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Non-contributory pensions – costly luxury or weapon against poverty?

Although the incidence of old age poverty in developing countries is high and set to increase further there is considerable resistance to establishing non-contributory pension programmes. It is often argued that they are unaffordable, that households can provide adequate support to older people and that there are many more pressing development challenges. However, evidence emerging from the handful of developing countries with substantial pensions schemes suggests these arguments are misplaced.

A report from the Institute for Development Policy and Management analyses the poverty reduction and poverty prevention functions of the two largest non-contributory pension programmes in developing countries – those in Brazil and South Africa.

Debate on pension policy has focused on contributory pension programmes yet in developing countries these only cover a few older people as they are restricted to workers in public and formal employment and generally exclude those in rural areas. Informal old age support is coming under increasing pressure from adverse economic conditions, migration, HIV/AIDS and changes in household composition. In the absence of policy interventions, older people and their households will continue to expand the ranks of the poor.

In Brazil and South Africa, non-contributory pension programmes reach a large number of poor older people (5.3 million in Brazil and 1.9 million in South Africa) at low cost (one per cent of GDP in Brazil and 1.4 per cent in South Africa). The programmes are available to both rural and urban populations, are reasonably well-administered and attract support from a range of political parties. They are well regarded by the public as they link redistribution to the poor with intergenerational redistribution.

When researchers interviewed families receiving a pension into their household they discovered that:

pension benefits are shared within households – it is more appropriate to regard non-contributory pension benefits as household cash transfers tagged on older people
among poorer households pension income makes up the larger part of household income
in the absence of non-contributory pension programmes, the poverty headcount and the poverty gap would be appreciably higher for households with older people
pension schemes significantly reduce the probability that individuals in households with a pension recipient will be in poverty
households with a non-contributory pension recipient show greater financial resilience
pension recipients, particularly in urban areas, are less excluded and deprived.

The policy environment is shifting:

Renewed attention is being given to non-contributory pensions – the ignored part of the World Bank’s 1994 call for a three-tiered approach to pension provision.
An emerging consensus around social protection has focused attention on the need to evaluate the potential advantages of non-contributory pension programmes – outreach to vulnerable groups, low administration costs and a lifeline for households affected by extreme poverty and vulnerability.
The rights-based approach to development – which views ‘development’ as a way of enabling people to claim their internationally recognised human rights - applied in the context of older people, is winning adherents.

Extending non-contributory pension programmes to other developing countries could have a significant impact on reducing poverty and vulnerability among households with older people. In low income countries, with a limited tax base and a lack of an effective administrative structure, their introduction would require international support.

In an ageing world it is unlikely that the Millennium Development Goals can be successfully achieved without establishing and extending non-contributory pension programmes.

Source(s):
‘What is the impact of non-contributory pensions on poverty? Estimates from Brazil and South Africa’ by Armando Barrientos, CPRC Working Paper No 33, Chronic Poverty Research Centre, University of Manchester, August 2003 Full document.
‘Non-contributory pensions and poverty prevention: a comparative study of South Africa and Brazil’ by Armando Barrientos, Monica Ferreira, Mark Gorman, Amanda Heslop, Helena Legido-Quigley, Peter Lloyd-Sherlock, Valerie Møller, João Saboia and Maria Lucia Teixeira Werneck, HelpAge International, August 2003 Full document.

Funded by: DFID R7897

id21 Research Highlight: 5 March 2004

Further Information:
Armando Barrientos
Chronic Poverty Research Centre
Institute for Development Policy and Management
University of Manchester
Harold Hankins Building,
Oxford Road
Manchester M13 9QH
UK

Tel: 44 (0) 161-275 2811 (ext.52811)
Fax: 44 (0) 161-273-8829
Contact the contributor: armando.barrientos@man.ac.uk

Chronic Poverty Research Centre, IDPM, UK

HelpAge International
PO Box 32832
London N1 9ZN
UK

Tel: 44 20 7278 7778
Fax: 44 20 7713 7993
Contact the contributor: hai@helpage.org

Helpage International

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