Most individuals will reach old age. If aging is almost a certainty for so many individuals, how can elderly people mitigate welfare risks or potential problems such as illness or disability? Social insurance programs can offer coverage of illness, disability, and other potential risks for a significant number of elderly people. However, in most developing countries, people with low income are more exposed to these risks. Social insurance might be restricted to a small group of workers, such as formal employees or employees in certain sectors. For those individuals who are not covered, the option of voluntary savings is close to impossible because a low income makes it difficult to save, and existing instruments for long-term savings are unavailable to them.
This chapter describes a key component that countries are rapidly introducing to support the special needs of elderly people: old-age social pensions.1 This type of program is becoming an important policy tool to address issues of low social insurance coverage and, in some cases, to address aspects of poverty alleviation. This chapter provides the general characteristics of noncontributory old-age social pensions in different regions, describes recent trends, gives performance indicators, and includes a special highlight on policy and implementation discussions and considerations (see highlight 2).
An aging population is a common trend across regions. For some regions, the onset of the trend will be sooner; for other regions, the effect of the trend will be much greater (see figure 4.1). Today, the Europe and Central Asia region has the largest percentage of elderly people; in the long term, Latin America and the Caribbean, South Asia, and East Asia and Pacific will experience the biggest increase. Although elderly people now represent 8 percent of the total population in Latin America and the Caribbean, their share is projected to grow nearly four times by the year 2100. While the share of elderly people now represents 5 and 8 percent of the total populations in South Asia and East Asia and Pacific, respectively, their shares are projected to grow over five times in South Asia (to 27 percent) and over 3.5 times in East Asia and Pacific (to 29 percent) by 2100 (United Nations Population Research Council 2017).
FIGURE 4.1 Population, Age 64 Years and Older, as a Percentage of Total Population, by Region
Source: Estimates based on UN Population Division data (https://www.un.org/development/desa/publications/world-population-prospects-the-2017-revision.html).
Despite the evident aging trend, most countries do not have systems and benefits that can fully cover elderly people or their special needs. Many countries have social insurance programs, but not everyone participates in those. In this context, very often the old-age social pension becomes a key instrument for providing social assistance coverage in old age.
Old-age social pensions are here defined as noncontributory cash benefits targeted at elderly people, generally provided and financed by governments, and not linked to past contributions, earnings, or years of service. Old-age social pensions take different forms, but their main parameters for eligibility include age, citizenship, residency, and, in some cases, means testing.
Three main characteristics of old-age social pensions set them apart from social insurance and some social assistance programs (Palacios and Knox-Vydmanov 2014). First, there is an important distinction between social pensions and minimum pensions. Minimum pensions are set up as the minimum guaranteed benefit provided by social insurance systems, while social pensions in countries with social insurance systems tend to be set below the minimum pension and to be accessible to those who have not made any contributions; have not participated in any mandatory scheme; and/or have an extremely low income. Second, old-age social pensions tend to be publicly financed out of government revenues (through general taxation). The third core distinction is between old-age social pensions and broader social assistance. Old-age social pensions are social assistance benefits exclusively targeted at older people. Social assistance programs can include and cover, but are not necessarily targeted at, elderly people.
Old-age social pensions were introduced in some countries almost as early as social insurance. In 1891, Denmark introduced a local social pension for poor citizens 60 years of age and older. New Zealand (1898), Australia (1908), Iceland (1909), the United Kingdom (1909), and Sweden (1913) then followed this policy. The first social pensions were means-tested. It was not until 1938 that New Zealand, for example, introduced a universal pension for individuals age 65 years and older.2 Figure 4.2 presents the evolution of old-age social pension systems around the world. Between 1940 and 1990, many countries introduced this type of social security benefit. Yet, around half of all old-age social pension programs have existed only since 1990.
FIGURE 4.2 Number of Countries with Old-Age Social Pensions, 1898–2012
Source: HelpAge Social Pensions Database.
