Income support programs for old age

Robert Palacios, World BankDissemination Workshop for Ageing StudyColombo, Sri Lanka, September 9, 2008

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Key findings

Current pension schemes in Sri Lanka suffer from problems of adequacy and sustainability in different degreesMore than 2/3 of the workforce is not covered by a pension scheme while the population is ageing rapidlyAn integrated approach is recommended whereby affordable social pensions provide a minimum and a seamless and portable contributory scheme allows for consumption smoothing

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Structure of presentation

Part I: assessment of current pension system

Part II: an integrated approach to the pension system

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I. Assessment of current system

Consider two objectives:Minimum income or poverty alleviation

Means-tested or universal financed from general revenues, ie., social pensions

Consumption smoothingEarnings related and mostly contributory (civil servants an exception); defined benefit or defined contribution

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Social pensions play a limited role…

Country Type of program

Beneficiaries/ population 65+ (%)

Social pension impact index (%)

Bangladesh Means-tested SP 22 1.6 India Means-tested SP 14 1.4 Nepal Universal flat SP 21 4.7 Sri Lanka Means-tested as

part of general SA

23 1.2

Mauritius Universal flat SP Over 100% 27.1 South Africa Means-tested SP 86% 27.3

Comparison of social pensions in selected countries

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Earnings related schemes are very different…

EPF/APPF CSPS Farmers Fishermen Self-employed

Members (000s) 2,350 825 680 48 53 Beneficiaries (000s)

94 419 14 0.5 2.2

Mode of payout Lump sum Un-indexed Annuity

Flat nominal annuity

Flat nominal annuity

Flat nominal annuity

Financing 12% employer/ 8% employee

Government budget

Schedule with flat nominal amount by age

Schedule with flat nominal amount by age

Schedule with flat nominal amount by age

Spending/GDP (%)

0.7 2.0 <0.01 <0.01 <0.01

Admin costs per member (rupees)

199 n.a. 236 326

Assets/GDP (%) 18 0 <0.01 <0.01 <0.01

Main earnings related schemes in Sri Lanka

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Each scheme has problems of adequacy...

Civil service pensions have high target replacement rates but wage base and indexation over time limit adequacyEPF has high contribution rate but withdrawals and low returns relative to wages result in low terminal balances; also there is no longevity insurance (annuity)F&F subject to discretionary indexation in the future with high degree of uncertainty

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Two thirds of workers are not covered

7%16%

4%

16%

21%

5%

17%

7%

7%

36%

Civil Servants Private employees (formal) StudentsHousewives Others Private employees (informal)Farmers/Fishermen Self-employed Migrants

Workforce(18 - 65 years)

13 million

Source: Rannan-Eliya

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Financial sustainability is uncertain in all four schemes

Civil service pensions are not backed by any fund and the unfunded liability is hugeEPF is funded, but invested in government bonds that will have to be redeemed as the the covered population ages and has likely not contributed to higher savings along the wayF&F and SE workers’ schemes are partly funded but would have large hidden liabilities if their benefits were maintained at an adequate level in the future (ie., indexed)

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Part II: an integrated approach to the pension systemConsider two objectives:

Minimum income or poverty alleviationMeans-tested or universal financed from general revenues, ie., social pensions

Consumption smoothingEarnings related and mostly contributory (civil servants an exception); defined benefit or defined contribution

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Social pensions may be warranted as population agesFirst option would be to use existing Samurdhischeme coverage of the elderly; but the program requires reformsThe second option is to set up a separate SP. The cost of a means-tested scheme would depend on whether it was targeted and the eligibility ageA universal flat scheme even at 15-20 % of income per capita would imply tradeoffs with other budget priorities, especially in long run; it would also provide hard to justify transfers to higher income elderly in a country where poverty rates among the old are not disproportionate

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Contributory pension scheme should be seamless and sustainableBegin with consensus target benefit levels for all regular wage workers, private/publicChoose contribution rate that can finance such benefits in the long runSet up regulatory and administrative infrastructure (likely drawing on existing EPF machinery, ID)Establish new governance and investment policy norms for pension fundHarmonize and customize the national platform for voluntary schemes for the informal sector possibly including matching contribution incentives

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How to move the reform agenda?

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Thank you