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Pensions Core Course: Reflections on social pensions in sub-saharan Africa


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Pensions Core Course: Reflections on social pensions in sub-saharan Africa

  1. 1. REFLEXIONS ONSOCIAL PENSIONS INSUB-SAHARAN AFRICAPhillippe Leite & Melis GuvenMorning Symposium on"Social Assistance vs. Social Pensions”April 3rd 2013
  3. 3. • High levels of poverty across all population groups• Limited fiscal space• High levels of informality and Low levels of formal contributorypension systems• Recent demographic changes: declining fertility rates and increasinglongevity• Increase old age dependency rates and young population• A share of elderly population have no regular income, and no accessto health care• Women, who is likely to be out of formal labor market, tends to livelonger and look after young family members are speciallyvulnerable.• Despite mild economic growth, elderly still are subjected to poverty,and deprived of basic services (mainly health care)
  5. 5. Challengeswith Contributory Schemes• Low Coverage: Contributory pension schemes in Sub-Saharan Africacover very few people due to the large informal sector in most oflivelihood activities and employment; no significant coverageincrease in past decades.• Limited Impact on Poverty Reduction: Contributory pensionschemes do not have impacts on poverty reduction sincebeneficiaries are not poor• Formal sector in SSA is too small and pension schemes largely benefit civilservants.• Fiscal Challenge: Most countries are seeing a deterioration on thefinancial situation of contributory pension schemes (low contributionrates and generous benefits); spending increasing but for a smallsegment of the population• Inefficencies in Administration: High administrative costs furtherincreasing the fiscal cost• Demographic Aging : Most countries are still young butdemographic aging will take place rapidily
  6. 6. New SocialPolicy Agenda: socialpensions to address thecoveragegap• Other policies are being considered and piloted toalleviate poverty, particularly cash transfers.• Increased scope and discussion for SocialPensions (non-contributory pension) programs.• Social Pensions as the way of addressing the coveragegap in the context of the persistently low coverage ofcontributory pension schemes.• but limited research nor conceptualization of the problemand no systemic presentation of issues related to SocialPensions
  8. 8. • Universal• Botswana, Mauritius, Namibia, Seychelles, Uganda, Zambia pilotprogram and Kenya pilot program• Pensions tested• Lesotho, Swaziland and Nigeria - Ekiti State• Means-tested• South Africa, Cape Verde, and Kenya pilot.• Benefit levels vary between 4% and 35% of per capitaGDP
  9. 9. • Annual costs range from 0.3% of GDP in Botswana where thebenefit level is the lowest to 1.8% of GDP in Lesotho where thebenefit is the highest.• Universal x Targeted: Social pension programs in Zambia is deemedlargely insufficient in reaching the elderly without other subsistenceincome who remain largely uncovered by safety nets. Even universalprograms have exclusion errors.• Stand alone or part of a broad cash transfer: Social pensions wereintroduced in some countries (Swaziland for example) to lighten theburden on the elderly caring for orphans. They have provided somesupport to orphans who live with an elderly person. However, as 55percent of poor children in Zambia do not live with an elderly person,25 percent of orphans are not poor, and 85 percent of extremely poorchildren are not orphans.• Old-age benefits may not be the most efficient programs for protectingvulnerable children such as orphans.
  10. 10. Elderly people: 65 years-old and moreHalf of median# % #pension FGT(0) FGT(1)Ghana 2005 1,039,355 4.68 27,787 15.5% 5.1%Malawi 2010 523,355 3.71 10,303 12.3% 2.6%Mali 2009 469,541 3.69 7,859 9.5% 1.9%Mauritius 2006 87,851 7.17 16,188 3.3% 0.8%Mozambique2008 637,455 2.96 29,862 15.3% 5.5%Nigeria 2010 7,545,263 4.65 84,006 10.9% 3.2%Zambia 2010 315,640 2.42 19.8% 6.3%
  11. 11. Elderly people: 65 years-old and moreCost: closing the elderly poverty gapAnnualCost($PPPmillions)#AVG dailytransfer($PPP)GDP($PPPmillions)% ofGDPGhana 2005 2,790 1,039,355 7.4 34,858 8.0%Malawi 2010 247 523,355 1.3 11,082 2.2%Mali 2009 1,400 469,541 8.2 14,593 9.6%Mauritius 2006 58 87,851 1.8 15,921 0.4%Mozambique2008 333 637,455 1.4 18,397 1.8%Nigeria 2010 4,550 7,545,263 1.7 318,278 1.4%Zambia 2010 208 315,640 1.8 17,173 1.2%Country ProgramBenefit level(LCU)Benefit level(US$ eq. aday)% of GDPBotswana (UMIC) Old Age pensions (U) P 220 1.79 0.33%Kenya* (LIC) Older persons (M) S 1,500 0.81 0.02%Lesotho (LMIC)Old Age pensions (U defacto)M 300 1.95 1.77%Mauritius (UMIC)Non-contr. retirementpensions (U)Rs. 2,945 6.14 1.70%Swaziland (LMIC) Old Age Grant (U) E 200 1.43 0.60%Cape Verde*(LMIC)Old Age Pensions (M) E 4,500 2.28 0.40%Namibia* (UMIC) Old Age Pensions (U) N$ 450 3.00 1.36%South Africa*(UMIC)Grant for Older (M) R 1,100 7.40 1.14%