Old-age social pensions have proliferated in the past two decades. Since 2001, 29 economies have introduced or expanded this social assistance/social safety net instrument (figure 4.3). Latin America and the Caribbean have led the trend, followed by East Asia and several African economies. In addition, economies that already had a social pension system (mostly contributory systems) introduced parallel benefits aimed at covering different groups (for example, the rural programs and “70 and Up” in Mexico). By 2014, an estimated 101 economies had introduced old-age social pensions.3 Almost all Latin American countries have them, whereas Sub-Saharan Africa economies have some of the largest old-age social pensions systems in terms of the share of the elderly population covered.
FIGURE 4.3 Introduction of Old-Age Social Pensions, 2001–13
Source: HelpAge Social Pensions Database.
Notes: The height of each column indicates the cumulative number of countries with a social pension during this period. Germany: needs-based pension supplement (Grundsicherung im Alter); Mexico: “70 y Mas” regional scheme was introduced in 2001; Nigeria: Osun Elderly Persons Scheme. Papua New Guinea: Only one province (New Ireland) has an old-age social pension.
Old-age social pensions are introduced on the basis of an economy’s needs and capacity, in particular to alleviate poverty, establish the main component of a pension system, or address a coverage gap in an existing pension system (see map 4.1). Bangladesh, India, Kenya, Myanmar, and Vietnam, for example, have introduced old-age social pensions as poverty alleviation programs. Australia and New Zealand (pioneer economies) and Bolivia, Maldives, and Timor-Leste (newcomer economies) have introduced old-age social pensions as the main component of their pension systems, in the form of universal pensions. Other economies have used old-age social pensions to address the coverage gap left by existing mandatory pension schemes (see highlight 2 for a policy discussion on introducing old-age social pensions and the special considerations that inform their design). Among those, some have mature contributory schemes but insufficient coverage (for example, Chile and Mexico), while others have immature contributory schemes for significant aging population trends (for example, Hong Kong SAR, China; the Republic of Korea; and Thailand).
Old-age social pensions reflect the economy context and take one of two forms: universal or means-tested. Universal pensions provide flat-rate benefits to all elderly people, generally those who reach a certain age and fulfill citizenship or residency criteria. Old-age social pensions can be considered a type of unconditional cash transfer.4 Means-tested or targeted programs provide benefits to the poor, who tend not to be covered by other (contributory) elements of the pension system. Means-tested benefits have the potential to be a main source of income for elderly people, and thus have the capacity to be pension-tested (that is, the capacity to exclude beneficiaries of other pension schemes).5 Figure 4.4 presents, for each region, the share of economies that had a social pension by 2014, the type of social pension, and the average total cost to GDP by region. Nearly 90 percent of Organisation for Economic Co-operation and Development (OECD) economies, 70 percent of Latin America and the Caribbean economies, and nearly 65 percent of Europe and Central Asian economies have old-age social pensions (panel a). Means-tested pensions are most common among all regions, except for Europe and Central Asia, where pension-tested schemes dominate (panel b).
FIGURE 4.4 Distribution of Old-Age Pension Programs
Source: Calculations based on HelpAge International Social Pensions.
Note: Data are as of 2014. GDP = gross domestic product; OECD = Organisation for Economic Co-operation and Development.
The design of each program in terms of the eligibility age is independent of the type of pension. Figure 4.5 shows the diversity of the design across regions by analyzing the age of eligibility. Panel a shows the minimum, maximum, and mean by region. In most regions, the mean eligibility age tends to be 65 years, except for Sub-Saharan Africa and the Middle East and North Africa. Panel b presents the average age of eligibility by gender. Old-age social pensions across regions often include age differentiation between men and women, with the latter usually eligible five years earlier.
FIGURE 4.5 Age of Eligibility for Pension Programs
Sources: ASPIRE team, using HelpAge International Social Pensions Database.
