Posts Tagged ‘targeting’

basic income works

Monday, May 15th, 2017

The current issue of Boston Review, a bimonthly American political and literary magazine, contains a forum on “Work Inequality Basic Income”. Here are excerpts from an online essay that contains links to numerous studies of basic income experiments. My only complaint is the neglect of the effect of income tests, which amount to a large taxes on earnings, with a predictably negative impact on employment.

In my opinion, the main problem with basic income is that most often it is not universal. Means tests (the lack of universality) stigmatizes beneficiaries, increases administration costs, and discourages recipients from working for pay. (more…)

toward universal pensions in the Philippines

Sunday, February 19th, 2017

There are signs of movement, but the pace is very slow.

[Philippine] President Rodrigo Duterte, last January, granted the P1,000 [US$100] pension hike for Social Security System (SSS) beneficiaries. The Department of Social Welfare and Development (DSWD) also has a larger budget for social pension for indigent seniors, effectively doubling the target coverage from 1.3 million elderly in 2016 to 2.8 million this year.

Despite these, a study by the Coalition of Services of the Elderly (COSE), in partnership with HelpAge International, showed that 38% of senior citizens will still not be provided with social pension. It also said 34% of SSS members receive less than P2,000 every month. ….

Using data from the Annual Poverty Indicators Survey (APIS) released in 2013, the study did a simulation that shows the poverty rate would be reduced [by 3 million] from 25.4% to 22.3% if a P2,000 universal social pension is provided. ….

The study said the government, realistically, could increase the amount of social pension to P1,500 monthly. This would cost P143.97 billion or 0.97% of the country’s gross domestic product (GDP) and 4.80% of its [total government] expenditures.

Patty Pasion, “Pension for all seniors to lift 3 million out of poverty – study“, Rappler, 19 February 2017.

The study’s recommendation is an improvement, but still leaves about 23 million persons – 22.9% of the population of older persons – in poverty. The Philippines’ latest poverty line for 2014 is a per capita income of 100,534 pesos a year, equivalent to 8,378 pesos a month. Providing all older people with a pension this size would eliminate elder poverty. Is it worth doing? Would it be money well spent? This is a political question that must be decided by the taxpayers of the country.

One way to reduce costs is to provide a universal pension half this size for the ‘younger old’, aged 60-64, who can continue to participate in the paid labour force. In addition, benefits should be taxed as regular income, so that older persons of any age who are continue to work contribute also to the budget of the country.

stumbling toward universal pensions in Hong Kong

Saturday, December 17th, 2016

Sad news from Hong Kong. What is the point of government consultation with voters, if government chooses to ignore dissenting views?

An official advisory commission on universal pensions, after three years of discussion and consultations, convened and released its Report on Thursday, 15 December. The Commission on Poverty of Hong Kong’s Legislative Council (LegCo) discussed the Report. LegCo is expected to retain a means-test for social pensions, even though the Report finds overwhelming public support for universal pensions. (more…)

chart of the month

Monday, October 31st, 2016

Here, from the OECD, are the five member countries with the lowest % of their population in poverty, and the five with the largest % living in poverty.

The statistics are after taxes and transfers, and refer to relative rather than absolute poverty. The marker is half of median income. Life on half of median income is, of course, more comfortable in a high-income country like Israel or the USA than in a low-income country like Turkey or Mexico.

Israel and the US have the highest poverty rates among OECD countries, according to this year’s Society at a Glance.

In both cases the problem appears to center around the lack of government intervention.

In the US “the system of social benefits is not very effective at fighting poverty amongst youth,” the report says. “Only 12 per cent of youth who would be poor before any transfers are lifted out of poverty by these transfers compared to 41 per cent across the OECD.” ….

Israel’s poverty problem also lies in the country’s system of allowances. ….

As Haaretz [newspaper] reported earlier this year, “since allowances are stingy in Israel, this creates a situation where the government’s influence when it comes to curtailing poverty is 30 per cent – as compared to 60 per cent in other developed countries. In other words, Israel’s assistance to its poor is half that of the OECD countries.”

