Archive for the ‘Universal Transfers’ Category

Chiapas (Mexico): another update

Wednesday, April 9th, 2014

The current governor of the state of Chiapas is Manuel Velasco Coello, of the traditional Partido Revolucionario Institucional (PRI). He won 67.1% of the vote in the July 2012 election, in coalition with two small parties: the Ecological Green Party (PVEM) and the New Alliance Party (PANAL). During his campaign, Mr Velasco promised to continue the universal pension (Amanecer) begun in 2007 by governor Juan Sabines of the leftist PRD. A monthly pension of 550 pesos (42 US dollars) was given to all residents of the state 64 years of age and older, irrespective of wealth or income, from January of 2007 through December of 2012.

In 2013, the experiment of Chiapas with universal pensions came to an end. Shortly after taking office, in December 2012, the new governor announced that the Amanecer pension would continue, but with a change of rules. From now on, anyone receiving another pension – such as a contributory (social security) pension or the federal 65 y mas social pension – would not be eligible for the Amanecer pension. Many older persons had become accustomed to receiving two pensions – 550 pesos from the state, and another 500 pesos from the federal government – so were naturally upset when they were removed from the Amanecer roster. More than a thousand older residents of the state filed suits for reinstatement of rights to an Amanecer pension. Only one of these suits – that of an 88-year old woman from San Cristobal de las Casas – was successful. This was widely reported by the press on November 10th of last year.

The woman’s name is Micaela Sánchez Gómez. She is now 89 years old and is back in the news (more…)

political taboos

Saturday, April 5th, 2014

Even the most advanced societies have taboos – untouchable areas of public life that only brave or foolhardy politicians go near. In America, social security and the right to bear arms are examples. In France, it is the labour laws. In Germany, it is the assertion of national interests abroad. In Britain, it is the NHS [National Health Service]. Any reform is interpreted by unions and voters as privatisation in drag. On the part of the unions, this is perfectly natural self-interest. But the public’s sensitivity lurks deeper in the soul and goes back to those years when a nation enervated and almost beggared by the second world war was moved to be “given” something for “free”. It is that searing folk memory that puts what passes for discourse about the NHS beyond the realm of reason.

The NHS is said to be the closest thing the British have to a national religion. If so, it must be led by a nonconformist, someone who believes in the core tenet of universal care but dissents from the surrounding theology of dirigisme. In Mr [Simon] Stevens, the government has found the most suitable of priests.

Janan Ganesh, “The data-driven technocrat out to break the NHS taboo“, Financial Times, 5 April 2014.

Simon Stevens (born 1966) was appointed chief executive of NHS England effective 1 April 2014. From 2000 to 2004 he was health policy adviser to Tony Blair and was closely associated with the former prime minister’s market-based plan to reform the NHS.


universal pension coverage – Japanese style

Wednesday, March 19th, 2014

The Wikipedia entry for “National Pension (Japan)” reports that “in 1961 the National Pension Act created universal pension coverage for residents of Japan.[1]”

The footnote leads me to a useful 53-page explanation of Japan’s complex system of old age pensions, from which I learn that every older resident receives a basic pension, to which an earnings-related pension can be added.

One of the characteristics of Japan’s public pensions is that the system of “universal pension coverage” is adopted in which all people are covered by public pensions regardless of occupation, income or other factors. Such a system was established by the start of the national pension plan in 1961. ….

Subsequently, the basic pension plan was introduced by a plan amendment in 1986.

Now, as a result, all working generations are insured by the national pension, and receive the benefits of a basic pension with a fixed amount according to their participation period when they become old. In addition, employees in the private sector, government employees or others participate in employees’ pensions (mutual aid pensions), and receive an earnings-related pension, as a topping-up of the basic pension, according to their earnings and participation period in the past.

Pension Bureau, The Point of the Pension Plan (Ministry of Health, Labour and Welfare, 1 June 2010), p.8.