Note: In panel a, for each region, there are three numbers: minimum, mean, and maximum. Because of insufficient data on Middle East and North Africa, some of the indicators could not be estimated. ASPIRE = Atlas of Social Protection: Indicators of Resilience and Equity; OECD = Organisation for Economic Co-operation and Development.
Old-age social pensions provide an alternative source of income for elderly people who are not covered by contributory schemes. Social pensions cover close to 35 percent of the population age 60 years and older in Organisation for Economic Co-operation and Development countries and in the Europe and Central Asia, East Asia and Pacific, Latin America and the Caribbean, and South Asia regions, according to estimations from HelpAge International data (figure 4.6). The Africa region has the largest coverage of old-age social pensions (measured as a percentage of the population age 60 years and older).6 In contrast, a few Middle Eastern and North African countries have introduced social pensions.
FIGURE 4.6 Old-Age Pension Coverage of Population Age 60 Years and Older, by Region
Sources: ASPIRE database, using data from HelpAge International.
Note: For each region, there are three numbers: minimum, mean, and maximum. ASPIRE = Atlas of Social Protection: Indicators of Resilience and Equity; OECD = Organisation for Economic Co-operation and Development.
Old-age social pensions have expanded rapidly in certain countries. Between 2010 and 2015, the number of beneficiaries in Chile, Mexico, the Philippines, and Vietnam grew by more than 70 percent (lowering the eligibility age often drives such expansion). In Bolivia, Mauritius, and Namibia, coverage of the population age 60 years and older has become universal.7
Elderly people in the first (poorest) quintile have benefited the most from old-age social pensions, no matter the program design. Using household survey data from the Atlas of Social Protection: Indicators of Resilience and Equity (ASPIRE) database, the distribution of beneficiaries (or beneficiary incidence) of old-age social pension programs was estimated.8 Figure 4.7 presents the distribution of old-age social pension beneficiaries by quintile of per capita pretransfer welfare and by type of targeting method, based on available data. In Bulgaria, Latvia, Lithuania, and Turkey, more than 50 percent of the old-age social pension beneficiaries are in the poorest quintile, while in Swaziland and Guatemala, more than 50 percent of the beneficiaries of social pensions are in the wealthiest (fourth and fifth) quintiles.
FIGURE 4.7 Distribution of Old-Age Social Pension Beneficiaries, by Income Quintile
Sources: ASPIRE database; selected surveys.
Note: Countries were selected based on the availability of reliable household survey data (ASPIRE). Beneficiaries’ incidence is determined as follows: (number of direct and indirect beneficiaries [people who live in a household where at least one member receives the transfer] in a given quintile)/(total number of direct and indirect beneficiaries). The sum of percentages across quintiles per given instrument equals 100 percent. Quintiles are calculated using per capita pretransfer welfare (income or consumption). ASPIRE = Atlas of Social Protection: Indicators of Resilience and Equity; Q = quintile.
Old-age social pensions provide income security and dignity in old age. To analyze the relative importance of the old-age social pension, Figure 4.8 presents the level of pension benefits as a share of beneficiary welfare for the poorest and second-poorest quintiles. In Brazil, Mauritius, and South Africa, old-age social pensions represent more than 50 percent of the total welfare for elderly people (and their households as indirect beneficiaries) in the poorest quintile.
FIGURE 4.8 Old-Age Social Pensions as a Share of Beneficiaries’ Welfare, Poorest and Second-Poorest Quintiles
Sources: ASPIRE database; selected surveys.
Note: Countries are selected based on the availability of reliable household survey data (ASPIRE). Pensions as a share of beneficiary welfare is defined as the ratio of the pension size to the average household per capita consumption or income of the respective welfare quintile (Q1: bottom 20 percent; Q2: bottom 21–40 percent). The poorest first and second quintiles are calculated using per capita posttransfer welfare (income or consumption). ASPIRE = Atlas of Social Protection: Indicators of Resilience and Equity; Q = quintile.