Federica Cocco, “Israel and the US have the highest poverty rates in the developed world“, Financial Times, 19 October 2016 (metered paywall).

The Heritage proposal for US pension reform

Saturday, August 27th, 2016

US public pensions, known as “Social Security”, are based on contributions (payroll taxes) of 12.4%. The contribution base is capped, currently at $118,500 a year. This cap increases yearly with increases in average wages. Pension benefits are based on the beneficiary’s age at retirement and on his or her contribution history. Participants with fewer than 40 quarters (10 years) of contributions are not eligible for any pension, nor a refund of contributions, but US residents with a small (or no) Social Security pension can apply for means-tested Supplemental Security Income (SSI). As of 2015, SSI was a maximum of $783 monthly for an individual or $1100 monthly for a couple, less than the official poverty level. SSI is financed from general government revenue, not from Social Security contributions.

Non-contributory Social Security pensions are also paid as a supplement to spouses and widows (or widowers) of retirees who receive contributory pensions. These supplements are financed from Social Security contributions. The spousal supplement is equal to one-half the benefit of the contributor’s pension, or a top-up, when necessary, to bring the spouse’s pension to one-half that of the primary contributor. A widow (or widower) can claim the full pension of her (or his) deceased spouse, unless the survivor is already receiving a Social Security pension with equal or greater benefits.

The Heritage Foundation wants to reduce Social Security expenditure. This is the brief mission statement posted on its web page:

Social Security began running deficits in 2010 and without reforms, Social Security’s permanent and growing deficits will help fuel our spending and debt crisis. Reform should strengthen retirement security, target Social Security benefits to those who are most in need, and gradually increase the retirement age to reflect gains in life expectancy.

Details are provided in five pages of a 49-page agenda for fiscal reform. Here are relevant extracts from those pages.

Heritage proposes to … strengthen the Social Security system by tightening its benefits and returning it to its original purpose: a guarantee that older Americans won’t fall into poverty. ….

Social Security will gradually be transformed from an “income replacement” system … into a flat payment to those who work more than 35 years—a flat payment that is sufficient to keep them out of poverty throughout their retirement. ….

The flat benefit will be the equivalent of about $1,200 per month in 2010 dollars when the reform is complete. This is both higher than today’s average Social Security retirement benefit payment ($1,164 per month) and well above the 2009 poverty level for a single adult over age 65 ($857 per month). To ensure that future retirees do not slip back into poverty, the flat benefit level will be indexed for wage growth. ….

[T]he program will concentrate on protecting the economic security of retirees rather than following the current approach of promising unaffordable benefits to all without regard to need.

This new approach means that retirees with substantial non–Social Security retirement income will start receiving a lower benefit on a sliding scale that gradually reduces Social Security checks to zero for those with the highest non–Social Security incomes. This transparent mechanism will apply to benefits received by affluent Americans under both the current system and the flat-rate system. ….

The Heritage approach, when fully phased in, would income-adjust benefits transparently and not tax the benefits a senior receives. …. [O]nly about 9 percent of seniors would see their checks reduced and only just over 3.5 percent of seniors would receive no check.

The Heritage Foundation, “Social Security”, Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity (2011), pp. 11-15.

The Heritage Plan promises a large decrease in Social Security expenditure. With a flat pension larger than the average Social Security benefit, and means-tests that affect only a small percentage of retirees, how is this possible?

The only possible explanation is that the number of beneficiaries will be drastically reduced. This detail is not highlighted in the Heritage brochure. Note that 10 years of contributions are currently necessary to qualify for Social Security benefits. With the Heritage plan, this will increase to 35 years. In addition, the flat pension is for workers only. There is no spousal supplement.

Note also that the average pension of remaining beneficiaries is undoubtedly much larger than the cited average of $1,164 per month. In brief, the number of beneficiaries will fall, and the average pension of those remaining will also fall with the move to a flat pension, even before clawing back benefits from non–Social Security incomes.

