1. EXPANDING COVERAGE: RECENT
DEVELOPMENTS
Robert Palacios, World Bank
Pension Core Course
April 2013

2. The policy challenge
2
LICs – 17%
MICs – 51%
TSEs – 66%

3. The policy challenge
3
 Decades of stagnant coverage – failure to expand
traditional SI, payroll tax-financed model
 Falling coverage in Eastern Europe and FSU
 Increasing concern as schemes mature and require
high payroll tax rates that may further distort the
labor market
 Aging populations that will put pressure on both
health and pensions (IMF 2011, 2012).

4. Emerging institutional responses
4
 ILO’s Social Floor (UN, DFID)
 Santiago Levy’s analysis and proposal
 World Bank
 social pensions and MDCs covered in SP strategy
 MDC book
 Social insurance and labor markets book
 upcoming LAC book
 upcoming ECA flagship report on pensions

5. Emerging responses on the ground
5
 Expansion of social pensions
 Chile, India, Nepal, Mexico, Panama
 New experiments with matching contributions
 China, India, Turkey
 Subsidized health insurance premia for the poor
 Colombia, Georgia, Ghana, India, Pakistan, Turkey
 Remains to be seen what happens as ECA country
pension coverage begins to decline

6. 6
Country
types
PPP$YCAP Coverage ratio Ratio 20-59/60+
population
LIC >4500 17% 7.6
MIC 4500-15,000 51% 6.3
HIC 15,000+ 90% 3.4
TSE 2000-20,000 66% 3.7

7. 7
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
1 2 3 4 5
Quintile
%ofemployedcontributing
Uruguay
El Salvador
India

8. Characteristics of target population
8
 Variable income flows
 Low savings capacity
 Low exposure to formal financial sector
 Transient career path (rural-urban migrants)
 High degree of self-insurance (i.e., lack of various
types of insurance coverage)
 High discount rate/liquidity preference
 Higher mortality/morbidity (relative to covered)
 Few opportunities for formal jobs (evasion issue minor)

9. Strategies for system design
9
 Minimize transaction costs
 Allow small and variable contribution amounts and flexible
timing
 Harness existing groups where possible
 Use IT to lower transaction costs on front end (banking
correspondents, mobile payments)
 Use formal pension system infrastructure where feasible
 Simple investment types, reliance on defaults
 Effective outreach
 Credible institutions must participate on provider side
 Pull factor may require paying providers’ incentives for
enrolment (especially at outset)

10. Strategies for system design
10
 Affordability and incentives
 Affordable contribution levels
 Link with health/disability insurance where feasible
 Voluntary pensions in rich countries exist due to tax
treatment, but irrelevant for informal sector workers – a
substantial matching contribution is needed to overcome
high discount rate and liquidity preference
 Age of withdrawal must be in line with realistic
biological deterioration

11. Matching contributions
11
 MCs can be targeted and capped (e.g., India matches up
to 1000 rupees per year for informal sector workers)
 1:1 match provides an immediate 100% return
 Can be bundled with insurance (eg. Health) reducing
the need for liquid precautionary savings
 In practice, there are a number of countries planning or
starting MDCs, but not enough experience to have
robust empirical results
 China, India, Indonesia, Vietnam, Dominican Republic

12. Steps in setting key parameters for MDC
MCT
TBL = x % of MCL
CR/PL = $
AP = % of PL
SR = 1-AP
MCT – minimum consumption target
TBL – target benefit level
CR – contribution rate
PL – premium level
AP – ability to pay
SR – subsidy rate
CT – coverage target
BR – budget requirement
CT - # workers BR - $

13. How affordable is the MDC to workers?
13
Example: Based on a
target benefit just
above the Indian
poverty line, the
contribution required
with a 1:1 match is 5%
of income for decile 3
0%
2%
4%
6%
8%
10%
12%
3 4 5 6 7 8
decile
%ofincome

14. How much take up can you buy?
14
Duflo et. al. (2005)
tested the take up
elasticity for US low
income workers, but
similar studies have
not been done for
developing countries
0
5
10
15
20
25
30
35
40
45
50
0 50 100 150 200 250
%takeup
% matching contribution

15. How much take up can you buy?
15

16. Age should be linked to target group
16
 Some limited empirical evidence supports the
intuition that the life expectancy differential by
income level is greater in LICs (eg., Bannerjee and
Duflo (2005) and Pal and Palacios (2010))
 Age of withdrawal should take shorter life
expectancy of target population into account
 Age can also be coordinated with social pension
eligibility age

17. Age parameters
17
10
12
14
16
18
20
22
0 5000 10000 15000 20000 25000 30000 35000 40000 45000
PPP adjusted $ income per capita
lifeexpectancyatage60

18. Parameters must be consistent with fisc
18
 Rough estimate of MDC cost
 Set target pension at 40% YCAP
 Calculate required total contribution for full career 10% of
YCAP
 Set match at 1:1 (5% of YCAP from government)
 With labor force/population (40%)* share in informal sector
(80%) * take up (50%) = 0.8% of GDP
 This can be reduced to 0.4% of GDP if targeted to the
bottom half of the informal sector; (this yields a 40%
increase in coverage or 8 percentage points)
 Match can be reduced subject to fiscal constraints

19. MDCs and social pensions
19
 MDCs take a long time to mature and have no impact on old age
poverty; it does nothing for the current or soon to be old
 MDC policy and social pensions can be linked and harmonized to
achieve clear objectives over time
 Social pension dependence will be greater for older workers and
gradually be replaced by dependence of younger workers on MDCs
 SP can be set at absolute poverty level and indexed to inflation while
MDC parameters linked to YCAP; prefunding as population ages
 Set target pension at 40% YCAP
 Calculate required total contribution for full career 10% of YCAP
 Set match at 1:1 (5% of YCAP from government)
 With labor force/population (40%)* share in informal sector (80%) * take up
(50%) = 0.8% of GDP
 This can be reduced to 0.4% of GDP if targeted to the bottom half of
the informal sector; in this case, coverage would be doubled
 Match can be reduced subject to fiscal constraints

20. Social pension only
20
0
.25
.5
.75
1
1.25
0 .5 1 1.5 2 2.5 3
Individual income, proportion of average income per capita
Contributory Social
0
.5
1
1.5
2
2.5
Grossrelativepensionlevel
0 .5 1 1.5 2 2.5 3
Individual income, proportion of average income per capita
Contributory Social
Here there is complete reliance on a social pension
indexed to income with no MDC

21. Social pension and MDC
21
0
.5
1
1.5
2
2.5Grossrelativepensionlevel
0 .5 1 1.5 2 2.5 3
Individual income, proportion of average income per capita
Contributory Social
Here, the social pension indexed to prices, with
MDC parameters indexed to income
0
.25
.5
.75
1
1.25
0 .5 1 1.5 2 2.5 3
Individual income, proportion of average income per capita
Contributory Social

22. 22
0%
2%
4%
6%
8%
10%
12%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61
%ofGDP
YEARS
Costs
MDC w/SP
SP only

23. Concluding thoughts
23
 MDCs are being considered or started in a number of
countries with low coverage
 MDC policies alone do not address the current
coverage gap – social pensions can play that role in
the short run until MDC matures
 Careful analysis of fiscal tradeoffs between the two
types of program can only be done with long term
projections and studies of take up elasticity
 It may be especially attractive in countries with DC
schemes for formal sector workers to reduce start up
costs and allow for a seamless system