account; and(e) the municipal value of the property owned but not occupied by the applicant and his or her spouse must be taken into account, but any outstanding bond payments must be deducted.

(2) Despite sub-regulation (1)(a), (b) or (c) the value of such assets must not be taken into account after a period of five years has lapsed from the date of donation or relinquishment.

(3) For purposes of determining the means of an applicant for an older person's grant, disability grant and war veteran's grant "assets" means - (a) immovable property owned by the applicant or his or her spouse, property held under leasehold, cash investment, bonds or loans or any outstanding debts in favour of the applicant or his or her spouse, interest in shares, share capital or assets of a company or other institution, endowment policies after maturity date and cash in hand or in any account with a financial institution;(b) any fideicommissary rights held by the applicant or his or her spouse; and(c) any lump sum invested by the applicant or his or her spouse in a company or a financial institution with the aim of procuring an annuity.

Permissible deductions when calculating an applicant's means21. When determining the income of the applicant and his or her spouse, excluding foster care grant, and when determining the personal income of a primary caregiver

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and his or her spouse in the case of child support grant, the Agency must, on submission of acceptable documentary proof, allow the following deductions or contributions -

(1) current obligatory contributions of the employee to a pension, provident or retirement annuity fund established in terms of an Act or, in the absence of such an obligatory contribution, another contribution which does not exceed 22 percent of the net income of the applicant;

(2) current deductions in respect of an employee's tax or standard income tax;

(3) current membership fees to an approved medical scheme in the Republic, established in terms of an Act, paid from income generated from services rendered or income from any other source; and

(4) current contributions to the unemployment insurance fund paid from income generated from services rendered.

Determination of the financial criteria for a Child Support Grant22 (1) The Minister must, with the concurrence of the Minister of Finance, determine the amount of a child support grant by notice in the Gazette.

(2) The primary care-giver qualifies for the amount referred to in sub-regulation (1), if his or her personal income is below an amount determined by the Minister by notice in the Gazette.

Determination of the amount and the period of Social Relief of Distress23 (1) Subject to the provisions of the Act, the value of social relief of distress must be equal to, in the case of - (a) a single person, an amount not exceeding the maximum amount payable per month in respect of older person's, disability and war veteran's grants;(b) a married person, where both spouses living together apply, an amount not exceeding the amount payable per month for each adult; and (c) a child, an amount not exceeding the maximum child support grant payable per month for each child.

(2) Social relief of distress must be issued monthly or for such periods as determined by the Agency for a maximum period of three successive months.

(3) Before extending social relief of distress in terms of sub-regulation (2), the Agency must re-evaluate the application on the recommendation of a social worker or any other person authorized by the Agency.

(4) The Agency may approve transport expenditure where - (a) an applicant is referred for and must attend treatment by a medical officer, and the applicant is unable to make his or her own travel arrangements, or cannot afford the cost of transport required to enable him or her to attend such treatment; or(b) an applicant has to travel to a specific destination to assume employment, where he or she will not be dependent on further state aid, and cannot afford the cost of such travel

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Appendix 2: Project Terms of Reference provided by DSD

SPECIFICATION TO APPOINT A CONSULTANT TO REVIEW TARGETING MECHANISMS/ MEANS TEST AND VALUES FOR SOCIAL SECURITY GRANTS

1. AIMTo appoint a consultant that will review the targeting mechanisms/means test and values for social security grants.

2. BACKGROUND

The means test takes into consideration the material means available to potential recipients in determining both whether they should receive benefits and what level of benefits they should receive. A targeting system or means test is needed to ensure that the poorest people benefit from the money that is available. Social security grants are means tested and provided at a sliding scale. As pre-grant income increases above a certain minimum level, the benefit level decreases, until a point is reached where no further benefits are paid.

The amount payable for Old Age Pension and Disability Grant is calculated according to a formula that takes into account the maximum payable amount per month and the income of a married and unmarried person. There is a need to review the formula and the scaling factor or ratio between married and unmarried person. It is also important to review the implications of having different formulas and scaling factors for both married and unmarried person.

