Coverage Under Old Age Security Programs and Protection for the Uninsured - What are the Issues?
Revised version of "Old Age Protection for the Uninsured: What Are the Issues?" in SHIELDING THE POOR: SOCIAL PROTECTION IN THE DEVELOPING WORLD, Nora Lustig, ed., Inter-American Development Bank and Brooking Institution Press, 2000
Posted: 24 Jan 2002
The majority of old people in developing countries are uninsured by formal social security programs. This paper argues that economic growth is the key to increased coverage. Contributory old age insurance programs (or formal programs more generally) may not be desirable or feasible for large portions of the population in underdeveloped economies. The trade-offs between higher take-home pay and old age benefits, between maximizing coverage and minimizing evasion, and between increased coverage and greater competitiveness, need to be carefully evaluated before opting for expanded coverage, especially among low income groups. However, policies also matter. Keeping the contribution rate low, the rate of return high and enhancing the credibility of the system may encourage participation marginally while avoiding these costly trade-offs.
In recent years we observe a tighter link between benefits and contributions in contributory systems - most obviously in the shift toward multi-pillar systems with a large defined contribution component, usually accompanied by a modest redistributive public pillar. This augments the fiscal sustainability of social security systems and therefore may be considered a pre-condition for financially sound coverage expansion. At the same time, it runs the risk of increasing the number of old people, who have only contributed small amounts and therefore remain uninsured or underinsured by formal programs. These people will continue to rely primarily on informal insurance mechanisms, such as the family and community.
The uninsured fall into two groups: workers who have spent much of their lives in the informal sector (often self-employed or in small firms) in labor market jobs that are not covered by contributory programs; and women, who have worked in the household rather than the labor market, expecting to be supported by the family system, which may fail them in old age. The second group (dependent spouses) can be partially protected by requiring the purchase of survivors' insurance and joint annuities by workers in the contributory scheme - thereby institutionalizing the informal family system into the formal social security system. For the first group (informal sector workers), social assistance programs targeted toward the lowest earners outside of the formal system seems to be essential - creating the need to design such programs efficiently and take their costs into account in planning the reform. The challenge is how to maximize the proportion of money that reaches the targeted groups while minimizing leakages, disincentives and moral hazard problems.
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