1. Should the Elderly be Targeted?
Social Pensions for the Elderly or
Social Assistance for Households
Lessons from Brazil rural pension
scheme
Washington DC, April 3, 2013
Mariano Bosch Mossi
IADB

2. The Context
 Social insurance systems have been unable to reach wide
coverage in developing economies:
– Design issues: in most cases exclude the self-employed, a large share
of employment in developing countries and those who never
participated in the labor market.
– Evasion: low compliance with health and pensions contributions.
 Inability to reform SS has led to a trend towards an
unprecedented expansion of non-contributive programs side
by side with traditional SS
– Health
– Pensions
– And more.

3. Non contributory pensions are on the rise
Source: BID
Non contributory pension programs
(Number of Programs)
 Large share of
countries in the
region have
implemented one
or more non
contributory
pensions.
 As population
ages this trends is
going to become
stronger.

4. Rural Pensions in Brazil
 Since the 1970s, Brazil has been giving pensions to rural
workers without contributions.
– As long as they can prove 15 years of rural work.
– In practice, 90% of elderly in rural areas receive this pension.
 During this time, the eligibility age has decreased and the
generosity has increased
– Before 1991: 65 (Only 1 household member),1/2 minimum wage
– After 1991: 60 (males), 55 (females), 1 minimum wage.

5. What are the key questions to ask?
 Coverage
– How much does it close the coverage gap?
– How much will it improve the life of beneficiaries?
 Integration with the contributory system:
– How the non-contributory pension may impact the contributory system?
– Will it reduce the incentive to contribute?
 Fiscal Costs:
– Generosity. Can we pay for it now?
– Demographics and Indexation. Can we pay for it in the future?
– Political economy. Will our politicians play with it?

6. What are the key questions to ask?
 Coverage
– How much does it close the coverage gap?
– How much will it improve the life of beneficiaries?
 Integration with the contributory system:
– How the non-contributory pension may impact the contributory system?
– Will it reduce the incentive to contribute?
 Fiscal Costs:
– Generosity. Can we pay for it now?
– Demographics and Indexation. Can we pay for it in the future?
– Political economy. Will our politicians play with it?

7. - 7 -
Fiscal Costs

8. The fiscal cost of non-contributory
pensions
 Three Factors
– Demographics
– Coverage (Targeting)
– Generosity (Indexation)

9. Rural pensions are generous
 9 times the poverty line (1.25$ per day)
Non-Contributory pensions in LAC
(Dollars per day PPP)
Source: BID

10. Income increases dramatically at eligibility
age
Average Income: Males
(Rural Brazil)
Average Income: Females
(Rural Brazil)
Source: 2010 Brazil Population Census
 A 65 year old woman (man) in rural brazil has an income 78% (40%) higher
than a 55 year old woman (man).

11. Indexation to the MW could be problematic
 Minimum wages
adjust to match
productivity.
 Will transfer
productivity gains
to pensioners.
Source: IMF and own calculations.

12. The cost can rapidly increase
 Had the pension
been inflation
adjusted since
1995, Brazil could
have saved 0.33
points of GDP in
2011.
 “Bolsa Familia”
the largest CCT in
the world costs
around 0.5 points
of GDP per year.
Source: Ministerio de Previdencia, IMF and own calculations.

13. Even if inflation adjusted the benefit would
have been more than adequate
Average monthly Income: Males
(Rural Brazil)
Average monthly Income: Females
(Rural Brazil)
Source: 2010 Population Census and own calculations.
 A 65 year old woman (man) in rural brazil would have had an income 45%
(21%) higher than a 54 year old woman (man).

14. What about the future?
Cost of rural pension: 2010-2050
(Share of GDP)
 If adjusted by
inflation they will
cost 1% of GDP.
 If adjusted by
GDPpc growth will
cost close to 3%
of GDP.
Source: Population projections CELADA, 2010 Population Census
and own calculations.

15. A brief note on the political economy of
non-contributory pensions

16. Non-contributory pensions face a slippery
slope
2007: 70 y mas starts
Eligibility: 70
Benefit: 500
Target: Towns <2500
2008: The program
expands to cities
<20.000 2009: The program
expands to cities
<30.000
2012: Electoral year.
President Calderon
pledges to extend the
program to the whole
country.
2012: Electoral year.
President elect Peña
Nieto, pledges to
reduce eligibility age
to 65.

17. Lessons from Brazil
 Coverage
• Great tool to reduce poverty in rural areas (or create relatively rich
people in rural areas).
 Integration with the contributory system:
• No real interaction since very few people contribute in rural areas
• However, it will be difficult to implement any kind of old-age saving
schemes with such high benefits.
 Fiscal Costs:
– Generosity.
• Probably too generous now
– Demographics and Indexation.
• It will be very expensive in the future if the MW keeps increasing.
– Political economy.
• Right approach: Establish a rule known by all.
• Wrong rule: Adjusted to the MW

18. A more reasonable design
 Coverage
• Universal (I am on the field of the universalists)
 Integration with the contributory system:
• Independent of labor histories and benefits will add to individual
savings/contributions.
 Fiscal Costs:
– Generosity.
• Target poverty: 2.5$ a day
– Demographics and Indexation.
• Indexed to inflation
– Political economy.
• Strong institutions: Known, sensible rule and difficult to change.