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

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.

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.

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.

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?

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?

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Fiscal Costs

The fiscal cost of non-contributory

pensions

Three Factors

– Demographics

– Coverage (Targeting)

– Generosity (Indexation)

Rural pensions are generous

9 times the poverty line (1.25$ per day)

Non-Contributory pensions in LAC (Dollars per day PPP)

Source: BID

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).

Indexation to the MW could be problematic

Minimum wages

adjust to match

productivity.

Will transfer

productivity gains

to pensioners.

Source: IMF and own calculations.

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.

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).

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.

A brief note on the political economy of

non-contributory pensions

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.

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

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.