Old-age social pensions have helped beneficiaries reduce or altogether escape poverty. In a sample of 18 countries (see figure 4.9), the effect of old-age social pensions on the poverty headcount and poverty gap reduction is significant (10–40 percent) in only three (Mauritius, South Africa, and Thailand). In the other 16 countries, the poverty impact is much less pronounced. Furthermore, the effect of old-age social pensions on inequality (as a reduction in the Gini coefficient for the overall population) is less than 10 percent (see figure 4.9), except for the same three countries (where coverage and benefit levels are high).
FIGURE 4.9 Impact of Old-Age Social Pensions on Poverty Headcount, Poverty Gap, and Gini Inequality Index Reduction, as a Share of Pretransfer Indicator Levels, Using Relative Poverty Line (Poorest 20 Percent)
Source: Calculations based on the ASPIRE database.
Note: Countries were selected based on the availability of reliable household survey data in the ASPIRE database. The impacts on poverty and inequality reduction were calculated as follows: (poverty headcount pretransfer – poverty headcount post transfer)/(poverty headcount pretransfer). Same calculations apply for the Gini index and poverty gap percentage reductions. ASPIRE = Atlas of Social Protection: Indicators of Resilience and Equity.
FIGURE 4.10 Benefit–Cost Ratio of Old-Age Social Pensions
Source: Calculations based on the ASPIRE database.
Note: Countries were selected based on the availability of reliable household survey data in the ASPIRE database. The benefit–cost ratio is the poverty gap reduction in US$ for each unity (US$1) spent in the social program. ASPIRE = Atlas of Social Protection: Indicators of Resilience and Equity; PPP = purchasing power parity.
In some African and Latin American countries, elderly people are not necessarily among the poorest, so the benefit’s impact on poverty alleviation might be marginal. While Mali, Mauritius, and Namibia have large shares of elderly people in the poorest households (32 percent, 38 percent, and 43 percent, respectively), they have even larger shares of children who live there (92 percent, 64 percent, and 95 percent, respectively), Guven and Leite (2016) note. However, in Argentina, Brazil, and Chile, mandatory schemes and social pensions have contributed to lowering poverty among elderly people; they also had a larger overall poverty reduction impact than programs targeted at children (Acosta, Leite, and Rigolini 2011). BÖger et al. (forthcoming) find that more than 50 percent of countries worldwide with old-age social pensions have raised elderly people above the international poverty line but not above national poverty lines.
Old-age social pensions have mixed results in reducing poverty, as seen in the benefit–cost ratio, measured as the reduction in the poverty gap obtained for each US$1 spent.9 On average, among the social pensions and countries included in this analysis, the benefit–cost ratio is 0.32, meaning that every US$1 spent on old-age social pensions reduces the poverty gap by 32 cents. Only Latvia and Lithuania have a ratio above 0.5. The design of the old-age social pension (universal or means-tested) likely affects this indicator, but more evidence is needed to better understand the potential link.
1. In this book, old-age social pensions and social pensions are defined differently. Social pensions (discussed in part I) are defined using the ASPIRE database and include old-age social pensions, noncontributory disability benefits, noncontributory benefits to war victims or war veterans, and noncontributory survivorship benefits.
2. The 1938 Social Security Act lowered the age for the means-tested pension to 60 and introduced a universal (not means-tested) superannuation from age 65 years (https://en.wikipedia.org/wiki/Welfare_in_New_Zealand).
3. HelpAge’s Social Pensions Database (http://www.pension-watch.net/about-social-pensions/about-social-pensions/social-pensions-database). For 20 of these 101 countries, there is no information on when the social pension was established.
4. More specifically, they are conditional only on an age threshold.
5. Countries like South Africa include an income test and an asset test. Beneficiaries cannot have assets worth more than R1,056,000 (US$77,728) if single or R2,112,000 (US$155,456) if married.
6. Coverage in Africa ranges from universal programs in Southern Africa to no programs in many countries across the continent. Hence, a measure of “average” coverage could be misleading.
