universal and other social pensions

Further to my Friday the 13th post – what is “universal pension”? – I have given further thought to the confusion surrounding universal and other social pensions, and drafted a taxonomy of social pensions that I hope might clarify things. To discuss pension issues, it is important that we speak a common language, or at least explain clearly what we mean by the terms we use. It is in this spirit that I offer this essay.

This is work in progress. Comments are very welcome.

Here is the introduction to (and summary of) the essay:

Non-contributory pensions, known popularly as “social pensions”, are a tool used by governments to ensure against – or at least alleviate – poverty of citizens and residents in old age. Social pensions differ from contributory pensions in that eligibility depends only on age, residence/citizenship and (possibly) need. The recipient of a social pension need not have worked for wages, and the amount of benefit does not vary with her earnings or contribution history. Benefits can vary for reasons unrelated to employment history: higher, for example, when a pensioner has dependents, lower when two pensioners are married and share accommodations, or much lower – often zero – due to government assessment of need.

This is my personal attempt to classify social pensions, with clear definitions. I intend to stick to these definitions in future writings. I can only impose rules on myself, but hope that others will find this taxonomy useful. Social pensions are equivalent to what the World Bank (2005) has come to refer to as a ‘zero pillar’. This differs from the World Bank’s broader (1994) pillar 1, which included all basic pensions, contributory as well as non-contributory.

I divide social pensions into four broad groups: Universal Pensions, Universal Minimum Pensions, Recoverable Social Pensions and Social Assistance Pensions. Universal Pensions are distributed to all residents (or citizens) who meet age and residency requirements, regardless of their income or wealth. Eligibility for other types of social pensions requires proof of need, in addition to proof of age and residence. A Universal Minimum Pension is perhaps the lightest test of need, promising full benefits for those with no other relevant pension income, and partial benefits for those with pension income that is less than the social pension. A Recoverable Social Pension is universal, in the sense that everyone who satisfies age and residence requirements is eligible to receive it, but it is income-tested through the tax system. Beneficiaries must include the social pension in their annual income tax returns, and are liable for a surcharge – higher than the normal rate for their tax bracket – up to the point where the full amount of the pension is recovered by tax authorities. Finally, Social Assistance Pensions require applicants to pass a means test, proving that they are poor enough to merit a non-contributory pension. It is useful, I believe, to divide this large group into two subgroups: those for which the test applies to the income (and/or wealth) of the individual or married couple (individual test) and those for which it applies to the income (and/or wealth) of the entire family or household (family test).

Continued here.

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