Paying into a pension is a concept we’re all pretty familiar with. Alongside tax it’s usually paid before you even see your wages.
But if you make your money by cleaning your neighbours’ houses in Nairobi or selling fruit at the side of the road in Chennai you may well not be registered. You won’t pay tax. And you almost certainly won’t have access to a contributory pension.
Who are informal workers?
Definitions vary, but the most simple answer is that they are workers without contracts. They can be non-salaried, self-employed, working temporarily, seasonally or even illegally. Cleaning houses and selling fruit are only two examples – the informal sector is huge.
In Africa 80% of non-agricultural workers work in the informal sector. Women are over-represented in the informal sector, for them this number can be as high as 95%.
While informal employment has helped millions of people support themselves and their families it is not all positive. Work is not always regular, job security is poor and low incomes are common.
All these factors mean that regular payments required by traditional contributory pension schemes are unsuitable for informal workers, leaving them vulnerable to poverty as their ability to work decreases with age.
Adapting contributory pensions
While formal pensions are unsuitable for the majority of workers globally there have been attempts to adapt the traditional pension scheme to be more appropriate for the informal sector.
The Mbao pension scheme in Kenya is one attempt. The scheme requires participants to save 20 Kenyan Shillings (around 14 pence) per day to qualify for a pension. By requiring a low contribution amount and allowing a flexible payment schedule this scheme is more accessible to informal workers.
Unfortunately, there are still challenges in reaching all those working informally and there’s been very little research into the impact of schemes like these. There is also the fact that low contribution levels result in a small pension.
The role of social pensions
The adaptation of formal pension schemes is a positive step but it cannot guarantee an income to all older people. Social pensions are essential to achieve this. Social pensions are an effective way of reducing poverty amongst older people and as they are non-contributory they are accessible to everyone.
However, many social pension schemes struggle to provide adequate coverage to older populations. Universal pensions are proven to provide high-coverage, reaching all sections of society and guaranteeing an income to older people.
And, as HelpAge’s studies into the feasibility of universal pensions in Belize, Tanzania and Sri Lanka have shown, they can be affordable and sustainable.