If Japan’s basic pension is universal, why do residents receive “a basic pension with a fixed amount according to their participation period when they become old”? Browsing the brochure, I discovered that coverage is universal only in the sense that contributions are mandated. Everyone from the age of 20 to 60, including the unemployed and self-employed, must contribute the same sum each month. In 2010, mandated contributions were set at ¥15,100 (US$180) a month. On reaching age 65, those with 480 months (40 years) of contributions become eligible for a full basic pension, equal – as of 2009 – to ¥66,008 (US$724) a month. Older residents with additional, or fewer, contributions receive a proportionately larger, or smaller, basic pension. Those with fewer than 25 full years of contributions are entitled to a lump sum payment based on the number of contributions, but no pension.

This is a flat contribution/flat benefit pension system. It is universal only in the sense that the same rules apply to everyone: with fewer contributions, the pension in smaller. With no, or too few, contributions, there is no pension.

But, if everyone is forced to contribute, isn’t this a universal scheme, at least in coverage? Perhaps. But what about those who live in poverty, and cannot afford to make the mandated contributions, or at least not enough contributions to qualify for a pension? Those with low incomes do qualify for means-tested exemptions of up to 100% of the required contribution. But, the exempted contributions count for only a portion of a fully-paid contribution: 1/2 in the case of 100% exemption, 5/8 for 75% exemption, 3/4 for 50% exemption and 7/8 for 25% exemption. Someone who is lifetime poor could end up with fewer than 25 years of contribution credits, with no entitlement to a pension. Or, more likely, the pension would be equal to something like 2/3 of a full basic pension, or US$480, well below any reasonable poverty line in Japan.

In brief, Japanese basic pensions do not provide universal coverage, because the poorest find it difficult to accumulate enough credits to qualify for a basic pension. Of those who do qualify, the reduction in the size of the pension for those with too short a record of contributions leaves msny in severe poverty.

My conclusion: Japan’s pension system is complex and inefficient. The country should consider funding a basic pension from general government revenue instead of mandated ‘contributions’. (These hidden head taxes could be replaced by normal, fairer taxes on income and consumption). And, the basic pension should be made universal – with tests only of age and residence. Earnings-related pensions and personal savings can top-up the flat, basic pension available to everyone from age 65.

Tyler Cowen on the Paul Ryan report

Thursday, March 6th, 2014

Economist Tyler Cowen of George Mason University (Virginia, USA) has written an excellent critique of the Paul Ryan report on poverty in the United States. (more…)

toward universal pensions in Tanzania

Sunday, March 2nd, 2014

In November 2003 Dr Kurt Madörin, a retired Swiss aid worker, used part of his pension to initiate an old age pension scheme in a remote part of Tanzania. He named his experiment Kwa Wazee (“for the elderly”). With help from European donors, Kwa Wazee now reaches 1,100 persons aged 65 and older in six wards of Muleba District in North-western Tanzania. Selected older person receive 12,000 TZS (7.50 USD) in cash each month, with a supplement of 7,000 TZS (4.30 USD) per child for those caring for orphaned grandchildren. Older couples apparently have to share a single pension.

The Kwa Wazee pension is equivalent to 13% of Tanzania’s per capita GDP, lower even than the official poverty line (about 20,000 TSZ per person per month). This modest sum is nonetheless a godsend for older persons living in poverty. (more…)

New Zealand’s KiwiSaver

Monday, February 24th, 2014

The always helpful “International Update” of the US Social Security Administration this month contains a summary of the 2013 tri-annual report of New Zealand’s Commission for Financial Literacy and Retirement Income. The report covers numerous topics, including a review of KiwiSaver — the voluntary, government-subsidized retirement savings scheme (introduced in 2007) to supplement New Zealand Superannuation, a flat-rate universal pension funded by general government revenue. (more…)

New Zealand’s universal pension system

Wednesday, February 19th, 2014

Michael Cullen in 2003 defended New Zealand’s simple approach to old age income, which rests on two tiers: (1) a flat, universal pension and (2) voluntary saving. The result is the envy of many: low government expenditure on pensions combined with low rates of elder poverty. (more…)

old age pensions in Mexico

Wednesday, January 22nd, 2014

I have just completed a short essay that summarizes my work on social pensions in Mexico. Regular readers of Thought du Jour will find nothing new here, but you might want to read a concise summary.

