universal pensions vs universal minimum pensions

Notes for a keynote address that I will deliver on November 27th to the Symposium “International Experiences on Universal Pensions” at the Polytechnic University of Hong Kong. The event is sponsored by Alliance for Universal Pensions (Hong Kong), an umbrella political action group.

Universal pensions and universal minimum pensions – the experience of Mexico City, Chile and Norway

by Larry Willmore, Research Scholar, International Institute for Applied Systems Analysis, Laxenburg, Austria

Universal pensions and universal minimum pensions are similar, with one important difference. A Universal Pension is a flat amount paid from general government revenue to all who qualify by residence or citizenship once they reach a designated age. Benefits are given regardless of a person’s employment history, income, assets, or retirement status. A Universal Minimum Pension is different only because it is tested against other pension income. It provides fewer benefits – or none at all – to those with sufficiently large employment-related pensions. This pension test is equivalent to a tax on pension income.

The three cases that I discuss illustrate distinct paths to – and from – universal systems. Mexico City is a wonderful example of successful and speedy implementation of a universal pension. Chile’s tortured history, with reforms in 1975, 1981 and 2008, has left the country with a unique hybrid of minimum pensions and social assistance pensions. Norway, which had a universal pension in the past, now provides only minimum pensions to the elderly who meet residence requirements and are not gainfully employed.

Mexico City’s modest, universal pension has functioned effectively and efficiently for ten years, without a hint of corruption.

In 1981, Chile introduced a major reform. Its most-publicised component was a switch of the contributory system from collective, pay-as-you-go pensions, to individual, pre-funded accounts.  Another, less-known component of the 1981 reform was the introduction of a minimum pension. It was twice as large as the assistance pension, with no limit on the number of beneficiaries, who were drawn almost exclusively from the wealthiest half of Chilean households.

There has been much disappointment in Chile with the 1981 reform. A 2008 change replaced the poorly-targeted assistance pension and the regressive minimum pension with a single “Solidarity Pension”, recovered from other pension income. The rate of recovery was initially set at 100%, but is now 50% and will fall to 37.5% next year (2012).

Chile’s “Solidarity Pension” is a minimum pension, but it is not universal because households in the upper 40% of the income distribution are not eligible for benefits. It remains to be seen whether targeting will be more accurate for this pension than it was for the assistance pension that it replaces. In time, the system might evolve into a true “minimum universal pension” or even into a universal pension.

Norway had a universal pension from 1959, but only for ten years. In 1969, the government re-introduced income-tests and became an all-too-common example of governments forcing citizens to save in order to replace a universal, flat pension with individual pensions. Norway now guarantees each qualified person a generous minimum pension that effectively amounts to 45% of the average net wage.  This is tested against other pension income and recovered at the rate of 80%.

Incentives matter. My three case studies illustrate how a government’s intervention in retirement incomes, particularly with regard to income tests, can change behaviour but often in unintended ways.  They also suggest that the more detailed the intervention, the greater is the likelihood of even greater future interventions.

Correction: With the 2011 reform, retirement from work is no longer required for receipt of a pension in Norway.

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