Social pensions refer to the monetary transfers from the public sector to a subset of society (generally the elderly) to ensure that the targeted group has some income support through the rest of their lives.
Prof Mukul Asher’s chapter in the new book, Social Protection for Older Persons: Social Pensions in Asia, published by the Asian Development Bank, argues that lowering the costs of delivering pensions would enhance distributions, Kwan Chang Yee reports.
Social pensions refer to the monetary transfers from the public sector to a subset of society (generally the elderly) to ensure that the targeted group has some income support through the rest of their lives. The evidence suggests that what is currently provided is insufficient, and an expansion of the scheme may be necessary to meet basic needs.
As financing of social pensions entail no contributions from the beneficiaries, they are typically undertaken fully as part of fiscal expenditure. Therefore, how this is financed is pertinent to the health of a government’s budget. This is what the chapter, ‘Social Pensions for the Elderly in Asia: Fiscal Costs and Financing Methods’, by Professor Mukul Asher in Social Protection for Older Persons: Social Pensions in Asia (2012) focuses on.
Early in the chapter, Professor Asher surveys and concludes that Asian countries have, in general, individually instituted variants of the scheme. However, the total costs of social pensions in general are low. Figure 1 is adapted from the chapter and illustrates this point.
It is evident that total fiscal costs are currently manageable. This is true even for Nepal, which is the only country to provide a pension level at greater than 10 percent of the average per capita income, and has the highest take-up rate of 80 percent. Total costs as a percentage of GDP (the solid line) is a mere 0.23 percent. Thus, pensions remain affordable at current cost and benefit levels.
However, changing population demographics over the next few decades are likely to increase future fiscal burden. Also, if Asian countries follow closely to the aim of poverty reduction, pensions per person will need to be higher than the present provision. Assuming an increase to 25 percent of the average per capita income, projected costs may rise several times, to above the 2 percent of GDP mark (the dashed line).
Therefore, governments will require an enhanced fiscal space in the range of 1 percent to 2.5 percent of GDP to meet the larger pension expenditure. And this is not yet including other more ‘conventional’ fiscal needs such as for health, education and infrastructure.
Meeting fiscal requirements
There are two broad avenues by which the requirements for a larger fiscal space could be met. One is to adjust benefit levels and the eligibility requirements. The other is to consider alternative sources of financing, away from the traditional reliance on taxes. But these are by no means the only ways the government budget can be ‘stretched’.
More subtly, Professor Asher points to the potential of savings possible from improving management and administrative practices. Firstly, if governments are going to migrate towards full implementation of a social pension, they need to take stock if existing agencies can be adapted for the system. Typically, establishing the administrative structure incurs a minimum level of fixed costs, with the variable component rising with the administrative size.
The literature estimates such costs as 5 percent of benefits paid out by each implemented programme. Thus, if this set of costs can be reduced, it undoubtedly enhances the expenditure capability of the government budget. This falls under the purview of compliance and public financial management.
Public sector departments that are judged by the quality and quantity of output instead of levels of expenditure are more likely able to get better results for less. In the present context, this would include having higher compliance for less, which is ultimately beneficial towards implementing a comprehensive social pension system.
A well-functioning public sector is synonymous with good financial management capabilities. Public sector departments that are judged by the quality and quantity of output instead of levels of expenditure are more likely able to get better results for less. In the present context, this would include having higher compliance for less, which is ultimately beneficial towards implementing a comprehensive social pension system.
In concluding the chapter, Professor Asher makes the following observations. First, social pension systems are a necessary, though insufficient, component of an integrated social protection system given both high informal sector employment and increasing life expectancy. Second, fiscal costs are likely to rise as demographics change,and there is a need to explore methods by which to finance this increase, with institutional design and delivery systems key to ensuring the sustainability of social pensions.
The subtler message to policymakers is enhancing the reach of the fiscal budget lies in improved administration and public financial management. For some reason, this appears to be a far less heralded feature of pension systems, and very often overlooked.
The book Social Protection for Older Persons: Social Pensions in Asia was published in July 2012 by the Asian Development Bank. It is available for sale, and the e-book for free download, at the Bank’s website http://www.adb.org/ publications/social-protectionolder- persons-social-pensionsasia.
Mukul Asher is a Professor at the LKY School. He is also on the Editorial Board of International Social Security Review, a leading journal in the field. His email is decb64_c3BwYXNoZXJAbnVzLmVkdS5zZw==_decb64