Thought du Jour

Few countries in the world today provide pensions solely on the basis of age and residence, regardless of employment, wealth or income. So far I had been able to put together a list of only 12 countries with universal pensions. It was thus with great excitement that I noted, in a Country Fact Sheet at the Pension Watch site of HelpAge, that Seychelles, a small territory in the Indian Ocean, provides a pension of 2200 rupees ($181 US$) a month to everyone from the age of 63.

Consulting various publications and online material, I discovered that Seychelles indeed has a universal age pension, and that it dates from 1979. The only requirement, in addition to age, is  five years continuous residence immediately prior to commencement of benefits. The monthly benefit was SR2200 in 2009. Applying the average exchange rate for that year, this is equivalent to approximately US$162. This was a reasonable pension, equal to 82% of the country’s (gross) minimum wage, and to 23% of its Gross National Income (GNI). A total of 7255 age pensioners – 8.3% of the population of Seychelles – received benefits that absorbed 1.66% of the country’s GDP (1.88% of its GNI).

The age benefit this year (2011) is SR2400 (US$196) a month, equal to 70% of the gross minimum wage. This seems to suggest a substantial decrease in generosity, but this is not the case. Appearances are deceiving because of major changes in taxation. Prior to July 2010 there was no income taxation in Seychelles. Pensions and other social security benefits were financed by a payroll tax of 22.5%, all but 2.5% of which was paid by employers. In 2009, the gross minimum wage was SR15.50 per hour, and the net minimum wage was only 2.5% less. Beginning in July 2010 the payroll tax was replaced with a flat 15% tax on all income, including wages. The difference between net and gross wages thus rose from 2.5% to 15%. The 2011 pension, unlike wages, is not taxable as income, so is equal to 82.4% of the net minimum wage, nearly as generous as it was in 2009.

Now for some history. Seychelles, like Mauritius, was uninhabited until settled by French planters accompanied by slaves, but the export crops differed: coconuts in Seychelles and sugar cane in Mauritius. The British later took possession of both colonies. Seychelles, in fact, was governed from Mauritius, as a ‘colony of a colony’ until 1903, when it became a separate crown colony. Seychelles, like Mauritius, has universal pensions (without means tests) for young widows and orphans as well as the aged, so I had expected to find influence of Mauritius on social policies in Seychelles. I could find none, however. For whatever reason, the two colonies went their separate ways.

A recent study published by the Commonwealth Secretariat, with help from UNRISID, covers the economic history of Seychelles quite thoroughly. I quote brief passages from the full report, which can be freely downloaded. A key point is that Britain paid little attention to Seychelles, so landowners, despite abolition of slavery, were able to keep social spending (and taxes) to a minimum.

Some colonial governors had important impacts on development policy (although many did not). Most prominent of these, due to his implementation of relatively progressive reforms, was Dr Percy Selwyn Selwyn-Clarke – known as the ‘socialist governor’. In reality, he was not a socialist and not even a member of the (then) ruling British Labour party which had appointed him in 1947, but he was renowned for his ‘social conscience’ and had been placed in Seychelles because this was seen by the British government as an important attribute in response to the reactionary domestic economic elite. … [T]his included a far greater emphasis on the collection of taxes from the landowning class. Selwyn-Clarke also promoted basic healthcare for plantation workers, improved housing for labourers on government estates, introduced a minimum wage and reformed old French legislation that made married women ‘completely subservient to their husbands’. …. Unsurprisingly, he was opposed at every step by the Seychelles Taxpayers and Landowners Association and his successor as governor immediately rolled back several of his progressive reforms in favour of their minority class interests.

[...]

Before independence in 1976, formal and institutionalised social protection was patchy ….  There were no pensions or social security for the elderly, except for public servants and employees of certain firms.

Accompanying the gradual shift in colonial policy to the institutionalisation of universal suffrage from 1948 (for property owners) to 1967 (for all citizens) was increased domestic political pressure for the creation of forms of social protection by the colonial state. ….

The National Provident Fund (NPF) was established in this context in 1971. The NPF was a compulsory social security savings plan aimed at working Seychellois. …. The scheme only benefited those in formal employment and those employees who contributed. Contributing employees were paid the full amount of the benefit they had contributed as a lump sum payment ….