To add insult to injury, the Heritage plan overstates fiscal savings. With fewer Social Security pensioners, more older persons will be eligible for SSI benefits. This additional expenditure on social assistance is ignored.

old-age pension coverage in Vietnam

Monday, August 1st, 2016

The pension system of Vietnam is very complex, covers few of the elderly and leaves many beneficiaries in poverty. This is not surprising, as complexity, poor coverage and low benefits typically go together.

A new report, prepared by a UK-based research centre for the UNDP, provides up-to-date information on social security in Vietnam, including cash payments to older persons.

Vietnam in theory has a universal minimum pension from age 80, but the take-up of the social pension is surprisingly low, and so is the benefit. Stigma is not mentioned as a reason for low take-up, but this is a possibility, as low benefits increase the likelihood of stigma, thus discouraging applications. Those aged 60 to 79 years can apply for a social assistance pension, but the means test is quite stringent, so few qualify for it. (And stigma may also discourage application, even by those who would pass the means test.)

A universal minimum Over-90’s pension was introduced in 2004. The age of eligibility was subsequently lowered to 80, but I do not know in what year this happened. More research is needed!

The history of social pensions in Vietnam is very incomplete. I have no idea of when means-tested benefits for the elderly were introduced, nor the initial age of eligibility (currently 60 years). Nor have I found any information on the take-up of social pensions over time.

Here are excerpts from the recently-released, 99-page report that I found useful. Click on the link below to access the full report.

The value of the over-80s allowance is one of the lowest social pensions in developing countries, at 6.7% of GDP per capita …. [snip] The Over-80s Allowance offers universal coverage through “pension-testing”: everyone without another form of pension is eligible to receive it (although a surprisingly high proportion of over-80s do not access the allowance). (p. 7)

[A] social pension for over-80s … was initially introduced for over-90s in 2004. It is offered to those with no other source of regular income – which, in practice, means a VSS [contributory] pension or Merit payment – and currently reaches around 1.4 million people. It is complemented by a small allowance for 207,000 people aged between 60 and 79 years, who live in poverty, with no family support. [snip]

A feature of Viet Nam’s categorical social assistance transfers is the freedom that Provincial governments have to vary key design issues. While the national government outlines the minimum standards parameters for each transfer, … Provincial governments have varied the base value of the transfer, the age of eligibility for the over-80s social pension – with Ho Chi Minh City, for example, reducing the age to 70 years and Ha Noi to 75 years – as well as the poverty line used in determining the Poor List. Some Provincial governments have also increased the value of the transfers. (p. 28)

The highest rates of poverty and vulnerability are among the over-80s, even though they are in receipt of a social pension …. (p. 41)

Viet Nam’s investment in its largest schemes – its social pensions (both the social allowances for over- 80s and those aged 60-79 years) – is … low in international comparisons, due to the low value of the transfers and the focus on supporting mainly the oldest old. …. While many developing countries invest more than 1% of GDP in social pensions, Viet Nam’s current investment is around 0.14% of GDP (p. 54)

[G]iven that coverage among over-80s should be universal, it is noteworthy that around 40% of the target group are excluded from any form of pension. (p. 56) [snip] The reasons are unclear, but it is probably due to poor communications about the scheme and deficiencies in the registration process. (p. 62) [Emphasis added.]

Stephen Kidd et al., “Social Assistance in Vietnam: Review and Proposals for Reform“, Development Pathways, Hanoi, 2016.

See also previous posts on this subject here and here and here.

good news for poor children in California

Sunday, July 24th, 2016

Four decades ago, California and 21 other US states passed legislation denying additional benefits to mothers on welfare if they had more children. These measures were inspired in part by the “welfare queen” rhetoric of Ronald Reagan and others.