7. Coverage rates above 100 percent are possible. Beneficiaries under universal old-age social pensions might outnumber the potential population of recipients because of identification issues (such as weak death registration systems) or fraud.
8. Beneficiary incidence is the percentage of program beneficiaries belonging to each quintile of the welfare distribution.
9. More precisely, the benefit–cost ratio is estimated as the poverty gap before the transfer minus the poverty gap divided by the total amount spent in the program.
Acosta, P., P. Leite, and J. Rigolini. 2011. “Should Cash Transfers Be Confined to the Poor? Implications for Poverty and Inequality in Latin America.” Policy Research Working Paper 5875, World Bank, Washington, DC.
ASPIRE (Atlas of Social Protection: Indicators of Resilience and Equity). 2017. “Data Sources and Methodology.” Database, World Bank, Washington, DC. http://datatopics.worldbank.org/aspire/~/documentation/.
Böger, T., and L. Leisering. Forthcoming. “Social Citizenship for Older Persons? Measuring the Social Quality of Social Pensions in the Global South and Explaining Their Spread.” World Bank Social Protection Working Paper, World Bank, Washington, DC.
Guven, M., and P. Leite. 2016. Benefits and Costs of Social Pensions in Sub-Saharan Africa. Washington, DC: World Bank.
Palacios, R., and C. Knox-Vydmanov. 2014. “The Growing Role of Social Pensions: History, Taxonomy, and Key Performance Indicators.” Public Administration and Development 34 (4): 251–64.
Pallares-Miralles, M., C. Romero, and E. Whitehouse. 2012. “International Patterns of Pension Provision II: A Worldwide Overview of Facts and Figures.” Social Protection and Labor Discussion Paper 1211, World Bank, Washington, DC.
United Nations Population Research Council. 2017. World Population Prospects: The 2017 Revision. New York: United Nations. https://www.un.org/development/desa/publications/world-population-prospects-the-2017-revision.html.
Most pension systems are mandatory, earnings-related, contributory programs. The first and second pillars of the pension system are mandatory (based on the World Bank’s typology), either publicly or privately managed, and linked to workers’ length of service or previous contributions (Pallares-Miralles, Romero, and Whitehouse 2012). These schemes tend to cover public sector employees, the military, occupational schemes, and, in some cases, the private sector, as well as facilitating the participation of the self-employed. In the Middle East and North Africa region and in many countries in Asia, most mandatory schemes cover only public sector employees and occupational schemes. Coverage as a percentage of the labor force of the working-age population and coverage of those age 60 years and older or 65 years and older (relative to the size of the population group) have decreased over time.
Different reasons have prevented mandatory schemes from reaching full coverage. Even though these schemes (first and second pillars) have been in place in low- and middle-income countries for decades, the labor force share (mainly in the formal sector) eligible to participate in them is low and has remained almost constant over time. The Latin America and the Caribbean region, for example, has high levels of informality as pensions systems are largely designed for salaried workers (Bosch, Melguizo, and Pagés 2013). In many Sub-Saharan African countries, pension schemes do not cover employees in the private sector and the combination of high contribution rates for social insurance, low wages, and high informality restrict coverage (Dorfman 2015). The rural poor are very unlikely to be able to participate in earnings-related pension schemes, Guven and Leite (2016) find. In addition, many civil servants and occupational schemes tend to be unfunded while providing high benefit levels. This limits the financial capacity of governments to introduce and implement other programs targeted at elderly people and the poor.
To this end, old-age social pensions are fast becoming a tool to meet the urgent needs of expanding coverage and alleviating poverty (Palacios and Knox-Vydmanov 2014). In Africa, full coverage of elderly people is (nearly) attained only in countries that have old-age social pensions (see figure H2.1). These high coverage rates are simply not possible through social insurance or mandatory pension schemes.
