Universal minimum old age pensions impact on poverty and fiscal cost in 18 Latin American countries

In Latin America, five countries - Argentina, Brazil, Chile, Costa Rica and Uruguay - have non-contributory pensions.  But pension coverage rates remain below 30% in half of Latin American countries.

This paper examines the impact on old age poverty and the fiscal cost of universal minimum old age pensions in 18 Latin American countries using recent household survey data. First the authors measure old age poverty rates for these countries. Then they discuss the design of minimum pensions schemes—means-tested or not—as well as the disincentives they introduce for the economic and social
behaviour of households including labor supply, saving and family solidarity.  Finally, the authors use household survey data to simulate the fiscal cost and the impact on poverty rates of alternative minimum pension schemes in the 18 countries.

Main conclusions:

• a universal minimum pension would substantially reduce poverty among the elderly (except in Argentina, Brazil, Chile and Uruguay where minimum pension systems already exist and poverty rates are low). Such schemes have much to be commended in terms of incentives, spillover effects and administrative simplicity, but they have a high fiscal cost. The latter is a function of the age at which benefits are awarded, the prevailing longevity, the generosity of benefits, the efficacy of means testing, and the fiscal capacity of the country

• poverty rates are consistently lower for the elderly than for the whole population in Argentina, Uruguay, Brazil and Chile
• in the other countries, the situation is heterogeneous and depends on the poverty line chosen. Using half the median income, Bolivia, Colombia, Costa Rica, Hondurasand Mexico have comparable overall levels of poverty in old age andthe elderly are poorer than the rest of the population
• the difference between old age and overall poverty rates is not very high for all countries with limited pension systems

• the affordability of minimum pension schemes depends on the poverty threshold that is chosen ($2.5 a day or half the median income) and on the country’s average income level. Countries with national income above the Latin American average could and should opt for a minimum pension equal to half the median income. For other countries, a $2.5 a day pension appears reasonable. In the poorest countries - Bolivia, Honduras, Nicaragua and Paraguay - a $2.5 minimum pension will have noticeable effects and a cost ranging from 1.1% to 0.3%, which seems affordable

• elderly people particularly in developing countries do not have much political weight. It is important to give the minimum pension scheme a constitutional status within a framework that takes into account socioeconomic parameters that change over time. For example, the age at which the pension is made available could vary with longevity, which generally improves over time as mortality rates decline in developing economies. Benefits should not be absolute but be linked to national income growth