It took 22 years, but California finally acknowledged last month that the ban was cruel and ineffective. …  Gov. Jerry Brown quietly signed into law the repeal of the so-called maximum family grant cap. “I don’t know a woman — and I don’t think she exists — who would have a baby for the sole purpose of having another $130 a month,” declared State Senator Holly Mitchell, a Democrat who led the repeal, in denouncing “a racist, classist, sexist policy.”

Repeal means $220 million a year in extra welfare aid to provide $136 a month for each of 130,000 children in 95,000 families. ….

California is the seventh state to repeal family caps since 2002 on the basis of studies showing that the strictures have had no effect on the birthrates of welfare mothers. ….

The family cap laws … are still in place in 15 states. The New Jersey Legislature voted to repeal the family cap last month. But Gov. Chris Christie vetoed the measure, saying that non-welfare mothers “do not automatically receive higher incomes following the birth of a child.”

Editorial Board, “California Deposes Its ‘Welfare Queen’”, New York Times, 24 July 2016.

Governor Chris Christie is wrong. Non-welfare families receive an income tax deduction for each additional dependent, so their after-tax income increases following the birth of a child. After-tax income is what matters for the family budget. Note, however, that the value of this gift of reduced taxable income is greater for high-income taxpayers, who are almost always in high tax brackets compared to low-income taxpayers. The value an additional dependent allowance is zero for parents on welfare, who earn so little they have no taxable income.

A more equitable way to combat child poverty would be to replace deductions for dependent children with universal child credits. The credits should be taxable as income, thus ‘clawed back’ in part from families with taxable income. This is the system used in many countries.

contributory and non-contributory pensions in Vietnam

Friday, July 22nd, 2016

The World Bank this week (19 July) released a report on Vietnam that emphasizes the challenges of coping with an ageing population. I have not seen the report, but an online news feed provides a brief summary. Here are some extracts.

[T]he rate of participation of the people in the retirement fund is still low, reaching only 22% of the workforce, while the majority are only entitled to a small social pension if they live to the age of 80.

The [contributory] pension system in the formal sector is financially unsustainable though it underwent reform in 2014. ….

[A proposal to lower] the age … [of eligibility for the] social pension from the current level of 80 years … has … not yet [been] approved. …. Besides, the social pension is very low, only equivalent to 10% of the average income ….

The official [contributory] pension … [is] currently … 3% for women for each year of contribution and 2.25% for men. Compared to international standards, this is a very high rate and unsustainable ….

Despite the high rate, the practical benefit is lower because most people only contribute based on the basic salary, which is usually the minimum wage.

In 2014, the Vietnamese government implemented reforms to expand the contribution base … [to include] not only the basic wage but also allowances, bonuses and other remuneration regimes. ….

[The World Bank recommends three policy changes.]

Firstly, gradually reduce the social pension age from 80 to 70. Secondly, … expand the … subsidized program [of social pensions for the informal sector]. [Emphasis added.]

Thirdly, … Vietnam cannot maintain the current [contributory] system without reform.

WB report: Vietnam’s pension system faces challenges“, VietNamNet Bridge, 22 July 2016.

HelpAge International (Pension Watch) reports that Vietnam’s social pension of 180,000 Dong (9 US$) a month is pension-tested for those aged 80 and older, and means-tested for those aged 60-79 years. The social pension, according to the same source, reaches 2% of Vietnam’s 60+ population.

I don’t understand the discrepancies between information from the World Bank and that from Pension Watch. Is there a social pension for persons aged 60-79 years? Or is it limited to those aged 80 and older? If the social benefit is pension-tested for those aged 80 years and older, this implies that 100% of the 80+ population receives some sort of cash pension, unless take-up of the social pension is low for reasons other than eligibility.

Perhaps someone from Pension Watch can clarify this. I appreciate the good work that Help Age does, filling gaps in our knowledge of social pensions. Non-contributory pensions are sadly neglected by the World Bank, ILO and other institutions, so the country data posted at Pension Watch are very helpful.

more on universal basic income

Monday, June 13th, 2016

Further to Friday’s post (and earlier ones), financial journalist James Surowiecki (born 1967 in Connecticut) has a great column on universal basic income (UBI) in the current issue of The New Yorker. I have copied and pasted highlights below. Click on the link below to read the full column. (Access is free.)

