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1 The pension coverage gap: Issues and options Robert Palacios Social Protection Department, South Asia World Bank-SECP Pension Reform Workshop Lahore, Pakistan April 14-15, 2006

2 Presentation structure The coverage gap Social pensions Contributory pensions for informal sector workers Towards an integrated system 2

3 The coverage gap Almost all countries have mandated contributory pension schemes After several decades, coverage has remained stagnant in most developing countries In South Asia, fewer than one in ten workers is covered Low coverage part of a larger problem of informal labor markets which in turn is function of various factors beyond scope of pension system 3

4 The coverage gap contributors as a share of the labor force in 90 countries US$ per capita (ppp-adjusted) 4

5 The coverage gap Frustration with persistent low coverage has led to emphasis on two policy approaches Social pensions Contributory schemes for the informal sector workers Outside government, NGOs, MFIs have started to offer various insurance products including pensions 5

6 Social pensions Defined as cash transfers targeted to the elderly with no link to previous contributions or employment history Can play a core or supplementary role in the overall system Can be means-tested or universal Vary in terms of eligibility age and benefit level 6

7 Core vs supplementary SPs 0% 5% 10% 15% 20% 25% 30% South Africa Mauritius Namibia Botswana Core schemes Brazil Bolivia Egypt, Arab Rep. Nepal Costa Rica Colombia Chile Bangladesh India Uruguay Russian Federation Argentina Estonia Algeria Dominican Republic Recipients/65+ pop X pension level/income per capita 7

8 Social pensions: initial conditions We argue that a number of country-specific conditions should be taken into account when making social pension policy. These can be summarized as questions: Is there already an SP operating? Is there a broad social assistance scheme? Are the old poor compared to other groups? Is coverage high in the contributory scheme? Does administrative capacity exist to run an SP? What are the expenditure tradeoffs? 8

9 Contributory schemes for informal sector workers Standard DB plans do not work here Transaction costs are high relative to incomes of workers Two approaches observed: pseudo DB subsidized DC 9

10 Contributory schemes for informal sector workers International experience is very thin Pseudo DBs based on flat payment in flat payment out or proxy wages (examples include Sri Lanka and Tunisia) Subsidized DCs involve a matching contribution from government (examples include planned matching scheme in Mexico, operating scheme in West Bengal in India) 10

11 Contributory schemes for informal sector workers Country Scheme type Other insurance Status Dominican Republic Subsidized DC life and disability Law passed but not implemented India (West Bengal) Subsidized DC none Implemented; 650,000 members in 2005 India (Kerala) Mixed DB and DC various Implemented Indonesia Mixed DB and DC work injury, health, life Law passed but not implemented Mexico Subsidized DC unclear Law passed but not implemented Sri Lanka Pseudo DB life and disability Implemented; 650,000 members in 2005 Thailand Undecided unclear Law under consideration Tunisia Pseudo DB life and disability, others Implemented Turkey Pseudo DB life and disability Implemented Vietnam Subsidized DC none Draft law under consideration 11

12 Contributory schemes for informal sector workers Pseudo DBs: pros and cons allows worker to avoid investment risk Difficult to set up such without creating an unfunded liability, especially with flat payment schedules Proxy wages difficult to assess with accuracy Vesting issues for those with inconsistent contributions Lack of portability Subsidized DCs: pros and cons Imposes some investment risk on worker Costs are up front and could be high depending on matching contribution and take up rate Sustainable by definition Portable in principle 12

13 Toward an integrated system An ideal system would: Provide a socially determined minimum based on poverty Provide similar consumption smoothing for those living above the subsistence minimum prior to old age Encourage full coverage among those above the subsistence minimum Allow portability between sectors, informal/formal, etc. Take advantage of the same regulatory and administrative infrastructure to reap economies of scale and keep costs as low as possible Contribute in a positive way to the economy through savings and capital market impact Respect the fiscal constraints of the government 13

14 Toward an integrated system Social pensions or social assistance could address the minimum poverty issue and the problem of lifetime poor that cannot otherwise save A defined contribution structure with solid regulation and recordkeeping could be the basis of the consumptionsmoothing part of the system Those with limited savings capacity in the informal sector could be directly subsidized subject to fiscal capacity and incentive issues vis a vis the contributory scheme Formal sector workers covered by virtue of the mandate All would use the same recordkeeping platform, institutions and regulations it would be seamless and fully portable System could increase and effectively channel long term savings 14