International Labour Office Zambia: A preliminary analysis of the scale and scope of a Universal Social Pension in Zambia (2008) Anthony Dumingu, MLSS Lusaka, 1 st June, 2017 1
Importance of Social Cash Transfer • No developing country has been able to provide older people with minimum income through contributory pensions. • Mandatory contributory pensions are only appropriate where there is large formal sector. • In developing countries are struggling to collect contributions from informal sector workers. • Many people too poor to contribute; have to use income for present needs rather than future needs. • Many people – especially women – are not in jobs and cannot contribute 2
World Bank model of pension system Voluntary Pensions Income from Pensions Income from Mandatory Contributory Pensions Pensions Safety Net Pension Poor Rich 0 100
Aim of the Global Campaign for Social Protection The aim of this project is to identify the amount of fiscal space needed to implement a minimum social protection package in Zambia. 4
Key Findings of the SPER in Zambia • Demographics: – Zambia is expected to see an increase in the population of 60+, and; – The general population is expected to rise rapidly over the next 15 years. • Poverty incidence: – There are high levels of poverty in Zambia; – Extreme poverty is significantly higher: • In rural areas, and; • For children and older people, aged 60 years and above. • A minimum package of benefits is affordable. 5
60+ Demographics in Zambia 6
Summarising the Demographic situation • The 60+ population represents less than 5% of the total population in Zambia; • The Zambian 60+ population is projected to increase by more than 25 % over the period 2005-2021: – The population may grow even faster after 2030; • The 60+ female population is set to grow slightly faster than the 60+ male population. 7
Zambian Labour Market • The Zambian labour market is highly informal : – Almost 86 per cent of people are in totally informal employment; • Labour force participation rates are high in Zambia; • Employment rates are very high for older people (60+) particularly in rural areas: – Low incomes for the 60+ group mean retirement is not an option. 8
Labour Market - How does this break down? Totally High Medium Low Totally Total informal informality informality informality formal Share of group in total Male 83% 6% 3% 4% 4% 100% Female 93% 3% 1% 2% 2% 100% Total 88% 4% 2% 3% 3% 100% Gender composition Male 49% 67% 73% 76% 73% 52% Female 51% 33% 27% 24% 27% 48% Total 100% 100% 100% 100% 100% 100% Source: Zambia – SPER 9
Poverty - Key Indicators • 50 % (2008) of all people in Zambia are thought to live in extreme poverty: – Incidence of extreme poverty was more than double in rural areas than urban areas. • Poverty levels were higher for the 60+ age group than for those under 60 years old; • Poverty rates for children are even higher. 10
Policy option – a Universal Social Pension • One of the options presented in the Zambian SPER and SB was a Universal Social Pension for the 60+ population: – This was identified as an affordable policy option as part of a minimum set of social protection benefits; – A child benefit and targeted social assistance were also found to be affordable for Zambia to implement. • The Zambian Ministry of Labour and Social Security have developed a concept note which looks at: – A 60,000 Kwacha a month Universal Social Pension for the 60+ population, and; – The cost of delivering the pension. 11
Preliminary Analysis of a Universal Social Pension • Additional preliminary analysis of the Universal Social Pension has been undertaken by the ILO in Geneva; • This preliminary analysis has four functions: – To begin the process of quality assuring the evidence provided in the SPER/SB and the Concept Note; – To look at the extent of coverage of the Universal Social Pension: • How many people will benefit? – To look at the adequacy of a Universal Social Pension: • How much can feasibly be paid to the beneficiaries? – To assess what impact the pension has on the poverty rate? 12
Preliminary Analysis - Methodology • Use demographic, GDP, and Consumer Price Index (CPI) assumptions from the Zambian Social Budget model; • Analyse cost of pension for three age groups (the extent of the reform): – 60+ years; – 65+ years; – 70+ years. • Assume that everyone receives the pension from 2009; • Analyse five different pension levels (the adequacy of the reform): – i) 60 ii) 70 iii) 80 iv) 90 and v) 100 Kwacha per month per beneficiary. 13
Relative costs of Universal Social Pension by age Relative Cost Comparison - 60,000 Kwacha Pension CPI Indexed - 60+, 65+, 70+ - Total Cost and % of GDP 800,000,000,000 0.60% 700,000,000,000 0.50% 600,000,000,000 0.40% 500,000,000,000 % of GDP Kwacha 400,000,000,000 0.30% 300,000,000,000 0.20% 200,000,000,000 0.10% 100,000,000,000 0 0.00% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year 60+ 65+ 70+ % of GDP - 60+ % of GDP - 65+ % of GDP - 70+ 14
Summary of pension options by age • The cost of providing the 60,000 Kwacha pension for everyone 60+ is projected to be less than 0.5% of Zambian GDP for a CPI indexed pension: – NB we will come back to indexing later. • As there are fewer beneficiaries, providing a 60,000 Kwacha per month pension to those 65+ is less expensive than a pension for everyone aged 60+; • A 60,000 Kwacha per month pension only for those aged 70+ reduces the cost even further; • But, a 65+ and 70+ pension would only cover 2% and 1% of the total Zambian population respectively: – The extent of the poverty alleviation would be very limited. 15
Should the Universal Social Pension be indexed? • The issue of whether the Universal Social Pension is indexed, and how it is indexed, is very important; – The indexation method impacts on cost , and; – Is of considerable importance to the long-term impact of the pension. • Three indexation methods have been examined: – No indexation; – Indexing the pension by CPI; – Indexing the pension by GDP per Capita. 16
Indexing the Universal Social Pension – Baseline option Comparison of costs - 60,000 Kwacha Pension, All 60+ - Different Indexing Options 900,000,000,000 0.60% 800,000,000,000 0.50% 700,000,000,000 600,000,000,000 0.40% % Cost of GDP 500,000,000,000 Kwacha 0.30% 400,000,000,000 300,000,000,000 0.20% 200,000,000,000 0.10% 100,000,000,000 0 0.00% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year No Indexing CPI Indexing 2008 GDP Per Capita Indexing % Cost of GDP - No Indexing % Cost of GDP - CPI Indexing % Cost of GDP - 2008 GDP Per Capita Indexing 17
Summarising indexing methods (1) • No indexation means that the 60,000 Kwacha baseline would remain constant at 60,000 Kwacha over time; • Based upon the assumptions made in the Zambian Social Budget, GDP is expected to grow faster than prices (CPI); • So indexing the pension by GDP per capita is projected to be more expensive than indexing by CPI; • Key decisions need to be made about indexing: – Should the pension be linked to prices? – Be kept relative to a proportion of average income? – No indexation? 18
RISK – the long-term impact of no indexation 19
Summarising indexing methods (2) • Using the inflation assumptions, no indexation would result in the Universal Social Pension being worth only 58% of its 2009 value in 2021; • This means the purchasing power of this pension would have fallen significantly over time, reducing the pension’s adequacy of impact over the long-term; • Indexation by either CPI, or GDP per capita maintain the value of the pension to some degree. 20
More analysis of the adequacy of the pension • It is difficult to predict exactly what 60,000 Kwacha is worth in today’s purchasing terms: – This is of specific importance as the pension will not be rolled-out for a period of time. • So it is worth looking at the nominal cost, and cost in terms of proportion of GDP, of higher pension levels; • Hence, in addition to a 60,000 Kwacha pension, pensions up to 100,000 Kwacha per month have been analysed, split by indexation method. 21
Summarising higher benefit levels • The analysis shows that even a 100,000 Kwacha pension benefit per month is likely to cost less than 1% of GDP. 22
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