The short- and long-term fiscal implications of old-age social pensions need to be considered carefully. Guven and Leite (2016) find that certain Sub-Saharan African countries expend most of the social protection budget on old-age programs; 29–61 percent of total social assistance spending goes to old-age social pension programs. Bosch, Melguizo, and Pagés (2013) describe how, in Latin America, universal old-age social pensions provide coverage for elderly people but require considerable resources; in some cases, governments transfer resources from infrastructure, health, and/or education budgets to meet pension obligations.
Analyzing the long-term costs of old-age programs, given either slow or fast demographic changes, is imperative. In several regions, the population age 65 years and older as a percentage of the total population will double by 2050, jeopardizing the fiscal sustainability of old-age social pensions. Understanding the relationship between demographic trends, macroeconomic and labor market conditions, and key program parameters is necessary to maintain the fiscal sustainability of programs not only now but also in the medium and long terms.
Introducing old-age social pensions should take into consideration factors beyond closing the coverage gap. Key elements of program design and impact should be carefully analyzed before implementing such programs. This analysis should also take into consideration the overall social assistance programs in place in a country to avoid an overlap of benefits and to ensure an efficient use of limited resources.
From a design perspective, universal and means-tested programs have clear trade-offs in efficiency, cost, and effectiveness of implementation. In addition, parameters such as age of eligibility, benefit levels, and benefit indexations can all affect people’s behavior during their working life, creating incentives or disincentives to participate or not in the pension system and/or in the labor force. Although a universal program might be perceived as easier to implement (that is, it leverages existing administrative capacities and reduces potential errors of inclusion and/or exclusion), it can be more expensive. Dorfman (2015) shows that despite the challenges of implementing an old-age social pension system targeted exclusively at the elderly poor, the policy has been found to reduce national poverty at almost twice the rate of a universal approach. In addition, targeting those age 65 years and older, rather than 60 years and older, has a significantly greater impact.
Setting the eligibility age, the benefit level, and the benefit indexation are key elements in the design and performance of an old-age social pension program. For example, if the benefit level is high and the eligibility age is close to or the same as the main social insurance, an old-age social pension might discourage labor force participation. Bosch, Melguizo, and Pagés (2013) find that certain parameters of old-age social pensions in Latin America and the Caribbean, particularly when they exist in parallel with contributory pension systems, can affect labor market dynamics and generate incentives for informal employment.
An analysis at the microeconomic level, such as household characteristics, is also necessary to inform the instrument design. The poverty gap of elderly people living alone can be misconstrued. Guven and Leite (2016) find that for a set of countries in Africa, the poverty headcount is significantly higher for households with children than for any other population group. Dorfman (2015) shows that many African countries have high co-residency levels and that elderly people rarely live alone. Thus, social assistance programs targeted at poor households can benefit elderly people as much as other members, including children.
The context for old-age social pension design and implementation matters. Old-age social pensions are both a form of social assistance/safety net for alleviating poverty and a potential component of pension systems for addressing coverage gaps. Considering the totality of existing social assistance programs, the priorities and needs of the overall population, and budget constraints when analyzing their introduction, are essential to designing an effective old-age social pension system.
Bosch, M., Á. Melguizo, and C. Pagés. 2013. Better Pensions Better Jobs: Towards Universal Coverage in Latin America and the Caribbean. Washington, DC: Inter-American Development Bank.
Dorfman, M. 2015. “Pension Patterns in Sub-Saharan Africa.” World Bank Social Protection and Labor Discussion Paper 1503, World Bank, Washington, DC.
Guven, M., and P. Leite. 2016. Benefits and Costs of Social Pensions in Sub-Saharan Africa. Washington, DC: World Bank.
Palacios, R., and C. Knox-Vydmanov. 2014. “The Growing Role of Social Pensions: History, Taxonomy, and Key Performance Indicators.” Public Administration and Development 34 (4): 251–64.
Pallares-Miralles, M., C. Romero, and E. Whitehouse. 2012. “International Patterns of Pension Provision II: A Worldwide Overview of Facts and Figures.” Social Protection & Labor Discussion Paper 1211, World Bank, Washington, DC.