Benefits were limited to the credit that the individual had contributed plus interest, the growth of which was often too small to keep up with … [inflation]. ….

While the stated justifications for the [1977 Marxist coup] … were mixed, one of the accusations against the previous government was the lack of progress in social development. The new government initially kept the NPF as the main social protection programme until the Social Security Fund was created by decree in 1979.

The core rationale behind the SSF was the one party state’s ambition to ensure that everybody in Seychelles benefited from development, rather than just the few. This universal insurance mechanism thus clearly fitted the stated socialist ideals of the new government. The SSF would collect contributions from workers and employees and use the revenue to assist those who were not in employment. In this way, the problems associated with the limited coverage and qualifying conditions of the NPF would be solved, as the new fund would include the whole population. ….

The return of multi-party democracy to Seychelles in 1993 only served to expand the scale and scope of social protection programmes. …. The right to social protection and the state’s responsibility to ‘undertake and maintain a system of social security’ was enshrined in the 1993 constitution as an unalienable right ….

Liam Campling, Hansel Confiance and Marie-Therese Purvis, Social Policies in Seychelles (Commonwealth Secretariat, London, 2011), pp. 11, 75-80.

The National Provident Fund (NPF) continues with a different name. It is now called the Seychelles Pension Fund (SPF). Benefits to SPF contributors are paid out in addition to the flat social security pension. The universal pension supplements, but does not replace, mandated retirement savings.

I discovered some interesting information on old-age pensions at the time of their introduction in Norway. Two things surprised me. First, an important motivation apparently was to “increase the number of children in the families”. By providing cash benefits for the elderly, the state made it possible for adult children to divert expenditure from aged parents to their own young children. Second, an unwritten promise was that anyone, regardless of means, could obtain at least a portion of the supposedly means-tested benefit. If means-tests were not strictly applied, part of the benefit was effectively universal. In support of this conjecture, I would like to see statistics on the proportion of age-eligible Norwegians in receipt of partial (or full) age pensions in those years.

[In Norway during the decades of 1880-1920] there was mutual responsibility of support between grown children and parents, according to the poor relief legislation. This principle was weakened by the introduction of the old age pension in 1923 (which was not passed until 1937, with minor changes). An important motivation behind the act was the wish to increase the number of children in the families. Those with an occupation should use their income on their children rather than on their elderly parents. In order to stimulate such a development, the children’s income, from 1937, was no longer a factor in the appraisal of whether the over-seventies were entitled to their pensions or not. This was a breach of what had been viewed as the natural bonds of familial solidarity. It was a marked distinction from the poor relief system and put heavier emphasis on the nuclear family’s importance in society. In other areas as well, means testing was less severe than in the poor relief system, and the appraisals of need were not as haphazard.

Retirement pension also represented a shift from the Norwegian insurance system. For the first time previous wage labour was not a requirement for receiving benefit. Thus eligibility became largely divorced from work performance or other market participation. Entitlements were made independent of individual contributions since the financial responsibility was shifted onto public revenues. The principle of rightful means testing is adopted. Everyone had a right to receive benefit if certain economic conditions were met. An expressed premise was that the aged would receive a certain sum without any means test, to encourage them to find some income in addition.

Compared to that of other Scandinavian countries, the Norwegian retirement pension system was based more on the recipients’ rights than on testing their means of income. In principle, all old people were guaranteed a standard minimum amount with no conditions of previous wage labour or premium payment attached to it. However, two groups were excluded: those who had lived abroad and those who had been convicted of vagrancy, begging, drunkenness, and so forth.

Øyvind BjØrnson, “The Social Democrats and the Norwegian Welfare State: Some Perspectives“, Scandinavian Journal of History, 26:3 (2001), pp. 197-223.

To restrain costs, the Norwegian government initially set the age of eligibility at 70 years. The old-age pension became universal (without a means test) in 1959. Income tests were reinstated in 1969, and later reduced to tests of other pension income. Norway today, like Sweden, provides a Universal Minimum Pension to everyone who meets age and residence requirements. The age of eligibility was reduced (from 70 to 67 years) in 1973.