In 2000, 22% of Mexico’s seniors (age 65 and older) received income from a pension. Thirteen years later, 88% had pensions. Nearly all this remarkable increase in coverage was due to social pensions: non-contributory benefits, unrelated to employment records.

This paper chronicles the rise of social pensions in Mexico. First it summarizes the pension system prior to introduction of social pensions. Next it describes how Mexico City, the federal government, and seventeen of Mexico’s 31 states initiated social pensions, a policy supported eventually by each of the three major political parties. It concludes with thoughts on what remains to be done.

Larry Willmore, “Old age pensions in Mexico: Toward Universal Coverage”, January 2014 (13 pages).

Update: This paper is now posted at Social Science Research Network (SSRN):


cash grants for the poor

Wednesday, January 22nd, 2014

Another startling finding of academic research: the poor really do benefit from receipt of unearned cash! This might seem obvious, but many presume that the poor will waste any cash handed over to them, especially if they are aboriginal North American Indians. A common belief is that the poor are lazy, drink and smoke too much, and are bad parents, so access to free cash will actually make them behave even worse. In North Carolina (USA), a researcher came across a ‘natural experiment’, and used it to test this ‘theory’ of the lazy class. (more…)

John Cochrane on tax breaks and cash transfers

Wednesday, January 8th, 2014

The Richmond Reserve Bank of Richmond (Virginia, USA) interviewed Chicago economist John Cochrane in late August, 2013. Here are two snippets of the interview that caught my attention. The first is from the published text. The second is from the full interview.

On tax breaks for savings

Medical savings accounts are a great idea, although the need for special savings accounts for medicine, retirement, college, and so on is a sign that the overall tax on saving is too high. Why tax saving heavily and then pass this smorgasbord of complex special deals for tax-free saving?  If we just stopped taxing saving, a single “savings account” would suffice for all purposes!

John Cochrane, “Interview“, Econ Focus, Federal Reserve Bank of Richmond, 3rd Quarter 2013, p. 37.

On transfers to the poor

Does a society that gives people income-based transfers, with inevitably high marginal taxes, do better? Do the people they’re trying to help end up going to school, investing in human capital, starting businesses, working their way out of their troubles, getting richer, and joining the tax-paying class? Or do societies that do that sort of thing end up with a permanent underclass that gets economically and socially more dysfunctional? And does the society as a whole also slow so that the size of the pie gets smaller?

My impression is that the latter conclusions are true. When many European countries allowed prime-aged men to be on the dole, the result was not, “Thank you for the money, now I’m going to medical school.” The result was staying on the dole for many years. Transfers do not end up producing a happy equality; they end up producing a permanent underclass.

Full Interview of John Cochrane (Web Exclusive).

I fully agree with Cochrane’s views on ending taxation of all saving, which is equivalent to taxing consumption rather than income. I would add, though, that all accumulated saving should be taxed as consumption on death (or on transfer to another person). Otherwise, a permanent rentier class will be created. Many wealthy self-made entrepreneurs, such as Bill Gates and Warren Buffet, understand this, so give away their wealth in a charitable fashion rather than pass it on to heirs, who would have no incentive to work and contribute to society.

I also agree that “income-based transfers” (means tests) result in high marginal rates of implicit taxation, so discourage work, saving and education. An unemployed person who returns to school, at least in the US, loses unemployment benefits on grounds that he or she is no longer actively searching for work. Cochrane would solve this problem by eliminating (or drastically reducing) transfers to the poor and the unemployed. I prefer to solve it with universal transfers of basic income, in wealthy countries at least, if not to all residents, then at a minimum in support of children, students, the elderly and the disabled. Taxation of such transfers should be zero (replacing personal deductions) or at normal rates, not the implicit rates of 80%, 100% and more that are common with means-tested benefits.

Thanks to “conversable economist” Tim Taylor for the pointer.