Income Security in Old Age

Even in the industrialised countries, despite the extraordinary successes achieved by social security pension systems, old age still spells insecurity for certain groups in the population,” according to the ILO’s World Labour Report, 2000. The report says that women are particularly affected by the absence of old-age provision, since their pension entitlements tend to be much lower than those of men and their life expectancy is longer.

The problem of poverty in old age is particularly acute in the developing countries of sub-Saharan Africa and in some other parts of the developing world, where coverage by social security pension systems is lower than 10% of the labour force.

Workers in the informal sector are also at risk of poverty or dependance upon general social assistance in old age due to the low wages and nearly total absence of any form of old age provision in informal sector jobs.

“Pension systems,” the ILO report says, “still have much unfinished business: at the same time they need to adapt to increasing life expectancy and to changes in labour markets and in gender roles.”

By far the most pressing need is “to provide greater income security for the elderly in most developing countries.” The report explores two options: non-contributory pensions, which are government-funded, universal schemes paying benefits to all residents of a certain age, and contributory pensions, which are based on earnings from participation in the labour force.

Non-contributory pensions face many obstacles in developing countries where budgetary resources are scarce and tax systems chronically weak. However the ILO insists that “such schemes need not prove excessively expensive as long as the pension age is set sufficiently high.” Almost invariably, benefits provided by such schemes are very low and while they in no way replace earnings from work, “they can still mean a lot to those who receive them.”

In South Africa, the pension takes the form of a means-tested benefit granted to women from age 60 and men from age 65 with the amount varying according to the individual’s income. The maximum amount payable is the SA rand equivalent of just under US$ 100 (about 10% of average earnings in manufacturing). Though it was initially designed to benefit a small section of society, mostly poor whites, the pension benefit has ceased to be linked to race and is delivered widely using the latest cash dispenser and security technology, even in rural areas.

While universal pension schemes, which are payable to all residents of pensionable age, cost governments more, they do have a number of advantages, including administrative feasibility, political support from all sections of the community and high levels of public confidence.

Contributory pension schemes do not normally cover people not earning income from work and even many who are in work prove reluctant to pay social security contributions. The ILO says that “the governance of social security schemes in many developing countries has been so weak that satisfactory compliance rates have often not been achieved, even among the limited groups of workers who should legally be covered by the scheme.”

Mandatory retirement savings schemes have lately attracted a good deal of attention, but like other contributory schemes they suffer from the problem of limited coverage. More important, their benefits are unpredictable, they provide lower pensions to women because of their greater life expectancy, and their administrative costs are extremely high. The report shows that workers in one Latin American country with such a system are on average having to pay 36 cents in administrative charges for every $ saved and that for the lower paid the burden is even higher.  In spite of these problems, mandatory savings schemes have been introduced by various countries in Latin America and in Central and Eastern Europe, with the encouragement of international financial institutions.

Industrialised countries are increasingly making use of a “public-private” mix in providing for old age, although in most countries “private occupational pensions play little part in providing retirement income.” They do have an important role in about a dozen high-income countries, in particular Japan, the Netherlands, the United Kingdom and the United States. But even in these countries private pensions are less important than social security benefits for most retirees. Some countries, such as Switzerland, have made these schemes a mandatory supplement to the social security scheme for all employees.

In most countries, pensions constitute the largest element of social protection expenditure, usually exceeding the amount spent on health care. Nevertheless, the percentage of GDP devoted to pensions varies enormously between countries. In nearly all countries, pension systems are maturing as the number of people drawing benefits rises and entitlements increase. Populations are also ageing as a result of falling birth rates and, to a lesser extent, greater life expectancy.

In order to balance the commitments of pension systems with the resources that will be available to them, a number of options for reform are under review. These include: increasing contribution rates; cutting benefit rates; modifying the conditions for receiving benefit, for example, by raising pensionable age or the required number of years of contribution or by applying a means test.

Of particular interest in reform projects, says the ILO, is the relation between pensions and gender. Many women reach retirement age with low or even zero pension entitlements because of their unpaid work as carers or related factors such as the marginal, temporary or informal nature of much female employment.

While social protection systems still tend to treat unpaid carers as dependants of the breadwinner, the ILO report cites various measures taken to enhance the social protection of people engaged in unpaid work, who are overwhelmingly female. Retirement accounts in some European countries, including Germany, Norway and Sweden, are credited with contributions for periods of care activity. In Ireland and the UK a procedure called home responsibilities protection compensates for years of low earnings in the computation of pension benefits. Gender discrimination in the form of survivor’s benefits has also been abolished in the social security systems of many countries, including the US and most EU Member States.

The ILO analysis concludes that while income security in old age often poses a much greater problem for women than for men, “equal treatment of men and women is gradually being introduced into social protection laws.” But there is still a long way to go and equality has sometimes made things worse for women.

In response to the maturing of pension schemes, the ILO cautions against “radical reforms which replace social insurance by privately managed mandatory retirement savings systems” insisting that “such systems may prove to be more useful as a complement to than a substitute for social insurance.”

“Governments must recognize that they also have a responsibility to provide a social minimum for elderly people with no other income and that they should provide a framework which enables people to make their own supplementary provision for old age,” says the ILO report.

The ILO analysis concludes that “contributory social security schemes remain the instrument best suited as the main source of retirement income for workers in the vast majority of countries.” The main priorities it says, need to be on increasing pension insurance coverage and improving governance.