In the mid-nineteen-seventies, the Canadian province of Manitoba ran an unusual experiment: it started just handing out money to some of its citizens. The town of Dauphin, for instance, sent checks to thousands of residents every month, in order to guarantee that all of them received a basic income. The goal of the project, called Mincome, was to see what happened. Did people stop working? Did poor people spend foolishly and stay in poverty? But, after a Conservative government ended the project, in 1979, Mincome was buried. Decades later, Evelyn Forget, an economist at the University of Manitoba, dug up the numbers. And what she found was that life in Dauphin improved markedly. Hospitalization rates fell. More teen-agers stayed in school. And researchers who looked at Mincome’s impact on work rates discovered that they had barely dropped at all. The program had worked about as well as anyone could have hoped. ….

Critics of the U.B.I. argue that handing people cash, instead of targeted aid (like food stamps), means that much of the money will be wasted, and that a basic income will take away the incentive to work, lowering G.D.P. and giving us a nation of lazy, demoralized people. But … most of the basic-income experiments suggest that the disincentive effect wouldn’t be large; in Manitoba, working hours for men dropped by just one per cent. It’s certainly true that the U.B.I. would make it easier for people to think twice about taking unrewarding jobs. But that’s a good consequence, not a bad one.

A basic income would not be cheap …. Yet the most popular social-welfare programs in the U.S. all seemed utopian at first. Until the nineteen-twenties, no state in the union offered any kind of old-age pension; by 1935, we had Social Security. Guaranteed health care for seniors was attacked as unworkable and socialist; now Medicare is uncontroversial.

James Surowiecki, “The Case For Free Money“, The New Yorker, 20 June 2016.

The results of the UBI experiment in Manitoba are not surprising, since UBI does not pay people to remain unemployed. Beneficiaries collect UBI regardless of whether they work or not. In short, UBI provides strong incentives to remain employed, or look for a job.

the ‘great flaw’ of basic income

Friday, June 10th, 2016

Canadian journalist Eric Reguly writes that that the basic-income model contains one great flaw. He is wrong. Here, in his own words, is Mr Reguly’s criticism.

When an idea is embraced by the political left, right and centre, you know it has to be too good to be true. ….

Basic income, in its purest form, would pay a guaranteed wage to everyone, including children, regardless of their income from other sources. It would be given unconditionally. The recipient would not have to prove that he or she is looking for work or even wants work; eternal sofa surfing would be allowed. ….

The great flaw with the concept is that economies might not reinvent themselves if millions of people are paid not to work. ….

Eric Reguly, “Basic income has its appeal, but it also has a very basic problem“, The Globe and Mail (Toronto), 18 March 2016.

Eric Reguly is the Rome-based European columnist for The Globe and Mail. He has a Masters in Journalism from the University of Western Ontario (London, Ontario).

Mr Reguly has it backwards. Income-tested welfare pays people remain unemployed, and takes away benefits when they return to work, even at a part-time job with low pay. A universal basic income pays people even when they work. Earned income is then taxed at normal rates.

Consider the following thought experiment. Suppose the normal welfare payment to a single person (due to job loss, for example) is $400 a week. If the beneficiary earns, say, $100 in wages, her benefits are typically reduced by this amount, leaving her total income the same ($400). Only if she earns more than $400 does her net income rise. This is an implicit tax of 100% on wage income, up to an income of $400 a week. The total tax can easily exceed 100% if there is an explicit tax on wages and/or income, which is very common.

With a universal basic income of $400, all taxes are explicit. There is no need for a personal income tax deduction (zero rate band). The basic income replaces that. Now there is an incentive to search for work. If the beneficiary finds a job paying $100 and wage income is taxed at, say, 50%, her total income rises to $450. If she works full-time for $400, her total income rises to $600.  There is a clear incentive for the beneficiary to return to work.