The question of how social transfers should be indexed over time is a hot topic for social protection practitioners. A recent case from Bolivia reveals some of the issues at stake.
Last week, on 1st May, Bolivia’s president Evo Morales marked Labour Day by announcing that the country’s universal non-contributory pension would be increased by 50 bolivanos per month. Since 2008, all Bolivians over the age of 60 have been eligible for the Renta Dignidad (or “Dignity Pension”) which pays 200 bolivianos (US$30) per month to people with no other pension, and a reduced level of 150 bolivianos for those with other pension income. The pension evolved from an earlier scheme called the Bonosol, introduced in 1997, which had a higher age of eligibility (65) and was paid on an annual basis. These schemes have had significant impacts on the lives of older people and their families, particularly in terms of supporting rural livelihoods and reducing extreme poverty.
What does the increase mean?
On the face of it, the additional 50 bolivianos per month looks generous: an increase of 25 per cent. But deeper analysis suggests that the story is not so simple. Figure 1 shows how the benefit level has changed since social pension payments first began in 1997, with comparison to alternative scenarios. The blue line shows the actual monthly benefit for individuals who receive no other pension income. From the initial transfer of just over 100 bolivianos (and following a decrease in the late 90s) ad hoc changes have seen the benefit gradually rise to the 250 bolivianos announced last week. The pink line presents a scenario where the initial benefit in 1997 is indexed to changes in consumer prices, showing what payments would have looked like over the past 15 years if this approach had been taken. The orange line also takes the same starting point but indexes the benefit to average income (GDP per capita).
The picture is relatively clear. The similar paths of the blue and pink lines show that, since 1997, ad hoc increases every few years mean that the actual benefit level has more or less kept track with rising prices. The fact that the benefit has retained its real value means it could theoretically buy the same basket of goods as it did in 1997. However, the divergence between the paths of the orange and blue lines shows that the benefit has not kept pace with average incomes. From a high in 2002 (when the increase in the benefit to 150 bolivianos outstripped growth in average income), the newly proposed benefit is just two thirds of what it could have been had it been indexed to average income.
Bolivia can be commended for sustaining the real value of the benefit over the last decade or so, something that many other countries have not been able to do. Yet it has not been able to maintain the value relative to average incomes, particularly in recent years when growth has been strong. The new announcement of a 50 bolivianos increase in the Renta Dignidad is effectively catching up with inflation in previous years. In a country with one of the highest levels of inequality in the world, this can be seen as a lost opportunity to use the universal pension as a mechanism to redistribute gains from economic growth. This is also a distinct approach from other countries such as Brazil where social pensions are indexed to wages and have been an avenue for substantial reductions in income inequality.
Could Bolivia do better?
While a higher level of benefit would be preferable, the obvious retort is that there are major constraints in terms of affordability. This is particularly concerning for Bolivia as the Renta Dignidad is principally funded by a tax on natural gas, where price fluctuations in the international market can create significant uncertainty. But is rising cost a real concern? Figure 2 shows that from 2009 to 2011 the cost of the programme actually fell, from 1.4 to 1.1 per cent of GDP, and this is despite increasing numbers of beneficiaries over the same period. This saving of nearly 25 per cent was driven by the decrease in the real value of the benefit described above. In fact, our own estimates suggest that, even with the new benefit level, economic growth in the last two years means the newly increased benefit will still cost around 1.1 per cent of GDP in 2013. This suggests that there would be significant space to increase benefits further and still remain within the budget that was available to the scheme in 2009.
Recommendations
So what can policy makers and civil society take from this? The key conclusion is that the new benefit level is not a particularly generous gesture to Bolivian citizens. Instead, it represents a rather a modest effort to keep benefits in line with price inflation, while still saving money compared to 2009 spending. Two potential recommendations from this could be:
1. If Bolivia is able to save money while retaining real value of benefits, why doesn’t it put in place automatic indexing to prices on a regular basis? This would create far greater predictability for recipients of the pension. It would also create greater transparency about when an increase is a real generous gesture or, as with the current proposal, just keeping up with inflation.
2. Could Bolivia not invest more in the Renta Dignidad? By tagging spending on the pension to 2009 spending (as a per cent of GDP), the benefit would act as a way to redistribute the increased growth of the country, thus having an impact on reducing the high levels of inequality in Bolivia.
Sources
Vice-ministry of Pensions, Ministry of Economy and Finance (Bolivia), Monthly bulletins (January 2009, January 2010, January 2011)
Economic data from IMF, World Economic Outlook Database (April 2013),
Notes
Beneficiary numbers in Figure 2 are for the month of January. Total numbers are likely to be higher as not all beneficiaries receive the pension on a monthly basis. The general trend is nevertheless representative.
Cost is estimated using beneficiary numbers from January 2011.They do not include administrative costs.
For any more information on assumptions please contact info@pension-watch.net.
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— Pension Watch (@PensionWatch) May 13, 2013