The means test for the payment of the Child Support Grant is based on the primary care givers net income of less than R800 per month if family is in urban areas and net income of less than R1 100 if family dwells in an informal dwelling unit or rural area. It is based on data from the October Household Survey of 1995. The cut-off levels are based on income patterns as at October 1995 and not linked to the current inflation rates. To reach more children, it is necessary to raise the cut-off level with inflation because income levels have risen in proportion to inflation.

There is a range of circumstances outlined in the Social Assistance Act 1992, which enables individuals to qualify for social security grants. According to regulation issued in terms of the above-mentioned Act, an individual may qualify for social security grants if he/she complies with the conditions outlined in the Act.

3. OBJECTIVES OF THE STUDY

To review targeting mechanisms through current means test, asset test and values of social security grants.

To provide policy recommendations on proposed targeting mechanisms/means test for social security grants.

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4. KEY DELIVERABLES

Provide a review of international experience/case studies on means testing.

Research the appropriateness of current targeting mechanisms in terms of the means test, asset test, scaling factor and any other relevant measures.

Provide recommendations on appropriate targeting mechanisms in terms of means test, asset test, scaling factor and any other relevant measures.

5. SCOPE OF THE TASK

The project should review the means test and amounts for social security grants based on current eligibility criteria. It should deliver the following requirements:

Provide the rationale for means testing social security grants

Provide a review of international experience/case studies on means testing

Review alternatives to means testing

Assess the weaknesses and strengths of the current means tests by grant type

Review the current means test for each grant and how it was derived

Review the scaling factor or ratio between married and single person

Provide the rationale for different scaling factors or ratio between married and single person

Provide a cost-benefit analysis of means testing social security grants. Evaluate the benefits in terms of fiscal savings versus the costs in terms of the added expense of administering a means test and any consequences for take-up.

Provide the basis for ongoing automated updates of the means test criteria where applicable

Reviewing the values of the grants in relation to different poverty indexes

Provide the rational for linking the values of the social security grants to an index of poverty

Provide a statement of how to construct the link between the poverty index and the means test including the mechanism upon which the means test should be updated annually

Identify key questions which could be taken forward in a subsequent project with a more intensive scope

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Appendix 3 Alignment of this report to the Terms of Reference

Table A3.1 Alignment of the objectives to the text of the main reportObjective Sections of main report

To review targeting mechanisms through current means test, asset test and values of social security grants.

Parts 1 and 3

To provide policy recommendations on proposed targeting mechanisms/ means test for social security grants.

Part 4

Table A3.2 Alignment of the deliverables to the text of the main reportDeliverable Sections of main report

Provide a review of international experience/ case studies on means testing.

Part 2

Research the appropriateness of current targeting mechanisms in terms of the means test, asset test, scaling factor and any other relevant measures.

Parts 1 and 3

Provide recommendations on appropriate targeting mechanisms in terms of means test, asset test, scaling factor and any other relevant measures.

Part 4

Table A3.3 Alignment of the elements of scope to the text of the main reportElement of scope Sections of main reportProvide the rationale for means testing social security grants Part 1, particularly

sections 1.2 - 1.5Provide a review of international experience/case studies on means testing

Sections 2.1 - 2.12

Review alternatives to means testing Section 2.13Assess the weaknesses and strengths of the current means tests by grant type

Part 3

Review the current means test for each grant and how it was derived

Part 3

Review the scaling factor or ratio between married and single person

Section 3.4.2

Provide the rationale for different scaling factors or ratio between married and single persons

Section 3.4.2

Provide a cost-benefit analysis of means testing social security grants. Evaluate the benefits in terms of fiscal savings versus the costs in terms of the added expense of administering a means test and any consequences for take-up.

Sections 1.3-1.5, 3.6

Provide the basis for ongoing automated updates of the means test criteria where applicable

Section 4.2

Reviewing the values of the grants in relation to different poverty indexes

Sections 3.2.4, 3.3, 3.4.4

Provide the rational for linking the values of the social security grants to an index of poverty

Section 4.3

Provide a statement of how to construct the link between the poverty index and the means test including the mechanism upon which the means test should be updated annually

Section 4.4

Identify key questions which could be taken forward in a subsequent project with a more intensive scope

Section 4.5

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Documents

Background Report on Targeting Mechanisms and Means … · Web viewTable of Contents. Executive Summary………………………………………………………………..7