  12. 12. Enlargescope: SP&L systemsAdministrativeInfrastructure andInstitutionalArrangementsFiscal andMacro-economicStabilityGovernance andAccountabilityLegal andRegulatorySupervisionSocialPensionsor old ageassistance Uniqueidentification Means-testinginfrastructure (asneeded) Application andeligibilitycertificationprocesses Record-keepingand datamanagement Disbursementmechanisms Fiscalcapacitytosupportbenefitcommitment theface ofaging. Rules, roles andcontrolssupporting elderlyassistance. Transparentdisclosure ofbenefit formulaand meanstesting. Mechanisms forredress ofcomplaintsLegalfoundationsupportingrules, rolesand controls. Externalaudit andevaluation Periodicindependentassessment Monitoringandevaluationprocesses60%77%29%40%23%71%0%10%20%30%40%50%60%70%80%All20 13 LICs 7MICsDonor influenced Government managedBut donnor influenceaffects capacity of acountry to efficientlyimplement a program
  13. 13. FYI• Chilean experience to increase protection of elderly population• For individuals with no savings capacity:• Stronger social safety net• Special measures for targeted groups (e.g. women)• For individuals with limited savings capacity• Improve incentives to save• Provide complementary benefits• For individuals with savings capacity, not currently covered:• Mandate participation• Increase compliance
  14. 14. • Challenge• expand coverage of policies for elderly population given that:• Individuals with no or limited savings capacity.• Firms with low productivity• but• Without affecting behavior• Generating equity• Being financial sustainable and effective
  16. 16. • Parameters• Benefit level• Fixed but small, fixed at the minimum wage level, variable butadding up to the poverty line?• Age• Arbitrariness, determined by individual capacity to work, function ofhealth / longevity• Difference between life expectancy and age chosen matters for thefiscal constraints• Targeted or Universal• Universal cost more but it is more attractive; political support; strongfiscal constraints implies conditionalities;• Financial support can comes from taxes but efficient taxation on thosewho do not need or means test are procedures that are “similar”• But even in Universal programs errors of exclusion exist and can belarge (significant)
  17. 17. • Income effects: Minimum pensions are expected to have disincentiveeffects on individual decisions• Retirement Decision: avoided if age is not too low• Prodigality Effect: individuals who would save for retirement canbe temped to avoid savings• Longevity: increase in dependency ratios as a result of increasedlongevity and declining fertility increases minimum cost. At thesame time minimum pensions would, by themselves, induce anincrease in longevity since they would provide the elderly withbetter food and health care.• Spillover effect: drop in labor supply of prime-age individuals,increase in health of children...
  18. 18. • There is a “wisdom” that universal is administratively simple, butuniversal have exclusion errors and people simple forget thatadministration of a larger caseload of beneficiaries requires moreinvestments (e.g. in many countries IDs as age-prof documents areinexistent among the elderly population.• Cost of such a programs far from negligible but it is reasonable.• The affordability of minimum pension schemes depends on thebenefit size, poverty and age threshold chosen• Benefits should not be absolute but linked to national incomegrowth.
  19. 19. CONCLUSION
  20. 20. • Poverty in old age is still prevalent.• Social pensions would be an effective tool to fight povertybut not alone• It is important to study and understand the causes of the low coverageof contributory pensions and its reasons• It is important to define new tailored strategies (SP&L system) toincrease coverage• In other words, we must have the SP&L system vision so that improvementsin mandatory and voluntary contributory schemes are required to significantlyexpand coverage beyond a tiny fraction of workers currently covered afteralmost half a century in operation.
  21. 21. • Bring the SP&L system vision to the debate• Example (1): Due to fiscal space• Targeting social pensions should often be the preferred solution• If targeting is used, why a separate program rather thanintegration into a general social assistance program• Example (2): Matching defined contribution (MDC)• MDC take a long time to mature and have any impact on old agepoverty• MDC policy and social pensions can be linked and harmonized toachieve clear objectives over time.• Social pension dependence will be greater for older workers andgradually be replaced by dependence of younger workers onMDCs.